<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY , 1996
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MITEK SYSTEMS, INC.
(Exact name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 87-0418827
(State or other jurisdiction (Primary Standard Industrial (I.R.S. employer
of incorporation or Classification Code) identification
organization of registrant) number)
</TABLE>
10070 CARROLL CANYON ROAD
SAN DIEGO, CALIFORNIA 92131
(619) 635-5900
(Address and telephone number of principal executive offices)
JOHN F. KESSLER
MITEK SYSTEMS, INC.
10070 CARROLL CANYON ROAD
SAN DIEGO, CALIFORNIA 92131
(619) 635-5900
(Name, address and telephone number of agent for service)
------------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
Robert G. Copeland, Esq. Paul E. Hurdlow, Esq.
Dennis J. Doucette, Esq. Dayna J. Pineda, Esq.
Luce, Forward, Hamilton & Scripps LLP Gray Cary Ware & Freidenrich
600 West Broadway, Suite 2600 4365 Executive Drive, Suite 1600
San Diego, California 92101 San Diego, California 92121
(619) 232-8311 (fax) (619) 677-1477 (fax)
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICAL AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO AGGREGATE PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) PER SHARE (2) OFFERING PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock................................ 4,686,250 $5.13 $24,040,046 $8,290
</TABLE>
(1) Includes the overallotment option granted to the Representative of 611,250
Shares of Common Stock.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c).
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 8, 1996
PROSPECTUS
4,075,000 SHARES
[LOGO]
MITEK SYSTEMS, INC
COMMON STOCK
------------------
Of the 4,075,000 shares of Common Stock offered hereby (the "Offering"),
2,500,000 shares are being sold by Mitek Systems, Inc. ("Mitek" or the
"Company") and 1,575,000 shares are being sold by certain selling stockholders
of the Company (the "Selling Stockholders"). The Company will not realize any
proceeds from the sale of Common Stock by the Selling Stockholders. See
"Principal and Selling Stockholders."
The Common Stock is quoted on the Nasdaq SmallCap Market under the symbol
"MITK." On July 5, 1996, the last reported sale price for the Company's Common
Stock was $5.125 per share. The Company has applied to have the Common Stock
listed on the Nasdaq National Market under the symbol "MITK" on the
effectiveness of this Offering.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. FOR
DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS
PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<S> <C> <C> <C> <C>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNT PROCEEDS TO THE SELLING
PUBLIC AND COMMISSION (1) COMPANY (2) STOCKHOLDERS
Per Share............. $ $ $ $
Total (3)............. $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended ("Securities Act"). See "Underwriting."
(2) Before deducting offering expenses estimated at $550,625, including the
Underwriter's non-accountable expense allowance, all of which are payable by
the Company.
(3) A Selling Stockholder has granted the Underwriter a 30-day option to
purchase up to an additional 611,250 shares of Common Stock solely to cover
overallotments, if any (the "Overallotment Option"). If the Underwriter
exercises the Overallotment Option in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to the Company and Proceeds
to Selling Stockholders will be $ , $ , $ , and $ ,
respectively. See "Underwriting."
The shares of Common Stock offered by this Prospectus are offered by the
Underwriter, subject to prior sale, when, as and if delivered to and accepted by
them, and subject to the right of the Underwriter to reject any order in whole
or in part. It is expected that certificates for the shares of Common Stock will
be available for delivery in Irvine, California, on or about , 1996.
------------------------
[LOGO]
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ SMALL CAP AND NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE OVERALLOTMENT OPTION. SEE "UNDERWRITING." WITH THE EXCEPTION OF HISTORICAL
MATTERS, THE MATTERS DISCUSSED IN THIS PROSPECTUS ARE FORWARD LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. SEE "RISK FACTORS -- FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISKS."
THE COMPANY
Mitek develops and markets automatic data recognition ("ADR") products which
enable end users to automate costly and labor intensive business functions such
as check and remittance processing, forms processing and order entry. The
Company's products incorporate proprietary object-oriented, neural network
software technology for the recognition and conversion of hand printed or
machine generated characters into digital languages, such as ASCII or Unicode.
Neural networks are powerful tools for pattern recognition applications and
consist of sets of coupled mathematical equations with adaptive parameters that
self-adjust to "learn" various forms and patterns. The Company's software
products are currently used to process sales orders, checks and financial
documents, tax forms, credit card drafts, ZIP codes, time sheets, and insurance
applications. These products are offered for virtually all major computer
operating systems.
Despite significant advances in information technology, the predicted
"paperless office" has not arrived. Rather, the volume of paper used in business
today has substantially increased. According to industry reports, nearly three
times as much paper is generated today as before the advent of the information
revolution. In the United States, approximately 600,000 people are engaged in
data entry of information contained in hand printed and machine generated
documents such as processing of checks, medical forms, remittances, and payroll
documents. Moreover, data entry functions are predominately ministerial in
nature and include highly repetitive and labor intensive tasks. Enterprises with
large volumes of data entry requirements have long sought to automate portions
of data entry with the emphasis placed on accuracy and consistency. The Company
leverages its core technology through offering a family of intelligent character
recognition ("ICR") software products that the Company believes offer the
highest accuracy commercially available for the recognition of hand printed
characters. The Company's ADR products incorporate the Company's ICR software
engine, QuickStrokes API, which has been developed with a flexible underlying
architecture to accommodate additional features and functionality as dictated by
market demands.
Mitek markets its products and services primarily through its direct sales
organization, focusing on what it believes are certain key systems integrators
of and designers of large and high performance document processing systems. The
Company sells to original equipment manufacturers ("OEMs"), such as BancTec,
Inc., NCR, ABC Bull, Unisys and IA Corporation, system integrators such as SHL
(a subsidiary of MCI) and TCSI, and value-added resellers ("VARs") such as OBOS,
CBSI and Moon Sun.
The Company has recently begun to address vertical end-user markets through
the introduction of Premier Forms Processor ("PFP"). PFP incorporates Mitek's
core ICR technology in an application designed to be marketed directly to end
users in a broad variety of industries with requirements for high volume
automated data entry. Other key elements to the Company's strategy include:
expansion of OEM channels of distribution, penetration of vertical markets,
building a recurring revenue base through maintenance contracts, expansion of
sales and marketing capability and strengthening its technological leadership in
ICR technology.
Prior to March 1995, the Company was engaged in the business of designing
modified computer systems for electronic security under the TEMPEST name,
principally for the defense industry. In March 1995, the Company sold the assets
of its TEMPEST business and discontinued TEMPEST operations.
3
<PAGE>
The Company develops and tests its products in San Diego, California and the
facilities of its wholly-owned subsidiary, Mitek Systems Canada, Inc. in
Calgary, Canada. The Company was incorporated in Delaware in 1986, its principal
executive offices are located at 10070 Carroll Canyon Road, San Diego,
California 92131, and its telephone number is (619) 635-5900. The Company's
Internet address is http:\\www.miteksys.com.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company......................... 2,500,000 Shares
By the Selling Stockholders............ 1,575,000 Shares
Common Stock outstanding after the
offering................................ 10,259,805 Shares (1)
Use of proceeds.......................... General corporate purposes, including working
capital and capital expenditures related to
research and development. See "Use of Proceeds."
Nasdaq symbol............................ MITK
</TABLE>
- ------------------------
(1) Does not include (i) up to 162,500 shares issuable upon exercise of warrants
to be granted to the Representative of the Underwriters upon completion of
this Offering (the "Representative's Warrant"), (ii) up to 215,000 shares
issuable upon the exercise of outstanding warrants and (iii) 387,059 shares
issuable upon the exercise of options granted under the Company's 1986 Stock
Option Plan and 1988 Nonqualified Stock Option Plan (the "Option Plans") at
a weighted average per share exercise price of $1.25.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER SIX MONTHS ENDED
30, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales:
ADR....................................... $ 2,874 $ 4,654 $ 5,135 $ 1,830 $ 3,749
TEMPEST (1)............................... 10,191 5,509 1,498 1,498 0
--------- --------- --------- --------- ---------
Total net sales........................... 13,065 10,163 6,633 3,328 3,749
Gross margin................................ 3,495 3,506 3,303 1,607 2,273
Operating income (loss)..................... (908) (1,280) (273) (181) 404
Net income (loss)........................... (902) (1,057) (69) 20 344
Net income (loss) per share................. $ (.13) $ (.15) $ (.01) $ .00 $ .04
Weighted average shares outstanding (2)..... 6,866 6,877 7,286 7,020 7,898
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 301 $ 11,891
Working capital..................................................................... 1,093 12,683
Total assets........................................................................ 3,136 14,726
Long term liabilities............................................................... 11 11
Total stockholders' equity.......................................................... 1,690 13,280
</TABLE>
- ------------------------
(1) In March 1995, the Company sold the assets of its TEMPEST business and
discontinued TEMPEST operations.
(2) For an explanation of the determination of the number of weighted average
shares outstanding please see Note 1 of the Notes to the Consolidated
Financial Statements.
(3) Gives effect to the sale of the Common Stock offered hereby and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE
CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED BY
THIS PROSPECTUS.
PRODUCT CONCENTRATION
The Company currently derives substantially all of its product revenues from
licenses and sales of products incorporating its ADR technology. As a result,
factors adversely affecting the pricing of or demand for the Company's ADR
products and services, such as competition from other products or technologies,
any decline in the demand for automated entry of hand printed characters,
negative publicity or obsolescence of the hardware or software environments in
which the Company's products operate, could have a material adverse effect on
the Company's business, operating results and financial condition. The Company's
financial performance will continue to depend, in significant part, on the
successful development, introduction and customer acceptance of new and enhanced
versions of the Company's ADR products and services. There can be no assurance
that the Company will continue to be successful in developing and marketing its
ADR products and related services. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Products."
DEPENDENCE ON EMERGING MARKETS FOR ADR PRODUCTS
The market for ADR products is relatively new, intensely competitive, highly
fragmented, underdeveloped, and rapidly evolving. Marketing and sales techniques
in the ADR marketplace, as well as the bases for effective competition, are not
well established. There can be no assurance that the market for ADR products
will develop or that, if it does develop, organizations will adopt the Company's
products or services. The Company has spent, and intends to continue to spend,
significant resources educating potential customers about the benefits of its
products. However, there can be no assurance that such expenditures will enable
the Company's products to achieve further market acceptance, and if the ADR
market fails to develop or develops more slowly than the Company anticipates,
the Company's business, operating results and financial condition would be
materially adversely affected. See "Business -- Industry Background" and "--
Competition."
NEW PRODUCTS AND CHANGING TECHNOLOGIES
The markets for products incorporating ADR technology are characterized by
rapidly advancing technology and rapidly changing user preferences. The
Company's ability to compete effectively with its ADR product line will depend
upon its ability to meet changing market conditions and develop enhancements to
its products on a timely basis in order to maintain its competitive advantage.
In addition, continued growth will ultimately depend upon the Company's ability
to develop additional technologies and attract strategic alliances for related
or separate product lines. There can be no assurance that the Company will be
successful in developing and marketing product enhancements and additional
technologies, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace, will be of acceptable quality, or will
achieve market acceptance. For example, the Company's recently-introduced PFP
product is designed to address vertical markets, certain of which have not in
the past made extensive use of ADR technologies. The Company intends to make
significant investments in further development and marketing relating to its PFP
product. Should the markets fail to develop, or should the Company's new
products, including its PFP product, fail to gain market acceptance, the
Company's business, operating results and financial condition would be
materially adversely affected. If the Company is unable, for technological or
other reasons, to develop and introduce products in a timely manner in response
to changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially and adversely
affected. Moreover, from time to time, the Company or its competitors may
announce new products or technologies
6
<PAGE>
that have the potential to replace the Company's existing product offerings.
There can be no assurance that the announcement of new product offerings will
not cause customers to defer purchases of existing Company products, which could
adversely affect the Company's results of operations. See "Business --
Products," and "-- Technology."
COMPETITION
The market for the Company's ADR products is intensely competitive, subject
to rapid change and significantly affected by new product introductions and
other market activities of industry participants. The Company faces direct and
indirect competition from a broad range of competitors who offer a variety of
products and solutions to the Company's current and potential customers. The
Company's principal competition comes from (i) customer-developed solutions;
(ii) direct competition from companies offering ICR systems; and (iii) companies
offering competing technologies capable of recognizing hand-printed characters.
Many of the Company's competitors have longer operating histories, including
greater experience in the data entry and character recognition markets,
significantly greater financial, technical, marketing and other resources than
the Company, greater name recognition and a larger installed base of customers.
It is also possible that the Company will face competition from new
competitors. These include companies that are existing licensors, such as HNC
Software, Inc. ("HNC") or OEM, systems integrator and VAR customers such as
BancTec, Inc., or dominant software companies with a presence in publishing or
office automation such as Microsoft Corporation and Adobe. In addition, the
Company's license agreement with HNC provides that, upon expiration of certain
exclusivity periods beginning in November 1997, HNC will have the right to use
certain of the core technologies used in the Company's ADR products, originally
developed by HNC and licensed to the Company in 1992, to compete directly with
the Company. Moreover, as the market for automated data entry and ICR software
develops, a number of these or other companies with significantly greater
resources than the Company could attempt to enter or increase their presence in
the Company's market either independently or by acquiring or forming strategic
alliances with competitors of the Company. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of the Company's current and prospective customers and it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition may result in
price reductions, reduced gross margins and loss of market share, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition. Furthermore, a significant percentage of the
Company's revenues are attributable to the sale of co-processor boards sold
together with the Company's software. Anticipated increases in the speed and
power of new microprocessors, such as the Pentium P-6, could have the effect of
reducing the demand for the Company's co-processor boards. It is possible that
the Company's co-processor boards will face competition from semiconductor
manufacturers embedding the technology on their chips. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition. See "Business -- Competition."
CUSTOMER CONCENTRATION; DEPENDENCE ON KEY CUSTOMERS
Because the Company currently markets its products principally to OEMs and
systems integrators, the Company is dependent upon a few significant customers
for the majority of its sales. In the six months ended March 31, 1996, three
customers, ABC Bull, BancTec, Inc. and TCSI, accounted for an aggregate of 47%
of the Company's total sales. The Company currently has no long term contracts
with these or other significant customers. Thus, there can be no assurance that
the Company's significant customers will continue to purchase products from the
Company and any reductions in orders from any of the Company's significant
customers could have a material adverse effect upon the Company's business,
operating results and financial condition. While the Company intends to expand
the direct marketing of its products, no assurances can be given with respect to
the speed or success of such efforts. Consequently, the Company anticipates that
it may continue to be dependent upon a
7
<PAGE>
select number of significant customers for a substantial portion of its revenues
in the near future. As a result, any cancellation or delay or reduction in
orders from any of these customers could result in a material adverse effect on
the Company's business, operating results and financial condition. See "Business
- -- Customers and End Users."
RISK OF PRODUCT DEFECTS
Products as complex as those offered by the Company, particularly the
Company's QuickStrokes and PFP products, may contain undetected defects or
errors when first introduced or as new versions are released. As a result, the
Company could in the future face loss or delay in recognition of revenues as a
result of software errors or defects. In addition, the Company's products are
typically intended for use in applications that may be critical to a customer's
business. As a result, the Company expects that its customers and potential
customers have a greater sensitivity to product defects than the market for
software products generally. Furthermore, in connection with the sale of its
TEMPEST business, the Company agreed to indemnify the purchaser for all product
defect claims (other than product errors claims) arising out of product which
were sold, or services which were rendered, prior to the sale of the TEMPEST
business. Consequently, the Company still faces potential product defect claims
from the TEMPEST business as well. Although the Company's business has not been
adversely affected by any such errors to date, there can be no assurance that,
despite testing by the Company and by current and potential customers, errors
will not be found in new products or releases after commencement of commercial
shipments, resulting in loss of revenues or delay in market acceptance,
diversion of development resources, damage to the Company's reputation, or
increased service and warranty costs, any of which would have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Business -- Research and Development."
EXPANSION OF SALES AND DISTRIBUTION CHANNELS
The Company has historically sold its ADR products to OEMs in the form of
recognition engines to be incorporated into such OEMs' products. The OEM has
then traditionally performed much of the marketing and distribution of the
Company's products. With the introduction of the Company's PFP product line,
which is intended to be sold principally to end users, the Company has
substantially increased and plans substantial future increases in expenditures
in support of its strategy to expand its global marketing, sales and customer
support infrastructure. Additionally, the Company intends to increase both its
product offerings and target markets through marketing, sales and distribution
and development of relationships with other companies. The Company intends to
increase the number of these strategic relationships as well as form alliances
with systems integrators, VARs and consultants. Whether the Company can
successfully generate its own sales leads, introduce new products and enter new
markets will depend on its ability to expand its direct sales and support
services, expand its indirect distribution channel, and increase its
relationships and alliances with other companies. As a result of its planned
expansion, the Company has and will continue to incur significant costs to build
such corporate infrastructure ahead of anticipated revenues, and any failure to
achieve growth in revenues in excess of increased expenses would have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to
successfully expand its direct sales and support services force, expand its
indirect distribution channel, or establish or maintain successful third party
relationships. Any failure to do so will have a material adverse effect on the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Sales and Marketing."
SUPPLIER AND COMPONENT DEPENDENCE
The Company depends heavily on subcontracted manufacturers of the
co-processor boards sold with its QuickStrokes API products to provide
components on a timely basis at reasonable prices. Although the Company believes
such board products could be manufactured from a variety of third party
manufacturers, the Company is currently receiving such products from only two
suppliers, HNC and EMSI. There can be no assurance that the Company will be able
to obtain, on a timely basis, all the components it requires. The Company has no
long term contracts with any of the co-processor
8
<PAGE>
board suppliers. If the Company cannot obtain essential components as required,
the Company could be unable to meet demand for its products, thereby adversely
affecting its operating results and allowing competitors to gain market share.
Additionally, scarcity of such components could result in cost increases and
adversely affect the Company's gross margin for its ADR products. See "Business
- -- Products."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors including the timing of customer
projects and purchase orders, new product announcements and releases by the
Company and other companies, gain or loss of significant customers, price
discounting of the Company's products, the timing of expenditures, customer
product delivery requirements, availability and cost of components or labor and
economic conditions generally and in the information technology market
specifically. Any unfavorable change in these or other factors could have a
material adverse effect on the Company's operating results for a particular
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results of Operations."
Many of the Company's customers order on an as-needed basis and often delay
issuance of firm purchase orders until their project commencement dates are
determined. Quarterly revenue and operating results will therefore depend on the
volume and timing of orders received during the quarter, which are difficult to
forecast accurately. Moreover, a significant portion of the Company's sales have
historically resulted from shipments during the last few weeks of the quarter
from orders generally received in the last month of the quarter. Any
concentration of sales at the end of the quarter may limit the Company's ability
to plan or adjust operating expenses. Therefore, if anticipated shipments in any
quarter do not occur or are delayed, expenditure levels could be
disproportionately high as a percentage of sales, and the Company's operating
results for that quarter would be adversely affected.
The Company expects quarterly fluctuations to continue for the foreseeable
future. Accordingly, the Company believes that period-to-period comparisons of
its financial results should not be relied upon as an indication of future
performance. No assurance can be given that the Company will be able to achieve
or maintain profitability on a quarterly or annual basis in the future. Due to
all of the foregoing factors, it is possible that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected.
MANAGEMENT OF CHANGING BUSINESS; ABILITY TO MANAGE GROWTH
Prior to November 1992, the Company's business focused on development and
sales of its TEMPEST products to government and defense industry customers. In
November 1992, the Company obtained a license to certain ADR technologies and
began a period of significant transition in its business focus. This growth, and
the transition of business focus has placed, and will continue to place, a
strain on the Company's management, operational, financial and accounting
resources. To continue the ongoing development of its technologies, while at the
same time managing the products it is already shipping, the Company must, among
other things, respond to competitive developments, continue to attract, retain
and motivate qualified personnel, use a portion of available capital to support
the expense of enhancing and marketing its technologies, and manage its growth
in the face of a rapidly changing business environment. Moreover, in order to
support additional commercial applications of its current products while
continuing to enhance its ADR technologies, the Company may need to expand its
customer engineering capabilities and develop tools and documentation which will
enable customers and OEMs to develop, integrate and test their products without
requiring direct support from the Company's product development groups. There
can be no assurance that these processes can be successfully managed given the
Company's limited resources. See "Business -- Overview."
9
<PAGE>
LENGTHY SALES CYCLE
Due in part to the mission-critical nature of certain of the Company's
applications, potential customers perceive high risk in connection with adoption
of the Company's neural network technology. As a result, customers have been
cautious in making product acquisition decisions. In addition, the purchase of
the Company's products involves a significant commitment to the Company's
technologies, with the attendant delays frequently associated with customers'
internal procedures to approve large capital expenditures and test and accept
new technologies that affect key operations. For these and other reasons, the
sales cycle associated with the purchase of the Company's products is typically
lengthy and subject to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews, over which the Company
has little or no control. Because of the lengthy sales cycle, if revenues
forecasted from a specific customer for a particular quarter are not realized in
that quarter, the Company likely would not be able to generate revenues from
alternate sources in time to compensate for the shortfall. As a result, and due
to the typical size of customers' orders, a lost or delayed sale could have a
material adverse effect on the Company's quarterly operating results.
PATENTS AND PROPRIETARY RIGHTS
The Company's success and its ability to compete is dependent in part upon
its proprietary technology. To license its products, the Company relies
primarily on "shrink wrap" licenses that are not signed by the end user and,
therefore, may be unenforceable under the laws of certain jurisdictions. In
addition, a substantial portion of the Company's sales are to OEMs and systems
integrators pursuant to purchase orders and invoices not subject to any
overriding purchase agreement or contract. As a result, the Company may have
relatively limited visibility as to these customers future requirements, and the
scope and terms of the parties' agreements with respect to matters typically
covered in such purchase agreements, such as intellectual property rights and
indemnification, may not be clearly defined. Additionally, the Company generally
relies on trademark, trade secret, copyright and patent law to protect its
intellectual property. The Company may also rely on creative skills of its
personnel, new product developments, frequent product enhancements and reliable
product maintenance as a means of protecting its proprietary technologies. There
can be no assurance, however, that such means will be successful in protecting
the Company's intellectual property. The Company presently has no patents or
patent applications pending relating to the Quickstrokes API products. There can
be no assurance that others will not develop technologies that are similar or
superior to the Company's technology. The source code for the Company's
proprietary software is protected both as a trade secret and as a copyrighted
work. Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries. Moreover, there can be no assurance that the
protection provided to the Company's proprietary technology by the laws and
courts of foreign nations against piracy and infringement will be substantially
similar to the remedies available under United States law. Any of the foregoing
considerations could result in a loss or diminution in value of the Company's
intellectual property could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company could be liable for contributory infringement claims with
respect to its OEM customers. There can be no assurances that any such
infringement claims or claims by such OEMs for indemnification will not occur in
the future. The Company could incur substantial costs in defending itself or its
customers in litigation brought by third parties alleging infringement or in
prosecuting infringement claims against third parties, or in seeking a
determination of the scope and validity of the proprietary rights of others. Any
such litigation could be costly and a diversion of management's attention, which
by themselves could have material adverse effects on the Company's business,
financial condition and results of operations. Adverse determinations in such
litigation could result in the loss of the Company's proprietary rights, subject
the Company to significant liabilities, require the Company to seek licenses
from third parties or prevent the Company from using its technologies, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Technology."
10
<PAGE>
DEPENDENCE ON THIRD PARTY LICENSORS
The Company licenses certain critical software from third parties. The core
ICR software for the Company's Quickstrokes API engine is licensed from HNC
pursuant to a License Agreement dated November 23, 1992, between the Company and
HNC. In addition, the Company licenses certain application software for its PFP
product line from VALIdata Sistemas de Captura, S.A. de C.V. ("VALIdata")
pursuant to a Marketing License Agreement dated as of March 26, 1996 between the
Company and VALIdata. Each of these license agreements requires the Company to
undertake certain obligations, and the failure of the Company to meet such
obligations could result in a termination of one or both of these licenses.
Furthermore, the Company's license agreement with VALIdata will expire in March
1997 and, upon expiration, Mitek's license to PFP application software will
terminate unless the parties mutually agree to renew the license agreement. In
the event that either the HNC or VALIdata license agreement terminates, the
Company may be required to develop or obtain licenses for replacement software.
Development or procurement of replacement software could be costly and require a
substantial expenditure of time and effort by the Company. Furthermore, no
assurance can be given that the Company would be able to develop or license
other software. Accordingly, the loss of either license could have a material
adverse impact upon the Company's business, financial condition and results of
operations. See "Business -- Technology."
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of its key technical and management personnel. The Company does not have
employment contracts with, or "key person" life insurance policies on, any of
its employees. Loss of services of key employees could have a material adverse
effect on the Company's operations and financial condition. Given the Company's
state of development, the Company is also dependent on its ability to identify,
hire, train, retain and motivate high quality personnel, especially highly
skilled engineers involved in the ongoing developments required to refine the
Company's technologies and to introduce future applications. The high technology
industry is characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. There can be no assurance that the Company will
be able to attract qualified personnel or that the Company's current employees
will continue to work for the Company. The failure to attract, assimilate and
train key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
In fiscal 1995 and the first six months of fiscal 1996, international sales
represented approximately 21% and 25% of the Company's total revenues,
respectively. The Company intends to continue to expand its operations outside
the United States and to enter additional international markets, which will
require significant management attention and financial resources. The Company
has committed and continues to commit significant time and development resources
to customizing its products for selected international markets and to developing
international sales and support channels. There can be no assurance that the
Company's efforts to develop products, international markets or to develop
international sales and support channels will be successful. The failure of such
efforts could have a material adverse effect on the Company's business,
financial condition and results of operations. International sales are subject
to inherent risks, including longer sales cycles, unexpected changes in
regulatory requirements, uncertainties with regard to laws protecting
proprietary technology, import and export restrictions and tariffs, difficulties
in staffing and managing foreign operations, the burdens of complying with a
variety of foreign laws, greater difficulty or delay in accounts receivable
collection, potentially adverse tax consequences and political and economic
instability. The Company's export sales are currently denominated exclusively in
United States dollars. An increase in the value of the United States dollar
relative to foreign currencies could make the Company's products more expensive
and, therefore, potentially less competitive in foreign markets. If for any
reason exchange or price controls or other restrictions on foreign currencies
are imposed, the Company's business, financial condition and results of
operations could be materially adversely affected. As the Company increases its
international sales, its total revenues may also be affected to a
11
<PAGE>
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in certain parts of the world. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Sales and Marketing."
INFRINGEMENT OF PROPRIETARY RIGHTS
The Company recently received correspondence from Cognitronics, Inc.,
("Cognitronics") asserting that Cognitronics has applied for a patent that
covers the presentation of arrays of character images which are used in one of
the Company's PFP product modules. Cognitronics asserted that if a patent is
issued, it will seek licensing fees for the use of this technique. The Company
has subsequently learned that a patent was issued to Cognitronics on June 11,
1996. To date, the Company has not received any further correspondence from
Cognitronics. Based on its investigation of the date that Cognitronics filed its
patent application, Mitek believes it independently developed this technique
significantly before Cognitronics filed for a patent. Based on this and other
factors, the Company believes that it has meritorious defenses to Cognitronics's
claim of infringement and after further evaluation may file an objection to the
patent. However, there can be no assurance that the Company would prevail in the
event of any litigation regarding Cognitronics's claim, and, if Cognitronics
were to bring such an action and prevail, the Company could be required to
develop an alternative technique for presenting such character images. While the
Company does not believe that developing such a new technique would have a
material adverse effect on the Company's business given the Company's ongoing
efforts to develop and market new technologies and products, there can be no
assurance that in the future the Company will not receive other communications
from third parties asserting that the Company's products infringe, or may
infringe, third parties' intellectual property rights. There can be no assurance
that licenses to disputed third-party technology or intellectual property rights
would be available on reasonable commercial terms, if at all. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation, either as plaintiff or defendant,
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks, whether or
not such litigation is resolved in favor of the Company. In the event of an
adverse ruling in any such litigation, the Company might be required to pay
substantial damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
infringing technology, and the court might invalidate the Company's patents,
trademarks or other proprietary rights. In the event of a successful claim
against the Company and the failure of the Company to develop or license a
substitute technology, the Company's business, financial condition and results
of operations would be materially and adversely affected.
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
Following this Offering, the Company's 5% stockholders, officers and
directors will beneficially own approximately 30.8%, and John M. Thornton,
Chairman of the Board, will beneficially own 27.4%, of the Company's outstanding
Common Stock (25.3% and 20.2%, respectively, if the Overallotment Option is
exercised in full). As a result, such persons will have significant ability to
control the vote on matters submitted to stockholders for approval (including
the election of all directors, and any merger, consolidation or sale of all or
substantially all of the Company's assets) and to control the management and
affairs of the Company. Accordingly, such concentration of ownership may have
the effect of delaying, deferring or preventing a change in control of the
Company. See "Management" and "Principal and Selling Stockholders."
FACTORS INHIBITING TAKEOVER
The Board of Directors is authorized to issue up to 1,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current plans to issue shares of
Preferred Stock. In addition, Section
12
<PAGE>
203 of the Delaware General Corporation Law restricts certain business
combinations with any "interested stockholder" as defined by such statute. The
statute may have the effect of delaying, deferring or preventing a change in
control of the Company. See "Description of Capital Stock."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been, and is likely to
continue to be, highly volatile. Over the last fiscal quarter the Company's
Common Stock was traded as low as $2.00 per share and as high as $6.125 per
share. Future announcements concerning the Company or its competitors, quarterly
variations in operating results, announcements of technological innovations, the
introduction of new products or changes in product pricing policies by the
Company or its competitors, claims of infringement of proprietary rights or
other litigation, changes in earnings estimates by analysts or other factors
could cause the market price of the Common Stock to fluctuate substantially. In
addition, the stock market has from time-to-time experienced significant price
and volume fluctuations that have particularly affected the market prices for
the common stocks of technology companies and that have often been unrelated to
the operating performance of particular companies. These broad market
fluctuations may also adversely affect the market price of the Company's Common
Stock. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has occurred against
the issuing company. There can be no assurance that such litigation will not
occur in the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Any adverse determination in such
litigation could also subject the Company to significant liabilities. See "Price
Range of Common Stock."
Additionally, the Company offers software products in a range of prices.
Sales of products with high average sales prices can constitute a significant
percentage of the Company's quarterly revenue. Operating results in any period
should not be considered indicative of the results to be expected for any future
period, and there can be no assurance that the Company's net sales will continue
to increase, or that its recent rate of quarterly sales and earnings growth will
be sustained.
NO DIVIDENDS
The Company has not paid any dividends on its Common Stock and does not
intend to pay dividends for the foreseeable future. See "Dividend Policy."
BROAD DISCRETION AND POSSIBLE CHANGES IN APPLICATION OF NET PROCEEDS
No specific purpose has been identified for the use of the net proceeds of
this Offering, and a significant portion of the estimated net proceeds has been
allocated for working capital. Consequently, the Company will have broad
discretion as to the specific application of these proceeds. See "Use of
Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION
The Offering involves an immediate and substantial dilution to new investors
of $3.76 per share of Common Stock between the public offering price of $5.25
per share of Common Stock and the pro forma net tangible book value of $1.29 per
share of Common Stock upon the completion of the Offering, assuming no exercise
of the Overallotment Option or the Representative's Warrants. See "Dilution."
RECENT LOSSES
The Company incurred losses in fiscal 1993, 1994 and 1995. It has only
recently begun to operate profitably. There can be no assurance that this trend
in increasing profitability will continue or, that the Company will not incur
substantial additional losses in the future. See "Selected Consolidated
Financial Data."
RECENT DELISTING
In connection with restructuring its business from dependence upon TEMPEST
products to its ADR technologies, the Company took significant write-downs and
accruals with the termination of its
13
<PAGE>
TEMPEST business. These write-downs and accruals, which exceeded $1 million,
caused the Company's net capital to fall below the minimum threshold for listing
on the Nasdaq SmallCap Market. As a result, the Company's Common Stock was
temporarily delisted from the Nasdaq SmallCap Market from March 1995 through May
1995. The Company immediately commenced a private placement of the Common Stock
which successfully raised additional capital and the Company's Common Stock
subsequently was relisted on the Nasdaq SmallCap Market. See "Certain
Transactions."
FUTURE CAPITAL NEEDS
The Company may need to raise additional funds through public or private
financing. No assurance can be given that additional financing will be available
or that, if available, it will be available on terms favorable to the Company or
its stockholders. If additional funds are raised through the issuance of equity
securities, the percentage ownership of then current stockholders of the Company
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. The
Company's capital requirements will depend on many factors, including, but not
limited to, the rate of market acceptance and competitive position of the
products incorporating the Company's technologies, the levels of promotion and
advertising required to launch and market such products and attain a competitive
position in the marketplace, the extent to which the Company invests in new
technology to support its products development efforts, and the response of
competitors to the products based on the Company's technologies.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act") and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to the products and
future economic performance of the Company. The forward-looking statements and
associated risks set forth in this Prospectus may include or relate to (i)
increasing sales through the introduction and development of new products and
product lines, (ii) success of marketing initiatives to be undertaken by the
Company, (iii) increasing sales through expansion of the Company's OEM channels,
(iv) success of the Company in forecasting demand for particular designs and
products and its success in establishing production and delivery schedules and
forecasts which accurately anticipate and respond to market demand, (v) success
of the Company in achieving increases in net sales such that cost of goods sold
and selling, general and administrative expenses may decrease as a percentage of
net sales, and (vi) the size and growth rate of the ADR market.
The forward-looking statements included herein are based upon current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based upon assumptions that the Company will
continue to design, manufacture, market and ship new products on a timely basis,
that competitive conditions within the ADR industry will not change materially
or adversely, that the ADR market will continue to experience steady growth,
that demand for the Company's products will remain strong, that the Company will
retain existing customers and key management personnel, that obsolescence risks
due to shifts in market demand will be minimized, that the Company's forecast
will accurately anticipate market demand and that there will be no material
adverse change in the Company's operations or business. Assumptions relating to
the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in forward-looking information will be realized.
Any of the other factors disclosed above could cause the Company's net sales or
operating results, or growth in net sales or net income, to differ materially
from prior results. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$11,590,000 assuming a public offering price of $5.25 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses. The Company will not receive any proceeds from the sale of
Common Stock by the Selling Stockholders, or from the exercise of the
Overallotment Option.
The Company expects to use the net proceeds of this Offering for general
corporate purposes, including research and development, sales and marketing
expenditures, and related capital expenditures and working capital. A portion of
the proceeds may also be used to acquire or invest in complementary businesses
or products or to obtain the right to use complementary technologies. However,
the Company has no present understandings, commitments, agreements or intentions
with respect to any material acquisitions of other businesses, products or
technologies. Pending use of the net proceeds for the above purposes, the
Company intends to invest such funds in short-term, interest-bearing, investment
grade obligations.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is currently traded on the Nasdaq SmallCap Market
under the symbol "MITK." The Company has applied to have its Common Stock listed
on the Nasdaq National Market upon the effectiveness of this Offering. The
following table sets forth, for the fiscal period indicated, the high and low
closing sales prices for the Common Stock as reported by the Nasdaq SmallCap
Market (or the OTC Bulletin Board for the period beginning March 1995 and ending
May 1995). The quotations for the Common Stock traded on the Nasdaq SmallCap
Market may reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1994
First Quarter....................................................................... $ 1 10/32 $ 1 1/16
Second Quarter...................................................................... 1 5/8 1 1/16
Third Quarter....................................................................... 1 7/16 15/16
Fourth Quarter...................................................................... 1 3/16 15/16
FISCAL 1995
First Quarter....................................................................... 1 1/4 13/16
Second Quarter...................................................................... 1 3/8 7/8
Third Quarter....................................................................... 1 3/16 15/16
Fourth Quarter...................................................................... 1 7/16 1 1/16
FISCAL 1996
First Quarter....................................................................... 1 15/32 1 7/32
Second Quarter...................................................................... 1 9/32 1 7/8
Third Quarter....................................................................... 6 1/8 2
</TABLE>
On July 5, 1996, the last reported sale price for the Common Stock, as
reported on the Nasdaq SmallCap Market, was $5.125 per share. The number of
record holders of Common Stock as of June 20, 1996 was 622 and the approximate
number of beneficial holders is estimated to be over 1,000 as of that same date.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its stock. The
Company currently anticipates that it will retain all future earnings for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future.
16
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1996 and on a pro forma basis to give effect to the sale of
the 2,500,000 shares of Common Stock offered by the Company hereby at an assumed
public offering price of $5.25 per share and the application of the estimated
net proceeds therefrom. The financial data in the following table should be read
in conjunction with the Company's Consolidated Financial Statements and notes
thereto and Unaudited Pro Forma Consolidated Statements of Operations contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------
ACTUAL PRO FORMA
-------------- --------------
<S> <C> <C>
Long-term liabilities (1)......................................................... $ 10,543 $ 10,543
-------------- --------------
Stockholders' equity:
Preferred stock, $0.001 par value; 1,000,000 shares authorized: no shares issued
and outstanding................................................................ -- --
Common stock, $0.001 par value; 20,000,000 shares authorized: 7,732,959 shares
issued and outstanding actual; 10,232,959 shares issued and outstanding pro
forma as adjusted (2).......................................................... 7,733 10,233
Additional paid-in capital...................................................... 3,426,595 15,014,095
Accumulated deficit............................................................. (1,744,122) (1,744,122)
-------------- --------------
Total stockholders' equity...................................................... 1,690,206 13,280,206
-------------- --------------
-------------- --------------
Total capitalization.......................................................... $ 1,700,749 $ 13,290,749
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) See Note 8 of Notes to Consolidated Financial Statements.
(2) Excludes at March 31, 1996: (i) up to 162,500 shares issuable upon exercise
of the Representative's Warrant, (ii) up to 215,000 shares issuable upon the
exercise of outstanding warrants and (iii) 413,905 shares issuable upon the
exercise of outstanding options granted under the Option Plans.
17
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1996 was
$1,572,037 or $.20 per share of Common Stock. Net tangible book value per common
share represents the amount of total tangible assets of the Company less the
amount of total liabilities divided by the number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of 2,500,000 shares
of Common Stock at an assumed offering price of $5.25 per share and receipt of
the estimated net proceeds therefrom, and recognizing that the Company will not
receive any proceeds from the sale of Common Stock by the Selling Stockholders
or the exercise of the Overallotment Option, the pro forma net tangible book
value of the Company at March 31, 1996 would have been approximately $13,162,037
or $1.29 per share. This represents an immediate increase in net tangible book
value of $1.09 per share of Common Stock held by the existing stockholders of
the Company, and an immediate dilution of $3.96 per share to new investors
purchasing shares at the public offering price. "Dilution" per share is
determined by subtracting pro forma net tangible book value per share after the
Offering from the amount paid for a share in the Offering.
The following table illustrates the dilution in net tangible book value per
share to new investors as of March 31, 1996.
<TABLE>
<S> <C> <C>
Assumed public offering price per share.............................. $ 5.25
Net tangible book value per common share as of March 31, 1996...... $ 0.20
Increase in net tangible book value per share attributable to
Shares offered hereby............................................. $ 1.09
---------
Pro forma net tangible book value per common share after Offering.... $ 1.29
---------
Dilution to new investors............................................ $ 3.96
---------
---------
</TABLE>
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to the
Company's consolidated statements of operations data for each of the three years
in the period ended September 30, 1995 and with respect to the Company's
consolidated balance sheets at September 30, 1994 and 1995 are derived from
consolidated financial statements that have been audited by Deloitte & Touche
LLP, independent auditors, which are included herein. The selected consolidated
financial data at March 31, 1996 and for the six months ended March 31, 1995 and
1996 are derived from unaudited financial statements of the Company, which are
included herein. In the opinion of management, the unaudited financial
statements have been prepared on the same basis as the audited financial
statements referred to above and include all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the financial
position of the Company and its results of operations for the indicated periods.
Operating results for the six months ended March 31, 1996 are not necessarily
indicative of results to be expected for any future period. The data should be
read in conjunction with the consolidated financial statements included herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales:
ADR..................................................... $ 2,874 $ 4,654 $ 5,135 $ 1,830 $ 3,749
TEMPEST (1)............................................. 10,191 5,509 1,498 1,498 0
--------- --------- --------- --------- ---------
Total net sales......................................... 13,065 10,163 6,633 3,328 3,749
Cost of goods sold........................................ 9,571 6,657 3,330 1,721 1,476
--------- --------- --------- --------- ---------
Gross margin.............................................. 3,494 3,506 3,303 1,607 2,273
Operating expenses:
Research and development................................ 1,192 1,024 1,004 576 587
Selling and marketing................................... 1,632 1,513 1,388 704 587
General and administrative.............................. 1,383 1,105 1,117 469 613
--------- --------- --------- --------- ---------
Total operating expenses.............................. 4,207 3,642 3,509 1,749 1,787
Income (loss) from operations............................. (713) (136) (206) (142) 486
Other income (expense):
Interest expense (net).................................. (195) (98) (67) (39) (82)
TEMPEST write downs and accruals........................ (1,046)
Gain on sale of TEMPEST................................. 205 205
--------- --------- --------- --------- ---------
Total other income (expense).......................... (195) (1,144) 138 166 (82)
Income (loss) before provision for income taxes........... (908) (1,280) (69) 24 404
Provision (benefit) for income taxes...................... (6) (223) 1 4 60
--------- --------- --------- --------- ---------
Net income (loss)......................................... $ (902) $ (1,058) $ (68) $ 20 $ 344
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income(loss) per common share......................... $ (.13) $ (.15) $ (.01) $ .00 $ .04
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding....................... 6,866 6,877 7,286 7,020 7,898
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) In March 1995, the Company sold the assets of its TEMPEST business and
discontinued TEMPEST operations.
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 236 $ 100 $ 104 $ 178 $ 301
Working capital............................................... 577 153 602 532 1,093
Total assets.................................................. 5,081 3,074 2,864 3,065 3,136
Long term liabilities......................................... 526 367 57 167 11
Total stockholders' equity.................................... 1,818 809 1,343 1,188 1,690
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED IN THIS
SECTION ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS RELATING
TO THE DEVELOPMENT AND PACE OF INTERNATIONAL SALES FOR THE COMPANY'S PRODUCTS,
EXPECTED TRENDS IN THE RESULTS OF THE COMPANY'S OPERATIONS, AND PROJECTIONS
CONCERNING AVAILABLE CASH FLOW AND LIQUIDITY FOR THE COMPANY FOLLOWING THE
COMPLETION OF THIS OFFERING. SEE "RISK FACTORS -- FORWARD-LOOKING STATEMENTS AND
ASSOCIATED RISKS."
OVERVIEW
Mitek develops and markets Automatic Data Recognition ("ADR") products for
specialized areas of the document image processing market. The Company's
products and services enable business and government agencies to automate high
speed, high volume data entry tasks. In November 1992, the Company entered a
license agreement with HNC, pursuant to which the Company obtained a perpetual
license (exclusive in the initial five years) to HNC's ADR technology, including
rights to neural network software programs that had been under development since
1987. In connection with this transaction, the Company employed twelve former
HNC personnel who had been the principal developers of the acquired technology.
Revenues from the sale of ADR products grew from $2.9 million in fiscal 1993 to
$4.7 million in fiscal 1994 and $5.1 million in fiscal 1995, though the Company
was unprofitable in each of those years. For the six months ended March 31,
1996, ADR revenues, principally attributable to the sale of the Company's
QuickStrokes API products, were $3.7 million and net income equaled $344,000.
The Company anticipates that its revenues from the sale of ADR products will
continue to increase for the remainder of fiscal 1996 and that it will be
profitable over that period. However, the Company's business and operating
results are subject to a variety of risks and uncertainties, and no assurance
can be given that the Company will actually achieve these results.
The Company was originally founded in 1982 to focus on a defense area known
as TEMPEST, a government program aimed at national security with respect to
electronic transmissions. Revenues from TEMPEST related operations equaled $10.2
million in the fiscal year ended September 30, 1993, but declined to $1.5
million in fiscal 1995 as a result of a decline in demand for TEMPEST products
leading to the sale of the TEMPEST product line in March 1995. In response to
declining TEMPEST revenue, the Company changed its focus to certain imaging
products which the Company believed would have greater market potential. Between
1992 and 1995, the Company significantly restructured its operations, reducing
personnel from approximately 240 to 28 and relocating to smaller facilities.
During that period, the Company incurred approximately $1.9 million of losses,
$1.8 million of which were write-offs associated with the TEMPEST business. In
March 1995, the Company sold all of the assets related to its TEMPEST business
for $350,000, marking its final step in shifting focus entirely to imaging
products.
Since fiscal 1992, the Company has developed new and enhanced ADR products
including the QuickStrokes API and Premier Forms Processor products. Revenues
from ADR products have increased steadily from 1992, and the Company intends to
continue to increase its emphasis on this market. The Company anticipates that
research and development and sales and marketing expenditures for fiscal years
1996 and 1997 will increase significantly. Three customers, ABC Bull, BancTec,
Inc., and TCSI accounted for 47% of the Company's net revenues for the first six
months of fiscal 1996. See "Business -- Customers and End Users."
Currently, the Company derives its revenues principally from sales of its
ADR products and, to a lesser extent, from sales of software maintenance
contracts relating to its products. The Company recognizes revenues in
accordance with the American Institute of Certified Public Accountants Statement
of Position No. 91-1, Software Revenue Recognition. Accordingly, software
product revenues are recognized upon shipment if collection is probable and the
Company's remaining obligations are insignificant. Product maintenance revenues
are amortized over the length of the maintenance
20
<PAGE>
contract, which is usually twelve months. Inflation has not had a significant
impact on the Company's operating results to date, nor does the Company expect
it to have a significant impact through fiscal 1997.
Historically, approximately 70% of the Company's revenue has been
attributable to sales of its software in combination with a co-processor board
as a "bundled" package. The Company anticipates that in the future the speed and
processing power of popular microprocessors, such as the Pentium P-6, will
increase, thus potentially reducing the need for co-processor boards as part of
the Company's solution. Although this evolution in hardware technology could
initially cause a reduction in the Company's total net sales, the Company
believes this change could allow it to provide more cost effective solutions,
which in turn could increase the rate of market acceptance for the Company's
products. Additionally, the Company has historically received greater gross
margins on the software component of its products, and therefor, anticipates
that any shift in its revenue mix toward a larger percentage of software-only
sales, as a result of the hardware evolution, would favorably impact gross
margins.
The Company is pursuing a strategy of developing products capable of
addressing document image processing requirements in selected international
markets by developing localized versions of its products and establishing
overseas distribution channels. International sales accounted for approximately
25% of the Company's net sales for the six month period ended March 31, 1996.
International sales in the past twelve months were made in sixteen countries.
See "Business -- Products." There can be no assurance that the Company's efforts
to develop products, international markets or to develop international sales and
support channels will be successful. The failure of such efforts could have a
material adverse effect on the Company's business, financial condition and
results of operations. International sales are subject to inherent risks,
including longer sales cycles, unexpected changes in regulatory requirements,
import and export restrictions and tariffs, difficulties in staffing and
managing foreign operations, the burdens of complying with a variety of foreign
laws, greater difficulty or delay in accounts receivable collection, potentially
adverse tax consequences and political and economic instability.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items of
the Company's consolidated statements of operations as a percentage of its net
sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales:
ADR..................................................... 21.6% 45.8% 77.4% 55.0% 100.0%
TEMPEST................................................. 78.4 54.2 22.6 45.0 0
----- ----- ----- ----- -----
Total net sales......................................... 100.0 100.0 100.0 100.0 100.0
Gross margin.............................................. 26.7 34.5 49.8 48.3 60.6
Research and development.................................. 9.1 10.1 15.1 17.3 15.7
Selling and marketing..................................... 12.5 14.9 20.9 21.2 15.7
General and administrative................................ 10.6 10.9 16.8 14.1 16.4
Interest-net.............................................. 1.5 1.0 1.0 1.2 2.2
TEMPEST write downs and accruals.......................... 10.3
Other income.............................................. 3.1
Income (loss) before income taxes......................... (6.9) (12.6) (1.0) .7 10.8
Provision (benefit) for income taxes...................... -- 2.2 -- .1 1.6
----- ----- ----- ----- -----
Net income (loss)......................................... (6.9)% (10.4)% (1.0)% .6% 9.2%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
21
<PAGE>
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1996 AND 1995
NET SALES. Net sales for the six month period ended March 31, 1996 were
$3,749,000, comprised solely of ADR sales, compared to $3,328,000, comprised of
TEMPEST and ADR sales, for the same period in 1995, an increase of $421,000, or
12.7%. Net sales, which also were comprised solely of ADR sales, for the six
month period ended March 31, 1996 were $3,749,000 compared to $1,830,000 for
prior year period, an increase of $1,919,000, or 104.9%.
GROSS MARGIN. Gross margin for the six month period ended March 31, 1996
was $2,273,000 compared to $1,607,000 for the same period in 1995, an increase
of $666,000, or 41.4%. The increase was primarily due to a change in the product
mix. As a percentage of sales, gross margin increased from 48.3% of sales in the
six month period ended September 30, 1994 to 60.6% of sales in the same period
in 1995. This increase is attributable to the Company's net sales being derived
exclusively from its ADR products, which carry a substantially higher gross
margin than the Company's TEMPEST business.
RESEARCH AND DEVELOPMENT. Research and development expenses for the six
months ended March 31, 1996 were $587,000 compared to $576,000 for the same
period in 1995, an increase of $11,000, or 1.9%. As a percentage of net sales,
research and development expenses decreased to 15.7% for the first six months of
fiscal 1996 compared to 17.3% for the first six months of fiscal 1995. The
decrease was primarily due to the increased net sales, as the actual dollar
amount spent on research and development increased only slightly but such
increase was offset by an increase in net sales.
SELLING AND MARKETING. Selling and marketing expenses for the six months
ended March 31, 1996 were $587,000 compared to $704,000 for the same period in
1995, a decrease of $117,000, or 16.6%. As a percentage of net sales, selling
and marketing expenses decreased to 15.7% for the first six months ended March
31, 1996 compared to 21.2% for the first six months ended March 31, 1995. The
decrease was primarily due to reduced advertising, promotion, and outside
consulting costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the six
months ended March 31, 1996 were $613,000 compared to $469,000 for the same
period in 1995, an increase of $144,000 or 30.7%. As a percentage of net sales,
general and administrative expenses increased to 16.4% for the first six months
of fiscal 1996 compared to 14.1% for the first six months of fiscal 1995. The
increase was primarily due to increased public relations costs and bad debt
reserves.
INTEREST EXPENSE. Interest expense for the six months ended March 31, 1996
was $82,000 compared to $39,000 for the same period in 1995, an increase of
$43,000 or 110.3%. The increase was primarily due to an increase in borrowing
costs and to a lesser extent, an increase in average debt outstanding.
PROVISION FOR INCOME TAXES. The provision for income taxes consists
primarily of federal alternative minimum tax and state tax. The tax rate is
substantially below the federal statutory rate due to the utilization of net
operating loss carryovers for which no benefit has previously been taken.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
NET SALES. Net sales for the fiscal year ended September 30, 1995 were
$6,633,000 compared to $10,163,000 for the same period in 1994, a decrease of
$3,530,000, or 34.7%. ADR revenue for the fiscal year ended September 30, 1995
was $5,135,000 compared to $4,654,000 for the same period in 1994, an increase
of $481,000, or 10.3%. This increase was primarily attributable to an increase
in the number of OEMs and systems integrators selling the Company's ADR
products. TEMPEST revenue for the corresponding periods was $1,498,000 and
$5,509,000, respectively. The decrease reflects the decline in demand for
TEMPEST products and the complete sale of the TEMPEST business in March 1995.
Net sales for the fiscal year ended September 30, 1994 were $10,163,000 compared
to $13,065,000 for the same period in 1993, a decrease of $2,902,000, or 22.2%.
ADR revenue for the fiscal year ended September 30, 1994 was $4,654,000 compared
to $2,874,000 for the same period in 1993, an increase of $1,780,000 or 61.9%.
This increase was primarily attributable to two large sales to system
integrators in connection with significant system installations by Avon Products
Corporation
22
<PAGE>
and the Mexican Tax Authority. TEMPEST revenue for the corresponding periods was
$5,509,000 and $10,191,000, respectively. The decrease was attributable to a
decline in demand for TEMPEST products.
GROSS MARGIN. Gross margin for the fiscal year ended September 30, 1995 was
$3,303,000, compared to $3,506,000 for the fiscal year ended September 30, 1994
and $3,494,000 for the fiscal year ended September 30, 1993, decreases of
$203,000 and $191,000 in the same periods, respectively. However, as a
percentage of net sales, gross margin increased to 49.8% of net sales for the
fiscal year ended September 30, 1995 as compared to 34.5% for the fiscal year
ended September 30, 1994 and 26.7% for the fiscal year ended September 30, 1993.
The increase in gross margin as a percentage of net sales is primarily the
result of a change in product mix; moving away from TEMPEST products, which
carried a relatively low gross margin, and into the relatively higher gross
margin ADR products. The impact on gross margin attributable to the TEMPEST
products ended with the sale of the TEMPEST business in March 1995. Royalties
and amortization charges resulting from the HNC acquisition in fiscal years
1995, 1994 and 1993 were $655,000, $753,000 and $693,000, respectively. All
royalties payable to HNC in connection with the acquisition of the ADR products
group have been paid in full. Monthly amortization of expenses related to the
acquisition of the ADR products group of $16,667 will continue until December
1997.
RESEARCH AND DEVELOPMENT. Research and development expenses for the fiscal
year ended September 30, 1995 were $1,004,000 compared to $1,024,000 for the
fiscal year ended September 30,1994 and $1,192,000 for the fiscal year ended
September 30,1993, decreases of $20,000 and $188,000 in the same periods,
respectively. However, stated as a percentage of sales, research and development
expenses accounted for 15.1% of sales for the fiscal year ended September 30,
1995, and 10.1% and 9.1% for the fiscal years ended September 30, 1994 and 1993,
respectively. The increase in research and development expenses, as a percentage
of net sales, is attributable to the decrease in net sales during the period
examined. During this period, the Company devoted an increasing percentage of
its research and development expenditures to development and enhancement of its
ADR technologies. The Company anticipates a significant increase in absolute
dollars spent on research and development expenses due to increased staffing
levels and payments to third parties associated with new product development and
existing product enhancements.
SELLING AND MARKETING. Selling and marketing expenses for the fiscal year
ended September 30, 1995 were $1,388,000 compared to $1,513,000 for the same
period in 1994, a decrease of $125,000 or 8.3%. Selling and marketing expenses
for the fiscal year ended September 30, 1993 were $1,632,000. Selling and
marketing expenses accounted for 20.9% of net sales for the fiscal year ended
September 30, 1995 compared to 14.9% and 12.5% of sales for the fiscal years
ended September 30, 1994 and 1993, respectively. The increase when stated as a
percentage of net sales, was the result of the decrease in overall net sales, as
well as a reduction in personnel costs offset by costs incurred in connection
with the introduction of new ADR products. The Company anticipates selling and
marketing expenses will increase in absolute dollars in the future due to
efforts to increase sales by hiring industry specialists and additional sales
and marketing staff.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
fiscal year ended September 30, 1995 were $1,117,000 compared to $1,105,000 in
1994, an increase of $12,000 or 1.1%. The increase was due to overall spending
reductions of approximately $70,000 offset by approximately $80,000 of expenses
incurred in conjunction with the Company's move to smaller facilities following
the sale of the TEMPEST business unit. As a percentage of net sales, general and
administrative expenses increased from 10.9% of sales in 1994 to 16.8% of net
sales in 1995 as a result of the decrease in management personnel offset by one
time charges associated with the termination of leases of the Company's prior
facilities. General and administrative expenses for the fiscal year ended
September 30, 1994 were $1,105,000 compared to $1,383,000 for the same period in
1993, a decrease of $278,000 or 20.1%. This decrease was primarily attributable
to a $126,000 bad debt recovery, as well as reductions in personnel. The Company
has completed major adjustments in connection with the transition from TEMPEST
to ADR products, and expects moderate increases in the dollar amount
23
<PAGE>
spent on general and administrative expenses commensurate with the growth of the
Company's business and that general and administrative expenses will remain
stable or decrease as a percent of net sales.
TEMPEST WRITE DOWNS AND ACCRUALS. During September 1994, the Company
determined that the value of certain assets and the benefit of certain
commitments related to the TEMPEST product line had been significantly impaired
due to the continued decline in sales of these products. Accordingly, the
Company recorded a charge of $1,046,000 during the quarter ended September 30,
1994, related to the write down of certain assets to net realizable value and
the accrual of certain obligations for which no future benefit is expected. The
charge was comprised of inventory obsolescence ($816,000), accrual of lease
obligations on a closed facility ($124,000), and other related charges
($106,000).
INTEREST EXPENSE. Interest expense for the fiscal year ended September 30,
1995 was $67,000 compared to $98,000 for the same period in 1994, a decrease of
$31,000, or 31.6%. Interest expense, as a percentage of net sales, amounted to
1%, 1% and 1.5% in fiscal years ended September 30, 1995, 1994 and 1993,
respectively. The decreases in interest expense resulted from a substantial
decrease in average outstanding interest bearing debt, and to a lesser extent,
from lower interest rates. The Company anticipates minimal or no interest
expense in the foreseeable future after receiving the proceeds of this Offering.
OTHER INCOME. Other income consists of the gain on the sale of the TEMPEST
business, made up of the following components: sale price ($350,000) offset by
the carrying cost of inventory sold ($132,000) and costs related to the
transaction ($13,000).
INCOME TAXES. For the fiscal year ended September 30, 1995, the Company
recorded an income tax provision of $800, which represents the minimum state
taxes payable. For the fiscal years ended September 30, 1994 and 1993 the
Company recorded an income tax benefit of $223,000 and $6,000, respectively.
Such benefits represent the carryback of net operating losses to recover taxes
paid in fiscal years 1991 and 1990. The Company anticipates utilizing the
balance of the two benefits in the fourth quarter of fiscal 1996 and the first
quarter of fiscal 1997 and anticipates realizing the benefits of research and
development credit carry forwards beginning in fiscal 1997.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial information for
fiscal 1995 and the first two quarters of fiscal 1996. This information is
derived from unaudited financial statements that include, in the
24
<PAGE>
opinion of management, all normal recurring accruals necessary for a fair
presentation of the information set forth therein. The operating results for any
quarter are not necessarily indicative of results to be expected for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
1994 1995 1995 1995 1995 1996
------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales:
ADR................................................................. $1,071 $ 759 $1,563 $1,742 $1,825 $1,924
TEMPEST (1)......................................................... 821 677 0 0 0 0
------- ------- ------- -------- ------- -------
Total net sales..................................................... 1,892 1,436 1,563 1,742 1,825 1,924
------- ------- ------- -------- ------- -------
Gross margin.......................................................... 861 746 863 833 1,085 1,187
------- ------- ------- -------- ------- -------
Operating expenses:
Research and development............................................ 289 287 230 198 268 320
Selling and marketing............................................... 306 398 347 337 303 283
General and administrative.......................................... 230 238 373 276 355 258
------- ------- ------- -------- ------- -------
Total operating expenses.......................................... 825 923 950 811 926 861
------- ------- ------- -------- ------- -------
Income (loss) from operations......................................... 36 (177) (87) 22 159 326
Other income (expense):
Interest expense (net).............................................. (19) (21) (10) (17) (48) (33)
Other income........................................................ 205
------- ------- ------- -------- ------- -------
Total other income (expense)...................................... (19) 184 (10) (17) (48) (33)
------- ------- ------- -------- ------- -------
Income (loss) before provision for income taxes....................... 17 7 (97) 5 111 293
Provision (benefit) for income taxes.................................. 3 1 (3) 22 38
------- ------- ------- -------- ------- -------
Net income (loss)..................................................... 14 6 (97) 8 89 255
------- ------- ------- -------- ------- -------
------- ------- ------- -------- ------- -------
Net increase (loss) per common share.................................. $ .00 $ .00 $ (.01) $ .00 $ .01 $ .03
------- ------- ------- -------- ------- -------
------- ------- ------- -------- ------- -------
Weighted average shares outstanding................................... 7,010 7,029 7,562 7,727 7,835 7,954
------- ------- ------- -------- ------- -------
------- ------- ------- -------- ------- -------
AS A PERCENTAGE OF NET SALES:
Net sales:
ADR................................................................. 56.6% 52.9% 100.0% 100.0% 100.0% 100.0%
TEMPEST (1)......................................................... 43.4 47.1 0.0 0.0 0.0 0.0
------- ------- ------- -------- ------- -------
Total net sales..................................................... 100.0 100.0 100.0 100.0 100.0 100.0
Gross margin.......................................................... 45.5 51.9 55.2 47.8 59.5 61.7
Research and development.............................................. 15.2 20.0 14.7 11.4 14.7 16.6
Selling and marketing................................................. 16.2 27.7 22.2 19.3 16.7 14.7
General and administrative............................................ 12.2 16.6 23.9 15.8 19.5 13.4
Interest expense (net)................................................ 1.0 1.5 .6 1.0 2.6 1.7
Gain on sale of TEMPEST............................................... 14.3
Income (loss) before provision for income taxes....................... .9 .5 (6.2) .3 6.1 15.2
Provision for income taxes............................................ .2 .1 .2 1.2 2.0
Net income (loss)..................................................... .7 .4 (6.2) .5 4.9 13.2
------- ------- ------- -------- ------- -------
------- ------- ------- -------- ------- -------
</TABLE>
- ------------------------
(1) In March 1995, the Company sold the assets of its TEMPEST business and
discontinued TEMPEST operations.
The Company's quarterly revenues and operating results have varied
significantly in the past and may do so in the future. General and
administrative expenses for the quarter ended June 30, 1995 included a one-time
charge of $80,000 in connection with the relocation of the Company's facilities.
General and administrative expenses for the quarter ended December 31, 1995
reflected an increase in the reserves for a questionable account. In June 1995,
the Company entered into a one-time arrangement with one of its significant
customers, BancTec, Inc., pursuant to which BancTec acquired certain software
licenses and co-processor boards at a reduced price, and agreed to pay the
associated license fees in advance of delivery of the co-processor boards. The
result of this transaction
25
<PAGE>
was to increase gross margin in the quarter ended June 30, 1995 as the Company
recognized revenues from the sale of the software licenses without any
associated costs, and to decrease gross margins for the quarter ended September
30, 1995 as the Company recognized revenues from the sale of co-processor boards
at an unusually low price, with the associated cost of goods remaining standard.
A significant portion of the Company's business has been derived from
substantial orders placed by large organizations, and the timing of such orders
has caused material fluctuations in the Company's operating results. Although
the Company hopes to derive a greater percentage of its revenues from monthly
usage fees and maintenance fees under long-term contracts, there can be no
assurance that the Company will realize such recurring revenues. The Company's
expense levels are based in part on its expectations regarding future revenues
and in the short term are fixed to a large extent. Therefore, the Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. As a result, if anticipated revenues in any quarter do not
occur or are delayed, the Company's operating results for that quarter would be
disproportionately affected. Operating results may also fluctuate due to factors
such as the demand for the Company's products, product life cycles, the
introduction and acceptance of new products and product enhancements by the
Company or its competitors, changes in the mix of distribution channels through
which the Company's products are offered, changes in the level of operating
expenses, customer order deferrals in anticipation of new products, competitive
conditions in the industry and economic conditions generally or in various
industry segments.
In addition, due in part to the mission-critical nature of certain of the
Company's applications, potential customers perceive high risk in connection
with adoption of the Company's neural network technology. As a result, customers
have been cautious in making product acquisition decisions. In addition, the
purchase of the Company's products involves a significant operational commitment
on the part of end users, with the attendant delays frequently associated with
customers' internal procedures to approve large capital expenditures and test
and accept new technologies that affect key operations. For these and other
reasons, the sales cycle associated with the purchase of the Company's products
is typically lengthy and subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews, over which the
Company has little or no control. Because of the lengthy sales cycle, if
revenues forecasted from a specific customer for a particular quarter are not
realized in that quarter, the Company likely would not be able to generate
revenues from alternate sources in time to compensate for the shortfall. As a
result, and due to the typical size of customers' orders, a lost or delayed sale
could have a material adverse effect on the Company's quarterly operating
results.
The Company expects quarterly fluctuations to continue for the foreseeable
future. Accordingly, the Company believes that period-to-period comparisons of
its financial results should not be relied upon as an indication of future
performance. No assurance can be given that the Company will be able to achieve
or maintain profitability on a quarterly or annual basis in the future. Due to
all of the foregoing factors, it is possible that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. See "Risk Factors -- Potential
Fluctuations in Quarterly Results."
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company's working capital had increased to
$1,093,000 from $602,000 at September 30, 1995. This increase was primarily
attributable to earnings applied to reduce bank debt and to decreases in
accounts payable resulting in a net increase in working capital of $491,000. The
Company's operating activities provided cash of $364,056 in the six months ended
March 31, 1996 and used cash of $54,489 in the same period in 1995. For the six
months ended March 31, 1996, net cash provided by operating activities was
primarily due to net income plus depreciation and amortization, and an increase
in accounts payable and accrued expenses, offset by increase in inventories,
prepaid expenses, and accounts receivable. For the six months ended March 31,
1996, net cash used in investing activities was $29,166 for purchases of
property and equipment. Net cash used in financing
26
<PAGE>
activities for the six months ended March 31, 1996 was $137,595 which was a
result of the repayment of existing debt offset by the collection of notes
receivable and proceeds from the exercise of stock options.
The Company paid off its factoring line of credit in March 1996 and
concurrently established a $400,000 line of credit with Rancho Santa Fe Bank
("Bank") for working capital purposes. Borrowings under this line bear interest
at the rate of 2 1/2% over the Bank's Prime Rate and the line of credit
currently expires on February 1, 1997. At June 30, 1996, the Company had not
drawn upon this line and the full amount was available for borrowing. The
Company also has a demand loan with the Bank in the principal amount of
$200,000, which matures on January 11, 1997. At June 30, 1996, $107,374 was
outstanding under the loan, with a monthly debt service of $20,000.
The Company expects to make capital expenditures for equipment throughout
the remainder of fiscal 1996, and expected personnel additions will require
additional capital expenditures. The Company believes that net proceeds from
this Offering, together with existing cash, credit available under the credit
line and cash generated from operations, will be sufficient to finance its
operation for the next twelve months. All cash in excess of working capital
requirements will be kept in short term, investment grade securities.
The Company was delisted from the Nasdaq SmallCap Market in March 1995 for
falling below the minimum net capital requirement. The decline in the Company's
net capital was the result of a write down of assets and obligations related to
the Company's TEMPEST business. In March 1995, the Company conducted a private
placement of its common stock, raising net proceeds of $475,704 and successfully
reapplied for listing on the Nasdaq SmallCap Market in May 1995. See "Risk
Factors -- Recent Delisting" and "Certain Transactions."
27
<PAGE>
BUSINESS
OVERVIEW
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED IN THIS
SECTION ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS RELATING
TO THE COMPANY'S STRATEGIES, THE DEVELOPMENT AND PACE OF INTERNATIONAL SALES FOR
THE COMPANY'S PRODUCTS, AND EXPECTED TRENDS IN THE RESULTS OF THE COMPANY'S
OPERATIONS. SEE "RISK FACTORS -- FORWARD-LOOKING STATEMENTS AND ASSOCIATED
RISKS."
Mitek develops and markets automatic data recognition ("ADR") products which
enable the automation of costly and labor intensive business functions such as
check and remittance processing, forms processing and order entry. The Company's
ADR products incorporate proprietary object-oriented neural network software
technology for the recognition and conversion of hand printed and machine
generated characters into digital languages such as ASCII code or Unicode.
Neural networks are powerful tools for pattern recognition applications and
consist of sets of coupled mathematical equations with adaptive parameters that
self adjust to "learn" various forms and patterns. The Company's ADR products
combine the Company's neural network software technology with an extensive
database of character patterns, enabling them to make fine distinctions across a
wide variety of patterns with high speed, accuracy and consistency. The Company
leverages its core technology across a family of ADR products that the Company
believes offer the highest accuracy commercially available for the recognition
of hand printed characters.
The Company's ADR products incorporate the Company's intelligent character
recognition ("ICR") software engine, QuickStrokes API, with high speed
co-processor boards which are configurable to meet customer requirements. The
Company's products are sold to original equipment manufacturers ("OEMs"), such
as BancTec, Inc., NCR, ABC Bull, Unisys and IA Corporation, systems integrators
such as SHL, a subsidiary of MCI, TCSI and value-added resellers ("VARs") such
as DEC, TRW, OBOS, CBSI, Moon Sun and Kliendeinst. Major end users include AVON
Products Company, certain of the Federal Reserve Banks, SCS Communications, the
Australian Tax Office, the Mexican Tax Authority and American Express.
QuickStrokes API can process documents in fourteen languages.
The Company has recently begun to address vertical end user markets through
the introduction of Premier Forms Processor ("PFP"). PFP incorporates Mitek's
core ICR technology in an application designed to be marketed directly to end
users in a broad variety of industries with requirements for high volume
automated data entry. PFP runs on the Windows operating platform on stand alone
or networked personal computers, features a graphical user interface ("GUI"),
and is designed for easy installation and configuration by the end user. The
Company also sells its PFP products to systems integrators and VARs.
INDUSTRY BACKGROUND
Despite significant advances in information technology, the predicted
"paperless office" has not arrived. Rather, the volume of paper used in business
today has substantially increased. According to industry reports, nearly three
times as much paper is generated today as before the advent of the information
revolution. In the United States, approximately 600,000 people are engaged in
data entry of information contained in hand printed and machine generated
documents such as check processing, medical forms, remittances, and payroll.
Moreover, data entry functions are predominately ministerial in nature and
include highly repetitive and labor intensive tasks. Individuals engaged in data
entry functions may develop debilitating long term health problems such as
repetitive stress syndrome thereby increasing company health care costs and
decreasing productivity.
Enterprises with large volumes of data entry requirements have long sought
to automate portions of the data entry task, including the use of documents
image processing ("DIP") technology to capture and manipulate paper images
digitally. In rudimentary form, DIP has existed in the form of optical
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character recognition ("OCR") technology for nearly 30 years. Despite this
longevity, OCR technologies remain unsuitable for certain DIP applications, in
part because OCR technologies do not generally achieve sufficient levels of
accuracy in recognizing hand printed or hand and machine generated characters.
Beginning in the late 1980's, the inherent limitations of OCR technologies
led to the development of ICR, an advanced technology capable of recognizing
hand-printed characters. Originally, ICR technologies were deployed primarily in
check processing applications, which had not been successfully addressed by OCR
products. They have continued to gain acceptance in the production imaging
segment of the DIP market, which is comprised of hand printed and/or hand
printed and machine generated forms processing. However, despite their early
success in certain applications, the usefulness of many ICR products remains
limited due to their reliance upon limited databases resulting in the products'
inability to adequately "learn" to recognize characters and patterns that
include inconsistencies and ambiguities. In addition, most ICR products
commercially available to date have been relatively expensive, custom
applications tailored to specific niche uses, and have not historically
incorporated the flexibility to enable their deployment across a broad range of
vertical applications.
THE MITEK SOLUTION
The Company develops, markets and supports what it believes to be the most
accurate ADR products commercially available for mission critical applications.
The Company's unique proprietary technology recognizes hand printed and machine
generated characters with a level of accuracy that renders the Company's ADR
products a viable alternative to manual data entry in many applications. The
Mitek solution allows customers that process large volumes of standardized hand
printed documents to do so more quickly, with greater accuracy and at reduced
costs.
The following are the key attributes of the Mitek solution:
ACCURACY IN MISSION CRITICAL APPLICATIONS. The market for ICR technologies
is characterized by applications with critical dependence on accuracy -- the
historic impediment to automated data image processing of hand printed documents
- -- such as processing checks, bank drafts, payments letters, and credit card
payment forms. The Company's QuickStrokes API engine, based upon object-oriented
software, provides high level accuracy in high volume hand printed and machine
generated character recognition applications. A system utilizing the Company's
ADR products has been installed at the Avon Products Company's order processing
plant, which processes over 2 million hand printed order forms per day. The
system, which incorporates the Company's ICR engine, has been able to achieve
and maintain an accuracy rate of 99.7%. The Company believes, based on market
testing and acceptance by major OEMs and end users, and based upon recognition
data submitted to the National Institute of Standards and Technology by the
Company and certain of its competitors, that its products offer increased
accuracy and superior cost/performance relative to its competitors.
RAPID DEPLOYMENT AND DEMONSTRATED RETURN ON INVESTMENT FOR CUSTOMERS. The
Company's software solutions are designed to be rapidly deployed and to quickly
demonstrate cost-benefit advantages to the customer. The Company usually
delivers its mission-critical products over a period of days, and customer
return on investment periods are often less than one year. Return on investment
is rapid because the software products address applications that have a
significant profit impact. The Company's products are often installed at
customer sites that process large numbers of similar forms on a daily basis. The
Company's ADR object-oriented software products can typically process hand
printed forms at a significantly higher rate and with greater accuracy than
conventional data entry methods, resulting in significant cost reductions.
FLEXIBLE DESIGN OPERATING ON INDUSTRY STANDARD PLATFORMS. Mitek's solutions
can be integrated into a customer's existing environment or architecture. The
Company has developed interfaces with many of the most popular operating
platforms such as MS-DOS, MS-Windows 3.1, MS-Windows NT, MS-Windows 95, OS/2,
Sun UNIX, OS/F, Solaris and PC UNIX. Mitek's application products represent a
complete software solution, including software, communications interfaces and
GUIs. The Company
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also supplies system integration, ongoing performance analysis and application
consulting services to help ensure ongoing success. The Company believes that
this flexible combination of product, service and platforms represents an
advancement that enables successful intelligent system development in many
mission-critical data entry applications.
SCALABLE DESIGN TO MEET A VARIETY OF NEEDS AND BUDGETS. The Company's ADR
software includes a proprietary flexible, neural network ICR engine, based upon
object-oriented software. The flexibility of this engine allows the Company to
customize products or create product enhancements through the addition of
modules that may be customized to a client's needs on a cost efficient basis in
a relatively rapid time frame. The Company has traditionally licensed its
QuickStrokes API recognition engine to OEMs, VARs and systems integrators who
have incorporated the engine into a variety of specific customer applications.
With the introduction of its Premier Forms Processor ("PFP"), the Company has
entered the end user market with a scalable turnkey product that can be tailored
by the Company, VARs or the end user to meet a variety of application
requirements. The scalability of the design also permits Mitek to bring the high
accuracy of its QuickStrokes API engine to lower volume applications on a cost
effective basis. Moreover, the PFP is designed to be scalable to provide
additional processing speed and capacity with enhancements to the end users'
hardware and software. The Company prices its products to deliver what the
Company believes to be the best functionality to price available in the
marketplace.
BUSINESS STRATEGY
The Company's objective is to become the leading provider of technologically
advanced ADR products to the production imaging segment of the DIP market. The
Company's strategy for achieving this goal includes the following:
EXPAND SYSTEMS INTEGRATORS AND OEM CHANNELS. The Company believes that
systems integrators and OEMs of document imaging production equipment represent
the most direct route to the end user and, therefore the Company's most
significant revenue opportunity. The Company plans to expand the number of
systems integrators and OEMs that utilize its products, and further develop
existing relationships with leading providers of electronic and document-based
financial transaction processing systems, such as TCSI, BancTec, Inc. and
Kleindeinst. The Company strives to deliver superior service to these customers
by developing frequent product enhancements and working closely with its
customers to ensure that the customers' needs are met by the Company's product
offerings.
PENETRATE VERTICAL MARKETS THROUGH THE DEVELOPMENT OF SPECIALIZED USER
INTERFACES. The Company intends to deploy its advanced ICR technology in a
series of ADR products addressing the requirements of strategic vertical markets
such as insurance, payroll processing and home healthcare. The Company believes
these markets represent a substantial opportunity due to the high level of data
entry/forms processing associated with these industries.
EXPAND SALES AND MARKETING CAPABILITY. The Company plans to significantly
expand its sales and marketing staff (both domestically and internationally) in
order to improve its sales to OEMs, systems integrators, VARs and end users. The
Company plans to add sales and marketing personnel with industry and channel
experience, pursue direct sales in several strategic markets and eventually open
sales, marketing and support offices in areas of the United States where large
OEMs and significant end users or large potential end users of its products are
located.
BUILD RECURRING REVENUE BASE BY EMPHASIZING MAINTENANCE OPPORTUNITIES. The
Company continues to market its ADR products as an ongoing service that includes
product updates, application consulting, and on-line or on-site support and
maintenance. The Company considers this to be an opportunity to enhance revenue
through better marketing of its maintenance service.
STRENGTHEN TECHNOLOGICAL LEADERSHIP. The Company believes that its ICR
technology based upon object-oriented neural networks enables it to provide the
most technologically advanced recognition engines available in the marketplace
for the recognition of hand printed characters. Since 1992,
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the Company has significantly enhanced its technology and plans to strengthen
its leadership position in this area by improving the recognition capability,
functionality and scalability of its products through ongoing investment in
research and development and the introduction of enhanced products to the
marketplace.
PRODUCTS
The Company incorporates its advanced ICR software technology into a family
of document imaging products addressing requirements for accurate, high volume,
automated entry of data residing on hand printed or machine generated forms. The
following chart depicts a typical document image processing system:
DOCUMENT IMAGING FLOW CHART
[CHART]
Graph depicts various work stations and document and information flow for a
typical Mitek Systems, Inc. document image process system.
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The following table lists the Company's current products accounting for
substantially all of the Company's sales:
MITEK PRODUCTS
<TABLE>
<CAPTION>
PLATFORMS
PRODUCT NAME APPLICATION SUPPORTED TARGET CUSTOMER LIST PRICE
<S> <C> <C> <C> <C>
QuickStrokes Remittance Processing DOS, OEMs, VARs, $9,000.00
API CAR and Check Clearing Windows3.x, Systems
Windows95, Integrators
WindowsNT,
OS/2,
QuickStrokes OS/F, HP-UNIX, $20,000.00 -
API CAR Solaris $30,000.00
w/Balboa,
Cortez and
Diego
Co-processor
Boards
QuickStrokes General Forms DOS, OEMs, VARs $4,000.00
API Forms Processing Windows3.x, Systems
Windows95, Integrators
WindowsNT,
OS/2, OS/F,
HP-UNIX,
QuickStrokes Solaris $15,000.00 -
API Forms $22,000.00
w/Balboa,
Cortez and
Diego
Co-processor
Boards
PFP General Forms Windows3.x, VARs Systems $14,000.00
Processing Windows95 Integrators, End
Users
PFP w/Balboa $25,000.00
Co-processor
Boards
</TABLE>
QUICKSTROKES API. QuickStrokes API is a "recognition engine." QuickStrokes
API CAR performs Courtesy Amount Recognition ("CAR"), which recognizes the
numeric portion of personal and commercial checks. QuickStrokes API Forms is a
recognition engine for forms that is licensed to large integrators of forms
processing systems, and to OEMs for use in remittance processing systems. This
recognition engine was designed to be the foundation of a forms processing
system. The QuickStrokes API products have been developed with a flexible
underlying architecture to accommodate additional features and functionality as
dictated by market demands.The Company's QuickStrokes API products are currently
in use processing sales orders, checks and financial documents, tax forms,
credit card drafts, ZIP codes, time sheets, and insurance applications.
PREMIER FORMS PROCESSOR. The Company has developed a proprietary forms
processing application, the Premier Forms Processor (PFP) which incorporates the
Company's core ICR technology in an application designed for end users in a
broad variety of industries with requirements for high volume automated data
entry. PFP consists of the modules required to implement a forms processing
application and can recognize hand printed and machine generated characters. PFP
runs on the Windows operating platform on stand alone or networked personal
computers, features a GUI, and is designed for easy installation and
configuration by the end user.
OTHER PRODUCTS. The Company markets the NiFaxshare product line, which
combines its ADR technologies with conventional incoming facsimile routing
technologies to provide economical and practical "faxmail" solutions. The
Company markets its NiFaxshare products to large end users, such as the Bank of
Montreal, Capital Cities-ABC, and J. P. Morgan Private Banking, as well as a
network of VARs. The QuickFrames API is an advanced page segmentation system
that separates the scanned image of a document into isolated regions, each
containing a single information type. The system
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outputs the coordinates and type of each region and can produce "cut-out" images
of isolated regions for easier processing. The QuickFrames API system is
well-suited for document imaging and forms processing applications in insurance,
banking, legal and governmental agencies.
The Company has an internal customer service department that handles
installation and maintenance requirements. The majority of inquiries are handled
by telephone, with occasional visits to the customer's facilities. The Company's
strategy is that as the installed base of its products grows, the customer
service function will become a source of recurring revenues.
CUSTOMERS AND END USERS
Mitek licenses and sells its ADR products to a broad range of companies
seeking high volume, high reliability document processing systems. Typically,
end users of the Company's products desire to streamline manual data entry
processing due to volume or time constraints. Traditionally, the Company has
derived its revenues from the sale of QuickStrokes API as an ICR engine to
various OEMs, VARs and systems integrators. With the introduction of the PFP,
the Company now offers a scalable turnkey system which is marketed to VARs,
systems integrators and end users. Certain of the Company's largest customers
based on payments received in the fiscal years 1995 and 1996, are listed below
under the major application category for which the Company believes the customer
is using the Mitek products:
<TABLE>
<CAPTION>
FINANCIAL DOCUMENT PROCESSING FORMS PROCESSING
- -------------------------------------------- --------------------------------------
<S> <C>
BancTec, Inc. (including Recognition SHL Systemhouse
International)
ABC Bull Wheb Systems
Unisys TCSI
NCR National Computer Systems
TRW Financial Solutions CentroMatic Systemi, SPA
Kleindeinst VALIdata Sistemas de Captura, S.A. de
C.V.
IA Corporation Headway CT
Infoscore IT
</TABLE>
Three customers, ABC Bull, BancTec, Inc., and TCSI, accounted for 47% of the
Company's net sales for the first six months of fiscal 1996. ABC Bull is a
multinational, multiproduct systems integrator that uses the Company's products
to develop document based check clearing processing systems in South America.
BancTec, Inc. is a leading provider of electronic and document-based financial
transaction processing systems, work flow and imaging products, application
software and professional services. BancTec, Inc. develops solutions for the
banking, financial services, insurance, health care, government, utility,
telecommunications, grocery and retail industries. TCSI is a manufacturer of
financial processing systems, primarily for financial institutions.
The Company's products are used in a variety of applications on a worldwide
basis. For example, systems using Mitek's technology are in use at Avon Products
Company's United States forms processing centers, handling approximately 2
million sales order forms daily, which are hand printed by over 450,000
different sales agents. The Company's products are also used by financial
institutions such as Mellon Bank, Nat West and Unibanco for check processing.
Systems using Mitek technology are currently being used by governmental taxing
authorities such as the Australian and Mexican tax authorities to process tax
returns. In addition, utilities companies such as Southwestern Bell and NYNEX
use the Company's technologies for invoice processing and payment
reconciliation.
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<PAGE>
SALES AND MARKETING
The Company markets its products and services primarily through its
internal, direct sales organization. The Company employs a technically-oriented
sales force with management assistance to identify the needs of existing and
prospective customers. Mitek's sales strategy concentrates on those companies
that it believes are key users and designers of automated document processing
systems for high-performance applications. Mitek currently maintains sales
offices in Virginia, Illinois and California. In addition, the Company sells and
supports its products through distributors in Australia and Germany. The sales
process is supported with a broad range of marketing programs which include
trade shows, direct marketing, public relations and advertising. Some of the
shows used are E-Mail World, AIIM (Association for Information and Image
Management), TAWPI (The Association for Work Process Improvement and Imaging
Expo). The Company's advertising is focused on image processing industry
specific publications, including Imaging World, IMC Journal and Imaging
Business.
The Company provides maintenance and support on a contractual basis after
the initial product warranty has expired. The Company provides telephone support
and on-site support. Customers with maintenance coverage receive regular
software releases from the Company. Foreign distributors generally provide
customer training, service and support for the products they sell. Additionally,
the product is supported internationally by periodic distributor and customer
visits by Company management. These visits include attending imaging shows, as
well as sales and training efforts. Technical support is provided by telephone
as well as technical visits in addition to those previously mentioned.
The Company's PFP system can process documents in ten languages, including
English, French, German, Italian, Dutch, Spanish, Russian, Portuguese, Swedish
and Arabic. The QuickStrokes API engine can also process all of these languages,
as well as Thai, Burmese, Laotian and Vietnamese for a total of 14 languages.
The ability to work in these different languages has materially assisted the
Company in its international sales effort. It is believed that the competition
has much less functionality in this capability area.
International sales accounted for approximately 25% of the Company's net
sales for the six-month period ended March 31, 1996. The Company believes that a
significant percentage of the products in its domestic sales are incorporated
into systems that are delivered to end users outside the United States such that
the total percentage of its products which are ultimately utilized by foreign
end users is between 40% and 50%. International sales in the past twelve months
were made in sixteen countries including Australia, Argentina, Belgium, Brazil,
England, France, Finland, Germany, Hong Kong, Italy, Malaysia, Mexico, Portugal,
Poland, Spain and Sweden. The Company sells its products in United States
currency only. See "Risk Factors -- Risks Associated with International Sales."
TECHNOLOGY
The Company utilizes a wide range of technologies in its proprietary
products. These include segmentation techniques, enhanced resolution techniques,
noise and line removal techniques, object-oriented programming, GUIs, and
extensive proprietary databases. The Company believes that the use of artificial
neural networks for recognition distinguishes its products from those of most of
its competitors.
Mitek provides a hand printed and machine generated character recognition
engine in several configurations. This engine performs all the processing
required to take the image of a section of a document, find the characters
within that area, remove noise or lines that might interfere with the correct
identification of the characters, separate the characters from each other,
eliminate character overlap, and then recognize the characters. The results are
then placed in a defined digital file format and returned to a host computer.
The results are the identity of the characters found, their locations and size,
the confidence level of correct recognition, and a second choice and the
confidence level that is associated with that second choice. This confidence
factor, the probability of recognition correctness, allows the system to be
"tuned" for the complexity or criticality of the specific application.
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<PAGE>
The enabling technology for the Company's products is artificial neural
network computation. The strength of neural networks is that they have the
ability to be "trained" to recognize various kinds of patterns. Neural networks
are mathematical equations with adaptive coefficients. Examples of data are
presented to the networks in a way that allows the adaptive coefficients to be
adjusted to fit. This adjustment is called "training" because it mimics the
manner in which human intelligence is trained to read and interpret information.
Once the network is trained, it will recognize at high speeds the patterns in
which it was trained. Once the training process is complete, the network will
have developed the capability to recognize digits in a wide degree of variation,
with very high speed and accuracy, approaching, or in certain applications,
exceeding average human accuracy.
The speed and accuracy obtained allows for the replacement of manual data
entry by automated processes. Mitek's advanced technology has allowed its ADR
products to function in a real world environment that has often stymied earlier
technologies in dealing with hand printed and machine generated documents.
Mitek's technology includes a comprehensive set of tools for extracting data
from many types of different forms including forms that are crooked, enlarged or
reduced and eliminates pre-printed instructions, lines or boxes, processing only
the data of interest, as defined by the user, such as numeric, alpha, or
alpha-numeric data. The forms processed may originate from several sources,
including the shop floor, a fax machine or warehouse. Once digitized, they may
emanate from a scanner or from digital archives. The quality of these images may
vary significantly. The Company's software can enhance these images using
proprietary noise filtering algorithms which eliminates smudges and stains,
enhance gray scale images, and repair broken and degraded characters. Mitek's
software has the ability to recognize the vagaries of characters, whether hand
printed or machine generated, separating characters that are touching or
overlapping, eliminating ambiguities, finding data that has "wandered" out of
its assigned area, and recognizing a vast array of characters, compensating for
personal, regional and national differences in character style.
The Company acquired a license (exclusive for the initial five years) to
core ICR technology and software underlying its ADR products from HNC in
November 1992. At the time of acquisition of the license, twelve of the
engineers responsible for developing HNC's core ICR software moved to Mitek in
connection with the transaction. The HNC license provided for a grant of rights
against payment of royalties amounting up to $2.6 million over three years. All
royalties and amounts due under the license have now been paid in full. On
November 23, 1997, certain of the Company's exclusive license rights from HNC
shall become nonexclusive and HNC will be able to use or license the rights to
others to use certain of the core technologies used in the Company's ADR
products to compete directly with Mitek.
The Company's PFP software product incorporates the Company's Quickstrokes
API engine, certain software modules developed by the Company and certain
software and technology licensed on a nonexclusive basis from VALIdata Sistemas
de Captura, S.A. de C.V., a Mexican corporation ("VALIdata"). Pursuant to a
Marketing License Agreement dated as of March 26, 1996 (the "VALIdata License
Agreement"), between the Company and VALIdata, the Company was granted a
nonexclusive, worldwide right to use, reproduce and distribute copies of PFP
software owned or controlled by VALIdata to customers of Mitek, in exchange for
payment of certain royalties to VALIdata. The VALIdata License Agreement
provides for a one year term, with provisions for annual renewal upon the
written consent of both parties. There can be no assurance, however, that the
VALIdata License Agreement will be renewed by VALIdata, and if renewed, on terms
acceptable to the Company.
The PFP software covered by the VALIdata License Agreement is designed for
the Windows 3.1 operating system. However, the Company believes that the Windows
NT operating system will become the industry standard for this type of
application over the near term. Accordingly, the Company is currently developing
PFP application software for the Windows NT operating platform.
The markets for products incorporating ADR technology are characterized by
rapidly advancing technology and rapidly changing user preferences. The
Company's ability to compete effectively with
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<PAGE>
its ADR product line will depend upon its ability to meet changing market
conditions and develop enhancements to its products on a timely basis in order
to maintain its competitive advantage. In addition, continued growth will
ultimately depend upon the Company's ability to develop additional technologies
and attract strategic alliances for related or separate product lines. There can
be no assurance that the Company will be successful in developing and marketing
product enhancements and additional technologies, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace,
will be of acceptable quality, or will achieve market acceptance.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends in part on its ability
to maintain and improve its core technologies, enhance its existing products and
develop new products that meet an expanding range of customer requirements. The
Company intends to expand its existing product offerings and to introduce new
forms processing software solutions. In the development of new products and
enhancements to existing products, the Company uses its own tools extensively.
To date, the Company has relied primarily on ICR technology acquired from HNC as
well as internal development, although it may, based on timing and cost
considerations, acquire technology or products from third parties or
consultants. The Company performs all quality assurance and develops
documentation internally. The Company intends to continue to support industry
standard operating environments.
The Company's team of specialists in recognition algorithms, software
engineering, user interface design, product documentation and quality
improvement is responsible for maintaining and enhancing the performance,
quality and usability of all of the Company's products.
In order to improve the accuracy of its ADR products, the Company focuses
research and development efforts on continued enhancement of its data base of
hundreds of thousands of images that is used to "train" the neural network
software that forms the core of the Company's ICR engine. Additionally, the
Company continues to enhance its specialized software which focuses on
eliminating the confusion of matrices that may otherwise mislead the software.
The confusing items are separated one by one until the ambiguities that cause
software algorithms errors are removed.
The Company's research and development organization included 14 software
engineers at March 31, 1996, including 6 with advanced degrees. During the first
six months of fiscal 1996, the Company spent approximately $587,000 on research
and development and spent approximately $1.1 million on research and development
in each of fiscal years 1995, 1994 and 1993. The Company balances its
engineering resources between development of ICR and applications development.
Of the 14 software engineers, approximately 6 are involved in ICR research and
development of the QuickStrokes API recognition engine. The remaining staff are
involved in applications development, including the PFP and NiFaxshare.
In addition to research and development, the engineering staff provide
customer technical support on an as needed basis, along with technical sales
support.
Products as complex as those offered by the Company, particularly the
Company's QuickStrokes and PFP products, may contain undetected defects or
errors when first introduced or as new versions are released. As a result, the
Company could in the future face loss or delay in recognition of revenues as a
result of software errors or defects. In addition, the Company's products are
typically intended for use in applications that may be critical to a customer's
business. As a result, the Company expects that its customers and potential
customers have a greater sensitivity to product defects than the market for
software products generally. Although the Company's business has not been
adversely affected by any such errors to date, there can be no assurance that,
despite testing by the Company and by current and potential customers, errors
will not be found in new products or releases after commencement of commercial
shipments, resulting in loss of revenues or delay in market acceptance,
diversion of
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<PAGE>
development resources, damage to the Company's reputation, or increased service
and warranty costs, any of which would have a material adverse effect upon the
Company's business, operating results and financial condition.
COMPETITION
The market for the Company's ADR products is intensely competitive, subject
to rapid change and significantly affected by new product introductions and
other market activities of industry participants. The Company faces direct and
indirect competition from a broad range of competitors who offer a variety of
products and solutions to the Company's current and potential customers. The
Company's principal competition comes from (i) customer-developed solutions;
(ii) direct competition from companies offering ICR systems; and (iii) companies
offering competing technologies capable of recognizing hand-printed characters.
It is also possible that the Company will face competition from new
competitors. These include companies that are existing licensors such as HNC and
OEM, systems integrators and VAR customers, such as BancTec, Inc., or dominant
software companies with a presence in publishing or office automation such as
Microsoft Corporation and Adobe. In addition, the Company's license agreement
with HNC provides that, upon expiration of certain exclusivity periods beginning
in November 1997, HNC will have the right to use certain of the core
technologies used in the Company's ADR products, originally developed by HNC and
acquired by the Company in 1992, to compete directly with the Company. Moreover,
as the market for automated data entry and ICR software develops, a number of
these or other companies with significantly greater resources than the Company
could attempt to enter or increase their presence in the Company's market either
independently or by acquiring or forming strategic alliances with competitors of
the Company or to otherwise increase their focus on the industry. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's current and prospective
customers.
The Company's Quickstrokes API products compete, to various degrees, with
products produced by a number of substantial competitors including AEG, a
subsidiary of Daimler Benz, Computer Gesellschaft Konstanz, a subsidiary of
Siemens, and Nestor. The Company believes its primary competitive advantages are
its (i) recognition accuracy with regard to hand printed characters, (ii)
flexibility, since it may operate on a broad range of computer operating
platforms, (iii) scalability and (iv) object-oriented software designs which can
be more readily modified, improved with added functionality, configured for new
products, and ported to new operating systems and upgrades. Despite these
advantages, QuickStrokes API's competitors have existed longer and have far
greater financial resources and industry connections than the Company.
The Company's PFP products compete against complete proprietary systems
offered by software developers, such as GTESS, Symbus and Cardiff Software. In
addition, PFP faces competition from providers of recognition systems that
incorporate ADR technology, including in some instances, the Company's
Quickstrokes API product, such as Microsystems Technology, Inc., and National
Computer Systems. Because PFP is based on the Company's proprietary QuickStrokes
API engine, its competitive advantages reflect the advantages of the
QuickStrokes engine. Competitors in this market offer both high and low cost
systems. The Company's strategy is to position PFP to competes successfully in a
scalable midrange price while offering a higher degree of accuracy and greater
flexibility than competing systems currently on the market. Increased
competition may result in price reductions, reduce gross margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. Furthermore, a significant
percentage of the Company's revenues are attributable to sale of co-processor
boards sold together with the Company's software. Anticipated increases in the
microprocessor speed and power available, such as the Pentium P-6, could have
the effect of reducing the demand for such co-processor boards. It is possible
that the Company's co-processor boards will have competition from semiconductor
manufacturers embedding the technology on their chips. There can be no assurance
that the
37
<PAGE>
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition. See "Risk Factors -- Competition."
EMPLOYEES
As of March 31, 1996, the Company employed a total of 34 persons, consisting
of 7 in marketing, sales and support, 14 in research and development, and 13 in
finance, administration and other capabilities. All employees work on a full
time basis. The Company has never had a work stoppage. None of its employees is
represented by a labor organization, and the Company considers its relations
with its employees to be good.
The Company's future performance depends in significant part upon attracting
and retaining key technical, sales, senior management and financial personnel.
Competition for such personnel is intense, and the inability to retain its key
personnel or to attract, assimilate or retain other highly qualified personnel
in the future on a timely basis could have a material adverse effect on the
Company's results of operations. See "Risk Factors -- Dependence on Key
Personnel."
PROPERTIES
The Company's principal executive offices, as well as its principal research
and development facility, is located in approximately 12,000 square feet of
leased office building space in San Diego, California. The lease on this
facility expires April 30, 1998, with an option to extend the lease for an
additional three years. The Company also leases a sales office facility in
Sterling, Virginia. In addition, the Company leases office space used as a
sales, service, and development facility in Calgary, Alberta, Canada. The
Company believes that its existing facilities are adequate for its current needs
and that additional space will be available as needed.
LEGAL PROCEEDINGS
There are no legal claims currently pending against the Company. The Company
has, however, received a notice of a possible claim arising in connection with
this Offering. In January 1995, the Company entered into a contract with
Heartland Financial Services Corporation ("Heartland") for the provision of
certain financial consulting services, including assisting the Company in
establishing relationships with investment bankers and improving the liquidity
of the Company's Common Stock. Heartland has indicated to the Company in
conversations that it believes that it is entitled to a $375,000 fee in
connection with this Offering under the terms of its contract. The Company
disputes this claim. The contract between Heartland and the Company requires
that all disputes be arbitrated. While there can be no assurance that Heartland
will not seek to arbitrate its claim against the Company or would be
unsuccessful in prosecuting such a claim if it were arbitrated, the Company
believes that any potential liability arising out of such a claim would be
immaterial.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the executive officers and directors of the
Company and their ages as of July 1, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --------- -------------------------------------------------------------
<S> <C> <C>
John M. Thornton................. 64 Chairman of the Board
John F. Kessler.................. 47 President, Chief Executive Officer and Director
Gerald I. Farmer, Ph.D........... 62 Executive Vice President and Director
James B. DeBello................. 37 Director
Daniel E. Steimle................ 48 Director
Sally B. Thornton................ 62 Director
</TABLE>
- ------------------------
MR. THORNTON, a director of the Company since March 1986, was appointed
Chairman of the Board as of October 1, 1987. Additionally, he served as
President of the Company from May 1991 through July 1991 and Chief Executive
Officer from May 1991 through February 1992. From 1976 through 1986, Mr.
Thornton was the principal shareholder and served as Chairman of the Board at
Micom, Inc. Mr. Thornton was a President of Wavetek Corporation for 18 years.
Mr. Thornton is also a director of Dynamic Instruments, Inc. and Chairman of the
Board of Software Products International, Inc. and Thornton Winery Corporation.
Mr. Thornton is the spouse of Sally B. Thornton, a director.
MR. KESSLER, a director of the Company since August 1993, was appointed
President and Chief Executive Officer of the Company in April 1994. Prior to
joining Mitek, he was Vice President -- Finance/Administration and Chief
Financial Officer of Bird Medical Technologies, Inc., a manufacturer of medical
equipment from November 1992 and also served as Secretary from January 1993.
Prior to joining Bird Medical, Mr. Kessler was Vice President,
Finance/Administration and Chief Financial Officer of Emerald Systems
Corporation, a computer systems company. From July 1980 to July 1991, Mr.
Kessler was with Wavetek Corporation serving in various positions, including
Chief Financial Officer during the period of 1987 to 1991.
DR. FARMER, a director of the Company since May 1994, has been Executive
Vice President of the Company since November 1992. Prior to joining the Company,
Dr. Farmer worked as Executive Vice President of HNC Software, Inc. from January
1987 to November 1992. He has held senior management positions with IBM
Corporation, Xerox, SAIC and Gould Imaging and Graphics.
MR. DEBELLO, a director of the Company since November 1994, has been
President of Solectek Corporation in San Diego, California, since April 1990. He
held various positions in the John M. Thornton & Associates group of companies
from July 1986 to April 1990. Prior to that, he was employed by the Los Angeles
Olympic Organizing Committee coordinating the marketing efforts to supports
ticket sales, traffic management and community relations.
MR. STEIMLE, a director of the Company since February 1987, has been Vice
President and Chief Financial Officer of Advanced Fibre Communications, a
telecommunications equipment company, since December 1993. Prior to that time,
Mr. Steimle was Senior Vice President and Chief Financial Officer of Santa Cruz
Operation from September 1991 to December 1993. Mr. Steimle served as Director
of Business Development for Mentor Graphics, a software development company,
from August 1989 to September 1991. Prior to that time, Mr. Steimle was the
Corporate Vice President, Chief Financial Officer and Treasurer of Cipher Data
Products, Inc., a manufacturer of data storage equipment.
MS. THORNTON, a director of the Company since April 1988, has been a private
investor for more than six years. She served as Chairman of Medical Materials,
Inc. in Camarillo until February 1996, is
39
<PAGE>
on the Board of Directors of Thornton Winery Corporation in Temecula, the UCSD
Medical Center, Sjogren's Syndrome Foundation in Port Washington, New York, and
is a Life Trustee of the San Diego Museum of Art. Ms. Thornton is the spouse of
John M. Thornton, a director.
Directors are elected by the stockholders at each annual meeting of
stockholders to serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. Officers are chosen by, and
serve at the discretion of, the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the last
three completed fiscal years by (i) the Company's chief executive officer and
(ii) the Company's two other most highly compensated executive officers who were
serving as executive officers at the end of that year (together, the "Named
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION AWARDS
------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- -------------------------------------------- --------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
John M. Thornton 1995 $ 150,000 $ -- -- --
Chairman of the Board 1994 150,000 -- -- --
1993 150,000 -- -- --
John F. Kessler 1995 140,000 -- -- --
President and Chief Executive Officer 1994 59,231(1) -- -- 200,000
1993 -- -- -- 5,000
Gerald I. Farmer, Ph.D 1995 137,627 -- -- --
Executive Vice President 1994 137,627 3,428 -- 50,000
1993 112,844 -- 45,000
</TABLE>
- ------------------------
(1) Mr. Kessler was elected President and Chief Executive Officer of the Company
in April 1994.
The following table sets forth the number of shares covered by both
exercisable and unexercisable stock options as of September 30, 1995. Also
reported are values of "in-the-money" options that represent the positive spread
between the respective exercise prices of outstanding stock options and the fair
market value of the Company's Common Stock as of September 30, 1995.
OPTION VALUES AT SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END AT FISCAL YEAR END (1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
John M. Thornton 0 0 $ 0 $ 0
John F. Kessler 86,805 118,195 20,944 27,861
Gerald Farmer, Ph.D. 56,250 38,750 25,688 9,977
</TABLE>
- ------------------------
(1) Based on closing bid price of $1.4375 as of September 29, 1995 as reported
on the Nasdaq SmallCap Market.
DIRECTOR COMPENSATION
The Company does not pay compensation for service as a director to persons
employed by the Company. Outside directors are paid $1,000 for each meeting they
attend.
EMPLOYEE BENEFIT PLANS
1986 AND 1988 STOCK OPTION PLANS. Mitek has two stock option plans, the
1986 Stock Option Plan (the "1986 Plan") and the 1988 Non-qualified Stock Option
Plan (the "1988 Plan). The 1986 Plan
40
<PAGE>
authorized the issuance of an aggregate of 630,000 shares of Common Stock. At
September 30, 1995, 537,491 shares of Common Stock were reserved for issuance
under the 1986 Plan of which 255,500 were subject to outstanding options and
281,991 remain available for future grants. The 1986 Plan authorizes the Company
to grant incentive stock options to key employees (including directors and
officers who are employees), and nonqualified stock options to key employees,
directors and consultants, subject to certain requirements. The 1988 Plan
authorizes the Company to grant to its directors, officers and key employees
non-qualified stock options to purchase up to 650,000 shares of Mitek Common
Stock. At September 30, 1995, 472,973 shares were reserved for issuance under
the 1988 Plan of which 300,000 were subject to outstanding options and 172,973
remained available for future grants. The Compensation Committee of the Board of
Directors administraters the 1986 Plan and the 1988 Plan. The Committee selects
the recipients to whom options are granted and determines the number of shares
to be awarded. Options granted pursuant to the 1986 Plan and the 1988 Plan are
exercisable at a price determined by the Committee at the time of the grant, but
in no event will the option price be lower than the fair market value of the
common stock on the date of the grant. However, discounted options to directors
under the 1988 Plan may be exercisable at $1.00 per share. Options become
exercisable at such times and in such installments (which may be cumulative) as
the Committee provides in the terms of each individual option agreement. In
general, the Committee is given broad discretion to issue options in exchange
and to accept a wide variety of consideration (including shares of Common Stock
of the Company, promissory notes, or unexercised options) in payment for the
exercise price of stock options.
EMPLOYEE SAVINGS PLAN. Effective January 1, 1991, the Company established
an Employee Savings Plan (the "Savings Plan") intended to qualify under Section
401(k) of the Internal Revenue Code (the "Code"), which is available to all
employees who satisfy the age and service requirements under the Savings Plan.
The Savings Plan allows an employee to defer up to 15% of the employee's
compensation for the pay period as elected in his or her salary deferral
agreement on a pre-tax basis pursuant to a cash or deferred arrangement under
Section 401(k) of the Code (subject to maximums permitted under federal law).
This contribution generally will not be subject to federal tax until it is
distributed from the Savings Plan. In addition, these contributions are fully
vested and non-forfeitable. Contributions to the Savings Plan are deposited in a
trust fund established in connection with the Savings Plan. The Company may make
discretionary contributions to the Savings Plan at the end of each fiscal year
as deemed appropriate by the Board of Directors. Vested amounts allocated to
each participating employee are distributed in the event of retirement, death,
disability or other termination of employment.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
As permitted by Section 145 of the Delaware General Corporation Law, the
Amended and Restated Bylaws (the "Bylaws") of the Company provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law, including circumstances in which indemnification is
otherwise discretionary under Delaware law, and further requires the Company to
indemnify such persons against expenses, judgments, fines, settlements and other
amounts reasonably incurred in connection with any proceeding to which any such
person may be made a party by reason of the fact that such person was an agent
of the Company (including expenses, judgments, fines and settlements of
derivative actions, unless indemnification is otherwise prohibited by law),
provided such person acted in good faith and in a manner he reasonably believed
to be in the best interests of the Company, and, in the case of a criminal
proceeding, had no reason to believe his conduct was unlawful.
As permitted by the Delaware General Corporation Law, the Company's
Certification of Incorporation includes a provision that eliminates the personal
liability of its directors to the fullest extent permitted by the Delaware
General Corporation Law, which eliminates personal liability for monetary
damages for breach of fiduciary duty as director except for liability (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit.
41
<PAGE>
CERTAIN TRANSACTIONS
At the close of its fiscal year ending September 30, 1994, the Company wrote
down $1,046,000 of assets related to its TEMPEST business, attributable to the
decline in the TEMPEST market. That write-down caused the Company's net capital
to fall below the minimum listing requirements for the Nasdaq SmallCap Market,
and the Company was delisted on March 9, 1995. In March, 1995, the Company
issued an aggregate of 666,999 shares of its Common Stock to 15 individuals, in
a private placement for an aggregate of $475,704, net of costs, or $0.71 per
share. Mr. Thornton, Chairman of the Board, acquired 26,000 shares of Common
Stock at a gross price of $.94 per share, and Mr. Kessler, President and Chief
Executive Officer, acquired 35,000 shares, in that offering at a gross price of
$.75 per share, on the same terms and conditions offered to other investors. The
proceeds from this offering were used to increase the Company's net capital and
in May 1995, the Company successfully reapplied for listing on the Nasdaq
SmallCap Market. See "Risk Factors -- Recent Delisting" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Effective October 20, 1995, the Company entered into investment banking
agreements with several NASD-registered broker dealers, including Cruttenden
Roth Incorporated. Pursuant to those agreements, the Company issued an aggregate
of 210,000 warrants to purchase its Common Stock at a price of $1.50 per share
exercisable for a period of two years. The warrants were granted in exchange for
the provision of various investment banking services, and contained piggyback
registration rights which permit the holders to include their shares in any
future registration statement filed by the Company until March 31, 1998, subject
to certain limitations. See "Description of Capital Stock -- Registration
Rights."
42
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's outstanding Common Stock as
of June 15, 1996, and as adjusted to reflect the sale of the Common Stock being
offered hereby by (i) each person (or group of affiliated persons) who is known
by the Company to own beneficially more than 5% of the Company's Common Stock,
(ii) each of the Company's directors, (iii) each of the Named Officers, (iv) all
executive officers and directors of the Company as a group, and (v) each of the
Selling Stockholders. Unless otherwise specified, the address of the stockholder
is the address of the Company as set forth herein.
<TABLE>
<CAPTION>
NUMBER OF
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED PRIOR TO BEING OWNED AFTER
OFFERING (1) OFFERED OFFERING (1)(2)
------------------------ --------- ------------------------
DIRECTORS, NAMED OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT NUMBER NUMBER PERCENT
- ------------------------------------------------------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
John M. and Sally B. Thornton Trust (3)................ 3,702,584 47.7% 894,001 2,808,583 27.4%
John B. DeBello (4).................................... 6,110 * 0 6,110 *
John F. Kessler (5).................................... 224,304 2.9 0 224,304 2.2
Gerald I. Farmer (6)................................... 93,193 1.3 0 93,193 *
Daniel F. Steimle (7).................................. 32,854 * 0 32,854 *
Directors and Executive Officers as a Group (6
persons).............................................. 4,059,045 52.3 % 894,001 3,165,044 30.8 %
<CAPTION>
OTHER SELLING STOCKHOLDERS
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TRACS International Inc. (8)........................... 3,000 * 3,000 0 *
Richard S. Dawson (9).................................. 23,557 * 17,724 0 *
Stephen M. Baird (10).................................. 23,391 * 19,224 0 *
Glenn Hamilton (8)..................................... 7,200 * 7,200 0 *
Ken Davis (8).......................................... 8,700 * 8,700 0 *
ETL Holdings Canada Inc. (8)........................... 9,576 * 9,576 0 *
Solion Corporation of Alberta Ltd. (8)................. 9,576 * 9,576 0 *
Merritt Widen (11)..................................... 193,364 2.5 193,364 0 *
Martin Cooper (12)..................................... 104,000 1.3 104,000 0 *
Robert S. Colman (13).................................. 100,000 1.3 100,000 0 *
Stephen W. Becker (14)................................. 54,000 * 54,000 0 *
Richard Battaglino (15)................................ 40,000 * 40,000 0 *
Nathan A. Low (16)..................................... 25,000 * 25,000 0 *
Douglas A. Backus (17)................................. 20,000 * 20,000 0 *
J.P. III, Inc. Pension Plan (18)....................... 20,000 * 20,000 0 *
David Rochat (19)...................................... 15,151 * 15,151 0 *
Mary E.C. Benek (20)................................... 15,151 * 15,151 0 *
Frederick Knoop (21)................................... 13,400 * 13,400 0 *
Wayne Johnson (22)..................................... 5,933 * 5,933 0 *
</TABLE>
- ------------------------
* Less than 1%
(1) As of June 15, 1996. Does not include (i) up to 162,500 shares issuable
upon exercise of the Representative's Warrant, (ii) up to 215,000 shares
issuable upon exercise of outstanding warrants and (iii) 387,059 issuable
upon the exercise of options granted under the Option Plans.
(2) Assumes the Overallotment Option is not exercised. The Overallotment Option
has been granted by the John M. and Sally B. Thornton Trust (the "Thornton
Trust") in an amount up to 611,250 shares. If the Overallotment Option is
exercised, the Thornton Trust will own 2,197,325 shares, or 20.2% of the
outstanding shares.
43
<PAGE>
(3) John M. Thornton and Sally B. Thornton, husband and wife, are trustees of a
family trust, and are each directors of the Company. Mr. Thornton has
served as its Chairman of the Board for the past nine years and was
President and CEO from 1991-92.
(4) Includes 6,110 shares of Common Stock subject to options exercisable within
60 days of June 15, 1996. Mr. DeBello is a director of the Company.
(5) Represents 16,100 shares of Common Stock held by John F. Kessler IRA and
33,900 shares of Common Stock held by John F. and Kerry J. Kessler, tenants
in common, and includes 174,304 shares of Common Stock subject to options
exercisable within 60 days of June 15, 1996. Mr. Kessler is the President,
CEO and a director of the Company.
(6) Represents 10,000 shares of Common Stock and includes 83,193 shares of
Common Stock subject to options exercisable within 60 days of June 15,
1996. Dr. Farmer is a director and Executive Vice President of the Company.
(7) Represents 14,521 shares of Common Stock and includes 18,333 shares of
Common Stock subject to options exercisable within 60 days of June 15,
1996. Mr. Steimle is a director of the Company.
(8) Address: c/o TRACS International, Inc., 10655 Southport Road, SW, Suite
560, Calgary, Alberta, Canada T2W 4Y1.
(9) Includes 5,833 shares of Common Stock subject to options exercisable within
60 days of June 15, 1996. Mr. Dawson is an employee at the Company's
subsidiary Mitek Systems Canada, Inc. and was a founder of TRACS
International, Inc. Address: c/o TRACS International, Inc., 10655 Southport
Road, S.W., Suite 560, Calgary, Alberta, Canada T2W 4Y1.
(10) Includes 4,167 shares of Common Stock subject to options exercisable within
60 days of June 15, 1996. Mr. Baird is an employee of the Mitek Systems
Canada, Inc. and was a founder of TRACS International Inc. Address: c/o
TRACS International, Inc., 10655 Southport Road, S.W., Suite 560, Calgary,
Alberta, Canada T2W 4Y1.
(11) Mr. Widen is an affiliate of Heartland Financial Services Corporation
("Heartland"). Heartland has provided financial services to the Company
over the prior two years. Address: 1 Hallidie Plaza, #701, San Francisco,
California 94102.
(12) Address: 2704 Ocean Front, Del Mar, California 92014.
(13) Address: 54 Lower Crescent, Sausalito, California 94965.
(14) Address: 4902 S.W. Bimini Circle N., Palm City, Florida 34990.
(15) Address: 67 Sullivan Street, New York, New York, 10012.
(16) Address: 515 West End Avenue, #33D, New York, New York, 10024.
(17) Address: 37 Kessel Court, #211, Madison, Wisconsin 53703.
(18) Address: 2 E. Mifflin Street, Suite 901, Madison, Wisconsin 53703.
(19) Address: RFD #1, Chelsea, Vermont 05038.
(20) Address: 2619 Prindle Road, Belmont, California 92002.
(21) Address: 10114 Walker Lake Drive, Great Falls, Virginia 22066.
(22) Address: 22 Wakeman Place, Westport, Connecticut 06880.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of (i) 20,000,000 shares of
Common Stock, $.001 par value, and (ii) 1,000,000 shares of Preferred Stock,
$.001 par value. All outstanding shares of Common Stock are fully paid and
nonassessable.
COMMON STOCK
As of June 20, 1996, there were 7,759,805 outstanding shares of Common Stock
held by 622 holders of record. Each share of Common Stock has an equal and
ratable right to receive dividends when, as and if declared by the Board of
Directors out of assets legally available therefor and subject to the dividend
obligations of the Company to the holders of any preferred stock then
outstanding. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share equally and ratably
in the assets available for distribution after the payment of all liabilities,
and subject to any prior rights of any holders of preferred stock that at the
time may be outstanding.
The holders of Common Stock have no preemptive rights or other rights to
subscribe for securities of the Company. Each share of Common Stock is entitled
to one vote in the election of directors and on all matters and submitted to a
vote of stockholders. Holders of Common Stock currently have the right to
cumulate their votes in the election of directors under a provision of the
California General Corporate Law which applies to the Company by virtue of the
nature of its operations in California. Under the California General Corporation
Law, the Company may amend its Bylaws to provide for the elimination of a
stockholder's right to cumulate votes in the election of directors. Such a
provision will become effective when the shares of the Company are listed on the
New York Stock Exchange or American Stock Exchange, or when the Company's shares
are listed on the Nasdaq National Market and the Company has at least 800
holders of its equity securities (measured as of the record date for its most
recent annual meeting of stockholders). The Company has applied to have its
Common Stock listed on the Nasdaq National Market on the effectiveness of this
offering, and expects that on such date it will have in excess of 800 holders of
its equity securities. The Company currently plans to submit to its stockholders
an amendment to its Bylaws that would eliminate cumulative voting for directors
in connection with the Company's next annual meeting of stockholders.
PREFERRED STOCK
The Company has no outstanding shares of Preferred Stock. Preferred stock
may, however, be issued from time to time in one or more series, and the Board
of Directors, without further approval of the stockholders, is authorized to fix
the dividend rates and terms, conversion preferences, privileges and restriction
rights and terms, liquidation preferences, sinking fund and any other rights,
preferences, privileges and restrictions applicable to each series of preferred
stock. The purpose of authorizing the Board of Directors to determine such
rights and preferences is to eliminate delays associated with a stockholder vote
on specific issuances. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more difficult
for a third party to gain control of the Company.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Anti-Takeover Law") regulating corporate
takeovers. The Anti-Takeover Law prevents certain Delaware corporations,
including those whose securities are listed on the Nasdaq National Market, from
engaging, under certain circumstances, in a "business combination" (which
includes a merger or sale of more than 10% of the corporation's assets), with
any "interested stockholder" (a stockholder who owns 15% or more of the
corporation's outstanding voting stock) for three years following the date that
such stockholder became an "interested stockholder." A Delaware corporation may
"opt out" of the Anti-Takeover Law with an express provision in its original
certificate of
45
<PAGE>
incorporation or an express provision in its certificate of incorporation or
bylaws resulting from a stockholders' amendment approved by at least a majority
of the outstanding voting shares. The Company has not "opted out" of the
provisions of the Anti-Takeover Law.
CERTAIN CHARTER PROVISIONS
Section 102 of the Delaware General Corporation Law provides that Delaware
corporations may include provisions in their certificate of incorporation
relieving directors of monetary liability for breach of their fiduciary duty as
directors, except for the liability of a director resulting from (i) any
transaction from which the director derives an improper personal benefit, (ii)
acts or omissions involving intentional misconduct or the absence of good faith,
(iii) acts or omissions constituting an unexcused pattern of inattention to the
director's duty, (iv) acts or omissions showing a reckless disregard for the
director's duty, or (v) the making of an illegal distribution to stockholders or
an illegal loan or guaranty.
The Company's Certificate of Incorporation provides that the personal
liability of the directors of the Company is eliminated to the fullest extent
permitted under Delaware law. The Company's Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
Delaware law, including circumstances in which indemnification is otherwise
discretionary under Delaware law, and further requires the Company to indemnify
such persons against expenses, judgments, fines, settlements and other amounts
reasonably incurred in connection with any proceeding to which any such person
may be made a party by reason of the fact that such person was an agent of the
Company (including expenses, judgments, fines and settlements of derivative
actions, unless indemnification is otherwise prohibited by law), provided such
person acted in good faith and in a manner he reasonably believed to be in the
best interests of the Company, and, in the case of a criminal proceeding, had no
reason to believe his conduct was unlawful. The Company believes that the
foregoing provisions are necessary to attract and retain qualified persons as
directors and officers.
REGISTRATION RIGHTS
The Company has granted registration rights under agreements with three
principal groups of security holders.
In March 1995, the Company sold shares of its Common Stock to 15 individuals
in a private placement in reliance on Section 4(2) of the Securities Act. See
"Certain Transactions." The Company also entered into registration rights
agreements with each of the individuals in that offering. Pursuant to the terms
of the registration rights agreement, investors holding a majority of the shares
acquired in the private placement have the right to demand that the Company
effect one registration statement covering their shares. This Prospectus is part
of a registration statement that includes certain of the shares issued in
connection with that offering, and no investors from the private placement will
have registration rights after the effectiveness of this Offering. In the event
that this Offering is not completed, the holders of a majority of the shares
issued in connection with the private placement would have the right to demand
that the Company effect a registration statement on or before March 31, 1997.
Alternatively, the Company could fulfill its obligations under the registration
rights agreements by providing the private placement investors an opportunity to
include their shares in any other registration statement filed by the Company
during that period.
In June 1995, the Company purchased substantially all of the assets of TRACS
International, Inc. ("TRACS"), a Calgary Canada corporation, in exchange for
75,000 shares of its Common Stock and royalties on certain product sales. In
connection with that transaction, the Company entered into a registration rights
agreement with TRACS, pursuant to which the Company covenanted to use its best
efforts to effect a registration covering such shares on or before June 30,
1996. All of the shares originally issued to TRACS are presently included in
this Offering, and upon its completion the Company's obligations to TRACS under
the registration rights agreement will be fulfilled.
46
<PAGE>
In October 1995, the Company entered into investment banking agreements with
several NASD registered broker-dealers. See "Certain Transactions." Pursuant to
the investment banking agreements, the Company issued warrants to purchase
Common Stock to the broker-dealers which vested upon the performance of certain
specified investment banking services. The warrants also provided for
"piggy-back" registration rights which permit the holders to include the Common
Stock under-lying their warrants in any future registration statement filed by
the Company at any time prior to March 31, 1998, subject to certain limitations
such as underwriter cutbacks. None of the shares issuable upon exercise of those
warrants are included in the present offering. As of the date of this
prospectus, 210,000 warrants had been issued to broker-dealers, of which 170,000
had vested and 10,000 had expired pursuant to their terms.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Chemical Mellon
Shareholder Services.
47
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters named below, for whom Cruttenden Roth Incorporated ("Cruttenden
Roth"), is acting as representative (the "Representative") have severally agreed
to purchase from the Company and the Selling Stockholders, and the Company and
the Selling Stockholders have agreed to sell to each Underwriter, the aggregate
number of shares of Common Stock set forth opposite their respective names on
the table below. The Underwriting Agreement provides that the obligations of the
Underwriter to pay for and accept delivery of the shares of Common Stock are
subject to certain conditions precedent, and that the Underwriter is committed
to purchase and pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Cruttenden Roth Incorporated...............................................................
-----------
Total..................................................................................
-----------
-----------
</TABLE>
The Company and the Selling Stockholders have been advised by the
Representative that the Underwriter propose to offer the shares of Common Stock
to the public at the offering price per share set forth on the cover page of
this Prospectus and to certain dealers (who may include the Underwriter) at such
price less a concession not in excess of $ per share. The Underwriter
may allow, and such dealers may reallow, a concession to certain other dealers
(who may include the Underwriter) not in excess of $ per share. After the
offering to the public, the offering price and other selling terms may be
changed by the Representative.
The Company has agreed to issue the Representative a Warrant (the
"Representative's Warrant") for a consideration of $162.50. The Representative's
Warrant is exercisable at any time during the four-year period commencing one
year from the date of this Prospectus to purchase shares of the Company's Common
Stock in an amount up to 162,500 shares of Common Stock at an exercise price
equal to One Hundred Twenty Percent (120%) of the price at which the Common
Stock is being offered hereby. The Representative's Warrant is not transferable
for one year from the date of this Prospectus except (i) to an Underwriter or a
partner or officer of an Underwriter or (ii) by will or operation by law. During
the term of the Representative's Warrant, the holders thereof are given the
opportunity to profit from a rise in the market price of the Company's
securities. The Company may find it more difficult to raise additional equity
capital while the Representative's Warrant is outstanding. At any time at which
the Representative's Warrant is likely to be exercised, the Company would
probably be able to obtain additional equity capital on more favorable terms. If
the Company files a registration statement relating to an equity offering under
the provisions of the Securities Act of 1933, as amended (the "Securities Act")
at any time during the five-year period following the date of this Prospectus,
the holders of the Representative's Warrant or underlying shares of Common Stock
will have the right, subject to certain conditions, to include in such
registration statement, at the Company's expense, all or part of the underlying
shares of Common Stock at the request of the holders. Additionally, the Company
has agreed, for a period of five years commencing on the date of this
Prospectus, on demand of the holders of a majority of the Representative's
Warrant or the underlying shares of Common Stock issued thereunder, to register
the shares of Common Stock underlying the Representative's Warrant one time at
the Company's expense. The number of shares of Common Stock issuable under the
Representative's Warrant and the exercise price are subject to adjustment under
certain events to prevent dilution.
The Company has agreed that for a period of one year after the effective
date of the Registration Statement, to which this Prospectus relates, if it
conducts an offering of any debt or equity securities for the purpose of raising
capital for the Company, then the Representative will have the right of first
refusal to manage the offering.
A Selling Stockholder has granted an option to the Representative
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 611,250 shares of Common
48
<PAGE>
Stock at the public offering price per share, less the underwriting discounts
and commissions, set forth on the cover page of this Prospectus. The
Representative may exercise the Overallotment Option only to cover
overallotments made in connection with the sale of the Common Stock offered
hereby. To the extent the Representative exercises the Overallotment Option,
each Underwriter will be committed, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares of Common Stock to be purchased by such Underwriter, as shown in the
above table, bears to the total shown.
In connection with this Offering, the underwriter and selling group members
(if any) or their respective affiliates may engage in passive market making
transactions in the Common Stock on the Nasdaq SmallCap Market, immediately
prior to the commencement of sales in this offering, in accordance with Rule
10b-6A under the Exchange Act. Passive market making consists of displaying bids
in the Nasdaq SmallCap Market limited by the bid prices of independent market
makers on each day. Such bids are generally limited to a specified percentage of
the passive market maker's average daily trading volume in the Common Stock
during a specified prior period and must be discontinued when such limit is
reached. Passive market making may stabilize the market price of the Common
Stock at a level above that which might otherwise prevail and, if commenced, may
be discontinued at any time.
In the Underwriting Agreement, the Company and the Selling Stockholders have
agreed to indemnify the Underwriter against certain liabilities that may be
incurred in connection with this offering, including liabilities under the
Securities Act or to contribute payments that the Underwriter may be required to
make in respect thereof.
Other than the shares of Common Stock to be sold by the Selling Stockholders
pursuant to this Prospectus, the Company and its directors and officers and the
Selling Stockholders have agreed that, without the prior written consent of
Cruttenden Roth Incorporated each will not, directly or indirectly, sell,
contract to sell, make any short sale, pledge, or otherwise dispose of, any
shares of Common Stock, options to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock of the Company, for
a period of 180 days after the effective date of the Registration Statement to
which this Prospectus relates, subject to certain limited exceptions. In
addition, during the period between 180 days and 270 days after the effective
date of the Registration Statement, the Company and its directors and officers
and the Selling Stockholders will not sell more than the number of shares of
Common Stock such person or entity can sell pursuant to Rule 144 of the
Securities Act.
The Representative has informed the Company and the Selling Stockholders
that the Underwriter will not confirm sales to discretionary accounts.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Luce, Forward, Hamilton &
Scripps LLP, San Diego, California. Gray Cary Ware & Freidenrich, a Professional
Corporation, La Jolla, California, is acting as counsel for the Underwriter in
connection with certain legal matters, relating to the Common Stock offered
hereby. Luce, Forward, Hamilton & Scripps LLP has warrants to purchase 15,000
shares of the Company's Common Stock at an exercise price of $1.50 per share.
49
<PAGE>
EXPERTS
The consolidated financial statements as of September 30, 1994 and 1995, and
for each of the three years in the period ended September 30, 1995, included in
this Prospectus and Registration Statement, have been audited by Deloitte &
Touche LLP, Independent Auditors, as stated in their report, appearing herein
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
Mitek has filed a Registration Statement with respect to the Shares offered
by this Prospectus on Form SB-2 (together with all amendments and exhibits
thereto, the "Registration Statement") under the Securities Act with the
Securities and Exchange Commission (the "Commission"). This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement, which may be inspected without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at the regional offices of the Commission
located at 7 World Trade Center, New York, New York 10048, and at Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
copies of all or any portion of the Registration Statement may be obtained from
the Public Reference Section of the Commission upon payment of the prescribed
fees.
The Company is also subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information can be
inspected and copied without charge at the Public Reference Section of the
Commission, and at the Commission's regional offices; and copies of such
material can be obtained from the Public Reference Section of the Commission
upon payment of prescribed fees.
ADDITIONAL INFORMATION
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any and all of the documents referred to above which have been
or may be incorporated in this Prospectus by reference (other than exhibits to
such documents, unless such exhibits are specifically incorporated by reference
therein). Requests for such copies should be directed to the Company's principal
executive offices located at 10070 Carroll Canyon Road, San Diego, California
92131, Attention: President, telephone number (619) 635-5900.
50
<PAGE>
MITEK SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------------------
<S> <C>
Independent Auditors' Report................................................................ F-2
Consolidated Balance Sheets................................................................. F-3
Consolidated Statement of Operations........................................................ F-4
Consolidated Statement of Changes in Stockholders' Equity................................... F-5
Consolidated Statement of Cash Flows........................................................ F-6
Notes to Consolidated Financial Statements.................................................. F-7 through F-12
Unaudited Pro Forma Consolidated Statement of Operations.................................... F-13
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Mitek Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Mitek
Systems, Inc. (the "Company") as of September 30, 1995 and 1994, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at September 30, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1995, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Diego, California
November 10, 1995
F-2
<PAGE>
MITEK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1994 1995
------------- ------------- MARCH 31,
-------------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash............................................................... $ 99,976 $ 103,895 $ 301,190
Accounts receivable -- net......................................... 1,512,373 1,619,886 1,895,858
Note receivable.................................................... 158,335
Income taxes receivable............................................ 238,950
Inventories........................................................ 127,117 131,929 280,163
Prepaid expenses................................................... 72,534 52,777 50,785
------------- ------------- -------------
Total current assets............................................. 2,050,950 2,066,822 2,527,996
------------- ------------- -------------
Property and Equipment -- net........................................ 208,683 131,085 90,852
Other Assets......................................................... 813,982 666,393 517,141
------------- ------------- -------------
Total............................................................ $ 3,073,615 $ 2,864,300 $ 3,135,989
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term liabilities........................... $ 335,662 $ 267,927 $ 8,362
Note payable -- bank............................................... 226,875 201,676
Amount payable under factoring agreement........................... 195,545
Accounts payable................................................... 570,407 722,955 523,279
Accrued payroll and related taxes.................................. 202,914 163,789 230,312
Other accrued liabilities.......................................... 562,092 114,803 471,611
------------- ------------- -------------
Total current liabilities........................................ 1,897,950 1,465,019 1,435,240
------------- ------------- -------------
Long-term Liabilities................................................ 366,831 56,567 10,543
------------- ------------- -------------
Commitments and Contingencies (Note 9)...............................
Stockholders' Equity:
Common stock -- $.001 par value; 20,000,000 shares authorized,
7,727,959 and 6,913,013 issued and outstanding in 1995 and 1994,
respectively...................................................... 6,913 7,728 7,733
Additional paid-in capital......................................... 2,820,619 3,423,072 3,426,595
Accumulated deficit................................................ (2,018,698) (2,088,086) (1,744,122)
------------- ------------- -------------
Total stockholders' equity....................................... 808,834 1,342,714 1,690,206
------------- ------------- -------------
Total.......................................................... $ 3,073,615 $ 2,864,300 $ 3,135,989
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------ --------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 13,065,030 $ 10,162,511 $ 6,633,176 $ 3,328,273 $ 3,749,282
Cost of goods sold........................ 9,570,523 6,656,394 3,330,109 1,720,935 1,476,429
------------- ------------- ------------ ------------ ------------
Gross margin.............................. 3,494,507 3,506,117 3,303,067 1,607,338 2,272,853
------------- ------------- ------------ ------------ ------------
Costs and expenses:
General and administrative.............. 1,382,640 1,104,972 1,117,014 468,546 613,188
Research and development................ 1,192,069 1,024,321 1,004,131 575,863 587,245
Selling and marketing................... 1,632,094 1,513,309 1,388,422 704,539 586,583
Tempest writedowns and accruals......... 1,046,394
Interest -- net......................... 195,823 97,538 66,941 39,280 81,707
------------- ------------- ------------ ------------ ------------
Total costs and expenses.............. 4,402,626 4,786,534 3,576,508 1,788,228 1,868,723
------------- ------------- ------------ ------------ ------------
Operating income (loss)............... (908,119) (1,280,417) (273,441) (180,890) 404,130
Other income.............................. 204,853 204,853
------------- ------------- ------------ ------------ ------------
Income (loss) before income taxes......... (908,119) (1,280,417) (68,588) 23,963 404,130
Provision (benefit) for income taxes...... (6,265) (222,766) 800 4,206 60,166
------------- ------------- ------------ ------------ ------------
Net income (loss)..................... $ (901,854) $ (1,057,651) $ (69,388) $ 19,757 $ 343,964
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Income (loss) per share................... $ (0.13) $ (0.15) $ (0.01) $ .00 $ .04
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED) AND
THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, October 1, 1992................................ $ 6,865 $ 2,772,240 $ (59,193) $ 2,719,912
Net loss.............................................. (901,854) (901,854)
----------- ------------- -------------- --------------
Balance, September 30, 1993............................. 6,865 2,772,240 (961,047) 1,818,058
Issuance of common stock.............................. 15 18,735 18,750
Exercise of stock options............................. 33 29,644 29,677
Net loss.............................................. (1,057,651) (1,057,651)
----------- ------------- -------------- --------------
Balance, September 30, 1994............................. 6,913 2,820,619 (2,018,698) 808,834
Issuance of common stock through private placement for
cash................................................. 667 475,037 475,704
Issuance of common stock in connection with Tracs
International, Inc. acquisition (Note 2)............. 75 78,563 78,638
Exercise of stock options............................. 73 48,853 48,926
Net loss.............................................. (69,388) (69,388)
----------- ------------- -------------- --------------
Balance, September 30, 1995............................. 7,728 3,423,072 (2,088,086) 1,342,714
Exercise of stock options............................. 5 3,523 3,528
Net income............................................ 343,964 343,964
----------- ------------- -------------- --------------
Balance, March 31, 1996................................. $ 7,733 $ 3,426,595 $ (1,744,122) $ 1,342,714
----------- ------------- -------------- --------------
----------- ------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------ ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Cash received from customers............... $ 13,846,571 $10,196,004 $ 6,530,318 $ 3,494,295 $ 3,473,310
Cash paid to suppliers and employees....... (11,492,487) (8,949,360) (7,009,961) (3,744,447) (3,017,412)
Interest paid.............................. (183,469) (136,120) (85,903) (42,487) (87,242)
Income tax refund received (paid).......... 185,134 58,852 238,150 238,150 (4,600)
------------ ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities................ 2,355,749 1,169,376 (327,396) (54,489) 364,056
------------ ----------- ----------- ----------- -----------
Investing Activities:
Net purchases of property and equipment.... (237,962) (94,434) (49,311) (10,118) (29,166)
Acquisition of business.................... (1,800,000)
Proceeds from sale of Tempest.............. 206,665 50,000
Proceeds from sale of property and
equipment................................. 36,923 6,045 6,045
------------ ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities................ (2,037,962) (57,511) 163,399 45,927 (29,166)
------------ ----------- ----------- ----------- -----------
Financing Activities:
Proceeds from borrowings................... 1,000,000 710,339 390,000 1,506,816
Repayment of debt.......................... (1,168,622) (1,254,437) (1,067,053) (483,764) (1,806,274)
Proceeds from note receivable.............. 158,335
Proceeds from exercise of stock options.... 6,195 48,926 26,060 3,528
Net proceeds from sales of stock........... 475,704 153,896
------------ ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities................ (168,622) (1,248,242) 167,916 86,192 (137,595)
------------ ----------- ----------- ----------- -----------
Net Increase (decrease) in Cash.............. 149,165 (136,377) 3,919 77,630 197,295
Cash at Beginning of Year.................... 87,188 236,353 99,976 99,976 103,895
------------ ----------- ----------- ----------- -----------
Cash at End of Year.......................... $ 236,353 $ 99,976 $ 103,895 $ 177,606 $ 301,190
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Reconciliation of Net Income to Net Cash
Provided by (Used in) Operating Activities:
Net income (loss).......................... $ (901,854) $(1,057,651) $ (69,388) $ 19,757 $ 343,964
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 1,102,980 807,912 423,690 212,387 218,651
Gain on sale of Tempest.................. (204,853) (204,853)
Gain on sale of property and equipment... (33,409) (6,045) (6,045)
Common stock issued as compensation...... 42,232
Changes in assets and liabilities:
Deferred rent.......................... 102,255 38,737 (76,064) (76,608)
Accounts receivable.................... 960,410 117,045 (96,813) 172,067 (275,972)
Income taxes receivable................ (238,950) 238,950 238,950
Inventory, prepaid expenses and other
assets................................ 1,507,291 1,275,875 (126,762) (180,193) (146,242)
Accounts payable and accrued expenses.. (415,333) 217,585 (410,111) (229,951) 223,655
------------ ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities................ $ 2,355,749 $ 1,169,376 $ (327,396) $ (54,489) $ 364,056
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Mitek Systems, Inc. (the "Company") is a designer, manufacturer
and marketer of advanced character recognition products for intelligent forms
processing applications ("Character Recognition"). Through March 1995, the
Company was also a systems integrator and value-added reseller of computer
equipment systems to businesses and high-security governmental agencies
("Tempest") (see Note 3).
BASIS OF CONSOLIDATION -- The consolidated financial statements include
accounts of Mitek Systems, Inc. and its wholly-owned subsidiary, Mitek Systems
Canada, Incorporated on June 21, 1995. All intercompany transactions and
balances are eliminated in consolidation.
UNAUDITED FINANCIAL INFORMATION -- The consolidated financial information as
of March 31, 1996 and for the six months ended March 31, 1995 and 1996 included
in the consolidated financial statements and notes thereto is unaudited. In the
opinion of management, such information contains all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of such
information. Information for the six months ended March 31, 1996 is not
necessarily indicative of the results to be expected for the entire year.
ACCOUNTS RECEIVABLE -- Accounts receivable are net of an allowance for
doubtful accounts of $32,953 in 1995 and $19,841 in 1994. The provision for bad
debts was $60,000, $115,895 and $0 for the years ended September 30, 1995, 1994
and 1993, respectively.
INVENTORIES -- Inventories are recorded at the lower of cost (on a first-in,
first-out basis) or market. Major classes of inventories at September 30, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Raw materials....................................................... $ 69,567 $ 36,929
Work-in-process..................................................... 42,970
Finished goods...................................................... 57,550 52,030
----------- -----------
Total............................................................. $ 127,117 $ 131,929
----------- -----------
----------- -----------
</TABLE>
PROPERTY AND EQUIPMENT -- Following is a summary of property and equipment
as of September 30, 1995 and 1994:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Property and equipment -- at cost:
Equipment..................................................... $ 2,460,016 $ 1,055,877
Furniture and fixtures........................................ 96,169 61,772
Leasehold improvements........................................ 78,094 52,985
------------- -------------
2,634,279 1,170,634
Less: accumulated depreciation and amortization................. 2,425,596 1,039,549
------------- -------------
Total......................................................... $ 208,683 $ 131,085
------------- -------------
------------- -------------
</TABLE>
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization of property
and equipment are provided using the straight-line method over estimated useful
lives ranging from three to five years. Depreciation and amortization of
property and equipment totalled $153,691, $352,543, and $410,349 for the years
ended September 30, 1995, 1994, and 1993, respectively. Amortization of prepaid
license/ support fees (see Note 2) totalled $270,000, $455,369 and $692,629 for
the years ended September 30, 1995, 1994, and 1993, respectively.
F-7
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
WARRANTY -- The Company accrues a warranty cost for all products sold. At
September 30, 1995 and 1994, other accrued liabilities included an accrued
warranty liability of $19,176 and $44,098, respectively. Warranty expense was
$-0-, $44,429, and $61,000 for the years ended September 30, 1995, 1994, and
1993, respectively.
REVENUE RECOGNITION -- Revenue from product sales is generally recognized
upon shipment.
RESEARCH AND DEVELOPMENT -- Research and development costs are expensed in
the period incurred.
INCOME TAXES -- The provision (benefit) for income taxes for the year ended
September 30, 1993 was computed pursuant to Statement of Financial Accounting
Standards No. 96 (FAS 96) "Accounting for Income Taxes". Effective October 1,
1993, the Company adopted Statement of Financial Accounting Standards No. 109
(FAS 109) "Accounting for Income Taxes," which was used in computing the
provision for income taxes for the years ended September 30, 1994 and 1995 (see
Note 7).
LOSS PER SHARE -- Loss per share is based on the weighted average number of
common and common equivalent shares outstanding during the year. Outstanding
stock options are included as common equivalents using the treasury stock method
when the effect is dilutive. The weighted average number of shares used in
determining loss per share was 7,285,788 in 1995; 6,877,425 in 1994; and
6,865,644 in 1993.
STATEMENTS OF CASH FLOWS -- Significant non-cash investing and financing
activities were comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Capital lease obligations and installment debt incurred to
acquire property and equipment.................................. $ 107,427
Conversion o deferred rent to short-term obligation due to lease
termination (Note 8)............................................ $ 198,762
Note receivable for the sale of the Tempest product line and
related assets (Note 3)......................................... $ 350,000
Shares exchanged for the assets and assumed liabilities of Tracs
International, Inc. (Note 2).................................... 78,638
</TABLE>
2. ACQUISITION
On June 21, 1995, the Company purchased substantially all of the assets and
assumed the liabilities of Tracs International, Inc., a Calgary, Canada based
developer of local area network facsimile servers. The purchase price included
75,000 unregistered shares of the Company's common stock and a 5% royalty on
facsimile related sales for a maximum period of three years or a maximum amount
of $300,000. Additional issuances of the Company's common shares may occur,
contingent upon the exceeding of certain revenue targeted during a six month
period following release from beta testing of a new product. The purchase
resulted in $136,250 of goodwill, to be amortized over 60 months.
3. SALE OF TEMPEST BUSINESS
On March 17, 1995, the Company sold its Tempest business for $350,000. The
Company recognized a gain on this sale of $204,853 which is recorded as other
income in the consolidated statement of operations.
F-8
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY
OPTIONS -- The Company has two stock option plans for executives and key
individuals who make significant contributions to the Company. The 1986 plan
provides for the purchase of up to 630,000 shares of common stock through
incentive and non-qualified options. The 1988 plan provides for the purchase of
up to 650,000 shares of common stock through non-qualified options. For both
plans, options must be granted at fair market value and for a term of not more
than six years. Employees owning in excess of 10% of the outstanding stock are
excluded from the plans.
Information concerning all stock options granted by the Company for the
years ended September 30, 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
---------- ---------------
<S> <C> <C>
Balance, October 1, 1992........................................ 755,834 $ .656-2.250
Granted......................................................... 121,000 .670-1.063
Cancelled....................................................... (4,500) .670-1.560
----------
Balance, September 30, 1993..................................... 872,334 .656-2.250
Granted......................................................... 357,500 1.160-1.340
Exercised....................................................... (32,369) .656-1.810
Cancelled....................................................... (404,465) .656-2.250
----------
Balance, September 30, 1994..................................... 793,000 .656-2.250
Granted......................................................... 81,000 1.09-1.250
Exercised....................................................... (72,947) .656-1.159
Cancelled....................................................... (245,553) .656-2.250
----------
Balance, September 30, 1995..................................... 555,500 .656-2.250
----------
</TABLE>
At September 30, 1995, options for 281,991 and 172,973 shares remained
available for granting under the 1986 and 1988 stock option plans, respectively.
At September 30, 1995, options for 291,597 shares were exercisable.
SALE OF COMMON STOCK -- The Company undertook a private placement stock
offering during the second and third quarters of 1995 in which 666,999 shares of
common stock were issued, with net proceeds of $475,704.
5. NOTES PAYABLE -- BANK
At September 30, 1994, the Company had $226,875 outstanding on a note
payable to a bank at an interest rate of 8.75%. The original note payable was
paid-off in full during 1995.
In October 1992, the bank agreed to advance an additional $1,000,000. The
$1,000,000 advance was payable in monthly installments of $20,833 plus interest
at prime plus 2% through November 1, 1993, at which time all unpaid principal
and interest were due. On November 19, 1993, the Company refinanced the then
remaining balance of $750,000. Under the refinancing, the term of the advance
was extended to November 1, 1996. The outstanding balance of the advance was
$291,667 and $541,667 as of September 30, 1995 and 1994, respectively.
Under the above term loan, the Company was required to maintain a minimum
net worth of $500,000 in addition to certain other financial ratios, and all of
the Company's existing or hereafter acquired assets are pledged to collateralize
these notes. The Company's principal investor may be required to advance funds
to the Company to maintain the net worth and other financial ratios stipulated
under the agreements. As of September 30, 1995, the Company was in compliance
with all the financial ratio requirements.
F-9
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FACTORING AGREEMENT
In September 1995, the Company entered into a receivable factoring agreement
with a finance company. Under the agreement, the finance company agreed to
finance receivables from the Company up to a maximum of $650,000. The finance
fee is calculated by taking 10% of the gross face value of the transferred
receivables for every 10 day period from the date the receivables are
transferred until such receivables are collected, subject to a minimum finance
fee of $6,500 per month. Such agreement expires in March 1996 and is renewable
at the option of the Company for six-month terms. At September 30, 1995 the
Company factored receivable balance was approximately $196,000.
7. INCOME TAXES
For the years ended September 30, 1995, 1994 and 1993, the Company's
provision (benefit) for income taxes was as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ------------ ---------
<S> <C> <C> <C>
Federal -- current........................................... $ (7,065) $ (227,000)
State -- current............................................. 800 4,234 $ 800
--------- ------------ ---------
Total...................................................... $ (6,265) $ (222,766) $ 800
--------- ------------ ---------
--------- ------------ ---------
</TABLE>
The federal benefit for fiscal years 1994 and 1993 represents the carryback
of net operating losses to recover taxes paid in prior periods.
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards (FAS) No. 109, "Accounting for Income Taxes". This
Statement supersedes FAS No. 96, which had been in use by the Company. There was
no material cumulative effect of adopting FAS No. 109 and no material effect on
the effective tax rate for fiscal 1994.
There was no provision for deferred income taxes in 1995, 1994 or 1993.
Under FAS No. 109, deferred income tax liabilities and assets reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's net deferred tax liabilities
and assets as of September 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible..................................... $ 610,000 $ 21,000
Book depreciation and amortization in excess of tax................... 161,000 108,000
Research credit carryforwards......................................... 360,000 529,000
Net operating loss carryforwards...................................... 46,000 838,000
Capitalized research and development costs............................ 27,000 24,000
Other................................................................. 86,000 148,000
-------------- --------------
Total deferred tax assets........................................... 1,290,000 (1,668,000)
Valuation allowance for net deferred tax assets..................... (1,290,000) (1,668,000)
-------------- --------------
Total................................................................... $ 0 $ 0
-------------- --------------
-------------- --------------
</TABLE>
The Company has provided a valuation allowance against deferred tax assets
recorded as of September 30, 1995 and 1994 due to uncertainties regarding the
realization of such assets.
The research credit and net operating loss carryforwards expire during the
years 2004 to 2010.
F-10
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The differences between the provision (benefit) for income taxes and income
taxes computed using the U.S. federal income tax rate were as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ----------
<S> <C> <C> <C>
Amount computed using statutory rate (34%)..................... $ (308,760) $ (435,342) $ (23,320)
Increase in valuation reserve for deferred tax assets.......... 203,829 192,320
Temporary differences:
Accrued expenses not deductible until paid................... 285,970 (169,000)
Deductible expenses accrued in financial statements of prior
years....................................................... (24,893)
Depreciation................................................. 41,383
Non deductible items........................................... 3,539 4,513
Other.......................................................... (4,304)
State income taxes............................................. 800 4,234 800
------------ ------------ ----------
Provision (benefit) for income taxes........................... $ (6,265) $ (222,766) $ 800
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
8. LONG-TERM LIABILITIES
As of September 30, 1995 and 1994, long-term liabilities were as follows:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Capital lease obligations (see Note 9)............................ 83,766 $ 31,831
Deferred rent payable (see Note 9)................................ 77,060 996
Notes payable bank (see Note 5)................................... 768,542 291,667
------------ ------------
929,368 324,494
Less current portions............................................. (562,537) (267,927)
------------ ------------
Total........................................................... $ 366,831 $ 56,567
------------ ------------
------------ ------------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
LEASES -- The Company's offices and manufacturing facilities are leased
under non-cancellable operating leases. The primary facilities lease expires in
April 30, 1998, at which time the lease is renewable at current market rates.
For financial statement purposes, the lease payments are expensed over the lease
term.
In addition, the following property and equipment is leased under
non-cancellable capital leases as of September 30, 1995 and 1994:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Equipment......................................................... $ 464,589 $ 133,751
Furniture and fixtures............................................ 30,738
Leasehold improvements............................................ 5,928
------------ ------------
501,255 133,751
Less accumulated amortization..................................... (444,631) (100,274)
------------ ------------
Total........................................................... $ 56,624 $ 33,477
------------ ------------
------------ ------------
</TABLE>
F-11
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future annual minimum rental payments under non-cancellable leases are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- ---------
<S> <C> <C>
Year Ending September 30:
1996............................................................... $ 119,135 $ 21,865
1997............................................................... 130,213 11,220
1998............................................................... 84,228 4,993
1999............................................................... 2,153
----------- ---------
Total............................................................ 335,729 38,078
Less amount representing interest.................................. 6,247
----------- ---------
Present value of minimum lease payments............................ $ 335,729 $ 31,831
----------- ---------
----------- ---------
</TABLE>
Rent expense for operating leases for the years ended September 30, 1995,
1994 and 1993 totalled $62,509, $480,996 and $466,287, respectively.
10. PRODUCT REVENUES AND SALES CONCENTRATIONS
PRODUCT REVENUES -- During fiscal years 1995 and 1994 the Company's revenues
were derived primarily from two product lines: Character Recognition and
Tempest. Prior to fiscal 1993, the Company's revenues were generated solely from
Tempest products. Revenues by product line, as a percentage of net sales, are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
------------------------
1994 1995
----- -----
<S> <C> <C>
Tempest...................................................................... 54% 22%
Character recognition........................................................ 45 74
Other........................................................................ 1 4
</TABLE>
SALES CONCENTRATIONS -- For the years ended September 30, 1995, 1994 and
1993, the Company had the following sales concentrations:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
U.S. government and its agencies
* Percent of total sales.................................................... 12% 11% 16%
Non-governmental customers to which sales were in excess of 10% of total sales
* Number of customers....................................................... 2 1 2
* Aggregate percentage of sales............................................. 45% 21% 25%
Foreign Sales -- primarily Europe........................................... 23% 13% 21%
</TABLE>
* * * * * *
F-12
<PAGE>
MITEK SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations for
the year ended September 30, 1995 gives effect to the sale of the TEMPEST line
of business which occurred on March 17, 1995. This transaction is reflected as
of October 1, 1994. The pro forma information is based on the September 30, 1995
statement of operations of Mitek Systems, Inc. ("Mitek"), giving effect to the
completed sale of Mitek's TEMPEST line of business and the accounting
assumptions and adjustments described in the accompanying notes to the pro forma
consolidated statement of operations.
The unaudited pro forma consolidated statement of operations has been
prepared by the management of Mitek based upon the unaudited statement of
operations of the TEMPEST line of business for the period from October 1, 1994
to March 17, 1995 (the date of sale) and the statement of operations of Mitek
for the year ended September 30, 1995.
Management of Mitek does not believe that the unaudited pro forma
consolidated statement of operations is indicative of the results that actually
would have occurred if the sale had taken effect on the date indicated or which
may be obtained in the future. The unaudited pro forma consolidated statement of
operations should be read in conjunction with the financial statements and notes
of Mitek Systems, Inc.
F-13
<PAGE>
MITEK SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MITEK SYSTEMS, INC. ADJUSTMENTS CONSOLIDATED
------------------- ----------- ------------
<S> <C> <C> <C>
Net sales............................................................. $6,633,176 $(1,498,000)(A) $ 5,135,176
Cost of goods sold.................................................... 3,330,109 (1,142,432)(A) 2,187,677
------------------- ----------- ------------
Gross margin.......................................................... 3,303,067 (355,568) 2,947,499
------------------- ----------- ------------
Costs and expenses:
General and administrative.......................................... 1,117,014 1,117,014
Research and development............................................ 1,004,131 (58,329)(A) 945,802
Selling and marketing............................................... 1,388,422 1,388,422
Interest -- net..................................................... 66,941 66,941
------------------- ----------- ------------
Total costs and expenses............................................ 3,576,508 (58,329) 3,518,179
------------------- ----------- ------------
Operating loss........................................................ (273,441) (297,239) (570,680)
Other income.......................................................... 204,853 (204,853)(B) 0
------------------- ----------- ------------
Loss before income taxes.............................................. (68,588) (502,092) (570,680)
Provision for income taxes............................................ 800 800
------------------- ----------- ------------
Net loss.............................................................. $ (69,388) $ (502,092) $ (571,480)
------------------- ----------- ------------
------------------- ----------- ------------
Loss per share........................................................ $ (0.01) $ (0.08)
Weighted average common shares outstanding............................ 7,285,788 7,285,788
</TABLE>
F-14
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Mitek Systems, Inc. ("Mitek") sold the TEMPEST line of business on March 17,
1995 for $350,000, recognizing a gain of $204,853. The following adjustments are
necessary to reflect the pro forma effects of the executed transaction.
(A) Reflects the revenue and related cost of sales recognized and the
research and development costs incurred from the TEMPEST line of business during
the period October 1, 1994 through March 17, 1995.
(B) Reflects the gain recognized on the sale of the TEMPEST line of business
in the year ended September 30, 1995.
F-15
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON. THE PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SALE WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE ANY OF THE
DATE AS OF WHICH INFORMATION IS FURNISHED OR SINCE THE DATE OF THIS PROSPECTUS.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Prospectus Summary.................................. 3
Risk Factors........................................ 6
Use of Proceeds..................................... 15
Price Range of Common Stock......................... 16
Dividend Policy..................................... 16
Capitalization...................................... 17
Dilution............................................ 18
Selected Consolidated Financial Data................ 19
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 20
Business............................................ 28
Management.......................................... 39
Certain Transactions................................ 42
Principal and Selling Stockholders.................. 43
Description of Capital Stock........................ 45
Underwriting........................................ 48
Legal Matters....................................... 49
Experts............................................. 50
Available Information............................... 50
Additional Information.............................. 50
Index to Financial Statements....................... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,075,000 SHARES OF
COMMON STOCK
[LOGO]
----------------------
PROSPECTUS
----------------------
OPQRSTU
, 1996
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation eliminates the personal liability
of the directors of the Company for monetary damages for breach of fiduciary
duties as a director of the Company except: (i) for any breach of the directors'
duty of loyalty to the Company or its stockholders; (ii) for acts for omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (iii) for unlawful dividends or distributions; or (iv) for any
transaction from which the director derived an improper personal benefit.
The Company's Bylaws permit the Company to indemnify its directors,
officers, employees and agents to the maximum extent permitted by section 145 of
the Delaware General Corporation Law. Section 145 provides that a director,
officer, employer, or agent of the Company who is or is made a party or is
threatened to made a party to any threatened, action, suit or proceeding, with a
civil, criminal, administrative or investigative, shall be indemnified and held
harmless by the Company at the fullest extent authorized by the Delaware
Corporation Law against all expense, liability and loss actually and reasonably
incurred or suffered by such person if he or she acted in good faith and in a
manner he or she reasonably believed to be in the best interest of the Company,
and, with respect to any criminal proceeding, had no reasonable cause to believe
that the conduct was unlawful. If it is determined that the conduct of such
person meets these standards, such person may be indemnified for expenses
incurred and amounts paid in such proceeding if actually and reasonably incurred
in connection therewith.
If such a proceeding is brought by or on behalf of the corporation (i.e., a
derivative suit), such person may be indemnified against expenses actually and
reasonably incurred if such person acted in good faith and in a manner
reasonably believed to be in the best interest of the corporation and its
stockholders. There can be no indemnification with respect to any matter as to
which such person is adjudged to be liable to the Company unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite such adjudication but in
view of all of the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the Court of Chancery or
such other court shall deem proper.
Where any such person is successful in any such proceeding, such person is
entitled to be indemnified against expenses actually and reasonably incurred by
him or her. In all other cases (unless order by a court), indemnification is
made by the corporation upon determination by it that indemnification of such
person is proper in the circumstances because such person has met the applicable
standard of conduct.
A corporation may advance expenses incurred in defending any such proceeding
upon receipt of an undertaking to repay any amount so advanced if it is
ultimately determined that the person is not eligible for indemnification.
The indemnification rights provided in Section 145 are not exclusive of
additional rights to indemnification for breach of duty to the corporation and
its stockholders to the extent additional rights are authorized in the
corporation's certificate of incorporation and are not exclusive of any other
rights to indemnification under any bylaw, agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in his or her office and
as to action in another capacity while holding such office.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses other than any underwriting
discounts or commissions, payable in connection with the distribution of the
shares being registered. The Company will pay all expenses incurred in
connection with the registration. All amounts shown are estimates except for SEC
and NASD Registration fees.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 8,290
NASD Filing Fee.................................................. 2,904
Nasdaq National Market Listing Fee............................... 53,000
Blue Sky Fees and Expenses....................................... 7,000
Printing and Engraving Expenses.................................. 50,000
Accounting Fees and Expenses..................................... 30,000
Consulting Fees.................................................. 125,000
Legal Fees and Expenses.......................................... 125,000
Registerer and Transfer Agent's Fees and Expenses................ 5,000
Miscellaneous Expenses........................................... 13,181
---------
Total........................................................ $ 419,375
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In the last three years, the Company sold the following securities without
registration under the Securities Act:
In March, 1995, the Company issued an aggregate of 666,999 shares of its
Common Stock to 15 individuals in a private placement at a price of $.75 per
share (except for 26,000 shares sold to Mr. Thornton at $.9375 per share) for an
aggregate of $505,125. In conducting the offering, the Company relied on Section
4(2) of the Securities Act of 1933, as amended. No advertising or general
solicitation was employed in offering the securities. All stockholders were
sophisticated investors capable of analyzing the merits and risks of their
investment. In connection with such offering, the Company paid expenses
aggregating to $29,760, including payment of a finder's fee of $14,260 which was
paid to Heartland Financial Services Corporation ("Heartland"). Heartland is in
the business of providing financial consulting services.
In June, 1995, the Company acquired substantially all the assets of TRACS
International, Inc., a Canadian corporation in exchange for 75,000 shares of the
Company's unregistered Common Stock and a percentage of royalties on certain
product sales. The transaction was affected pursuant to Section 4(2) of the
Securities Act. No sales commissions were paid in connection with the
transaction.
Effective October 20, 1995, the Company entered into investment banking
agreements with several NASD-registered broker-dealers, pursuant to which the
Company agreed to issue an aggregate of up to 210,000 warrants to purchase its
Common Stock at a price of $1.50 per share, exercisable for a period of two
years. The warrants vested in accordance with investment banking services such
as marketing making functions, research reports, and consulting services to be
performed by the broker-dealers.
II-2
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
1.2 Form of Selected Dealer Agreement (4)
1.3 Form of Representative's Warrant (4)
3.1 Certificate of Incorporation and Amendments thereto (1)
3.2 Amended and Restated Bylaws (1)
4.1 Certificate of Designation of Preferences of Class A Preferred Stock (1)
4.2 Form of Warrant Issued to Investment Bankers in October 1995 Offering
5.1 Opinion of Luce, Forward, Hamilton & Scripps LLP regarding legality of Common
Stock
10.1 1986 Stock Option Plan
10.2 1988 Nonqualified Stock Option Plan
10.3 401(k) Plan
10.4 Agreement for Purchase and Sale of Assets dated as of November 23, 1993 between
the Company and HNC Software, Inc. (2)
10.5 License Agreement dated as of November 23, 1992 between the Company and HNC, Inc.
(2)
10.6 Agreement of Purchase and Sale of Assets dated as of March 17, 1995 between the
Company and Ravenn Data Systems, Inc. (3)
10.7 Marketing, License Agreement effective as of March 26, 1996 between the Company
and VALIdata Sistemas de Captura, de C.V.
23.1 Consent of Luce, Forward, Hamilton & Scripps LLP (included in Exhibit 5)
23.2 Consent of Deloitte & Touche LLP
24. Power of Attorney
</TABLE>
- ------------------------
(1) Incorporated by reference from the exhibits to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1987.
(2) Incorporated by reference from the exhibits to the Company's Current Report
on Form 8-K, filed December 7, 1992.
(3) Incorporated by reference from the exhibits to the Company's Current Report
on Form 8-K, filed March 17, 1995.
(4) To be filed by amendment.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the indemnification provisions
described under Item 24, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
registration in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time the Commission declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of San Diego, State of California, on July 8, 1996.
MITEK SYSTEMS, INC.
By: /s/ JOHN F. KESSLER
-----------------------------------
John F. Kessler, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------------- ----------------
<C> <S> <C>
/s/ JAMES B. DEBELLO
------------------------------------------- Director July 8, 1996
James B. DeBello
/s/ GERALD I. FARMER
------------------------------------------- Executive Vice President and July 8, 1996
Gerald I. Farmer Director
/s/ DANIEL E. STEIMLE
------------------------------------------- Director July 8, 1996
Daniel E. Steimle
/s/ JOHN M. THORNTON
------------------------------------------- Chairman of the Board and July 8, 1996
John M. Thornton Director
/s/ SALLY B. THORNTON
------------------------------------------- Director July 8, 1996
Sally B. Thornton
/s/ JOHN F. KESSLER
------------------------------------------- President, Chief Executive July 8, 1996
John F. Kessler Officer and Director
</TABLE>
II-5
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of Mitek Systems, Inc. (the
"Company"), do hereby constitute and appoint John F. Kessler and John M.
Thornton, or any of them, our true and lawful attorneys and agents to sign a
Registration Statement on Form SB-2 to be filed with the Securities and Exchange
Commission, and to do any and all acts and things and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorneys and agents, or any one of them, may deem necessary or advisable
to enable the Company to comply with the Securities Act of 1933, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with such Registration Statement, including
specifically, but without limitation, power and authority to sign for us or any
of us in our name and in the capacities indicated below, any and all amendments
(including post-effective amendments) hereto; and we do hereby ratify and
confirm all that the said attorneys and agents, or any of them, shall do or
cause to be done by virtue of this power of attorney.
Executed below by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------------- ----------------
<C> <S> <C>
/s/ JAMES B. DEBELLO
------------------------------------------- Director July 8, 1996
James B. DeBello
/s/ GERALD I. FARMER
------------------------------------------- Executive Vice President and July 8, 1996
Gerald I. Farmer Director
/s/ DANIEL E. STEIMLE
------------------------------------------- Director July 8, 1996
Daniel E. Steimle
/s/ JOHN M. THORNTON
------------------------------------------- Chairman of the Board and July 8, 1996
John M. Thornton Director
/s/ SALLY B. THORNTON
------------------------------------------- Director July 8, 1996
Sally B. Thornton
/s/ JOHN F. KESSLER
------------------------------------------- President, Chief Executive July 8, 1996
John F. Kessler Officer and Director
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ----------- -------------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Selected Dealer Agreement (4)
1.3 Form of Representative's Warrant (4)
3.1 Certificate of Incorporation and Amendments thereto (1)
3.2 Amended and Restated Bylaws (1)
4.1 Certificate of Designation of Preferences of Class A Preferred Stock (1)
4.2 Form of Warrant Issued to Investment Bankers in October 1995 Offering
5.1 Opinion of Luce, Forward, Hamilton & Scripps LLP regarding legality of Common Stock
10.1 1986 Stock Option Plan
10.2 1988 Nonqualified Stock Option Plan
10.3 401(k) Plan
10.4 Agreement for Purchase and Sale of Assets dated as of November 23, 1993 between the Company
and HNC Software, Inc. (2)
10.5 License Agreement dated as of November 23, 1992 between the Company and HNC, Inc. (2)
10.6 Agreement of Purchase and Sale of Assets dated as of March 17, 1995 between the Company and
Ravenn Data Systems, Inc. (3)
10.7 Marketing, License Agreement effective as of March 26, 1996 between the Company and VALIdata
Sistemas de Captura, de C.V.
23.1 Consent of Luce, Forward, Hamilton & Scripps LLP (included in Exhibit 5)
23.2 Consent of Deloitte & Touche LLP
24. Power of Attorney
</TABLE>
- ------------------------
(1) Incorporated by reference from the exhibits to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1987.
(2) Incorporated by reference from the exhibits to the Company's Current Report
on Form 8-K, filed December 7, 1992.
(3) Incorporated by reference from the exhibits to the Company's Current Report
on Form 8-K, filed March 17, 1995.
(4) To be filed by amendment.
<PAGE>
DRAFT OF 6/26/96
4,075,000 SHARES(1)
MITEK SYSTEMS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
, 1996
------------------
CRUTTENDEN ROTH INCORPORATED
As Representative of the several Underwriters
c/o Cruttenden Roth Incorporated
18301 Van Karman, Suite 100
Irvine, California 92715
Ladies and Gentlemen:
Mitek Systems, Inc., a Delaware corporation (the "Company"), John M.
Thornton ("Principal Stockholder"), and certain additional stockholders of the
Company named in Schedule B hereto (collectively the Principal Stockholder and
the additional Stockholders named in Schedule B shall hereafter be called the
"Selling Stockholders") address you as the Representative of each of the
persons, firms and corporations listed in Schedule A hereto (herein collectively
called the "Underwriters") and hereby confirm their respective agreements with
the several Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
2,500,000 shares (the "Company Shares") of its authorized and unissued
Common Stock $.001 par value per share, to the several Underwriters. The
Selling Stockholders, acting severally and not jointly, propose to sell an
aggregate of up to 1,575,000 shares (the "Selling Stockholder Shares") of
the Company's authorized and outstanding Common Stock, $.001 par value per
share, to the several Underwriters. The Company Shares and the Selling
Stockholders Shares are hereinafter collectively called the "Firm Shares."
The Principal Stockholder also proposes to grant to the Underwriters an
option to purchase up to 611,250 additional shares of the Company's Common
Stock, $.001 par value per share (the "Option Shares"), as provided in Section
7 hereof. As used in this Agreement, the term "Shares" shall include the
- ----------------------
(1) Plus an option to purchase up to 611,250 additional shares from the John M.
Thornton and Sally B. Thornton Trust to cover over-allotments.
<PAGE>
Firm Shares and the Option Shares. All shares of Common Stock, $0.001 par
value per share, of the Company to be outstanding after giving effect to
the sales contemplated hereby, including the Shares, are hereinafter
referred to as "Common Stock."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE
PRINCIPAL STOCKHOLDER.
I. Each of the Company and the Principal Stockholder jointly and
severally hereby represents and warrants to and agrees with each Underwriter
that:
(a) A registration statement on Form SB-2 (File No. 333-_____)
with respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of
such registration statement and amendments, of each related prospectus subject
to completion (the "Preliminary Prospectuses") and of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations have
been delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if Cruttenden Roth Incorporated, on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if Cruttenden
Roth Incorporated, on behalf of the several Underwriters, shall
2
<PAGE>
agree to the utilization of Rule 434 of the Rules and Regulations, the
information required to be included in any term sheet filed pursuant to Rule
434(b) or (c), as applicable, of the Rules and Regulations. The term
"Registration Statement" as used in this Agreement shall mean such registration
statement, including financial statements, schedules and exhibits (including
exhibits incorporated by reference), in the form in which it became or becomes,
as the case may be, effective (including, if the Company omitted information
from the registration statement pursuant to Rule 430A(a) or files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the information deemed to be
a part of the registration statement at the time it became effective pursuant to
Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event of
any amendment thereto or the filing of any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations relating thereto after the
effective date of such registration statement, shall also mean (from and after
the effectiveness of such amendment or the filing of such abbreviated
registration statement) such registration statement as so amended, together with
any such abbreviated registration statement. The term "Prospectus" as used in
this Agreement shall mean the prospectus "relating to the Shares as included in
such Registration Statement at the time it becomes effective (including, if the
Company omitted information from the Registration Statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of the
Registration Statement at the time it became effective pursuant to Rule 430A(b)
of the Rules and Regulations); PROVIDED, HOWEVER, that if in reliance on Rule
434 of the Rules and Regulations and with the consent of Cruttenden Roth
Incorporated, on behalf of the several Underwriters, the Company shall have
provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as
applicable, prior to the time that a confirmation is sent or given for purposes
of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus
subject to completion" (as defined in Rule 434(g) of the Rules and Regulations)
last provided to the Underwriters by the Company and circulated by the
Underwriters to all prospective purchasers of the Shares (including the
information deemed to be a part of the Registration Statement at the time it
became effective pursuant to Rule 434(d) of the Rules and Regulations).
Notwithstanding the foregoing, if any revised prospectus shall be provided to
the Underwriters by the Company for use in connection with the offering of the
Shares that differs from the prospectus referred to in the immediately preceding
sentence (whether or not such revised prospectus is required to be tiled with
the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use. If in reliance on Rule 434
of the Rules and Regulations and with the consent of Cruttenden Roth
Incorporated, on behalf of the several Underwriters, the Company shall have
provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as
applicable, prior to the time that a confirmation is sent or given for purposes
or Section 2(10)(a) of the Act, the Prospectus and the term sheet, together,
will not be materially different from the prospectus in the Registration
Statement.
b. The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that
3
<PAGE>
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; PROVIDED, HOWEVER, that none of the representations and
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(c) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as a corporation in good standing
under the laws of their respective jurisdictions of incorporation with full
power and authority (corporate and other) to own, lease and operate their
properties and conduct their business as described in the Prospectus; the
Company and each Subsidiary are duly qualified to do business as a foreign
corporation and are in good standing in each jurisdiction in which the
ownership or leasing of their properties or the conduct of their business
requires such qualification, except where the failure to be so qualified or
be in good standing would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company; no proceeding has been instituted in any
such jurisdiction revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification; the Company
and each Subsidiary is in possession of and operating in compliance with
all authorizations, licenses, certificates, consents, orders and permits
from state, federal and other regulatory authorities that are material to
the conduct of its business, all of which are valid and in full force and
effect; the Company and each Subsidiary is not in violation of its charter
or bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material
bond, debenture, note or other evidence of indebtedness, or in any material
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or such
Subsidiary, respectively, is a party or by which its properties may be
bound; and the Company and each Subsidiary are not in material violation of
any law, order, rule, regulation, writ, injunction, judgment or decree of
any court, government or governmental agency or body, domestic or
4
<PAGE>
foreign, having jurisdiction over the Company or over its properties of
which it has knowledge. The Company does not own or control, directly or
indirectly, any corporation, association or other entity, except that the
Company is the sole shareholder of ________________ (the "Subsidiary").
(d) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the Company
and is a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a material
default under, (i) any material bond, debenture, note or other evidence of
indebtedness, or under any material lease, contract, indenture, mortgage, deed
of trust, loan agreement, joint venture or other agreement or instrument to
which the Company is a party or by which its properties may be bound, (ii) the
charter or bylaws of the Company or (iii) any law, order, rule, regulation,
writ, injunction, judgment or decree of any court, government or governmental
agency or body, domestic or foreign, having jurisdiction over the Company or its
properties. No consent, approval, authorization or order of or qualification
with any count government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or its properties is required for the
execution and delivery of this Agreement and the consummation by the Company of
the transactions herein contemplated, except such as may be required under the
Act, or under state or other securities or Blue Sky laws, all of which
requirements have been satisfied in all material respects.
(e) There is not any pending or, to the Company's
knowledge, threatened action, suit, claim or proceeding against the Company
or the Subsidiary, or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over
the Company or the Subsidiary or their respective officers or properties or
otherwise which (i) might result in any material adverse change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company or might materially and adversely affect
the Company's properties, assets or rights, (ii) might prevent consummation
of the transactions contemplated hereby or (iii) is required to be
disclosed in the Registration Statement or Prospectus and is not so
disclosed; and there are no agreements, contracts, leases or documents of
the Company of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations which have
not been accurately described in all material respects in the Registration
Statement or Prospectus or filed as exhibits to the Registration Statement.
5
<PAGE>
(f) All outstanding shares of capital stock of the Company
(including the Selling Stockholder Shares) have been duly authorized and
validly issued and are fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the authorized and outstanding
capital stock of the Company is as set forth in the Prospectus under the
caption "Capitalization" and conforms in all material respects to the
statements relating thereto contained in the Registration Statement and the
Prospectus (and such statements correctly state the substance of the
instruments defining the capitalization of the Company); the Firm Shares
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company
against payment therefor in accordance with the terms of this Agreement,
will be duly and validly issued and fully paid and nonassessable, and will
be sold free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest; and no preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
stockholders exists with respect to any of the Firm Shares or the issuance
and sale thereof other than those that have been satisfied or expressly
waived prior to the date hereof. No further approval or authorization of
any stockholder, the Board of Directors of the Company or others is
required for the issuance and sale or transfer of the Shares except as may
be required under the Act or under state or other securities or Blue Sky
laws. Except as disclosed in the Prospectus and the financial statements
of the Company, and the related notes thereto included in the Prospectus,
the Company has no outstanding options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or
sell, shares of its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's stock option,
stock bonus and other stock plans or arrangements, and the options or other
rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with
respect to such plans, arrangements, options and rights.
(g) Deloitte & Touche LLP, have examined the consolidated
financial statements of the Company, together with the related schedules and
notes, as of September 30, 1995 and 1994 and for each of the years in the three
(3) years ended September 30, 1995 filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are independent
accountants within the meaning of the Act and the Rules and Regulations; the
audited financial statements of the Company, together with the related schedules
and notes, and the unaudited financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company at the respective dates and for the
respective periods to which they apply; and all audited financial statements of
the Company, together with the related schedules and notes, and the unaudited
financial information, filed with the Commission as part of the Registration
Statement, have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except as may be
otherwise stated therein. The selected and summary financial and statistical
data included in the Registration Statement present fairly the information
6
<PAGE>
shown therein and have been compiled on a basis consistent with the audited
consolidated financial statements presented therein. No other financial
statements or schedules are required to the be included in the Registration
Statement.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been (i)
any material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company, (ii) any transaction
that is material to the Company, except transactions entered into in the
ordinary course of business, (iii) any obligation, direct or contingent, that is
material to the Company, incurred by the Company, except obligations incurred in
the ordinary course of business, (iv) any change in the capital stock or
outstanding indebtedness of the Company that is material to the Company, (v) any
dividend or distribution of any kind declared, paid or made on the capital stock
of the Company, or (vi) any loss or damage (whether or not insured) to the
property of the Company which has been sustained or will have been sustained
which has a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) the Company has good and marketable title to all properties
and assets described in the Registration Statement and Prospectus as owned
by it, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest, other than such as would not have a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company, (ii) the
agreements to which the Company is a party described in the Registration
Statement and Prospectus are valid agreements, enforceable by the Company
in accordance with their terms, except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or
by general equitable principles and, to the Company's knowledge, the other
contracting party or parties thereto are not in material breach or material
default under any of such agreements, and (iii) the Company has valid and
enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement thereof
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles. Except as set forth in the
Registration Statement and Prospectus, the Company owns or leases all such
properties as are necessary to its operations as now conducted or as
proposed to be conducted.
(j) The Company (and, during their existence, its subsidiaries)
has timely filed all necessary federal, state and foreign income and franchise
tax returns and has paid all taxes shown thereon as due, and there is no tax
deficiency that has been or, to the Company's knowledge, might be asserted
against the Company (or any of its subsidiaries) that might have a material
adverse effect on the condition (financial or
7
<PAGE>
otherwise), earnings, operations, business or business prospects of the Company;
and all tax liabilities are adequately provided for on the books of the Company.
(k) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for its business and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect;
the Company has not been refused any insurance coverage sought or applied for;
and the Company does not have any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not materially and adversely affect the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company.
(l) No labor disturbance by the employees of the Company
exists or is imminent; and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its principal
suppliers, value added resellers, subcontractors, authorized dealers or
international distributors that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company. No collective
bargaining agreement exists with any of the Company's employees and, to the
Company's knowledge, no such agreement is imminent.
(m) The Company owns or possesses adequate rights to use all
patents, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names and copyrights which are necessary to conduct its businesses
as described in the Registration Statement and Prospectus; except as set forth
in the Registration Statement and the Prospectus, the expiration of any patents,
patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company; the Company has not received any notice of, and has no knowledge of,
any infringement of or conflict with asserted rights of the Company by others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, nor has it any knowledge of, any infringement of or
conflict with asserted rights of others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights which, individually or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, might have a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company.
8
<PAGE>
(n) The Common Stock is registered pursuant to Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is
listed on the Nasdaq Smallcap Market. The Company has applied to have its
Common Stock listed on the Nasdaq National Market under the symbol "MITK" on the
effectiveness of the Registration Statement. Except as specifically disclosed
in the Registration Statement, the Company has taken no action designed to, or
likely to have the effect of, terminating the registration of the Common Stock
under the Exchange Act or delisting the Common Stock from The Nasdaq National
Market, nor has the Company received any notification that the Commission or the
National Association of Securities Dealers, Inc. ("NASD") is contemplating
terminating such registration or listing.
(o) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it is not and will not become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(q) The Company (nor during the term of their existence, any of
its subsidiaries) has not at any time during the last five (5) years (i) made
any unlawful contribution to any candidate for foreign office or failed to
disclose fully any contribution in violation of law, or (ii) made any payment to
any federal or state governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Except as otherwise set forth in the Registration Statement
and the Prospectus, each officer and director of the Company, each Selling
Stockholder and each entity that is a stockholder and is affiliated with a
director of the Company has agreed in writing that such person will not, except
as described below, for a period of 180 days from the date of the final
Prospectus (the "Lock-up Period"), offer to sell, contract to sell, or otherwise
sell, dispose of, loan, pledge or grant any rights with respect to
9
<PAGE>
(collectively, a "Disposition") any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock (collectively, "Securities") now
owned or hereafter acquired directly by such person or with respect to which
such person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners or
stockholders of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, or (iii) with the prior
written consent of Cruttenden Roth Incorporated. The foregoing restriction has
been expressly agreed to preclude the holder of the Securities from engaging in
any hedging or other transaction which is designed to or reasonably expected to
lead to or result in a Disposition of Securities during the Lock-up Period, even
if such Securities would be disposed of by someone other than such Stockholder.
Such prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Furthermore, such person has
also agreed and consented to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction. The Company has provided to
counsel for the Underwriters a complete and accurate list of all securityholders
of the Company as of ___________, 1996 and the number and type of securities
held by each securityholder. The Company has provided to counsel for the
Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors and stockholders have agreed to such
or similar restrictions (the "Lock-up Agreements") presently in effect or
effected hereby. The Company hereby represents and warrants that it will not
release any of its officers, directors or other stockholders from any Lock-up
Agreements currently existing or hereafter effected without the prior written
consent of Cruttenden Roth Incorporated.
(t) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance, in all material respects, with all
rules, laws and regulations relating to the use, treatment, storage and disposal
of toxic substances and protection of health or the environment ("Environmental
Laws") which are applicable to its business, (ii) the Company has not received
notice from any governmental authority or third party of an asserted claim under
Environmental Laws that is required to be disclosed in the Registration
Statement and the Prospectus and is not so disclosed, (iii) the Company will not
be required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property which is owned, leased or occupied by
the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. Section 9601, ET SEQ.), or otherwise designated as a contaminated site
under applicable state or local law.
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(u) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(v) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(w) No relationship, direct or indirect, exists between or
among the Company or the Subsidiary, on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company or
Subsidiary, on the other hand, which is required to be described in the
Registration Statement or the Prospectus which is not so described.
Except as disclosed in the Registration Statement or the
Prospectus, the Company has not incurred any liability or potential
liability for any fee, commission, or other compensation on account of the
employment of any broker or finder in connection with the transactions
contemplated by this Agreement.
II. Each Selling Stockholder, severally and not jointly, represents
and warrants to and agrees with each Underwriter and the Company that:
(a) Such Selling Stockholder now has and on the Closing Date,
and on any later date the Option Shares are purchased, will have valid
marketable title to the Shares to be sold by such Selling Stockholder, free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest other than pursuant to this Agreement; and upon delivery of such Shares
hereunder and payment of the purchase price as herein contemplated, each of the
Underwriters will obtain valid marketable title to the Shares purchased by it
from such Selling Stockholder, free and clear of any pledge, lien, security
interest pertaining to such Selling Stockholder or such Selling Stockholder's
property, encumbrance, claim or equitable interest, including any liability for
estate or inheritance taxes, or any liability to or claims of any creditor,
devisee, legatee or beneficiary of such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized (if
applicable), executed and delivered, in the form heretofore furnished to the
Representative, an irrevocable Power of Attorney (the "Power of Attorney")
appointing ________________________________________ as attorney(s)-in-fact
(collectively, the "Attorneys" and individually, an "Attorney") and a Letter of
Transmittal and Custody Agreement (the "Custody Agreement") with [American Stock
Transfer & Trust Company] as custodian (the "Custodian"); each of the Power of
Attorney and the Custody Agreement constitutes a valid and binding agreement on
the part of such Selling Stockholder enforceable in accordance with its terms,
except as the enforcement thereof may be limited
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by applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by general
equitable principles; and each of such Selling Stockholder's Attorneys, acting
alone, is authorized to execute and deliver this Agreement and the certificate
referred to in Section 6(i) hereof on behalf of such Selling Stockholder, to
determine the purchase price to be paid by the several Underwriters to such
Selling Stockholder as provided in Section 3 hereof; to authorize the delivery
of the Selling Stockholder Shares under this Agreement and to duly endorse (in
blank or otherwise) the certificate or certificates representing such Shares or
a stock power or powers with respect thereto, to accept payment therefor, and
otherwise to act on behalf of such Selling Stockholder in connection with this
Agreement.
(c) All consents, approvals, authorizations and orders required
for the execution and delivery by such Selling Stockholder of the Power of
Attorney and the Custody Agreement, the execution and delivery by or on behalf
of such Selling Stockholder of this Agreement and the sale and delivery of the
Selling Stockholder Shares under this Agreement (other than, at the time of the
execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other securities or
Blue Sky laws) have been obtained and are in full force and effect; such Selling
Stockholder, if other than a natural person, has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization as the type of entity that it purports to be; and such Selling
Stockholder has full legal right, power and authority to enter into and perform
its obligations under this Agreement and such Power of Attorney and Custody
Agreement, and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Stockholder under this Agreement.
(d) Except as set forth in the last sentence of Section 2(I)(s)
above, such Selling Stockholder will not, during the Lock-up Period, effect the
Disposition of any Securities now owned or hereafter acquired directly by such
Selling Stockholder or with respect to which such Selling Stockholder has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or stockholders of such
Selling Stockholder, provided that the distributees thereof agree in writing to
be bound by the terms of this restriction, or (iii) with the prior written
consent of Cruttenden Roth Incorporated. The foregoing restriction is expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than the Selling Stockholder.
Such prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from the
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Securities. Such Selling Stockholder also agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the securities held by such Selling Stockholder except in compliance
with this restriction.
(e) Certificates in negotiable form for all Shares to be sold by
such selling Stockholder under this Agreement, together with a stock power or
powers duly endorsed in blank by such selling Stockholder, have been placed in
custody with the Custodian for the purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Selling Stockholder and is a valid and binding
agreement of each Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a material breach or violation of any of the
terms and provisions of, or constitute a material default under, any material
bond, debenture, note or other evidence of indebtedness, or under any material
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder, or any Selling Stockholder Shares
hereunder, may be bound or, to such Selling Stockholders' knowledge, result in
any violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over such Selling Stockholder or over the
properties of such Selling Stockholder, or, if such Selling Stockholder is other
than a natural person, result in any violation of any provisions of the charter,
bylaws or other organizational documents of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Selling Stockholder
Shares that is contained in the representations and warranties of such Selling
Stockholder in such Selling Stockholder's Power of Attorney or set forth in the
Registration Statement or the Prospectus is, and at the time the Registration
Statement became or becomes, as the case
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may be, effective and at all times subsequent thereto up to and on the Closing
Date, and on any later date on which Option Shares are to be purchased, was or
will be, true, correct and complete, and does not, and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date, and on any later
date on which Option Shares are to be purchased, will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make such information not misleading.
(j) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date, or
any later date on which Option Shares are to be purchased, as the case may be,
and will advise one of its Attorneys and Cruttenden Roth Incorporated prior to
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, if any statement to be made on behalf of such Selling
Stockholder in the certificate contemplated by Section 6(i) would be inaccurate
if made as of the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be.
(k) Such Selling Stockholder does not have, or has waived prior
to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be sold
by the Company or any of the other Selling Stockholders to the Underwriters
pursuant to this Agreement; such Selling Stockholder does not have, or has
waived prior to the date hereof; any registration right or other similar right
to participate in the offering made by the Prospectus, other than such rights of
participation as have been satisfied by the participation of such Selling
Stockholder in the transactions to which this Agreement relates in accordance
with the terms of this Agreement; and such Selling Stockholder does not own any
warrants, options or similar rights to acquire, and does not have any right or
arrangement to acquire, any capital stock, rights, warrants, options or other
securities from the Company, other than those described in the Registration
Statement and the Prospectus.
(l) To the best knowledge of such Selling Stockholder, and after
due inquiry: (i) each part of the Registration Statement, when such part became
effective, did not contain and each such part, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Prospectus does not contain and, as
amended or supplemented, if applicable, will not contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which, they were
made, not misleading, except that the representations and warranties set forth
in this paragraph (l) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein, and (iii) such Selling Stockholder, after due
inquiry, is not aware that, and has no reason to believe
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<PAGE>
that, any of the representations and warranties of the Company set forth in
Section 2.I. above is untrue or inaccurate in any material respect.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_________ per share, the
respective number of Firm Shares which is set forth opposite the name of such
Underwriter in Schedule A hereto (subject to adjustment as provided in Section
10).
The certificates in negotiable form for the Selling Stockholder Shares
have been placed in custody (for delivery under this Agreement) under the
Custody Agreement. Each Selling Stockholder agrees that the certificates for
the Selling Stockholder Shares of such Selling Stockholder so held in custody
are subject to the interests of the Underwriters hereunder, that the
arrangements made by such Selling Stockholder for such custody, including the
Power of Attorney is to that extent irrevocable and that the obligations of such
Selling Stockholder hereunder shall not be terminated by any act of such Selling
Stockholder or by operation of law, whether by the death or incapacity of such
Selling Stockholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If any Selling Stockholder should
die or be incapacitated, or if any other such event should occur before the
delivery of the certificates for the Selling Stockholder Shares hereunder, the
Selling Stockholder Shares to be sold by such Selling Stockholder shall, except
as specifically provided herein or in the Custody Agreement, be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company (and the Company agrees not to deposit any such check in the bank
on which it is drawn, and not to take any other action with the purpose or
effect of receiving immediately available funds, until the business day
following the date of delivery to the Company and, in the event of any breach of
the foregoing, the Company shall reimburse the Underwriters for the interest
lost and any other expenses borne by the Underwriters by reason of such breach),
at the offices of Gray Cary Ware & Freidenrich, 4365 Executive Drive, Suite
1600, San Diego, California (or at such other place as may be agreed upon among
the Representative, the Company and the Attorneys, at 7:00 A.M., San Diego time
(a) on the third (3rd) full business day following the first day that Shares are
traded, (b) if this Agreement is executed and delivered after 1:30 P.M., San
Diego time, the fourth (4th) full business day following the day that this
Agreement is executed and delivered or (c) at such other time and date not later
than seven (7) full business days following the first day that Shares are traded
as the
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Representative, the Company and the Attorneys may determine (or at such time and
date to which payment and delivery shall have been postponed pursuant to Section
10 hereof), such time and date of payment and delivery being herein called the
"Closing Date"; PROVIDED, HOWEVER, that if the Company has not made available to
the Representative copies of the Prospectus within the time provided in Section
4(d) hereof, the Representative may, in its sole discretion, postpone the
Closing Date until no later than two (2) full business days following delivery
of copies of the Prospectus to the Representative. The certificates for the
Firm Shares to be so delivered will be made available to you at such office or
such other location including, without limitation, in New York City, as you may
reasonably request for checking at least one (1) full business day prior to the
Closing Date and will be in such names and denominations as you may request,
such request to be made at least two (2) full business days prior to the Closing
Date. If the Representative so elects, delivery of the Firm Shares may be made
by credit through full fast transfer to the accounts at The Depository Trust
Company designated by the representative.
It is understood that you, individually, and not as the Representative
of the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the Closing Date for the
Firm Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make a public offering (as such term is described in
Section 11 hereof) of the Firm Shares at a public offering price of $_________
per share. After the public offering, the several Underwriters may, in their
discretion, vary the public offering price.
The information set forth on the front cover page (insofar as
such information relates to the underwriters) concerning stabilization,
over-allotment and passive market making by the Underwriters, and under the
caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitutes the only information furnished by the Underwriters to the
Company for inclusion in any Preliminary Prospectus, the Prospectus or the
Registration Statement, and you, on behalf of the respective Underwriters,
represent and warrant to the Company and the Selling Stockholders that the
statements made therein do not include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this
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Agreement is executed and delivered by the parties hereto, to become effective
as promptly as possible; the Company will use its best efforts to cause any
abbreviated registration statement pursuant to Rule 462(b) of the Rules and
Regulations as may be required subsequent to the date the Registration Statement
is declared effective to become effective as promptly as possible; the Company
will notify you, promptly after it shall receive notice thereof, of the time
when the Registration Statement, any subsequent amendment to the Registration
Statement or any abbreviated registration statement has become effective or any
supplement to the Prospectus has been filed; if the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules
and Regulations, the Company will provide evidence satisfactory to you that the
Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as
applicable, of the Rules and Regulations have been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (7) of Rule 424(b) of
the Rules and Regulations; if for any reason the filing of the final form of
Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it
will provide evidence satisfactory to you that the Prospectus contains such
information and has been filed with the Commission within the time period
prescribed; it will notify you promptly of any request by the Commission for the
amending or supplementing of the Registration Statement or the Prospectus or for
additional information; promptly upon your request, it will prepare and file
with the Commission any amendments or supplements to the Registration Statement
or Prospectus which, in the opinion of counsel for the several Underwriters
("Underwriters' Counsel"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriters, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing therefor to which you shall
reasonably
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<PAGE>
object in writing, subject, however, to compliance with the Act and the Rules
and Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts (including by
providing full cooperation with your counsel, whose services in this matter are
required and which you and the Company will seek to expedite) to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction for such purpose.
(d) The Company will furnish to you, as soon as available, and,
in the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first full business day following the first
day that Shares are traded, copies of the Registration Statement (two of which
will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if Cruttenden Roth Incorporated, on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statement.
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(f) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and, upon request by a stockholder,
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
stockholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's stockholders, (ii)
concurrently with furnishing to its stockholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
stockholders' equity, and of cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants, (iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders, (iv) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any securities exchange or the NASD, (v) every material
press release and every material news item or article in respect of the Company
or its affairs which was generally released to stockholders or prepared by the
Company, and (vi) any additional information of a public nature concerning the
Company, or its business which you may reasonably request. During such five (5)
year period, if the Company shall have active subsidiaries, the foregoing
financial statements shall be on a consolidated basis to the extent that the
accounts of the Company and such subsidiaries are consolidated, and shall be
accompanied by similar financial statements for any significant subsidiary which
is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated
by reason of any failure, refusal or inability on the part of the Company or any
Selling Stockholder to perform any agreement on their respective parts to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to Section
11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to
Section 11(a) or 11(b), then the provisions of Section 9 of that certain
letter agreement dated June 25, 1996 between you and the Company (the
"Letter Agreement") shall govern payment and reimbursement obligations of the
parties.
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(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without
the prior written consent of Cruttenden Roth Incorporated, effect the
Disposition or purchase of, directly or indirectly, any Securities other than
the sale of the Firm Shares and the Company's issuance of options or Common
Stock currently reserved for issuance under the Company's presently
authorized stock option and stock purchase plans described in the
Registration Statement and the Prospectus.
(l) The Company shall issue and sell to the Representative
upon the Closing Date, at a price of $0.001 per share, a warrant to purchase
up to 162,500 shares of the Company's Common Stock at an exercise price
equal to One Hundred and Twenty Percent (120%) public offering purchase price
per share set forth in Section 3 hereof (the "Representative's Warrants"). The
Representatives Warrants shall have a term of four (4) years from the date of
issuance and shall be in substantially the form attached hereto as EXHIBIT A.
(m) For a period ending upon the earlier of (i) one (1) year
following the Closing Date; and (ii) the closing of a public offering of the
Company's securities in which the Representative has declined to exercise its
rights under this subsection, the Company shall notify the Representative in
writing at least thirty (30) days prior to initiating (A) any proposed
private or public offering of any debt or equity securities (other than bank
debt or similar financing with institutional lending institutions) by the
Company or by any of its majority owned or controlled subsidiaries having as
its principal objective the raising of capital for the Company; or (B) the
proposed public offering of any equity securities by any of the Company's
stockholders owning at least five percent (5%) of the outstanding Common
Stock of the Company. Such written notice shall describe the proposed
transaction giving rise to the notice, including the price and the terms and
conditions upon which the Company proposed to conduct such transaction. The
Representative or, at the option of the Representative, a group of associated
investment bankers including and led by the Representative, shall have the
right of first refusal to manage the offering on substantially the terms and
conditions set forth in the notice. The Representative agrees to provide the
Company with notice of its acceptance of such right of first refusal no later
than ten (10) days of receipt of the Company's notice hereunder. If the
Representative fails to exercise its right of first refusal within the ten
(10) day period and the terms of the proposed subsequent financings
thereafter are altered in any material respect, the Company shall again offer
to the Representative this right of first refusal to manage such subsequent
financings upon such altered terms, in the manner provided in this subsection.
(n) The Company will cause its Common Stock (including the
Shares) to be listed on the Nasdaq National Market, and the Company will
comply with all registration, filing, reporting and other requirements of the
Exchange Act and any such exchange or the Nasdaq National Market which may
from time to time be applicable to the Company, and the Company shall not
agree to the delisting from the Nasdaq National Market without the prior
written consent of the Representative.
(o) The Company will use its best efforts to maintain a board
of directors that will at all times include at least two (2) non-employee
directors.
5. EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and
exhibits), Preliminary Prospectuses and the Prospectus and any amendments or
supplements thereto; the drafting and printing of this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary
Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters'
Questionnaire and Power of Attorney, and any instruments related to any of
the foregoing; the issuance and delivery of the Shares hereunder to the
several Underwriters, including transfer taxes, if any, the cost of all
certificates representing the Shares and transfer agents' and registrars'
fees; the fees and disbursements of counsel for the Company; all fees and
other charges of the Company's independent certified public accountants; the
cost of furnishing to the several Underwriters copies of the Registration
Statement (including appropriate exhibits), Preliminary Prospectus and the
Prospectus, and any amendments or supplements to any of the foregoing; NASD
filing fees and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings
and Blue Sky qualifications) all fees and expenses in connection with listing
the Shares on the Nasdaq National Market; and all other expenses directly
incurred by the Company and the Selling Stockholders in connection with the
performance of their obligations hereunder. In addition, upon the Closing
Date the Company will pay the Representative a non-accountable expense
allowance equal to one percent (1%) of the total proceeds from the offering
of the Shares (assuming exercise of the option provided by Section 7 hereof
and the sale of the Option Shares pursuant thereto), less $25,000. The
provisions of this Section 5(a)(i) are intended to relieve the Underwriters
from the payment of the expenses and costs which the Selling Stockholders and
the Company hereby agree to pay, but shall not affect any agreement which the
Selling Stockholders and the Company may make, or may have made, for the
sharing of any of such expenses and costs. Such agreements shall
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not impair the obligations of the Company and the Selling Stockholders hereunder
to the several Underwriters.
(ii) In addition to its other obligations under Section
8(b) hereof, the Company agrees that as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in THE WALL STREET JOURNAL which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(iii) In addition to their other obligations under Section
8(f) hereof, each Selling Stockholder agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(b) hereof relating to such Selling Stockholder, it will
reimburse the Underwriters on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of such
Selling Stockholder's obligation to reimburse the Underwriters for such expenses
and the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Selling Stockholders, together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Underwriters within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request. In no event shall the aggregate amount that
any Selling Stockholder (as a Selling Stockholder) is required to advance
pursuant to this paragraph exceed the net proceeds received by such Selling
Stockholder from sales of Selling Stockholder Shares contemplated by this
Agreement.
(b) In addition to their other obligations under Section 8(c)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(c) hereof, they will reimburse the
Company and each Selling Stockholder on a
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monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Underwriters' obligation to reimburse
the Company and each such Selling Stockholder for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company and each
such Selling Stockholder shall promptly return such payment to the Underwriters
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to the Company
and each such Selling Stockholder within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof and will not resolve the ultimate propriety
or enforceability of the obligation to indemnify for expenses which is created
by the provisions of Sections 8(a), 8(b) and 8(c) hereof or the obligation to
contribute to expenses which is created by the provisions of Section 8(e)
hereof:
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Stockholders
herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 2:00 P.M., San Diego time, on the date following the date of this
Agreement, or such later date and time as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company, any Selling
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Stockholder or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date, or any later date on which Option Shares are to
be purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of counsel for the Company and the Selling Stockholders, dated
the Closing Date or such later date on which Option Shares are to be purchased
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that:
(i) The Company and the Subsidiary have been duly
incorporated and are validly existing as a corporation in good standing under
the laws of the jurisdiction of their incorporation;
(ii) Each of the Company and the Subsidiary have the
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus;
(iii) Each of the Company and the Subsidiary are duly
qualified to do business as a foreign corporation and are in good standing in
each jurisdiction, if any, in which the ownership or leasing of their
properties or the conduct of their business (as known to such counsel)
requires such qualification, except where the failure to be so qualified or
be in good standing would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations or business of the Company or
the Subsidiary, as applicable. To such counsel's knowledge, the Company does
not own or control directly or indirectly, any corporation, association or
other entity other than the Subsidiary;
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(iv) The authorized, issued and outstanding capital stock
of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and outstanding
shares of capital stock of the Company (including the Selling Stockholder
Shares) have been duly and validly issued and are fully paid and nonassessable,
and, to such counsel's knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right;
(v) The Firm Shares to be issued by the Company
pursuant to the terms of this Agreement have been duly authorized and, upon
issuance and delivery against payment therefor in accordance with the terms
hereof; will be duly and validly issued and fully paid and nonassessable and
will not have been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other similar
right contained in the Company's charter or bylaws or, to such counsel's
knowledge, in any other agreement or contract to which the Company is a party.
(vi) The Company has the corporate power and authority to
enter into this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder,
(vii) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification provisions may be
limited by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles;
(viii) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened under the
Act;
(ix) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial statements
(including supporting schedules), financial data derived therefrom and other
financial and statistical information included therein as to which such counsel
need express no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations;
(x) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes matters of law
or legal
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conclusions, has been reviewed by such counsel and is a fair summary of such
matters and conclusions; and the forms of certificates evidencing the Common
Stock comply with Delaware law;
(xi) The description in the Registration Statement and
the Prospectus of the charter and bylaws of the Company and of statutes are
accurate and fairly present the information required to be presented by the Act
and the applicable Rules and Regulations;
(xii) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a party of a
character required to be described or referred to in the Registration Statement
or Prospectus or to be filed as an exhibit to the Registration Statement which
are not described or referred to therein or filed as required;
(xiii) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than performance of
the Company's indemnification obligations hereunder, concerning which no opinion
need be expressed) will not (a) result in any violation of the charter or bylaws
of the Company or (b) to such counsel's knowledge, result in a material breach
or violation of any of the terms and provisions of, or constitute a default
under, any bond, debenture, note or other evidence of indebtedness, or any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which the
Company is a party or by which its properties are bound, or any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court, government or governmental
agency or body having jurisdiction over the Company or any of its properties or
operations; provided, however, that such counsel need not express any opinion or
belief with respect to state securities or Blue Sky laws;
(xiv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company or any of its properties or operations is
necessary in connection with the consummation by the Company of the transactions
herein contemplated, except such as have been obtained under the Act or such as
may be required under state or other securities or Blue Sky laws in connection
with the purchase and the distribution of the Shares by the Underwriters;
(xv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those described
therein;
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(xvi) To such counsel's knowledge, the company is not
presently (a) in material violation of its respective charter or bylaws, or (b)
in material breach of any applicable statute, rule or regulation known to such
counsel or, to such counsel's knowledge, any order, writ or decree of any court
or governmental agency or body having jurisdiction over the Company or over any
of its properties or operations; and
(xvii) To such counsel's knowledge, except as set forth in
the Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction of
such rights;
(xviii) Each Selling Stockholder that is not a natural
person has full right, power and authority to enter into and to perform its
obligations under the Power of Attorney and Custody Agreement to be executed and
delivered by it in connection with the transactions contemplated herein; the
Power of Attorney and Custody Agreement of each Selling Stockholder that is not
a natural person has been duly authorized by such Selling Stockholder; the Power
of Attorney and Custody Agreement of each Selling Stockholder has been duly
executed and delivered by or on behalf of such Selling Stockholder, and the
Power of Attorney and Custody Agreement of each Selling Stockholder constitutes
the valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles;
(xix) Each of the Selling Stockholders has full right,
power and authority to enter into and to perform its obligations under this
Agreement and to sell, transfer, assign and deliver the Shares to be sold by
such Selling Stockholder hereunder:
(xx) This Agreement has been duly authorized by each
Selling Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Selling Stockholder; and
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<PAGE>
(xxi) upon the delivery of and payment for the Shares as
contemplated in this Agreement, each of the Underwriters will receive valid
marketable title to the Shares purchased by it from such Selling Stockholder,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest in rendering such opinion, such counsel may assume that the
Underwriters are without notice of any defect in the title of the Shares being
purchased from the Selling Stockholders.
In addition, such counsel shall state that such counsel has acted
as outside corporate legal counsel to the Company and participated in
conferences with officials and other representatives of the Company, the
Representative, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads such counsel to believe that, at the
time the Registration Statement became effective and at all times subsequent
thereto up to and on the Closing Date and on any later date on which Option
Shares are to be purchased, the Registration Statement and any amendment or
supplement thereto (other than the financial statements including supporting
schedules, other financial information derived therefrom and other financial and
statistical information included therein, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the Closing Date or any later date on
which the Option Shares are to be purchased, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions
of law not involving the laws of the United States, the State of California or
the corporate laws of the State of Delaware upon opinions of local counsel, and
as to questions of fact upon representations or certificates of officers of the
Company, the Selling Stockholders or officers of the Selling Stockholders (when
the Selling Stockholder is not a natural person), and of
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government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representative of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, an opinion
of Luce, Forward, Hamilton & Scripps LLP, in form and substance satisfactory to
you, with respect to the sufficiency of all such corporate proceedings and other
legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a letter
from Deloitte & Touche LLP ("D&T"), addressed to the Underwriters, dated the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be (in each case, the "Bring Down Letter"), confirming that they
are independent certified public accountants with respect to the Company within
the meaning of the Act and the applicable published Rules and Regulations and
based upon the procedures described in a letter delivered to you concurrently
with the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than two (2) business days prior to the Closing
Date or such later date on which Option Shares are to be purchased, as the case
may be, (i) confirming, to the extent true, that the statements and conclusions
set forth in the Original Letter are accurate as of the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be, and
(ii) setting forth any revisions and additions to the statements and conclusions
set forth in the Original Letter that are necessary to reflect any changes in
the facts described in the Original Letter since its date, or to reflect the
availability of more recent financial statements, data or information. The
Bring Down Letter shall not disclose any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
from that set forth in the Registration Statement or Prospectus, which, in your
sole judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. The Original Letter from D&T shall be
addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the balance sheet of the Company as of September 30, 1995 and related statements
of operations, stockholders' equity and cash flows for the twelve (12) months
ended September 30, 1995, (iii) state that D&T has performed the procedures set
out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information and providing the report of D&T as described in SAS 71 on
the financial
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statements for the three-quarter period ended June 30, 1996 (the "Quarterly
Financial Statements"), (iv) state that in the course of such review, nothing
came to their attention that leads them to believe that any material
modifications need to be made to any of the Quarterly Financial Statements in
order for them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented, (v) state that nothing came
to their attention that caused them to believe that the financial statements
included in the Registration Statement and Prospectus do not comply as to form
in all material respects with the applicable accounting requirements of Rule
11-02 of Regulation S-X and that any adjustments thereto have not been properly
applied to the historical amounts in the compilation of such statements, and
(vi) address other matters agreed upon by D&T and you. In addition, you shall
have received from D&T a letter addressed to the Company and made available to
you for the use of the Underwriters stating that their review of the Company's
system of internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as of September 30, 1995, did not disclose any weaknesses in internal
controls that they considered to be material weaknesses.
(g) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing Date or
any later date on which Option Shares are to be purchased, as the case may be,
and the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and
at all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Act and the Rules and Regulations, and in all material respects conformed to
the requirements of the Act and the Rules and Regulations, the Registration
Statement, and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact necessary to make the
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statements therein, in the light of the circumstances under which they were
made, not misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, (b) any
transaction that is material to the Company, except transactions entered into in
the ordinary course of business, (c) any obligation, direct or contingent, that
is material to the Company, incurred by the Company, except obligations incurred
in the ordinary course of business, (d) any change in the capital stock or
outstanding indebtedness of the Company that is material to the Company or is
out of the ordinary course of business of the Company, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company, or (f) any loss or damage (whether or not insured) to the property of
the Company which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company.
(h) You shall be satisfied that, and you shall have received a
certificate dated the Closing Date, or any later date on which Option Shares are
to be purchased, as the case may be, from the Attorneys for each Selling
Stockholder to the effect that, as of the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, they have not been
informed that:
(i) The representations and warranties made by such
Selling Stockholder herein are not true or correct in any material respect on
the Closing Date or on any later date on which Option Shares arc to be
purchased, as the case may be; or
(ii) Such Selling Stockholder has not complied with any
obligation or satisfied any condition which is required to be performed or
satisfied on the part of such Selling Stockholder at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be.
(i) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each Selling
Stockholder and each entity that is a stockholder and is affiliated with a
director of the Company in writing prior to the date hereof that such person
will not, except as described below, during the Lock-up Period, effect the
Disposition of any Securities now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction, (ii)
as a distribution to partners or stockholders of such person, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of Cruttenden
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Roth Incorporated. The foregoing restriction shall have been expressly agreed
to preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than the such holder. Such prohibited
hedging or other transactions would include, without limitation, any short sale
(whether or not against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to any
Securities or with respect to any security (other than a broad-based market
basket or index) that includes, relates to or derives any significant part of
its value from Securities. Furthermore, such person will have also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction.
(j) The Company and the Selling Stockholders shall have
furnished to you such other certificates and documents as you shall reasonably
request (including certificates of officers of the Company, the Selling
Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person) as to the accuracy of the representations
and warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder and as to the other conditions concurrent and precedent to
the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Stockholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
(k) You shall have received the Representative's Warrant, in
a form reasonably satisfactory to you, duly and validly executed by the
President of the Company.
(l) Prior to the Closing Date, the Company's Common Stock,
including the Shares, shall have been approved for listing on the Nasdaq
National Market, subject only to official notice of issuance.
7. OPTION SHARES.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein
set forth, the John M. and Sally B. Thornton Trust hereby grants to the
several Underwriters, for the purpose of covering over-allotments, a
nontransferable option to purchase up to an aggregate of 600,000 Option Shares
at the purchase price per share for the Firm Shares set forth in Section 3
hereof. Such option may be exercised by the representative on behalf of the
several Underwriters on one (1) or more occasions in whole or in part during the
period of forty-five (45) days after the date on which the Firm Shares are
initially offered to the public by giving written notice (the "Option Notice")
to the Company and the Selling Stockholders. The number of Option Shares to be
purchased by each Underwriter upon the exercise of such option shall be the same
proportion of the total number of Option Shares to be purchased by the several
Underwriters pursuant to the exercise of such option as the number of Firm
Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to
the total number of Firm Shares purchased by the several Underwriters (set
forth in
31
<PAGE>
Schedule A hereto), adjusted by the Representative in such manner as to avoid
fractional shares.
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the
option granted by this Section 7 shall be made against payment of the
purchase price therefor by the several Underwriters by certified or official
bank check or checks drawn in next-day funds, payable to the order of the
John M. Thornton and Sally B. Thornton Trust, as the case may be (and the
John M. Thornton and Sally B. Thornton Trust, agrees not to deposit any such
check in the bank on which it is drawn, and not to take any other action with
the purpose or effect of receiving immediately available funds, until the
business day following the date of its delivery to the payee). In the event
of any breach of the foregoing, the Company shall reimburse the Underwriters
for the interest lost and any other expenses borne by them by reason of such
breach. Such delivery and payment shall take place at the offices of Gray
Cary Ware & Freidenrich, 4365 Executive Drive, Suite 1600, San Diego,
California or at such other place as may be agreed upon among the
Representative, the Company and the John M. Thornton and Sally B. Thornton
Trust (i) on the Closing Date, if written notice of the exercise of such
option is received by the Company and the John M. Thornton and Sally B.
Thornton Trust at least two (2) full business days prior to the Closing Date,
or (ii) on a date which shall not be later than the third (3rd) full business
day following the date the Company and the John M. Thornton and Sally B.
Thornton Trust receive written notice of the exercise of such option, if such
notice is received by the Company and the John M. Thornton and Sally B.
Thornton Trust after the date two (2) full business days prior to the Closing
Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representative so elects, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representative.
It is understood that you, individually, and not as the
Representative of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
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<PAGE>
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company and the Selling
Stockholders herein, to the accuracy of the statements of the Company, the
Selling Stockholders and officers of the Company made pursuant to the provisions
hereof, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder, to the conditions set forth in Section 6
hereof, and to the condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such Option Shares
shall be satisfactory in form and substance to you and to Underwriters' Counsel,
and you shall have been furnished with all such documents, certificates and
opinions as you may request in order to evidence the accuracy and completeness
of any of the representations, warranties or statements, the performance of any
of the covenants or agreements of the Company and the Selling Stockholders or
the satisfaction of any of the conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and the Principal Stockholder agree to indemnify
and hold harmless, jointly and severally, each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject (including, without limitation, in its capacity as an Underwriter
or as a qualified independent underwriter within the meaning of Schedule E of
the Bylaws of the NASD), under the Act, the Exchange Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of the Company
herein contained, (ii) any untrue statement or alleged untrue statement or any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
such Preliminary Prospectus or the Prospectus, or any such amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, PROVIDED FURTHER, that the indemnity agreement provided in this
Section 8(a) with respect to any Preliminary
33
<PAGE>
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any losses, claims, damages, liabilities or actions based upon
any untrue statement or alleged untrue statement of material fact or omission or
alleged omission to state therein a material fact purchased Shares, if a copy of
the Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected had not been sent or given to such
person within the time required by the Act and the Rules and Regulations, unless
such failure is the result of noncompliance by the Company with Section 4(d)
hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of each person,
if any, who controls any Underwriter within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any liabilities
which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not jointly, agrees
to indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject (including, without limitation, in its capacity as an Underwriter or as
a "qualified independent underwriter" within the meaning of Schedule E or the
Bylaws of the NASD) under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling Stockholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, all to the extent that any such untrue statement or omission, or
alleged untrue statement or omission, was known, or after due inquiry should
have been known, to such Selling Stockholder and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the indemnity agreement provided in
this Section 8(b) with respect to any Preliminary Prospectus shall not inure to
the benefit of any Underwriter from whom the person asserting any losses,
claims, damages, liabilities or actions based upon any untrue statement or
alleged untrue statement of a material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of each person,
if any, who
34
<PAGE>
controls any Underwriter within the meaning of the Act or the Exchange Act.
This indemnity agreement shall be in addition to any liabilities which such
Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Stockholder may become subject under the Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of such
Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(c) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company and each such Selling Stockholder
for any legal or other expenses reasonably incurred by the Company and each such
Selling Stockholder in connection with investigating or defending any such loss,
claim, damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, each Selling Stockholder and each person, if any, who controls
the Company or any Selling Stockholder within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any liabilities
which each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8 except to the extent that it has been
prejudiced by such omission. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory
35
<PAGE>
to such indemnified party; PROVIDED, HOWEVER, that if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have
the right to select separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of the indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 8(a),
8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; PROVIDED that such
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
8 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last sight of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the public offering
price, and the Company and the Selling Stockholders are responsible for the
remaining portion, PROVIDED, HOWEVER, that (i) no Underwriter shall be required
to contribute any amount in excess of the amount by which the underwriting
discount applicable to the Shares purchased by such Underwriter exceeds the
amount of damages which such Underwriter has otherwise been required to pay and
(ii) no person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the
36
<PAGE>
Act) shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(e)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company or
any Selling Stockholder within the meaning of the Act or the Exchange Act and
each officer of the Company who signed the Registration Statement and each
director of the Company.
(f) The liability of each Selling Stockholder (other than the
Principal Stockholder) under the representations, warranties and agreements
contained herein and under the indemnity agreements contained in the
provisions of Section 8(b) shall be limited to an amount equal to the gross
proceeds of the Selling Stockholder Shares sold by such Selling Stockholder
to the Underwriters. The Company and such Selling Stockholders may agree, as
among themselves and without limiting the rights of the Underwriters under
this Agreement, as to the respective amounts of such liability for which they
each shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated businesspersons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or
any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
37
<PAGE>
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including nonbusiness hours) another
underwriter or underwriters (which may include any nondefaulting Underwriter)
satisfactory to the Company. If no such underwriter or underwriters shall have
been substituted as aforesaid by such postponed Closing Date, the Closing Date
may, at the option of the Company, be postponed for a further twenty-four (24)
hours, if necessary, to allow the Company the privilege of finding another
underwriter or underwriters, satisfactory to you, to purchase the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If it shall be arranged for the remaining Underwriters or substituted
underwriter or underwriters to take up the Firm Shares of the defaulting
Underwriter or Underwriters as provided in this Section 10, (i) the Company
shall have the right to postpone the time of delivery for a period of not more
than seven (7) full business days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or in
any other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
ln the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, then other than as set forth in the
Letter Agreement, neither the Company nor any Selling Stockholder shall be
liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor
shall any Underwriter (other than an Underwriter who shall have failed,
otherwise than for some reason permitted under this Agreement, to purchase the
number of Firm Shares agreed by such Underwriter to be purchased hereunder,
which Underwriter shall remain liable to the Company, the Selling Stockholders
and the other Underwriters for damages, if any, resulting from such default) be
liable to the Company or any Selling Stockholder (except to the extent provided
in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
38
<PAGE>
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of (i)
6:30 A.M., San Diego time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the public offering shall mean the
time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set
forth in Section 12 before the time this Agreement becomes effective, you, as
Representative of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i) and 8 hereof.
(b) You, as Representative of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company or any Selling Stockholder shall have failed, refused or been
unable to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse, or (ii) if
additional material governmental restrictions, not in force and effect on the
date hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the New York
Stock Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities generally shall have been suspended
on either such exchange or in the over the counter market by the NASD, or if a
banking moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representative, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event
of termination pursuant to subparagraph (i) above, the Company and the Selling
Stockholders shall remain obligated to pay costs and expenses pursuant to
Sections 4(i) and 8 hereof. Any termination pursuant to any of subparagraphs
(ii) through (v) above shall be without liability of any party to any other
party except as provided in Sections 4(i) and 8 hereof.
39
<PAGE>
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Cruttenden Roth Incorporated, 18301 Von Karman,
Suite 100, Irvine, California 92715, telecopier number (714) 852-9603,
Attention: [General Counsel]; if sent to the Company, such notice shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to Mitek Systems, Inc., 10070 Carroll Canyon Road, San
Diego, CA 92131, Attention: President, if sent to one or more of the Selling
Stockholders, such notice shall be sent mailed, delivered, telegraphed (and
confirmed by letter) or telecopied (and confirmed by letter) to ______________,
as Attorney-in-Fact for the Selling Stockholders, at _____________________.
13. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters, the Company and the Selling Stockholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Stockholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Stockholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
Cruttenden Roth Incorporated on behalf of you.
14. APPLICABLE LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
15. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which will constitute an original.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
If the foregoing correctly sets forth the understanding among the
Company, the Selling Stockholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Stockholders
and the several Underwriters.
Very truly yours,
MITEK SYSTEMS, INC.
By:
------------------------------
PRINCIPAL STOCKHOLDER
By:
------------------------------
John M. Thornton
SELLING STOCKHOLDERS
By:
------------------------------
Attorney-in-Fact for the
Selling Stockholders (other
than the Principal Stockholder
named in Schedule B hereto
Accepted as of the date first above written:
CRUTTENDEN ROTH INCORPORATED
On their behalf and on behalf of each
of the several Underwriters named in
Schedule A hereto.
By CRUTTENDEN ROTH INCORPORATED
By
----------------------------
Authorized Signatory
41
<PAGE>
SCHEDULE A
Number of
Firm Shares
To Be
Underwriters Purchased
------------ ---------
Cruttenden Roth Incorporated . . . . . . . . . . . . . . .
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . 4,075,000
-----------
-----------
1
<PAGE>
SCHEDULE B
Number of Firm
Shares To Be
Company Sold
------- ----
Mitek Systems, Inc.. . . . . . . . . . . . . . . . . . . . up to 2,500,000*
----------
Total . . . . . . . . . . . . . . . . . . . . . . .
----------
----------
Number of
Selling
Stockholder
Shares
Name of Selling Stockholder To Be Sold
--------------------------- ----------
up to
John M. and Sally B. Thornton Trust. . . . . . . . . . . . . [1,500,000]*
Tracks International, Inc. . . . . . . . . . . . . . . . . . up to [3,000]*
Richard S. Dawson. . . . . . . . . . . . . . . . . . . . . . up to [17,724]
Stephen M. Baird . . . . . . . . . . . . . . . . . . . . . . up to [19,224]*
Glenn Hamilton . . . . . . . . . . . . . . . . . . . . . . . up to [7,200]*
Ken Davis. . . . . . . . . . . . . . . . . . . . . . . . . . up to [8,700]*
ETL Holdings Canada Inc. . . . . . . . . . . . . . . . . . . up to [9,576]*
Solion Corporation of Alberta Ltd. . . . . . . . . . . . . . up to [9,576]*
____________
Total . . . . . . . . . . . . . . . . . . . . . . . . [1,575,000]
- -----------------------
* [The Company's independent directors shall determine the number of Option
Shares, if any, to be sold by the Company. Any remaining Option Shares
shall be sold by the Selling Stockholders in proportion to the number of
shares indicated on this Exhibit B or as they may otherwise agree.]
1
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR
HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE
ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
Void after 5:00 p.m., San Diego Time, on December 31, 1997.
MITEK SYSTEMS, INC.
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Luce, Forward, Hamilton & Scripps,
a California general partnership, is entitled to purchase Fifteen Thousand
(15,000) shares of the Common Stock of MITEK SYSTEMS, INC., a Delaware
corporation, at a price of $1.50 per share ("Warrant Price"), subject to
adjustments and all other terms and conditions set forth in this Warrant.
1 DEFINITIONS. As used herein, the following terms, unless the context
otherwise requires, shall have the following meanings:
(a) "Act" shall mean the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
(b) "Commission" shall mean the Securities and Exchange Commission,
or any other Federal agency at the time administering the Act.
(c) "Common Stock" shall mean shares of the Company's presently or
subsequently authorized Common Stock, and any stock into which such Common Stock
may hereafter be exchanged.
(d) "Company" shall mean MITEK SYSTEMS, INC., a Delaware corporation,
and any corporation which shall succeed to or assume the obligations of MITEK
SYSTEMS, INC., under this Warrant.
(e) "Date of Grant" shall be deemed February 1, 1996.
(f) "Exercise Date" shall mean the effective date of the delivery of
the Notice of Exercise pursuant to Sections 4 and 11 below.
<PAGE>
(g) "Holder" shall mean any person who shall at the time be the
registered holder of this Warrant.
(h) "Shares" shall mean shares of the Company's Common Stock, as
described in the Company's certificate of determination and articles of
incorporation.
(i) "Warrant Shares" shall mean 15,000 shares of the Company's Common
Stock which this Warrant entitles the Holder to purchase, provided the Warrant
Shares have become vested as provided in Section 3 hereof.
2. ISSUANCE OF WARRANT AND CONSIDERATION THEREFOR. This Warrant is
issued in consideration of legal services previously rendered to the Company.
3. TERM. The purchase right represented by this Warrant is exercisable
only during the period commencing upon the Date of Grant and ending on the
earlier of (i) December 31, 1997 or (ii) concurrently with the closing date of:
a sale of all or substantially all of the Company's assets; a merger of the
Company with or into another entity or of an entity with or into the Company
following which the voting control of the surviving entity in the merger is
ultimately controlled by persons who presently do not own beneficially or
otherwise 10 percent or more of the issued and outstanding voting stock of the
Company; or sale by existing shareholders of at least 51 percent of the
presently issued and outstanding stock of the Company. The foregoing events are
collectively referred to as a "change of control." After December 31, 1997 or a
change of control, this Warrant shall be of no further force or effect.
4. METHOD OF EXERCISE AND PAYMENT.
(a) METHOD OF EXERCISE. Subject to Section 3 hereof and compliance
with all applicable Federal and state securities laws, the purchase right
represented by this Warrant may be exercised, in whole or in part and from time
to time, by the Holder by (i) surrender of this Warrant and delivery of the
Notice of Exercise (the form of which is attached hereto as Exhibit A), duly
executed, at the principal office of the Company and (ii) payment to the Company
of an amount equal to the product of the then applicable Warrant Price
multiplied by the number of Shares then being purchased pursuant to one of the
payment methods permitted under Section 4(b) below.
(b) METHOD OF PAYMENT. Payment shall be made either (1) by check
made payable to the Company, (2) by cash, or (3) by wire transfer of United
States funds for the account of the Company.
(c) DELIVERY OF CERTIFICATE. In the event of any exercise of the
purchase right represented by this Warrant, certificates for the Shares so
purchased shall be delivered to the Holder within thirty (30) days of delivery
of the Notice of Exercise and, unless this Warrant has been fully exercised or
has expired, a new warrant representing the portion of the Shares with respect
to which
2
<PAGE>
this Warrant shall not then have been exercised shall also be issued to the
Holder within such thirty (30) day period.
(d) NO FRACTIONAL SHARES. No fractional shares shall be issued in
connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the fair market
value per Share as of the date of exercise.
5. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. In case the Company
shall at any time after the Date of Grant (i) subdivide the outstanding shares
of its common stock, (ii) combine the outstanding shares of its common stock
into a smaller number of shares of common stock, or (iii) issue by
reclassification of its shares of common stock other securities of the Company
(including any such reclassification in connection with a consolidation or
merger in which the Company is the surviving person), the number and kind of
shares purchasable upon exercise of this Warrant outstanding immediately prior
thereto shall be adjusted so that the Holder shall be entitled to receive at the
same aggregate Warrant Price the kind and number of shares of common stock or
other securities of the Company which the holder would have owned or have been
entitled to receive after the happening of any of the events described above had
such Warrant been exercised in full immediately prior to the earlier of the
happening of such event or any record date with respect thereto. In the event
of any adjustment of the total number of shares of common stock purchasable upon
the exercise of this Warrant, the Warrant Price shall be adjusted to be the
amount resulting from dividing the number of shares of common stock (including
fractional shares of common stock) covered by this Warrant immediately after
such adjustment into the total amount payable upon exercise of this Warrant in
full immediately prior to such adjustment. An adjustment made pursuant to this
Section 5 shall become effective immediately after the effective date of such
event retroactive to the record date, if any, for such event. Such adjustment
shall be made successively whenever any event listed above shall occur.
6. COMPLIANCE WITH ACT; TRANSFERABILITY AND NEGOTIABILITY OF WARRANT;
INVESTMENT INTENT.
(a) COMPLIANCE WITH ACT. The Holder, by acceptance hereof, agrees
that this Warrant and the Shares to be issued upon the exercise hereof are being
acquired solely for its own account (or a trust account if the Holder is a
trust) and not as a nominee for any other party and not with a view toward the
resale or distribution thereof and that it will not offer, sell or otherwise
dispose of this Warrant or any Shares to be issued upon the exercise hereof
except under circumstances which will not result in a violation of the Act.
Upon the exercise of this Warrant, the Holder shall confirm in writing, in a
form satisfactory to the Company, that the Shares so issued are being acquired
solely for its own account (or a trust account if the Holder is a trust) and not
as a nominee for any other party and not with a view toward resale or
distribution thereof. This Warrant and the Shares to be issued upon the
exercise hereof (unless registered under the Act) shall be imprinted with a
legend in substantially the following form:
3
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE
144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE
SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (i)
IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SHARES UNDER THE ACT OR (ii) IN COMPLIANCE WITH RULE
144, OR (iii) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE ACT.
In addition, this Warrant and the Shares to be issued upon the exercise
hereof shall bear any legends required by the securities laws of any applicable
states.
Any legend endorsed on a certificate pursuant to this Section 6 shall be
removed, and the Company shall issue a certificate without such legend to the
Holder of such securities if (i) such securities are registered and sold under
the Act and a prospectus meeting the requirements of Section 10 of the Act is
available, (ii) such securities are sold or may be sold in compliance with Rule
144(k), or (iii) at the request of any holder, if the holder shall have obtained
an opinion of counsel at such holder's expense (which counsel may be counsel to
the Company) reasonably acceptable to the Company to the effect that the
securities proposed to be disposed of may lawfully be so disposed of without
registration, qualification or legend.
(b) NO TRANSFER. Holder will not dispose of any of the Warrants or
the Shares to be issued upon exercise of the Warrants other than (i) in
conjunction with an effective registration statement for the Warrants and/or
Warrant Shares under the Act, (ii) in compliance with Rule 144 promulgated under
the Act or (iii) in compliance with any applicable exemption from registration
under the Act, and in compliance with applicable state, local or foreign
securities laws. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144.
(c) KNOWLEDGE AND EXPERIENCE. Holder (i) has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of such Holder's prospective investment in the Warrants and the
Shares to be issued upon exercise of the Warrants; (ii) has the ability to bear
the economic risks of such Holder's prospective investment; (iii) has been
furnished with and has had access to such information as such Holder has
considered necessary to make a determination as to the purchase of the Warrants
and the Shares to be issued upon exercise of the Warrants together with such
additional information as is necessary to verify the accuracy of the information
supplied; (iv) has had all questions which have been asked by such Holder
satisfactorily answered by the Company; and (v) has not been offered the
Warrants and the Shares to be issued upon exercise of the Warrants by any form
of advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media or broadcast over television or radio, or
any seminar or meeting whose attendees have been invited by any such media.
4
<PAGE>
7. RIGHTS OF HOLDERS. No Holder shall be entitled to vote or receive
dividends or be deemed the holder of Shares or any other securities of the
Company which may at any time be issuable on the exercise of this Warrant for
any purpose, nor shall anything contained herein be construed to confer upon the
Holder, as such, any of the rights of a shareholder of the Company or any right
to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, consolidation, merger, transfer of assets or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until this Warrant shall have been exercised
and the Shares issuable upon exercise hereof shall have become deliverable, as
provided herein. The Company shall provide to the Holder all notices and other
information which it provides to its stockholders.
8. REPLACEMENT OF WARRANTS. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
9. EXCHANGE OF WARRANT. Subject to the other provisions of this Warrant,
on surrender of this Warrant for exchange, properly endorsed and subject to the
provisions of this Warrant with respect to compliance with the Act, the Company
at its expense shall issue to or on the order of the Holder a new warrant or
warrants of like tenor, in the name of the Holder or as the Holder (on payment
by the Holder of any applicable transfer taxes) may direct, for the number of
Shares issuable upon exercise thereof.
10. GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
11. SURVIVAL. The representations, warranties, covenants and agreements
made herein shall survive the execution of this Agreement and the closing of the
transactions contemplated hereby.
12. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
13. NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be sent by facsimile,
overnight courier or mailed by certified or registered mail, postage prepaid,
return receipt requested, to the facsimile number or address shown on the
signature pages to this Agreement or to such other facsimile number address
provided to the
5
<PAGE>
parties to this Agreement in accordance with this Section 13 Such notices or
other communications shall be deemed received upon receipt of a confirmation of
facsimile receipt or three (3) days after deposit in the mails.
14. SEVERABILITY. In case any provision of this Agreement shall be
declared invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
15. TITLES AND SUBTITLES. The titles of the sections of this Agreement
are for convenience of reference only and are not to be considered in construing
this Agreement.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
DATED: February 1, 1996
MITEK SYSTEMS, INC., a Delaware corporation
By:__________________________________________
John Kessler, President
6
<PAGE>
ACCEPTANCE OF WARRANT
The undersigned hereby accepts this Warrant and agrees to abide by all the
terms and conditions hereof. The undersigned further represents and agrees that
it is accepting this Warrant for its own account for investment purposes and not
with a view to or for sale in connection with a distribution of the Warrant or
the Warrant Shares. The undersigned further affirms the representations
contained in Section 6 of the Warrant
WARRANT HOLDER:
LUCE, FORWARD, HAMILTON & SCRIPPS
By:_____________________________________
Name:___________________________________
Title:__________________________________
7
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
TO: MITEK SYSTEMS, INC.:
1. The undersigned Holder of the attached original, executed Common Stock
Purchase Warrant hereby elects to exercise its purchase right under such Warrant
with respect to Shares, as defined in the Warrant, of MITEK SYSTEMS, INC.
2. The undersigned Holder elects to pay the aggregate Warrant Price for
such Shares (the "Exercise Shares') in the following manner:
[ ] by the enclosed cash or check made payable to the Company in the
amount of $________; or
[ ] by wire transfer of United States funds to the account of the
Company in the amount of $____________, which transfer has been
made before or simultaneously with the delivery of this Notice
pursuant to the instructions of the Company.
3. Please issue a stock certificate or certificates representing the
appropriate number of Shares in the name of the undersigned or in such other
names as is specified below;
Name:_________________________
Address:______________________
______________________________
Tax Ident. No.________________
HOLDER:
_____________________________________________
By:__________________________________________
Dated: ________________ Title:_______________________________________
<PAGE>
July 8, 1996
Mitek Systems, Inc.
10070 Carroll Canyon Road
San Diego, CA 92131
Re: MITEK SYSTEMS, INC.
Ladies and Gentlemen:
We are counsel for Mitek Systems, Inc., a Delaware corporation ("Mitek"), in
connection with its proposed public offering under the Securities Act of 1933,
as amended, of 2,500,000 shares ("Shares") of its Common Stock and of 1,575,000
shares (2,186,250 shares if the overallotment option is exercised in full) which
are being sold by certain selling stockholders of Mitek ("Selling Stockholders")
through a Registration Statement on Form SB-2 (the "Registration Statement") as
to which this opinion is a part, to be filed with the Securities and Exchange
Commission (the "Commission").
In connection with rendering our opinion as set forth below, we have reviewed
and examined originals or copies of such corporate records and other documents
and have satisfied ourselves as to such other matters as we have deemed
necessary to enable us to express our opinion hereinafter set forth.
Based upon the foregoing, it is our opinion that:
The Shares covered by the Registration Statement, when issued in accordance with
the terms and conditions set forth therein, will be duly authorized, validly
issued, fully paid, and non-assessable shares of Common Stock.
The shares of Common Stock being registered for the account of the Selling
Stockholders are duly authorized, validly issued, fully paid and nonassessable
shares of Common Stock.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
LUCE, FORWARD, HAMILTON & SCRIPPS
<PAGE>
MITEK SYSTEMS, INC.
1986 STOCK OPTION PLAN
SECTION 1. PURPOSE
The purpose of the Plan is to authorize the grant to Key
Employees of Mitek Systems, Inc. (the "Company") or any Subsidiary thereof, of
(i) non-qualified stock options and (ii) incentive stock options to purchase
shares of Common Stock and thus benefit the Company by giving such employees a
greater personal interest in the success of the enterprise and an added
incentive to continue and advance in their employment.
SECTION 2. DEFINITIONS
The following terms, when used in the Plan, shall have the
meanings set forth in this Section 2:
BOARD: The Board of Directors of the Company.
CODE: Internal Revenue Code of 1986, as amended.
COMMITTEE: Such committee as shall be appointed by the Board
pursuant to the provisions of Section 9.
COMMON STOCK: The Common Stock of the Company, $0.001 par value
per share, or such other class of shares or other securities as may be
applicable pursuant to the provisions of Section 4.
COMPANY: Mitek Systems, Inc., a Delaware corporation.
DISABILITY: Inability to perform the services normally rendered
by the employee due to any physical or mental impairment that can be expected
either to be of indefinite duration or to result in death, as determined by the
Committee on the basis of appropriate medical evidence.
FAIR MARKET VALUE: As applied to the Common Stock on any day,
the closing market price of such stock on the last preceding day if such stock
is listed on a national securities exchange; the average of the bid prices on
the last preceding day if such stock is traded over-the-counter; or, if not so
listed or traded such per share price as the Committee
<PAGE>
shall in good faith determine, but in no event less than the book value per
share of the Company on the last preceding month end.
INCENTIVE STOCK OPTION: An option to purchase shares of Common
Stock as set forth in Section 6.
KEY EMPLOYEE: With respect to Incentive Stock Options, the term
"Key Employee" as used hereinafter shall include any employee of the Company or
of a Subsidiary, including an officer or director who is an employee, who in the
Committee's judgment can contribute significantly to the growth and successful
operations of the Company or of a Subsidiary. With respect to Non-Qualified
Stock Options only, the term "Key Employee" as used hereinafter shall also
include all directors, whether or not employees, officers and executive,
managerial and other key employees of the Company or any of its Subsidiaries,
together with such other key persons or entities who are consultants to the
Company and any of its Subsidiaries, associated with the Company and any of its
Subsidiaries, and important to its continued success, whether or not employees,
with regard to which the Committee may determine the potential of a proprietary
interest represented by the options granted pursuant to this Plan would promote
the interests of the Company. From this eligible class of persons or entities,
the Committee shall have complete discretion to select those to whom Non-
Qualified Stock Options shall be granted. Notwithstanding anything herein to
the contrary, the term "Key Employee" shall exclude any person who owns stock
possessing more than 10% of the total combined voting power or value of all
classes of stock of the Company or a Subsidiary.
NON-QUALIFIED STOCK OPTION: An option to purchase shares of
Common Stock as set forth in Section 5.
PLAN: Mitek Systems, Inc. 1986 Stock Option Plan herein set
forth, as amended from time to time.
STOCK INCENTIVE: A stock incentive granted under the Plan in
one of the forms provided for in Section 3.
SUBSIDIARY: A corporation at least 50 percent of whose issued
and outstanding voting stock is owned, directly or indirectly, by the
Company.
SECTION 3. GRANTS OF STOCK INCENTIVES
(a) Subject to the provisions of the Plan, the Committee may at
any time, or from time to time, grant Stock
2.
<PAGE>
Incentives under the Plan to Key Employees who are not directors.
(b) Subject to stockholder approval, all Stock Incentives held
as of December 18, 1987 by Key Employees who are directors will be cancelled and
replaced by Stock Incentives under the Plan, as amended, for an equal number of
shares. Additional Stock Incentives shall be granted to Key Employees who are
directors according to the following schedule:
(i) For non employee directors: Each nonemployee
director in office prior to the date of the 1988 annual meeting of stockholders
to whom no Stock Incentives had been granted previously shall receive a Stock
Incentive for 10,000 shares. Each nonemployee director elected at the 1988
annual meeting (including those nonemployee directors receiving options under
the other provisions of this paragraph (b)) and at each annual meeting
thereafter during the term of the Plan, shall receive Stock Incentives for 5,000
shares. If any nonemployee is hereafter appointed to the Board between annual
meetings, such person shall automatically receive a pro rata portion of a Stock
Incentive for 5,000 shares, based on the number of full months to the next
anniversary of the last annual meeting divided by 12.
(ii) For employee directors: The Committee will be
authorized to approve the grant of Stock Incentives to them from time to time in
amounts determined by the Committee in its discretion, limited to Stock
Incentives for no more than 150,000 shares per person in any consecutive period
of twelve months.
(c) Stock Incentives may be in the following forms:
(i) a Non-Qualified Stock Option, in accordance with
Section 5, or
(ii) an Incentive Stock Option, in accordance with
Section 6.
SECTION 4. STOCK SUBJECT TO THE PLAN
(a) Subject to adjustment as provided in Section 7, the
aggregate number of shares of Common Stock which may be made the subject of
Stock Incentives granted under the Plan shall not exceed 630,000 shares.
Charges against such
3.
<PAGE>
aggregate number are governed by the provisions of paragraph (c) of this Section
4 and paragraph (j) of Section 5 (and said paragraph (j) of Section 5 as
incorporated in Incentive Stock Options by paragraph (a) of Section 6).
(b) Such shares may be either authorized but unissued shares or
shares issued and thereafter acquired by the Company.
(c) If any shares subject to a Stock Incentive shall cease to be
subject thereto because of the termination without exercise, in whole or in
part, of such Stock Incentive, the shares as to which the Stock Incentive was
not exercised shall no longer be charged against the aggregate limitation in
paragraph (a) of this Section 4 and may again be made subject to Stock
Incentives.
SECTION 5. NON-QUALIFIED STOCK OPTIONS
Stock Incentives in the form of Non-Qualified Stock Options shall
be subject to the following provisions
(a) The option price per share shall be the Fair Market Value at
the time of the grant of the option.
(b) Subject to the provisions of paragraph (f) of this Section 5
and the provisions of paragraph (a) of Section 10 relating to absence on leave,
an option granted under the Plan may not be exercised unless, at the time of
such exercise, the optionee shall be in the employ of or be a director or
consultant to or have a close beneficial association with the Company or a
Subsidiary.
(c) Each option shall expire at such time as the Committee may
determine at the time the option shall be granted but not later than ten years
from the date such option shall have been granted.
(d) Each option shall be exercised solely by the person to whom
granted (or by his guardian or legal representative), except as provided in
paragraph (f)(i) of this Section 5 in the case of such person's death.
(e) After completion of the required period of employment or
association specified in the option grant, the option may be exercised, in whole
or in part, at any time or from time to time during the balance of the term of
the option, except as limited by provisions contained in the option (including
provisions regarding exercise in installments). The
4.
<PAGE>
minimum number of shares as to which any option shall be exercisable is twenty,
except for a smaller number of shares which are all of the shares subject to a
currently exercisable option or portion thereof.
(f) Subject to the exceptions listed in (i), (ii), and (iii)
immediately below, an optionee whose employment terminates for any reason may
exercise his option on the date of such termination or at any time within the
one-month period next succeeding such termination (but in no event after the
date of expiration of his option), as to any or all shares purchasable on the
date of his termination of employment. In the event of death, disability or
termination of the employee's employment for cause, as defined herein below at
(iii), the final exercise dates should be determined as follows:
(i) If the optionee shall die while employed by the
Company or a Subsidiary or within one month after termination of such
employment, the option theretofore granted to him may be exercised within, but
only within, the period of twelve months next succeeding his death, and in no
event after the date of expiration of his option, and then only as and to the
extent that he was entitled to exercise it at the date he terminated employment
with the Company.
(ii) If an optionee terminates employment prior to
retirement by reason of disability, he may exercise his option on, or any time
within the twelve months next succeeding, the date of such termination by
disability (but in no event after the date of expiration of his option) as to
any or all shares purchasable on such date.
(iii) If an optionee is terminated from employment by the
Company for cause, the optionee shall be prohibited from exercising the option
until the Board makes a determination in its sole discretion that the option is
exercisable ("the determination"). For this purpose, an employee shall be
considered terminated upon receipt of written notice of termination. If the
employee is not available for service of notice, then the employee shall be
considered terminated upon posting by registered mail of such notice. The Board
shall make its determination and provide notice of its determination to the
optionee within twenty days of termination. Unless the Board determines that the
option is exercisable, the option will expire as of the date of termination. In
the event the Board determines that the option is exercisable, the optionee may
exercise the option only to such extent, for such time, and upon such terms and
conditions as if he had ceased to be employed by the Company or such affiliate
upon the date of such termination for a reason other than for cause, death, or
5.
<PAGE>
disability. Termination for cause shall include termination for malfeasance or
gross misfeasance in the performance of duties or conviction or illegal activity
in connection therewith or any conduct detrimental to the interests of the
Company or any affiliate, or the definition of "for cause" in a written
employment agreement, if applicable, by which the optionee is employed, and in
any event, the determination of the Board with respect thereto shall be final
and conclusive.
(g) A person electing to exercise an option shall give written
notice to the Company of such election and of the number of shares to which such
election relates.
(h) The Committee may impose such conditions on the exercise of
any option as may be required to satisfy the requirements of Rule 16b-3 adopted
under the Securities Exchange Act of 1934, as amended (or any successor
provision in effect at the time).
(i) Shares purchased upon exercise of an option shall be paid
for in full in cash, by check to the order of the Company, or in shares of
Common Stock with an aggregate Fair Market Value equal to the aggregate option
price at the time of exercise.
(j) The forms of option authorized by the Plan may contain such
other provisions as the Committee shall deem advisable. Without limiting the
foregoing and if so authorized by the Committee, the Company may, with the
consent of the optionee, and at any time or from time to time, cancel all or a
portion of any option granted under the Plan then subject to exercise and
discharge its obligation in respect of the option either by payment to the
optionee of an amount of cash equal to the excess, if any, of the Fair Market
Value, at such time, of the shares subject to the portion of the option so
cancelled over the aggregate purchase price of such shares, or by issuance or
transfer to the optionee of shares of Common Stock with a Fair Market Value, at
such time, equal to any such excess, or by a combination of cash and shares.
Upon any such payment of money or issuance of shares, (1) there shall be charged
against the aggregate limitation in paragraph (a) of Section 4 a number of
shares equal to (i) the number of shares so issued plus (ii) the number of
shares purchasable with the amount of any cash paid to the optionee on the basis
of the Fair Market Value as of the date of payment; and (2) the number of shares
subject to the portion of the option so cancelled, less the number of shares so
charged against such limitation, shall thereafter be available for other grants
of Stock Incentives.
6.
<PAGE>
SECTION 6. INCENTIVE STOCK OPTIONS
(a) Except as otherwise provided in this Section 6, Stock
Incentives in the form of Incentive Stock Options shall be subject to the same
provisions as Non-Qualified Stock Options set forth in Section 5.
(b) If an Incentive Stock Option is to be granted to a Key
Employee, who immediately before such grant owned stock representing more than
10 percent of the voting power of all classes of stock of the Company or any of
its Subsidiaries, the option price per share shall be not less than 110 percent
of the Fair Market Value at the time of the grant of the Incentive Stock Option,
and the Incentive Stock Option shall expire not more than five years from the
date such option shall have been granted.
(c) The aggregate Fair Market Value (as determined at the time
the Option is granted) of Incentive Stock Options first exercisable by any Key
Employee may not exceed $100,000 in any calendar year.
(d) The excess of any Incentive Stock Options granted during any
calendar year which exceed the limitation set forth in paragraph (c) of this
Section 6 or which upon audit by the Internal Revenue Service do not for
whatever reason qualify as Incentive Stock Options under the Internal Revenue
Code of 1986, as amended (the "Code"), shall be treated as and subject to the
provisions for Non-Qualified Stock Options under the Plan.
(e) Incentive Stock Options shall terminate not more than one
month after the optionee terminates employment with the Company and its
Subsidiaries; provided, however, that if the termination occurs by reason of the
optionee's disability or death, such option shall expire not more than one year
from the date of death.
(f) Incentive Stock Options granted under the Plan are intended
to qualify as "Incentive Stock Options" under Section 422A of the Code.
Accordingly, the Board, subject to Section 11, may at any time amend or revise
this Section 6 to impose or remove such conditions on the grant, exercise, or
other provisions of any heretofore unissued Incentive Stock Options as may be
required to comply with Section 422A of the Code (or any successor provision in
effect at the time).
7.
<PAGE>
SECTION 7. ADJUSTMENT PROVISIONS
(a) The options granted under the Plan shall contain such
provisions as the Committee may determine with respect to adjustments to be made
in the number and kind of shares covered by such options and in the option price
in the event of a reorganization, recapitalization, stock split, stock dividend,
combination of shares, merger, consolidation, rights offering or any other
change in the corporate structure or shares of the Company; and in the event of
any such change, the aggregate number and kind of shares available under the
Plan shall be appropriately adjusted.
(b) Adjustments under this Section 7 shall be made by the Board
of Directors, whose determination as to the adjustments to be made, and the
extent thereof, shall be final, binding and conclusive. No fractional shares of
Common Stock shall be issued under the Plan on account of any such adjustment.
SECTION 8. TERM
(a) The Plan shall become effective when adopted by the Board;
provided, however, that no shares may be issued pursuant to options granted
hereunder until the Plan is approved by the shareholders of the Company. No
options shall be granted under the Plan after ten years from the earlier of the
date of adoption by the Board or the date approved by the shareholders.
SECTION 9. ADMINISTRATION
(a) The Plan shall be administered by the Committee, to be
appointed from time to time by the Board and to consist of at least one but not
more than three of the then members of the Board. No member of the Committee
shall at the time he exercises discretion in administering the Plan, or at any
time within the twelve months prior thereto, be eligible for selection as a
person to whom stock may be allocated or to whom stock options may be granted
pursuant to the Plan or any other plan of the issuer or any of its affiliates
entitling the participants therein to acquire stock, stock option or stock
appreciation rights of the issuer or any of its affiliates.
(b) The Committee shall select one of its members as its
Chairman and shall hold its meetings at such times and places as it shall deem
advisable. The greater of two members or one-third of the entire Committee
shall constitute a
8.
<PAGE>
quorum, and the act of a majority of the members present shall be the act of the
Committee. Any decision or determination reduced to writing, signed by all
members of the Committee and filed with the minutes of the proceedings of the
Committee, shall be fully as effective as if made by a unanimous vote at a
meeting duly called and held. The Committee may appoint a Secretary, shall keep
minutes of its meetings, and shall make such rules and regulations for the
conduct of its business and for the carrying out of the Plan as it shall deem
appropriate.
(c) Stock Incentives under the Plan shall be granted in
accordance with the Committee's determinations pursuant to the Plan, and by
execution and prompt delivery to the employee of instruments approved by the
Committee. Any such grant shall be effective on the date of such determination
or, if later, on the date specified in the instrument evidencing the grant.
(d) The interpretation and construction by the Committee of any
provision of the Plan and of any Stock Incentives granted thereunder shall,
unless otherwise determined by the Board, be final and conclusive on all persons
having any interest thereunder.
SECTION 10. GENERAL PROVISIONS
(a) Absence on leave approved by an officer of the Company or a
Subsidiary authorized to give such approval shall not be considered an
interruption or termination of employment for any purpose of the Plan, or Stock
Incentives granted thereunder, except that no Stock incentives may be granted to
an employee while he is absent on leave.
(b) Stock Incentives may be granted under the Plan from time to
time in substitution for stock options held by employees of other corporations
who are or are about to become employees of the Company or a Subsidiary as the
result of a merger or consolidation of the employing corporation with the
Company or a Subsidiary, or the acquisition by the Company or a Subsidiary of
the assets of the employing corporation, or the acquisition by the Company or a
Subsidiary of stock of the employing corporation as the result of which it
becomes a Subsidiary. The terms and conditions of the substitute Stock
Incentives so granted may vary from the terms and conditions set forth in
Sections 5 and 6 to such extent as the Board may deem appropriate to conform, in
whole or in part, to the provisions of the substituted stock options.
9.
<PAGE>
(c) Nothing in the Plan nor in any instrument executed pursuant
thereto shall confer upon any employee any right to continue in the employ of
the Company or a Subsidiary.
(d) No shares of Common Stock shall be sold, issued, or
transferred pursuant to a Stock Incentive unless and until there has been
compliance, in the opinion of counsel to the Company, with all applicable legal
requirements, including without limitation those relating to securities laws and
stock exchange listings, as applicable.
(e) No employee (individually or as a member of a group), and no
beneficiary or other person claiming under or through him, shall have any right,
title, or interest in or to any shares of Common Stock allocated or reserved for
the Plan or subject to any Stock Incentive except as to such shares of Common
Stock, if any, as shall have been sold, issued or transferred to him. The
Company will forward a copy of its annual report to stockholders to each option
holder who does not otherwise receive one.
(f) The Company or a Subsidiary may make such provisions as it
may deem appropriate for the withholding of any taxes which the Company or
Subsidiary determines it is required to withhold in connection with any Stock
Incentive.
(g) No Stock Incentives and no rights under the Plan, contingent
or otherwise, (i) shall be assignable or subject to any encumbrance, pledge, or
charge of any nature, whether by operation of law or otherwise, (ii) shall be
subject to execution, attachment, or similar process, or (iii) shall be
transferable other than by will or the laws of descent and distribution, and
every Stock Incentive and all rights under the Plan shall be exercisable during
the employee's lifetime only by him or by his guardian or legal representative.
(h) Nothing in the Plan is intended to be a substitute for, or
shall preclude or limit the establishment or continuation of, any other plan,
practice or arrangement for the payment of compensation or fringe benefits to
any employee which the Company or any Subsidiary now has or may hereafter put
into effect, including, without limitation, any retirement, pension, savings or
thrift, insurance, death benefit, stock purchase, incentive compensation, or
bonus plan.
(i) In the event of any reorganization or recapitalization of
the Company (by reclassification of its outstanding Common Stock or otherwise)
or in the event of any consolidation or merger with or into another corporation,
or the sale, conveyance, lease, or other transfer by the Company
10.
<PAGE>
of all or substantially all of its assets, pursuant to which the then
outstanding shares of the Company's Common Stock are split, combined, changed
into, or become exchangeable for other shares of stock or property, any
outstanding unexercised Stock Incentives granted pursuant to the Plan shall be
assumed by any successor corporation and, in lieu of being options to purchase
shares of the Company's Common Stock, shall become options to purchase such
other shares of stock or property which the shares subject to the Stock
Incentives would have been changed into or exchangeable for, if they had been
outstanding at the time of the transaction, and, on exercise of the Stock
Incentives, each Key Employee shall be entitled to receive the shares of stock
or property which that Key Employee would have received as a result of such
reorganization, recapitalization, consolidation, merger, sale, or other transfer
if, at the time of such event, the Key Employee had held shares of the Company's
Common Stock instead of the Stock Incentives and had exchanged such shares in
accordance with the terms of the reorganization, recapitalization,
consolidation, merger, sale, or other transfer.
SECTION 11. AMENDMENT OR DISCONTINUANCE OF PLAN
(a) The Plan may be amended by the Board at any time, provided
that, without the approval of the stockholders of the Company, no amendment
shall be made which (i) increases the aggregate number of shares of Common Stock
which may be made the subject of Stock Incentives as provided in paragraph (a)
of Section 4, (ii) materially increases the benefits accruing to participants
under the Plan, (iii) materially modifies the requirements as to eligibility for
participation in the Plan, (iv) amends Section 8 to extend the term of the Plan,
or (v) amends this Section 11.
(b) The Board may discontinue the Plan at any time.
(c) No amendment or discontinuance of the Plan shall adversely
affect, except with the consent of the holder, any Stock Incentive theretofore
granted; provided that any Stock Incentive granted under the Plan, or as a
result of an amendment thereto requiring stockholder approval, shall not be
exercisable until the Plan or the amendment is approved by the stockholders of
the Company within one year following adoption of the Plan or the amendment.
11.
<PAGE>
TO BE EXERCISED NOT LATER THAN 4 p.m., Pacific time on (insert date)
(the day next preceding the sixth anniversary of the Date of Grant).
OPTION NO. ___
MITEK SYSTEMS, INC.
INCENTIVE STOCK OPTION GRANTED UNDER
1986 STOCK OPTION PLAN (THE "PLAN")
Option granted on (insert date) (hereinafter called the "Date of Grant") by
MITEK SYSTEMS, INC. (a Delaware corporation hereinafter called the "Company") to
(Insert Name) (insert #) shares
----------- --------
(hereinafter called the "Optionee") $(insert cost) per share
-----------
1. GRANT OF OPTION. The Company grants to the Optionee an option to
purchase on the terms and conditions hereinafter set forth, (insert #of shares)
shares (hereinafter called "Option Shares") of the Company's Common Stock,
$0.001 par value per share, at $ (insert cost) per share (hereinafter called
"Option Price"). This Option is an Incentive Stock Option granted pursuant to
Section 6 of the Plan and is intended to qualify as an "Incentive Stock Option"
under Section 422A of the Code.
2. PERIOD OF OPTION AND CERTAIN LIMITATIONS ON RIGHT TO EXERCISE. This
Option will expire at 4 p.m. Pacific time, on the day next preceding the sixth
anniversary of the Date of Grant (such day of expiration being hereinafter
called the "Expiration Date"), except that (a) if the Optionee ceases, on or
before the Expiration Date, for any reason other than death, to be an Employee,
this Option shall expire as provided in Section 5 below, and (b) if the Optionee
dies on or before the Expiration Date, this Option shall expire as provided in
Section 6 below. The term "Employee" as used in this Option means a Key Employee
as defined in Section 2 of the Plan.
Unless otherwise provided hereinafter, and subject to the right of the
Committee to accelerate the rate at which this Option is exercisable, and
subject to the further provisions of this Section 2 and to Sections 5 and 6
below, the right to exercise this Option shall be determined as follows:
Commencing on issuance, the Option grant is exercisable at a cumulative
rate of 1/36th each month until the Option is fully exercisable on the third
anniversary of the Date of Grant.
If this Option is exercisable in installments, the right to purchase
the shares comprised in each installment shall be cumulative; i.e., once such
right has become exercisable it may be exercised in whole at any time, or in
part from time to time, until the Expiration Date (subject to the provisions
<PAGE>
hereof), except that not less than twenty shares may be purchased at any time
unless the number of shares then purchasable hereunder shall be less than
twenty.
Except as provided in Sections 5 and 6 below, none of the Option Shares
may be purchased hereunder unless the Optionee, at the time he/she exercises
this Option, is an Employee and has continuously been an Employee since the date
hereof. Absence on leave, if approved in writing by an officer of the Company or
of any subsidiary authorized to give such approval, shall not be considered an
interruption or termination of employment for any purpose of this Option.
3. METHOD OF EXERCISE OF OPTION. This Option shall be exercised in, and
only in, the following manner: the Optionee shall give written notice to the
Company, in a form satisfactory to the Company, specifying the number of Option
Shares which he/she then elects to purchase, accompanied by payment, in cash or
by check to the order of the Company, or in the Fair Market Value of shares of
the Company's Common Stock, $0.001 par value per share, duly endorsed to the
order of the Company, of the full option price of the shares being purchased.
4. NON-TRANSFERABILITY OF OPTION. This Option shall not be transferable by
the Optionee other than by Will or the laws of descent and distribution, and it
shall be exercisable, during the lifetime of the Optionee, only by him/her (or
by his/her legal guardian or legal representative).
5. TERMINATION OF EMPLOYMENT. If the Optionee ceases on or before the
Expiration Date, to be an Employee for any reason other than death, disability
or for cause: (a) he/she may, but only within the period of one month next
succeeding such cessation and in no event after the Expiration Date, exercise
this Option to the extent that he/she was entitled to exercise it at the date of
such cessation, and (b) such Option shall expire (except as provided in Section
6 below) at 4 p.m. Pacific time, on whichever is the earlier of (i) the last day
of the aforesaid one month period or (ii) the Expiration Date.
Notwithstanding the foregoing provisions of this Section 5, if the
Optionee terminates employment by reason of disability (as defined in the Plan)
(a) he/she may exercise this Option on, or any time within the period of twelve
months next succeeding, the date of such disability (but in no event after the
Expiration Date) as to any or all shares purchasable on such disability
termination date (i.e., those comprised in all installments which shall have
become exercisable on or prior to such date, to the extent not already
exercised), and (b) such Option shall expire (except as provided for in Section
6 below) at 4 p.m. Pacific time, on whichever is the earlier of (i) the last day
of the aforesaid twelve month period or (ii) the Expiration Date.
If an Optionee is terminated from employment by the Company for cause
(as defined in the Plan), the Optionee shall be prohibited from exercising the
Option until the Board of Directors of the Company (the "Board"), in its sole
discretion, makes a determination that the Option is exercisable. The Board
shall make its determination and provide notice of its determination to the
Optionee within twenty days of termination. Unless the Board determines that the
Option is exercisable, the Option will expire as of the date of termination. In
the event the Board determines that the Option is exercisable, the Optionee may
exercise the Option only to such extent, for such time, and upon such terms and
conditions as if he/she had ceased to be employed by the Company or such
affiliate upon the date of such termination for a reason other than for cause,
death or disability.
<PAGE>
This Option confers no right upon the Optionee with respect to the
continuation of his/her employment with the Company or any of its subsidiaries
and shall not interfere with the right of the Company or its subsidiaries, or of
the Optionee, to terminate his/her employment at any time.
6. DEATH OF OPTIONEE. If the Optionee dies on or before the Expiration
Date either while he/she is an Employee or within one month after ceasing to be
an Employee, (a) this Option shall be exercisable by the Optionee's executor or
administrator, or the person or persons to whom the Optionee's rights under this
Agreement are transferred by Will or by the laws of descent and distribution
within, but only within, the twelve month period next succeeding such death, and
in no event after the Expiration Date, and then only if, and to the extent that,
the Optionee was entitled to exercise it at the date of his/her death (i.e.,
with respect to the shares comprised in all installments which shall have become
exercisable on or prior to such date, to the extent not already exercised), and
(b) this Option shall expire at 4 p.m. Pacific time, on whichever is the earlier
of (i) the first anniversary of the Optionee's death or (ii) the Expiration
Date.
7. ADJUSTMENTS UPON THE OCCURRENCE OF CERTAIN EVENTS. The following
provisions shall apply on the occurrence of the indicated events:
(a) In case the Company shall hereafter declare or pay to the
holders of its Common Stock a dividend or dividends in stock of the Company, the
Optionee, upon any exercise of this Option, shall be entitled to receive (in
addition to the Option Shares purchased upon such exercise and without any
payment other than the Option Price for such shares) such additional share or
shares of stock as the Optionee would have received as such dividend or
dividends if, from the Date of Grant of this Option, he/she had been the holder
of record of the Option Shares so purchased and had not, prior to the date of
such exercise, disposed of any of such Option Shares or any shares which he/she
would have received as a stock dividend or dividends stemming from such holding
or such Option Shares.
(b) In case of any reorganization or recapitalization of the
Company (by reclassification of its outstanding Common Stock or otherwise), or
its consolidation or merger with or into another corporation, or the sale,
conveyance, lease or other transfer by the Company of all or substantially all
of its property, pursuant to any of which events the then outstanding shares of
the Company's Common Stock are split up or combined, or are changed into or
become exchangeable for other shares of stock or property, the Optionee, upon
any exercise of this Option, shall be entitled to receive, in lieu of the Option
Shares which he/she would otherwise be entitled to receive upon such exercise
and without any payment in addition to the option price therefore, the shares of
stock or property which the Optionee would have received upon such
reorganization, recapitalization, consolidation, merger, sale or other transfer,
if immediately prior thereto he/she had owned the Option Shares to which such
exercise of the Option relates and had exchanged such Option Shares in
accordance with the terms of such reorganization, recapitalization,
consolidation, merger, sale or other transfer. In case any such reorganization,
recapitalization, consolidation, merger, sale or other transfer is preceded by
(i) a stock dividend or dividends of the type for which adjustment is provided
in paragraph (a) of this Section 7, or (ii) a reorganization, recapitalization,
consolidation, merger, sale or other transfer of the character referred to in
the next preceding sentence, shall be deemed to include or refer to the stock or
other property which the Optionee would, upon exercise of this Option, be
entitled to receive in addition to or in lieu of the Option Shares as a result
of such preceding stock dividend, reorganization, recapitalization,
consolidation, merger, sale or other transfer.
<PAGE>
(c) In case of any distribution of the Company rights to
stockholders, the issuance of stock options to persons other than Employees, the
issuance by the Company of securities convertible into the Company's Common
Stock or into shares of any stock or security into which such Common Stock shall
have been changed or for which it shall have been exchanged, or any other change
in the capital structure of the Company (other than as specified above in this
Section 7) which, in the judgment of the Company, would effect a dilution of the
Optionee's rights hereunder, the Company may make such adjustment, if any, as it
shall deem appropriate in the number or kind or option price of shares then
purchasable under this Option, and such adjustment shall be effective and
binding for all purposes of this Option. The decision to make an adjustment
contemplated by this paragraph (c) shall be completely at the discretion of the
Board of Directors of the Company.
No adjustment provided for in this Section 7 shall require the
Company to sell a fractional share under this Option.
8. DELIVERY OF STOCK CERTIFICATES. Upon each exercise of this Option, the
Company, as promptly as practicable, shall mail or deliver to the Optionee a
stock certificate representing the shares then purchased, and will pay all stamp
taxes payable in connection therewith. The issuance of such shares and delivery
of the certificate or certificates therefore shall, however, be subject to any
delay necessary to complete (a) the listing of such shares on any stock exchange
upon which shares of the same class are then listed, (b) such registration or
other qualification of such shares under any state or federal law, rule, or
regulation as the Company may determine to be necessary or advisable, and (c)
the making of provision for payment or withholding of any taxes required to be
withheld pursuant to any applicable law, in respect of the exercise of this
Option or the receipt of such shares.
9. NOTICES, ETC. Any notice hereunder by the Optionee shall be given to
the Company in writing and such notice and any payment by the Optionee hereunder
shall be deemed duly given or made only upon receipt thereof at the Company's
office c/o Corporate Secretary, Mitek Systems, Inc., 10070 Carroll Canyon Road,
San Diego, California 92131, or at such other address as the Company may
designate by notice to the Optionee.
Any notice or other communication to the Optionee shall be in
writing and any such communication and any delivery to the Optionee hereunder
shall be deemed duly given or made if mailed or delivered to the Optionee at
such address as the Optionee may have on file with the Company or in care of the
Company at its above office.
10. WAIVER. The waiver by the Company of any provision of this Option shall
not operate as or be construed to be a waiver of the same provision or any other
provision hereof at any subsequent time or for any other purpose.
11. IRREVOCABILITY. This Option shall be irrevocable until it expires as
herein provided.
12. EFFECTIVE DATE. This Option shall be deemed granted and effective on
the Date of Grant, provided that no options granted under the Plan or as a
result of an amendment thereto requiring stockholder approval shall be
exercisable until the Plan or the amendment is approved by the stockholders of
the Company within one year following the adoption of the Plan or the amendment.
<PAGE>
13. INTERPRETATION AND CONSTRUCTION. The interpretation and construction of
this Option by the Committee provided for in the Plan under which this Option is
granted shall, unless otherwise determined by the Company's Board of Directors,
be final and conclusive. Terms used in this Option shall have the same meaning
given those terms in the Mitek Systems, Inc. 1986 Stock Option Plan unless
otherwise specified herein. The section headings in this Option are for
convenience of reference only and shall not be deemed part of, or germane to the
interpretation or construction of, this Option.
IN WITNESS WHEREOF, the Company has caused this Option to be executed
and its corporate seal to be hereunto affixed by its proper corporate officers
thereunto duly authorized.
ATTEST:
MITEK SYSTEMS, INC. MITEK SYSTEMS, INC.
By By
--------------------------------- -------------------------------------
John M. Thornton, Chairman John F. Kessler, President & CEO
<PAGE>
EXHIBIT 10.2
MITEK SYSTEMS, INC.
1988 NONQUALIFIED STOCK OPTION PLAN
A Nonqualified Stock Option Plan is hereby adopted for the benefit of
directors, officers and key management employees of Mitek Systems, Inc. and its
subsidiaries, hereinafter sometimes referred to collectively as the
"Corporation" or "Mitek."
1. PURPOSE. The purpose of the Plan is to advance the interests of the
Corporation and its shareholders by providing for directors, officers and key
management employees an incentive to serve and to continue service with the
Corporation. By encouraging such directors, officers,and key management
employees to become owners of the capital stock in Mitek, the Corporation seeks
to attract and retain in its employ people of "training, experience and ability,
and to furnish additional incentive to employees upon whose judgment, initiative
and efforts the successful conduct of its business depends. It is the intention
of the Corporation that this objective will be accomplished through the granting
of nonqualified stock options and stock appreciation rights to certain
directors, officers and key management employees, including newly employed
executives.
A Committee appointed by the Board of Directors shall have full
discretion to grant stock options and stock appreciation rights within the
limits herein prescribed.
Numbers and genders as used herein are interchangeable as the
context requires.
2. DEFINITIONS. As used herein:
a. The words "Committee" or "Plan Committee" refer to the "Mitek
Stock Option Committee" to be appointed by the Board of Directors of Mitek.
b. The word "Plan" refers to the Mitek 1988 Nonqualified Stock
Option Plan.
c. The word "Corporation" refers to either Mitek or any one or
more of its subsidiaries, as the context may require.
-1-
<PAGE>
d. The words "option" or "options" or "stock options" refer to
stock option or options giving the optionee the right to purchase shares in
Mitek. It is not intended that the options which may be granted hereunder be
qualified for favorable tax treatment under the Internal Revenue Code of 1986,
as amended.
e. The words "stock appreciation right" or "stock appreciation
rights" refer to a stock appreciation right or rights giving an Employee the
right to receive cash or shares in Mitek, or a combination of cash and shares,
upon exercise of the stock appreciation right and surrender of the related
option.
f. The term "Discounted Options" shall have the meaning ascribed
to it in Paragraph 7(b).
g. The words "Eligible Employee" or "Employee" refer to directors,
officers and key management employees, including newly employed executives, who
may be so designated from time to time by the Board of Directors or the
Committee, in their discretion. Directors who are members of the Committee or
who have irrevocably waived, in writing, their right to participate in the Plan,
as directors, are not eligible to participate in the Plan.
3. TERM AND EFFECTIVE DATE OF PLAN. The term of the Plan shall be for
ten years and one day fron its effective date, designated by the Board of
Directors of Mitek as September 13, 1988, if ratified and approved by a majority
of the stockholders on or before March 1, 1989.
4. SHARES OF STOCK SUBJECT TO PLAN. The shares of stock which may be
issued under the Plan, on exercise of a stock option or settlement of a related
stock appreciation right, shall not exceed in the aggregate 650,000 shares of
the Corporation's no par value Common Stock. Such shares will be authorized and
unissued shares. Any shares subject to an option, which for any reason expires
or is terminated unexercised, shall again be subject to and be available for
future issuance under this Plan. If a stock appreciation right related to an
option is exercised in whole or in part, all or a portion of the related option,
as the case may be, shall be surrendered. The shares subject to the related
option shall be available for future issuance under this Plan, less the number
of shares actually issued upon exercise of the stock appreciation right. If the
Committee permits pursuant to Paragraph 8(e), an employee to surrender all or a
portion of his then exercisable options in exchange for a number of shares, the
shares subject to such surrendered option shall be available
-2-
<PAGE>
for future issuance under this Plan, less the number of shares actually issued
to the employee.
5. ADMINISTRATION OF THE PLAN. Within the limitations described
herein, the Committee shall administer the Plan, select the Employees to whom
options and stock appreciation rights will be granted, determine the number of
shares subject to such options and rights for each Employee, determine the
method of payment for option shares exercised, including deferred payment not to
exceed five (5) years from the date of exercise, together with interest at times
and rates determined reasonable by the Committee during the existence of the
Plan, and interpret, construe and implement the provisions of the Plan. By the
adoption of this Plan, the Board of Directors is delegating to the Committee
which it appoints by resolution plenary authority to administer the Plan. A
member of the Committee shall not be eligible to receive any option or stock
appreciation right under the Plan other than those options classified as
"Discounted." Upon its appointment and during its tenure, the Committee rather
than the Board shall have authority to adopt rules and regulations for carrying
out the Plan, to interpret, construe and implement the provisions of the Plan,
including the right to make loans to or guarantee any obligations of any
participants, including officers and directors, in connection with the Plan,
whenever the Committee determines that such loan or guarantee may reasonably be
expected to benefit the Corporation. The Committee, in its absolute discretion,
grant to optionees in exchange for the surrender and cancellation of their
options, new options having option prices lower (or higher) than the option
price provided in the options so surrendered and cancelled and containing such
other terms and conditions as the Committee may deem appropriate. Decisions of
the Committee shall be binding on the Corporation and on all employees eligible
to participate in the Plan. The selection of any Mitek director or officer to
be a recipient of any options or stock appreciation rights and the number of
such options or stock appreciation rights to be granted are subject to approval
either by a majority of the Committee, if all the members of the Committee are
disinterested persons, or by the Board of Directors. With respect to the
participation of directors, a majority of the Board and a majority of the
directors acting in the matter must be disinterested persons. "Disinterested"
means a person who, at the time of such approval, is not eligible, and has not
at any time within one year prior thereto been eligible, for selection as a
person to whom stock options or stock appreciation rights may be allocated or to
whom stock options or stock appreciation rights may be granted pursuant to this
Plan or any other plan of the Corporation entitling participants therein to
acquire stock, stock options or stock appreciation rights of the Corporation.
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<PAGE>
6. INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as Directors or as members of the Committee,
members of the Committee shall be indemnified by the Corporation against the
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan, or any option or stock appreciation right granted thereunder, and against
all amounts paid by them in settlement thereof (provided such settlement is
approved by independent legal counsel selected by the Corporation), or paid by
them in satisfaction of a judgment in any such action, suit or proceeding,
except in relation to matters as to which it shall be adjudged in such action,
suit or proceeding that such Committee member is liable for negligence or
misconduct in his duties; provided that within 60 days after the institution of
such action, suit or proceeding, a Committee member shall offer the Corporation,
in writing, the opportunity, at its own expense, to handle and defend the same.
7. NUMBER OF OPTIONS GRANTED.
a. NUMBER OF 0PTIONS GRANTED TO AN ELIGIBLE EMPLOYEE. In addition
to an initial grant to an Employee, such Employee may be granted, during the
term of the Plan, additional options and stock appreciation rights if in the
opinion of the Committee the circumstances warrant.
b. DISCOUNTED OPTIONS FOR DIRECTORS. Discounted Options shall be
granted automatically on the first business day of January of any year to any
nonemployee Director who, prior to said date files with the Secretary of the
Company an irrevocable election to receive a stock option in lieu of retainer
fees to be earned in the following calendar year. A nonemployee Director shall
receive that number of options equal to the amount of his annual retainer
divided by the difference between the fair market value of a share of Mitek
common stock on the date of the grant and $1.00.
8. STOCK 0PTION AGREEMENT.
a. FORM. Options and stock appreciation rights shall be evidenced
by stock option agreements in such form and not inconsistent with this Plan as
the Committee shall approve from time to time, which agreements shall contain in
substance the following terms and conditions:
b. PRICE. The purchase price per share of stock deliverable upon
the exercise of an option shall be the fair
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<PAGE>
market value of the stock on the date of grant. In the event of a grant
conditioned, among other things, on stockholder ratification of this Plan, the
date of such conditional grant shall be the date of grant for the purpose of
this Paragraph 8. In the case of Discounted Options, the purchase price shall
be $1.00 per share.
c. NUMBER OF SHARES. The option agreement shall specify the
number of shares subject to the option and the stock appreciation right, if
any.
d. EXERCISABILITY. Options shall become exercisable at such times
and in such installments (which may be cumulative) as the Committee shall
provide in the terms of each individual option. Discounted Options shall be
100% vested and exercisable on the first anniversary of the date of the grant.
e. EXERCISE OF 0PTION AND TIME AND METHOD OF PAYMENT. Each
employee exercising an option pursuant to a stock option agreement as herein
provided shall notify the Secretary of the Corporation of the exercise thereof,
in writing, and shall pay to the Secretary, in cash or by check, at the time of
delivery of such notice, or on a deferred basis evidenced by a promissory note,
containing such terms and subject to such security as the Committee shall
determine fair and reasonable from time to time, for the total option price for
the number of shares so elected, whereupon the Secretary shall cause to be
issued and delivered to such employee, as soon as practicable thereafter, a
certificate of stock in the name of the employee for the shares so purchased.
The Committee, in its sole discretion, may accept payment in Mitek stock,
subject to compliance with applicable laws and regulations and such
conditions as the Committee may impose.
Solely at the discretion of the Committee, upon the application
of any employee, the Committee may elect to permit the employee to surrender to
the Corporation all or part of his then exercisable options in lieu of
exercising those options and to receive in exchange therefor the number of
shares of the Corporation's common stock whose total fair market value on the
date of surrender is equal to the difference between the option price and the
fair market value of the shares covered by the option or options which the
employee has surrendered.
f. EMPLOYEE'S AGREEMENT TO SERVE. Each employee receiving an
option shall, as one of the terms of the option agreement referred to in
Paragraph 8, agree that he will remain within the employ of the Corporation or
one or more of its subsidiaries, for a period of at least six (6) months from
the date the option is granted to him, subject to vacations, sick
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<PAGE>
leaves, and other approved absences, or as required from time to time by the
Board of Directors. Such employment, subject, however, to the provisions of any
contract between the Corporation or any such subsidiary and such employee, shall
be at the pleasure of the employing Corporation or Corporations and at such
compensation as such employing Corporation shall reasonably determine.
g. TERMINATION OF EMPLOYMENT. Any stock option which has not been
exercised prior to its expiration date shall terminate and be cancelled. If the
employment of an employee or service as a director terminates during the option
period (other than by reason of dishonesty or willful neglect of his duties),
such employee shall have thirty (30) days after such termination within which to
exercise his stock option; and if termination is due to death of an employee,
his legal representatives shall have six (6) months from the date of his death
to exercise the stock option; provided, however, that in no event shall the
exercise occur after the expiration date of the option. If an employee's
employment terminates due to dishonesty or willful neglect of his duties, all of
the stock options shall forthwith terminate. Notwithstanding the foregoing,
Discounted Options shall become exercisable in whole upon the retirement of the
optionee, or his total and permanent disability or upon his death.
h. STOCK APPRECIATION RIGHTS. Stock appreciation rights may be
granted in connection with any option granted under the Plan, either at the time
of the grant of such option or at any tine thereafter during the term of the
option, subject to Paragraph 17 of the Plan. A stock appreciation right shall
entitle the employee upon exercise of the stock appreciation right and
surrender of the related option, or a portion thereof, to receive a number of
shares or cash or some combination of the two, equal to the difference between
the fair market value on the exercise date of the shares subject to the stock
appreciation right and the exercise price of the related option. A stock
appreciation right shall be exercisable by the holder thereof (or by such other
person entitled to exercise the related option) at such time or times and to the
extent, but only to the extent, that the related option shall be exercisable.
The Committee may place an upper limit on the amount payable on exercise of a
stock appreciation right, may limit the exercise of such a right to a portion of
the shares subject to the related option, may require a portion of the shares
subject to the option to be exercised as a condition to exercise the stock
appreciation right, may provide for the manner of settlement of the stock
appreciation right (for example, limit settlements to stock, or specify a
partial percentage of cash or stock), and may provide such other provisions or
limitations relating to the stock appreciation right as are consistent with the
Plan, in their sole
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discretion, including such conditions on exercise of a stock appreciation right
as may be required to satisfy the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934 (or any successor provision in effect at the
time).
i. TAX BENEFIT RIGHTS. The Committee may grant tax benefit rights
("TBRs") to the employees on such basis as the Committee shall determine,
including, but not limited to, TBRs which become exercisable only upon an
employee's being subject to the restrictions of Section 16 of the Securities
Exchange Act of 1934 and, consequently, Section 83 of the Internal Revenue Code
of 1986, as amended. A TBR may be granted only with respect to a stock option
under the Plan, and may be granted concurrently with or after the grant or
exercise of a stock option. A TBR shall entitle an employee to receive from the
Corporation an amount in cash equal to: the amount of ordinary income, if any,
realized by the employee for Federal income tax purposes as a result of the
exercise or surrender of a nonqualified stock option multiplied by a percentage,
not to exceed 60%, which may vary according to the employee's annual
compensation, estimated income tax and other factors selected by the Committee.
The Committee may cancel or place a limit on the term of, or the amount payable
for, any TBR at any time. The Committee shall determine all other terms and
provisions of any TBR grant.
j. REPLACEMENT OPTIONS. The Committee, in its absolute discretion
may grant to optionees in exchange for the surrender and cancellation of their
options, new options having option prices lower (or higher) than the option
price provided in the options so surrendered and cancelled and containing such
other terms and conditions as the Committee may deem appropriate.
9. RECAPITALIZATION. In the event that dividends are payable in Common
Stock of the Corporation, or in the event there are splits, subdivisions or
combinations of shares of Common Stock of the Corporation, the number of shares
available under the Plan shall be increased or decreased proportionately, as the
case may be, without change in the aggregate purchase price (where applicable).
10. REORGANIZATION. In case the Corporation is merged or consolidated
with another corporation and the Corporation is not the surviving corporation,
or in case the property or stock of the Corporation is acquired by another
corporation, or in case of a separation, reorganization or liquidation of the
Corporation, the Board of Directors of the Corporation, or the Board of
Directors of any corporation assuming the obligations of the Corporation
hereunder, shall as to outstanding options and stock appreciation rights:
either (a) make appropriate provision for protection of any such outstanding
options or stock
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<PAGE>
appreciation rights by the substitution of an equitable basis of appropriate
stock of the Corporation, or of the merged, consolidated or otherwise
reorganized corporation which will be issuable in respect to the shares of
Common Stock of the Corporation, provided only that the excess of the aggregate
fair market value of the shares subject to the options (and stock appreciation
rights, if applicable) immediately after such substitution over the purchase
price thereof is not more than the excess of the aggregate fair market value of
the shares subject to such options (and stock appreciation rights, if
applicable) immediately before such substitution over the purchase price
thereof, or (b) upon written notice to the Employee provide that the option (or
stock appreciation right, if applicable) must be exercised within sixty (60)
days of the date of such notice or it will be terminated. In any such case, the
Board of Directors may, in its discretion, advance the waiting periods and
exercise dates.
11. GENERAL RESTRICTION. Each option shall be subject to the
requirement that, if at any time the Board of Directors or the Committee, in its
discretion, shall determine that the listing, registration, or qualification of
the shares subject to such option upon any securities exchange or under any
state or federal law, or the consent or approval of any government regulatory
body, is necessary or desirable as a condition of, or in connection with, the
granting of such option, or the issue or purchase of shares thereunder, such
option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of Directors.
12. RIGHTS AS A SHAREHOLDER. The holder of an option shall have no
rights as a shareholder with respect to any shares covered by the option until
the issuance of a stock certificate to him or her for such shares. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date is prior to the date such
stock certificate is issued. The Plan Committee and the Board of Directors
agree to use their best efforts to secure prompt issuance of stock certificates
following full performance of exercise duties by any optionee.
13. NON-ASSIGNABILITY OF OPTIONS. No option or stock appreciation
right shall be assignable or transferable by the recipient except by will or by
the laws of descent and distribution, as provided in Paragraph 8(g). During the
life of the recipient, the option and stock appreciation right, if applicable,
shall be exercisable only by him or her, or by the
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<PAGE>
duly appointed legal representative of an incompetent option holder.
14. SUBSIDIARY. As used herein, the term "subsidiary" shall mean any
future or present corporation which would be a "subsidiary corporation" of the
Corporation as the term is defined in Section 425 of the Internal Revenue Code
of 1986, as amended.
15. WITHHOLDING TAXES. Whenever under the Plan shares are to be issued
or cash is to be paid in satisfaction of options or stock appreciation rights
granted thereunder, the Corporation shall have the right to require the
recipient to remit to the Corporation an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such shares or payment of such cash. In the
alternative, at the sole discretion of the Committee, the Corporation may
withhold that number of shares, based on the market valve of the shares, which
would satisfy the federal, state and local withholding amounts due in connection
with the shares to be issued to the Employee upon exercise of the Employee's
option.
16. AMENDMENT OF THE PLAN. The Plan may, at any time or from time to
time, be terminated, modified or amended by a majority vote of the shareholders
of the Corporation. The Board of Directors may, at any time and from time to
time, modify or amend the Plan in any respect, except that without shareholder
approval, the Board of Directors may not materially increase the benefits
accruing to participants under the Plan, materially increase the number of
shares which may be issued under the Plan (other than increases due to changes
in capitalization) or materially modify the requirements as to eligibility for
participation in the Plan. The termination, modification, or amendment of the
Plan shall not, without the consent of an Employee, affect his or her rights
under an option or stock appreciation right previously granted to him or her.
With the consent of each Employee affected, the Board of Directors may amend
outstanding option agreements in a manner not inconsistent with the Plan.
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17. TERMINATION. Unless previously terminated by the Board of
Directors, this Plan shall terminate at the close of business on September 13,
1998, and no options or stock appreciation rights shall be granted under it
thereafter, but such termination shall not affect any option theretofore
granted.
Approved by the Board of Directors on September 13, 1988.
Approved by the Stockholders on ________________________.
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TO BE EXERCISED NOT LATER THAN 4 p.m., Pacific time on "anniv_date"(the day next
preceding the sixth anniversary of the Date of Grant).
Option No. "option no"
MITEK SYSTEMS, INC
NON-QUALIFIED STOCK OPTION GRANTED UNDER
1988 STOCK OPTION PLAN (THE "PLAN")
Option granted on "date_of_grant"(hereinafter called the "Date of Grant") by
MITEK SYSTEMS, INC. (a Delaware corporation hereinafter called the "Company") to
"name" #of shares shares
(hereinafter called the "Optionee") "share cost" per share
THIS AGREEMENT, effective as of "date-of-grant" is entered into by
and between Mitek Systems, Inc. a Delaware corporation ("Corporation") and
"name" Holder").
WHEREAS, pursuant to the 1988 Nonqualified Stock Option Plan of the
Company ("Plan"), the Mitek Stock Option Committee ("Committee"), as appointed
by the Board of Directors of the Corporation, has granted to Holder effective as
of "date-of-grant", a nonqualified stock option ("Option") to purchase shares of
common stock, $.001 par value, of the Corporation (the "Shares"), for the term
and upon the terms and conditions set forth below:
NOW, THEREFORE, in consideration of the mutual promises, and
covenants made herein and the mutual benefits to be derived herefrom, the
parties hereto agree as follows:
1. GRANT OF OPTION. The Corporation hereby grants to Holder as a matter
of separate inducement and agreement in connection with the Holder's employment
or engagement, and not in lieu of any salary or other compensation for his or
her services (other than in lieu of retainer fees paid to nonemployee
Directors), the right and option to purchase in accordance with the Plan and on
the terms and conditions hereinafter set forth, all and any part of an aggregate
of "spell-of-shares" (authorized but unissued Shares at the Price, exercisable
from time to time prior to the close of business on the Expiration Date. The
Price shall be "share-cost" unless adjusted pursuant to the term of this
agreement. In the event dividends are payable in common stock of the
Corporation, or in the event that there are splits, subdivisions, or
combinations of Shares, the number of Shares subject to this Option shall be
increased or decreased proportionately, as the case may be, without change in
the aggregate purchase price.
2. EXERCISABILITY OF OPTION. The Option shall become exercisable, to
the extent of one-thirty-sixth (1/36) share of Shares represented by the Option
on each one-month anniversary from the Date of Grant. To the extent that the
Holder does not purchase in any month or year, as the case may be, all or any
part of the Shares to which the Holder is entitled, the Holder has the right
cumulative thereafter to purchase any Shares not so purchased and such rights
shall continue until the Option terminates or expires. The Option may be
exercised only as to whole Shares. Fractional Share interests shall be
disregarded except that they may be accumulated from year to year. This
Agreement and the Option shall expire on the Expiration Date unless therefore
terminated in accordance with the provisions hereof and of the Plan.
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<PAGE>
3. CONTINUANCE OF EMPLOYMENT. As consideration for granting the Option,
the Holder hereby agrees to remain the employ or engagement of Corporation or
one of its subsidiaries, if any, for a period of not less than six (6) months
from the Date of Grant, subject to vacations, sick leaves and other approved
absences, or as required from time to time by the Board of Directors of the
Corporation. Nothing contained in this Agreement nor in the Plan shall confer
upon the Holder any right with respect to his or her continued employment or
engagement by the Corporation or one of its subsidiaries, if any, or interfere
in any way with the right of the Corporation or of such subsidiary at any time
to terminate such employment or engagement or to increase or decrease the
compensation received by the Holder, but nothing contained herein shall effect
any otherwise existing contractual rights of the Holder.
4. METHOD OF EXERCISE AND PAYMENT. Each exercise of Option shall be by
means of written notice of exercise, conforming to paragraph 8 of this
Agreement, delivered to the Secretary of the Corporation and specifying the
number of whole Shares with respect to which the Option is being exercised,
together, in the case of exercise of the Option, with tender to Corporation of
the full Price attributable to the Shares to be purchased. The Committee, in its
sole discretion, may accept payment in Shares. The Committee, in its sole
discretion, may elect to permit the Holder to exercise the Option by paying any
part of the Price in cash, by check, or by issuing a promissory note containing
such terms as subject to such security as the Committee, in in its sole
discretion, determines to be fair and reasonable. The Committee in its sole
discretion may, upon request of Holder, elect to permit the Holder to exchange
all or a portion of his or her then exercisable Option for Shares whose fair
market value at the time of exchange equals the difference between the Price and
fair market value of the Shares covered by the Option.
5. TERMINATION OF OPTION. The Option and all the rights thereunder, to
the extent such rights shall not have been exercised, shall terminate and become
null and void at such time as the Holder ceases to be employed or engaged by
either the Corporation or a subsidiary, if any, by reason of dishonesty or
willful neglect of the Holder's duties. In the event of the Holder's
termination of employment or engagement, other than termination by reason of
dishonesty or willfull neglect of duties, the Holder may at any time within the
period of thirty (30) days after such termination, exercise the Option to the
extent is exercisable by him or her on date of such termination except that, in
the event that the Holder dies while in the employ or engagement of the
Corporation or such subsidiary, then the Option, to the extent that the Holder
(or former Holder) would have been entitled to exercise it as of the date of his
or her death may be exercised within six (6) months after such death by the
legal representatives of the Holder; provided, however, that in no event may the
Option be exercised to any extent by any person after the Expiration Date.
6. NONASSIGNABILITY OF OPTION. Subject to the provisions of paragraph 5
above, and paragraph 8 (g) of the Plan, the Option and the rights and privileges
conferred hereby are not transferrable or assignable, and shall not be pledged
or hypothecated in any way (whether by operation of law or otherwise), and shall
not be subject to execution, attachment, garnishment, levy or similar process.
The Option may be exercised during the lifetime of Holder only by Holder (or the
duly appointed legal representative of any incompetent Holder) or, subject to
the provisions of paragraph 5, within six (6) months after death by Holder's
transferees by will or under the laws of descent and distribution and not
otherwise, regardless of any community property or other interest therein of the
spouse of the Holder or such spouse's successor-in-interest. In the event that
the Holder's spouse shall have acquired a community property interest in the
Option, the Holder, or such transferees, may exercise it on behalf of the spouse
or such spouse's successor-in-interest. Any person other than the Holder who is
entitled to exercise the Option shall be subject to the provisions of this
Agreement as if such person were the Holder.
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7. HOLDER NOT A STOCKHOLDER. Holder shall have no rights as a
stockholder with respect to the Shares covered by the Option until the date of
issuance of a stock certificate or stock certificates to him or her. No
adjustments will be made for dividends or other rights for which the record date
is prior to the date on which stock certificate or certificates are issued even
if such record date is subsequent to the date upon which notice of exercise is
delivered and tender of payment was accepted.
8. NOTICES. Any notice to be given under the terms hereof shall be hand
delivered to the Secretary of the Corporation or sent by certified mail, return
receipt requested to Mitek Systems, Inc., Attention: Secretary, 10070 Carroll
Canyon Road, San Diego, California, 92131, and any notice to be given to the
Holder shall be addressed to him or her at the address given beneath his or her
signature hereto, or such other addresses a party may to designate in writing to
the other party. Notice shall have been deemed duly given when enclosed in a
properly sealed envelope, addressed as aforesaid, certified mail, and deposited
(postage or certified fee prepaid) in a post office or branch post office
regularly maintained by the United States Government.
9. APPLICATION OF SECURITIES LAWS. No Shares may be purchased pursuant
to the Option unless and until any then applicable requirements of the
Securities and Exchange Commission, the California Corporations Commission or
any other regulatory agency having jurisdiction over the Shares and of any
exchanges upon which the Shares may be listed shall have been fully complied
with. Holder represents and agrees that if he or she exercises the Option, in
whole or in part, at a time when there is not (i) in effect under the Securities
Act of 1933, as amended ("Act"), a registration statement relating to the Shares
issuable upon exercise and (ii) available for delivery to him or her a
prospectus ("Prospectus") meeting the requirements of Section 10 (a) (3) of the
Act, he or she will not acquire the Shares issuable upon such exercise except
for the purpose of investment and without a view to their resale or distribution
and that, as a condition to each such exercise, Holder will furnish to the
Corporation written statements satisfactory to the Corporation in form and
substance. The Holder further represents and agrees that if and when he or she
proposes to publicly offer to sell shares which are issued to Holder hereunder,
he or she will notify the Corporation prior to any such offering or sale and
will abide by the opinion of counsel to the Corporation as to whether and under
what conditions and circumstances, if any, Holder may offer and sell such
shares, but such procedure need not be followed if a Prospectus was delivered to
Holder with the Shares and the Shares were and are listed on a national
securities exchange. Any person or persons entitled to exercise the Option under
the provision of paragraph 5 above shall be obligated on the provision of this
paragraph 9 to the same extent as is Holder.
10. EFFECT OF AGREEMENT. This Agreement shall be binding upon and
inure to benefit of any successor or successor of the Corporation only in
accordance with paragraph 13 of the Plan.
11. PLAN. The Option and this Agreement are subject to, and the
Corporation and Holder agree to be bound by, all the terms and conditions of
the Plan. The rights of the Holder are subject to limitations, adjustments,
modifications, suspension, and termination in certain conditions as set forth
in the Plan.
12. TAX WITHHOLDING. The Corporation shall have the right to require
Holder to remit to the Corporation an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to delivery of any stock
certificate or certificates for such cash. In the alternative, at the sole
discretion of the Committee, the Corporation may withhold that number of Shares
based on the market value of the Shares, which would satisfy the federal, state
and local tax withholding amounts due in connection with the Shares to be issued
to the Holder upon exercise of the Option.
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13. LAW APPLICABLE TO CONSTRUCTION. The interpretation, performance
and enforcement of the Option and this Agreement shall be governed by the laws
of the State of California.
The Corporation and the Holder execute this Agreement as of the date
first above written.
MITEK SYSTEMS, INC.
By:
----------------------------
John M. Thornton, Chairman
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MITEK SYSTEMS, INC. 401(K) SAVINGS PLAN
<PAGE>
PREAMBLE
This AGREEMENT is made and entered into by Mitek Systems, Inc.
(Hereinafter referred to as "Employer").
The Employer desires to provide its Eligible Employees with a method
of saving money for their security upon retirement, disability, or death.
The Mitek Systems, Inc. 401(k) Savings Plan is hereby created for the
sole and exclusive benefit of Eligible Employees and their Beneficiaries. The
Plan, and the Trust described in the Plan, are designed and intended to qualify
under the appropriate provisions of the Internal Revenue Code and the
appropriate State or Territory Taxation Code.
<PAGE>
401(k) SAVINGS PLAN
I N D E X
ARTICLE PAGE
ARTICLE ONE 1-1
ELECTIVE PROVISIONS
1.1 PLAN INFORMATION AND DEFINITIONS
(a) PLAN
(b) EFFECTIVE DATE
(c) EFFECTIVE DATE FOR COMMENCEMENT OF
EMPLOYEE DEFERRAL S (OPTIONAL )
(d) PLAN ADMINISTRATOR
(e) PLAN YEAR
(f) LIMITATION YEAR
(g) HOUR OR SERVICE
(h) LOOK BACK YEAR
(i) TOTAL DISABILITY
(j) PARTICIPATING EMPLOYER(S) [0PTIONAL]
(k) ELAPSED TIME OPTIONAL
1.2 PARTICIPATION
(A) ELIGIBILITY REQUIREMENTS
(B) ELIGIBILITY REQUIREMENTS FOR EMPLOYEE DEFERRALS (OPTIONAL)
(C) ELIGIBILITY COMPUTATION PERIODS
(D) ENTRY DATE
(E) ENTRY DATE FOR EMPLOYEE DEFERRALS OPTIONAL
(F) COUNTED YEARS OF SERVICE FOR PARTICIPATION (OPTIONAL)
1.3 EMPLOYER CONTRIBUTIONS AND ALLOCATIONS AND ALLOCATION LIMITS
(A) COMPENSATION
(B) EMPLOYEE DEFERRALS
(1) COMMENCEMENT OF EMPLOYEE DEFERRALS
(2) CHANGE OF EMPLOYEE DEFERRAL AMOUNTS
(C) MATCHING CONTRIBUTIONS
(1) EMPLOYER MATCHING CONTRIBUTIONS
(2) LIMITATIONS ON MATCHING CONTRIBUTIONS
(3) EMPLOYEES ELIGIBLE TO RECEIVE A MATCHING CONTRIBUTION
(4) ELIGIBILITY OR MATCHING CONTRIBUTIONS
(5) FORFEITURES OF MATCHING CONTRIBUTIONS (OPTIONAL)
(6) ELIGIBILITY FOR RECEIVING FORFEITURES
OF MATCHING CONTRIBUTIONS (OPTIONAL)
(7) TIMING OF FORFEITURES OF MATCHING CONTRIBUTIONS (OPTIONAL)
(D) NON-ELECTIVE CONTRIBUTION DISCRETIONARY
(1) EMPLOYER NON-ELECTIVE CONTRIBUTIONS
(2) ALLOCATION METHOD
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(3) ELIGIBILITY TO RECEIVE AN ALLOCATION OF
NON-ELECTIVE CONTRIBUTIONS
(4) ALLOCATION OF FORFEITURES FROM
NON-ELECTIVE CONTRIBUTIONS (OPTIONAL)
(5) TIMING OF FORFEITURES OF
NON-ELECTIVE CONTRIBUTIONS (OPTIONAL)
QUALIFIED NON-ELECTIVE CONTRIBUTIONS
ELIGIBILITY TO RECEIVE AN ALLOCATION OF
QUALIFIED NON-ELECTIVE CONTRIBUTIONS
(e) EMPLOYEE VOLUNTARY (AFTER-TAX) CONTRIBUTIONS
(f) ROLLOVERS FROM QUALIFIED PLANS
(g) TRANSFERS FROM QUALIFIED PLANS
(h) VALUATION RELATED INFORMATION
(1) DEPOSIT OF EMPLOYER CONTRIBUTIONS
(2) ALLOCATION DATE(S)
(3) GUARANTEED RATE OF RETURN
(4) VALUATIONS PER YEAR
(i) FAILSAFE ELECTION FOR CODE SECTION 415 LIMITS
(j) MINIMUM TOP-HEAVY ALLOCATIONS
(k) MINIMUM BENEFITS FOR COMBINATION PLANS
1.4 VESTING OF EMPLOYER CONTRIBUTIONS
(a) VESTING COMPUTATION PERIOD
(b) VESTING SCHEDULE
(c) TOP-HEAVY VESTING SCHEDULE
(d) COUNTED YEARS OF SERVICE FOR VESTING
1.5 DISTRIBUTION OF BENEFITS
(a) NORMAL RETIREMENT AGE
(b) NORMAL RETIREMENT OR NORMAL RETIREMENT DATE
(c) EARLY RETIREMENT AGE
(d) EARLY RETIREMENT DATE
(e) FORM OF DISTRIBUTIONS
(f) DISTRIBUTIONS UPON DEATH
(g) AMOUNT OF DISTRIBUTION UPON TERMINATION OR RETIREMENT
(h) CONDITIONS FOR DISTRIBUTIONS UPON TERMINATION
(i) IN-SERVICE DISTRIBUTIONS - WITHDRAWAL OF EMPLOYER CONTRIBUTIONS
(j) PRE-RETIREMENT DISTRIBUTIONS
(k) HARDSHIP DISTRIBUTIONS
(l) LIFE EXPECTANCIES
1.6 MISCELLANEOUS
(a) PARTICIPANT DIRECTED ACCOUNTS
(b) LOANS TO PARTICIPANTS
(c) LIFE INSURANCE
ARTICLE TWO
DEFINITIONS 2-1
2.1 ACCOUNT BALANCE 2-1
2.2 ADMINISTRATIVE COMMITTEE, COMMITTEE OR
PLAN ADMINISTRATOR
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<PAGE>
2.3 AGGREGATION GROUP 2-1
2.4 ANNIVERSARY DATE 2-1
2.5 ANNUAL ADDITIONS 2-1
2.6 8ENEFICIARY 2-2
2.7 BREAK IN SERVICE 2-2
2.8 CODE 2-2
2.9 COMPENSATION 2-2
2.10 DEFINED BENEFIT PLAN FRACTION 2-4
2.11 DEFINED CONTRIBUTIONN PLAN FRACTION 2-4
2.12 DETERMINATION DATE 2-5
2.13 EARNED INCOME 2-5
2.14 ELAPSED TIME 2-5
2.15 ELIGIBLE EMPLOYEE 2-6
2.16 EMPLOYEE 2-6
2.17 EMPLOYEE CONTRIBUTIONS (AFTER-TAX) 2-6
2.18 EMPLOYEE CONTRIBUTION ACCOUNT 2-6
2.19 EMPLOYEE DEFERRAL CONTRI UTION 2-7
2.20 EMPLOYEE DEFERRAL OR DEFERRED INCOME ACCOUNT 2-7
2.21 EMPLOYER 2-7
2.22 EMPLOYER CONTRIBUTIONS 2-7
2.23 EMPLOYER CONTRIBUTION OR GENERAL ACCOUNT 2-7
2.24 EMPLOYER MATCHING CONTRIBUTION
OR MATCHING CONTRIBUTION 2-7
2.25 EMPLOYER MATCHING ACCOUNT 2-7
2.26 ERISA 2-7
2.27 FIDUCIARY 2-7
2.28 FISCAL YEAR 2-8
2.29 HIGHLY COMPENSATED EMPLOYEE 2-8
2.30 HOUR OF SERVICE 2-9
2.31 KEY EMPLOYEE 2-10
2.32 LEASED EMPLOYEE 2-10
2.33 NAMED FIDUCIARY 2-11
2.34 NET PROFITS 2-11
2.35 NON-KEY EMPLOYEE 2-11
2.36 OWNER-EMPLOYEE 2-11
2.37 PARTICIPANT 2-11
2.38 PARTICIPANT'S ACCOUNT OR ACCOUNTS 2-11
2.39 PARTY-IN-INTEREST 2-11
2.40 PRIOR PLAN 2-11
2.41 QUALFIED JOINT AND SURVIVOR ANNUITY 2-11
2.42 QUALFIED PRE-RETIREMENT SURVIVOR ANNUITY 2-11
2.43 SELF-EMPOYED INDIVIDUAL 2-11
2.44 SHAREHOLDER-EMPLOYEE 2-12
2.45 TAXABLE YEAR OR FISCAL YEAR 2-12
2.46 TOP-HEAVY GROUP 2-12
2.47 TOP-HEAVY PLAN 2-12
2.48 TOTAL DISABILITY 2-12
2.49 TRUST OR TRUST FUND 2-12
2.50 TRUST AGREEMENT 2-13
2.51 TRUSTEE 2-13
2.52 YEAR OF SERVICE 2-13
- 3 -
<PAGE>
ARTICLE THREE
PARTICIPATION 3-1
3.1 ELIGIBILITY TO PARTICIPATE 3-1
3.2 TERMINATION 3-1
3.3 LEAVE OF ABSENCE AND MILITARY SERVICE 3-1
3.4 INACTIVE PARTICIPANTS 3-2
3.5 BREAK IN SERVICE RULES - ELIGIBILITY 3-2
3.6 ELIGIBILITY COMPUTATION PERIODS 3-3
3.7 COMMENCEMENT OF PARTICIPATION 3-4
3.8 PARTICIPATION UPON RETURN OF ELIGIBLE CLASS 3-4
ARTICLE FOUR
CONTRIBUTIONS AND ALLOCATIONS 4-1
4.1 COST OF PLAN 4-1
4.2 EMPLOYER CONTRIBUTIONS 4-1
4.3 EMPLOYEE (AFTER-TAX) CONTRIBUTIONS 4-2
4.4 EMPLOYEE DEFERRAL ELECTION 4-3
4.5 ELECTIVE DEFERRALS-CONTRIBUTIONS LIMITATION 4-4
4.6 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS 4-4
4.7 ACTUAL DEFERRAL PERCENTAGE TEST 4-5
4.8 DISTRIBUTION OF EXCESS CONTRIBUTIONS 4-7
4.9 RECHARACTERIZATION 4-8
4.10 EMPLOYER MATCHING CONTRIBUTIONS 4-9
4.11 QUALIFIED MATCHING CONTRIBUTIONS 4-9
4.12 LIMITATIONS ON EMPLOYEE CONTRIBUTIONS
AND MATCHING CONTRIBUTIONS 4-9
4.13 DETERMINATION OF EXCESS AGGREGATE CONTRIBUTIONS 4-14
4.14 QUALIFIED NON-ELECTIVE CONTRIBUTIONS 4-17
4.15 NONFORFEITABILITY AND VESTING 4-17
4.16 DISTRIBUTION REGUIREMENTS 4-18
4.17 PARTICIPANTS' ACCOUNTS 4-18
4.18 ALLOCATIONS TO PARTICIPANTS' ACCOUNTS 4-19
4.19 LIMITATIONS OF BENEFITS AND CONTRIBUTIONS 4-23
4.20 ROLL-OVER CONTRIBUTIONS 4-28
4.21 DIRECT TRANSFERS 4-28
ARTICLE FIVE
VESTING OF ENPLOYER CONTRIBUTIONS 5-1
5.1 FULL VESTING 5-1
5.2 INCREMENTAL VESTING 5-1
5.3 YEAR OF SERVICE RULES -- VESTING 5-1
5.4 EFFECT OF CERTAIN CASH--OUTS 5-3
5.5 VESTING COMPUTATION PERIOD 5-4
5.6 AMENDMENT TO VESTING SCHEDULE 5-4
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<PAGE>
ARTICLE SIX
THE ADMINISTRATIVE COMMITTEE 6-1
6.1 COMMITTEE MEMBERSHIP 6-1
6.2 COMMITTEE ACTION 6-1
6.3 ADMINISTRATIVE RULES 6-1
6.4 POWERS OF THE COMMITTEE 6-1
6.5 EMPLOYMENT OF ADVISERS 6-2
6.6 INFORMATION TO BE COMMUNICATED 6-3
6.7 COMPENSATION AND INDEMNITY 6-3
6.8 DUTY OF CARE 6-3
6.9 ESTABLISHMENT OF FUNDING POLICY 6-3
ARTICLE SEVEN
THE TRUST AGREEMENT 7-1
7.1 TRUST AGREEMENT 7-1
7.2 RELATIONSHIP OF COMMITTEE AND TRUSTEE 7-1
7.3 RULE AGAINST PERPETUITIES 7-1
ARTICLE EIGHT
THE INSURANCE COMPANY 8-1
8.1 INSURER NOT A PARTY HERETO 8-1
8.2 NOTIFICATION OF CHANGES IN PLAN 8-1
8.3 OWNERSHIP OF POLICIES 8-1
8.4 ACTION OF INSURER 8-1
8.5 EXECUTLON OF DOCUMENTS 8-1
ARTICLE NINE
TYPE OF INSURANCE CONTRACT 9-1
9.1 PURCHASE OF CONTRACT 9-1
9.2 UNINSURABLE PARTICIPANTS 9-1
9.2.1 VOLUNTARY WAIVER OF INSURANCE CONTRACT 9-1
9.3 APPLICATION FOR CONTRACTS 9-2
9.4 PAYMENT OF PREMIUMS 9-2
9.5 APPLICATION OF DIVIDENDS 9-2
9.6 PARTICIPANT'S ELECTION 9-2
9.7 DISTRIBUTION OF INSURANCE CONTRACTS 9-3
9.8 LIMITATIONS 9-3
ARTICLE TEN
APPLICATIONS FOR BENEFITS 10-1
10.1 APPLICATION PROCEDURE 10-1
10.2 REVIEW PROCEDURE 10-1
10.3 COMMITTEE ACTION 10-1
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<PAGE>
ARTICLE ELEVEN
DISTRIBUTION OF BENEFITS 11-1
11.1 RETIREMENT BENEFITS 11-1
11.2 MODES OF DISTRIBUTION 11-1
11.3 LATE RETIREMENT 11-2
11.4 TERMINATION PRIOR TO RETIREMENT 11-2
11.5 LEAVE OF ABSENCE AND MILITARY SERVICE 11-3
11.6 VALUE OF BENEFITS 11-3
11.7 COMMENCEMENT OF BENEFITS 11-4
11.8 DISTRIBUTION OF BENEFIT RULES 11-4
11.9 HARDSHIP WITHDRAWALS 11-6
11.10 IN-SERVICE DISTRIBUTIONS -- WITHDRAWAL
OF EMPLOYER CONTRIBUTIONS 11-7
11.11 LOANS TO PARTICIPANTS 11-8
11.12 REPAYMENT OF DISTRIBUTED BENEFITS 11-9
11.13 TOTAL DISABILITY 11-10
ARTICLE TWELVE
ANNUITY ELECTION 12-1
12.1 APPLICATION OF ARTICLE 12-1
12.2 QUALIFIED JOINT AND SURVIVOR ANNUITY 12-1
12.3 QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY 12-1
12.4 DEFINITIONS FOR PURPOSES OF SURVIVOR ANNUITIES 12-1
12.5 NOTICE REQUIREMENTS 12-3
12.6 SAFE HARBOR RULES 12-4
12.7 TRANSITIONAL RULES 12-5
12.8 CASH--OUTS 12-7
ARTICLE THIRTEEN
PAYMENTS UPON DEATH 13-1
13.1 SELECTION OF BENEFICIARY 13-1
13.2 PROCEDURE UPON DEATH 13-1
13.3 PAYMENT OF TAXES 13-2
ARTICLE FOURTEEN
SPECIAL RULES FOR TOP-HEAVY PLANS 14-1
14.1 CONTINGENT RULES 14-1
14.2 NO IMPUTED SOCIAL SECURITY BENEFITS 14-3
14.3 COORDINATION OF TWO OR MORE PLANS OF EMPLOYER 14-3
14.4 BENEFITS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF
DETERMINING WHETHER SUCH PLAN IS A TOP-HEAVY PLAN 14-3
14.5 ADJUSTMENT TO SECTION 415 LIMITATIONS
FOR TOP-HEAVY PLANS 14-4
14.6 EXCEPTION WHERE BENEFITS FOR KEY EMLOYEESDO NOT
EXCEED 90% OF TOTAL BENEFIT AND ADDITIONAL
CONTRIBUTIONS ARE MADE FOR NON-KEY EMPLOYEES 14-4
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<PAGE>
14.7 TRANSITIONAL RULE 14-4
14.8 TOP-HEAVY DEFINITIONS 14-4
ARTICLE FIFTEEN
AMENDMENT, TERMINATION AND MERGER 15-1
15.1 AMENDMENT OF PLAN 15-1
15.2 DISCONTINUANCE AND TERMINATION 15-1
15.3 MERGER AND CONSOLIDATION 15-2
ARTICLE SIXTEEN
MISCELLANEOUS PROVISIONS 16-1
16.1 LIMITATION ON EMPLOYEES' RIGHTS 16-1
16.2 NON-ASSIGNABILITY 16-1
16.3 QUALIFIED DOMESTIC RELATIONS ORDERS 16-1
16.4 CONTINUATION OF BUSINESS 16-3
16.5 CONTRIBUTIONS NOT RECOVERABLE 16-4
16.6 PAYMENTS TO DISABLED PERSONS 16-4
16.7 FIDUCIARY RESPONSIBILITY 16-4
16.8 CONDITIONAL CONTRIBUTIONS 16-5
16.9 FORFEITURE OF BENEFIT UPON FAILURE
TO LOCATE RECIPIENT 16-6
16.10 PARTICIPATING EMPLOYERS 16-7
16.11 HEADINGS NO PART OF AGREEMENT 16-8
16.12 INSTRUMENT IN COUNTERPARTS 16-8
16.13 SUCCESSORS AND ASSIGNS 16-8
16.14 GENDER 16-8
16.15 STATE LAW GOVERNS 16-8
-- 7 --
<PAGE>
ARTICLE ONE
ELECTIVE PROVISIONS
1.1 PLAN INFORMATION AND DEFINITIONS
(a) PLAN shall mean the MITEK SYSTEMS, INC. 401(k) SAVINGS PLAN.
(b) EFFECTIVE DATE shall mean January 1, 1991.
(c) PLAN ADMINISTRATOR shall mean the Employer.
(d) PLAN YEAR shall mean the twelve (12)-consecutive month period
commencing on January 1st, and ending on December 31st.
(e) LIMITATION YEAR shall be the same as the Plan Year.
(f) HOUR OF SERVICE, for all Employees covered under the Plan,
shall be determine on the basis of actual hours for which an Employee
is paid, or entitled to payment.
(g) LOOK BACK YEAR shall mean prior Plan Year.
(h) TOTAL DISABILITY shall be defined by considering a Participant's age,
education an work experience, the inability to engage in any
substantial gainful activity by reason of any medically determinable
physical, or mental impairment that can be expected to result in
death, or which has lasted, or can be expected to last for a
continuous period of not less than twelve (12) months. The permanence
and degree of such impairment to be supported by medical evidence.
1.2 PARTICIPATION
(a) ELIGIBILITY REQUIREMENTS. An Eligible Employee shall mean any
Employee of the Employer who was employed as of the Effective Date and
has satisfied the age requirement set forth below. Thereafter,
Employees must satisfy both the age and service eligibility
requirements set forth below.
An Employee shall satisfy the eligibility requirements upon attaining
age twenty-one (21) and completing three (3) Months during which an
Employee shall not be required to complete any specified number of
Hours of Service to receive credit for such fractional year.
- 1-1 -
<PAGE>
(b) ELIGIBILITY COMPUTATION PERIODS shall mean the Initial Eligibility
Computation Period, which is the twelve (12) consecutive month period
beginning with the date upon which an Employee first performs an Hour
of Service for the Employer, and the Subsequent Eligibility
Computation Period which shall mean the Plan Year which includes the
first anniversary of the commencement of the twelve (12) consecutive
month period beginning with the date upon which an Employee first
performs an Hour of Service for the Employer, and, where additional
periods are necessary, succeeding Plan Years.
(c) ENTRY DATE shall be the date an Eligible Employee commences
participation in the Plan, and shall mean the earlier of the first day
of the Plan Year, or first day of the 7th month of the Plan Year
following the Participant's satisfaction of the Eligibility
Requirements of the Plan, or the date required under the provisions of
Section 3.7.
1.3 EMPLOYER CONTRIBUTIONS, ALLOCATIONS AND ALLOCATION LIMITS
(a) COMPENSATION shall mean the W-2 earnings paid to each Participant.
Compensation shall be based on the Plan Year.
Compensation for the first year of participation shall be recognized
as of the Participant's Entry Date.
Compensation and "414(s) Compensation" shall include compensation
which is not currently includable in the Participant's income by
reason of the application of Code Sections 125, 402(a)(8),
402(h)(1)(B), or 403(b).
(b) EMPLOYEE DEFERRALS
A Participant may elect to defer from one percent (1%) to
fifteen percent (15%) of his Compensation into the Trust each Plan
Year.
Bonuses, paid within two and one-half months after the end of the Plan
Year, shall not be subject to elective deferral for the prior Plan
Year, but shall be included in the definition of Compensation for
purposes of determining the percentage of salary deferrals for the
year in which such bonus was received.
(1) COMMENCEMENT OF EMPLOYEE DEFERRALS
A Participant may begin to defer Compensation upon electing to
make payroll deductions, beginning with the next payroll period
coincident with, or following each Entry Date.
(2) CHANGE OF EMPLOYEE DEFERRAL AMOUNTS
(i) A Participant may increase the rate of his deferral on each
Entry Date during the Plan Year.
(ii) A Participant may decrease the rate of his deferral on each
Entry Date of each Plan Year. stop his deferral
(iii) A Participant may stop his deferral anytime during the Plan
Year.
- 1-2 -
<PAGE>
(iv) In order to make a requested change in the deferral rate in
a timely manner, the Administrator must be given at least
ten (10) working days notice of any changes in deferral
percentage.
(c) MATCHING CONTRIBUTIONS
(1) EMPLOYER MATCHING CONTRIBUTIONS
The Employer may make a Hatching Contribution equal to a
discretionary percentage, subject to the limitations set
forth in Section 1.3(c)(2).
In the event that the Employer contributions are
insufficient to provide the full Hatching Contribution as
described above, the matching contribution shall be prorated
to the amount of Employer contribution available at the time
of the allocation.
(2) LIMITATIONS ON MATCHING CONTRIBUTIONS
Matching Contributions shall not exceed Code Section 401(m)
limitations as set forth in Article Four, Section 4.12.
(3) EMPLOYEES ELIGIBLE TO RECEIVE A MATCHING CONTRIBUTION
All Participants who elect to make deferrals shall be entitled to
receive an allocation of Hatching Contributions, subject to the
provisions of Section 1.3(c)(4) and Section 4.12 of the Plan.
(4) ELIGIBILITY FOR MATCHING CONTRIBUTIONS
In order to receive a Hatching Contribution, a Participant must
complete 1,000 Hours of Service, and be employed on the last day
of the Fiscal Year.
If, by the Participants not sharing in Employer Matching
Contributions, or forfeitures (if any) of such contributions for
the Plan Year, the Plan would fail to meet the coverage
requirements of Code Section 410(b)(1) for the Plan Year, then,
subject to Section 4.18(b), and within the provisions of Code
Section 401(b), the members of the group of Participants,
previously specified in this Section as not sharing in Employer
Contributions, shall share in Employer Contributions for the Plan
Year as follows: the minimum number required to meet the coverage
tests under Code Section 410(b)(1) shall be eligible to receive
an allocation based on their number of Hours of Service credited
during the Plan Year, ranked in descending order. If more than
one individual receives credit for the lowest number of Hours of
Service for which any individual must be covered in order to meet
the coverage tests, then all individuals receiving credit for
exactly that number of Hours of Service shall share in the
allocation of Employer Contributions.
(5) FORFEITURES OF MATCHING CONTRIBUTIONS
All forfeitures of Hatching Contributions shall be used to reduce
Employer contributions.
- 1-3 -
<PAGE>
(6) TIMING OF FORFEITURES OF MATCHING CONTRIBUTIONS
Forfeitures of Matching Contributions shall occur immediately
upon the distribution of benefits from the Plan to the
Participant, subject to the requirements of Article Eleven.
(d) EMPLOYER NON-ELECTIVE CONTRIBUTIONS (DISCRETIONARY)
Non-elective (discretionary) Contributions shall not be made to
the Plan.
QUALIFIED NON-ELECTIVE CONTRIBUTIONS
Qualified Non-elective Contributions may be made in an amount to
be determined by the Employer in accordance with Section 4.14.
ELIGIBILITY TO RECEIVE AN ALLOCATION OF QUALIFIED NON-ELECTIVE
CONTRIBUTIONS
In order to receive an allocation of Qualified Non-elective
Contributions, a Participant must complete 1,000 Hours of Service
during a Plan Year, and be employed on the last day of the Fiscal
Year.
(e) EMPLOYEE VOLUNTARY (AFTER-TAX) CONTRIBUTIONS:
Employee Voluntary (after-tax) Contributions shall not be permitted
under the Plan.
(f) ROLLOVERS FROM QUALIFIED PLANS:
Rollovers, from other qualified plans, shall be allowed from any
Employee, even if not a Participant.
(g) TRANSFERS FROM QUALIFIED PLANS:
Transfers, from other qualified plans, shall be allowed from any
Employee, even if not a Participant, but must be distributed in a form
permitted by the Plan.
(H) VALUATION RELATED INFORMATION
(1) DEPOSIT OF EMPLOYER CONTRIBUTIONS
The Employer shall deposit Employer Contributions into the Trust
as prescribed in Section 4.2(c), or on a more frequent basis at
the discretion of the Employer.
(2) ALLOCATION DATE(S)
Employer contributions shall be allocated on an annual basis, or
more frequently at the discretion of the Plan Administrator.
- 1-4 -
<PAGE>
(3) GUARANTEED RATE OF RETURN
There shall be no guaranteed rate of return in the Plan.
Investment returns shall be based on actual earnings of the
Trust.
(4) VALUATIONS PER YEAR
On a quarterly basis (or more frequently at the discretion of the
Plan Administrator), a valuation shall be performed subject to
the provisions of Section 4.18(d).
(i) FAILSAFE ELECTION FOR CODE SECTION 415 LIMITS
If any Participant in the Plan is also covered by one or more
qualified retirement plans, a welfare benefit fund, as defined in Code
Section 419(e), an individual medical account, as defined in Code
Section 415(1)(2), which are maintained, or considered to be
maintained by the Employer, then the following method shall be used in
regard to the treatment of Annual Additions with respect to any
Participant in the Plan.
No participant has ever been covered by one, or more qualified plans
maintained by this Sponsoring Employer.
(j) MINIMUM TOP-HEAVY ALLOCATIONS: Contributions and forfeitures, equal to
3% of each non-Key Employee's Compensation, shall be allocated to the
Employee's account when the Plan is Top-Heavy, subject to the
contribution allocations to Key Employees.
(k) MINIMUM BENEFITS FOR COMBINATION PLANS
For Employers who maintain both defined benefit and defined
contribution plans:
The Minimum Top-Heavy Allocation, referenced in Section 1.3(j), shall
be provided by this Plan.
For Employers who maintain two or more defined contribution plans, the
Minimum Top-Heavy Allocation, referenced in Section 1.3(j), shall be
provided under this Plan.
The term "Present Value" shall refer to the Account Balance(s) of each
Participant in the Plan, as the Employer does not maintain a Defined
Benefit Pension Plan.
1.4 VESTING OF EMPLOYER CONTRIBUTIONS
(a) VESTING COMPUTATION PERIOD shall mean the twelve (12) consecutive
month period concurrent with the Plan Year.
(b) VESTING SCHEDULE
(1) Each Participant shall have a fully vested, nonforfeitable
interest in his Employee Deferral Account.
- 1-5 -
<PAGE>
(2) Matching Contributions shall become vested in accordance
with the following vesting schelule:
YEARS OF COUNTED SERVICE VESTED PERCENTAGE
------------------------ -----------------
Less than 2 years O%
2 33%
3 66%
4 or more years 100%
(3) TOP-HEAVY VESTING SCHEDULE, for years in which the Plan is
Top-Heavy, and all years thereafter, shall be determined on
the basis of:
The same vesting schedule as the non Top-Heavy
vesting schedule.
(4) COUNTED YEARS OF SERVICE FOR VESTING:
All of an Employee's Years of Service with the Employer are
counted to determine the vested percent of the Employee's
account balance derived from Employer Contributions.
1.5 DISTRIBUTION OF BENEFITS
(a) NORMAL RETIREMENT AGE shall mean age sixty (60).
(b) NORMAL RETIREMENT or NORMAL RETIREMENT DATE shall mean the date the
date the Participant attains Normal Retirement Age.
(c) EARLY RETIREMENT AGE shall mean age fifty-five (55).
(d) EARLY RETIREMENT DATE shall be the date the Participant attains Early
Retirement Age.
(e) FORM OF DISTRIBUTIONS:
Distributions shall be made in lump sums.
Further, distributions shall be made in cash only (other than
insurance, or annuity contracts).
(f) DISTRIBUTIONS UPON DEATH, as set forth in Article Thirteen, shall be
made pursuant to the election of the Participant, or beneficiary.
(g) AMOUNT OF DISTRIBUTION UPON TERMINATION OR RETIREMENT:
The Participant shall be eligible to receive a distribution of the
vested portion of his Account, and the balance of any other accounts
of such Participant.
(h) CONDITIONS FOR DISTRIBUTIONS UPON TERMINATION:
At the Participant's election, immediate distributions shall be made
as soon as administratively feasible.
- 1-6 -
<PAGE>
(i) IN-SERVICE DISTRIBUTIONS -- WITHDRAWAL OF EMPLOYER CONTRIBUTIONS shall
not be allowed
(j) PRE-RETIREMENT DISTRIBUTIONS shall be permitted if the Participant is
100% vested, and has reached the age of 59-1/2. The Participant may
request a distribution of his Account balance without terminating
employment. The Participant may take distributions from the following
Participant's Account(s):
All Accounts.
(k) HARDSHIP DISTRIBUTIONS:
Participants may request a distribution based on financial hardship,
subject to the provisions of Section 11.9 of the Plan. This
distribution shall only be permitted from a Participant's Employee
Deferral Account.
(l) The LIFE EXPECTANCIES of the Participant, and the Participant's
spouse, should the Participant (or spouse) so elect under Article
Eleven of the Plan, shall be recalculated pursuant to Code Section
401(a)(9)(D).
1.6 MISCELLANEOUS
(a) PARTICIPANT DIRECTED ACCOUNTS:
Participants shall be permitted to direct the investment of their
accounts regardless of the Participant's vested interest in the Plan.
(b) LOANS TO PARTICIPANTS:
Participants shall be permitted to borrow from the Trust, pursuant to
the provisions of the loan policy.
Monies borrowed from Employer derived contributions shall be treated
as a general investment of Plan assets. Monies borrowed from Employee
deferral shall be credited directly to such Participant's account(s).
The minimum loan amount is $1,000.
(c) LIFE INSURANCE:
The purchase of life insurance shall not be allowed.
- 1-7 -
<PAGE>
ARTICLE TWO
DEFINITIONS
2.1 ACCOUNT BALANCE shall mean the balance of the Participant's Account which
shall be the accrued benefit.
2.2 ADMINISTRATIVE COMMITTEE, COMMITTEE OR PLAN ADMINISTRATOR shall mean the
individual, individuals or Employer specified in Article One, Section
1.1(c) appointed to act in accordance with the provisions of Article Six
hereof.
2.3 AGGREGATION GROUP shall mean (i) each plan of the Employer in which a Key
Employee is a Participant, and (ii) each other plan of the Employer which
enables any plan described in subsection (i) above to meet the
requirements of Sections 401(a)(4) or 410 of the Code. The Employer may
treat any plan not required to be included in an Aggregation Group under
subsections (i) and (ii) above, as being a part of such group if such
group would continue to meet the requirements of Sections 401(a)(4) and
410 of the Code with such plan being taken into account. Collectively-
bargained plans that include a Key Employee of the Employer must be
included in the required Aggregation Group for that Employer.
2.4 ANNIVERSARY DATE shall mean the last day of the Plan Year.
2.5 ANNUAL ADDITIONS: For Plan Years beginning on or after January 1, 1987,
the sum of the following amounts credited to a Participant's Account for
the Limitation Year:
(i) Employer Contributions (including Employee Deferrals),
(ii) Employee (after-tax) Contributions,
(iii) Forfeitures, and
(iv) amounts allocated, after March 31, 1984, to an individual medical
account, as defined in Section 415(1)(2) of the Code, which is
part of a pension or annuity plan maintained by the Employer are
treated as Annual Additions to a defined contribution plan. Also
amounts derived from contributions paid or accrued after December
31, 1985, in taxable years ending after such date, which are
attributable to post-retirement medical benefits, allocated to the
separate account of a Key Employee, as defined in Section
419A(d)(3) of the Code, under a welfare benefit fund, as defined
in Section 419(e) of the Code, maintained by the Employer are
treated as Annual Additions to a defined contribution plan.
For this purpose, any excess amount applied under Sections 4.19(d) or
4.19(k) in the Limitation Year to reduce Contributions will be considered
Annual Additions for such Limitation Year.
- 2-1 -
<PAGE>
For this purpose, any excess amount applied under Sections 4.19(d) or
4.19(k) in the Limitation Year to reduce Contributions will be considered
Annual Additions for such Limitation Year.
2.6 BENEFICIARY shall mean the recipient selected by a Participant to receive
death benefits from the Participant's Account. If a Participant fails to
designate a Beneficiary, the Committee shall be empowered to designate a
Beneficiary or Beneficiaries from among the following persons and in the
following order: (1) spouse at time of death; (2) natural and adopted
children; (3) parents; (4) brothers, sisters, nieces and nephews; (5)
estate of the Participant. Neither the Employer nor the Trustee shall be
named as Beneficiary.
2.7 BREAK IN SERVICE shall mean a Vesting Computation Period, Eligibility
Computation Period, or other relevant twelve (12) consecutive month period
(computation period) during which the Participant does not complete more
than five hundred (500) Hours of Service with Employer.
2.8 CODE shall mean the Internal Revenue Code of 1986 as amended.
2.9 COMPENSATION shall mean a Participant's compensation as specified by the
Employer in Section 1.3(a). For any self-employed individual covered under
the Plan, Compensation will mean Earned Income.
For purposes of Section 1.3(a), "415 Compensation" shall mean the 415 Safe
Harbor Compensation as defined in Section 4.19(m), "W-2 earnings" shall
mean wages as defined in Section 3401(a) of the Code for the purposes of
income tax withholding at the source but determined without regard to any
rules that limit the remuneration included in wages based on the nature or
location of the employment for the services performed (such as the
exception for agricultural labor in Code Section 3401(a)(2), "total
compensation" shall mean wages as defined in Section 3121(a) of the Code
for purposes of calculating social security taxes but determined without
regard to the wage base limitation in Section 3121(a)(1), the limitations
on the exclusions from wages in Section 3121(a)(5)(C) and (D) for employee
elective deferrals and payments by reason of salary reduction agreements,
the special rules in Code Section 3121(v), any rules that limit covered
employment based on the type or location of an employee's employer, and
any rules that limit the remuneration included in wages based on familial
relationship or based on the nature or location of the employment or the
services performed (such as the definition of employment in Code Section
3121(b)(1) through (20).
As an alternative to the definition of Compensation provided in Section
1.3(a), an Employer may, by written resolution or certificate, elect to
use the definition contained in Internal Revenue Temporary Regulation
1.414(s)-1T(c)(3) which is a "safe-harbor alternative definition".
Compensation, using this safe-harbor definition, shall mean compensation
as defined in Code Section 415(c)(3) or the "415 Safe Harbor Compensation"
defined in Section 4.8(m) of the Plan reduced by all of the following:
reimbursements or other expense allowances, fringe benefits (cash or
noncash), moving expenses, deferred compensation, and
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welfare benefits. The foregoing safe-harbor definition shall not be used
to determine the Compensation of a self-employed individual.
Notwithstanding the above, if elected by the Employer in Section 1.3(a),
Compensation shall include any amount which is contributed by the Employer
pursuant to a salary reduction agreement and which is not includible in
the gross income of the Employee under Sections 125, 402(a)(8), 402(h) or
403(b) of the Code.
For years beginning after December 31, 1988, the annual Compensation of
each Participant taken into account under the Plan for any year shall not
exceed two hundred thousand dollars ($200,000), as adjusted by the
Secretary at the same time and in the same manner as under Section 415(d)
of the Code, except that the dollar increase in effect on January 1st of
any calendar year is effective for years beginning such calendar year and
the first adjustment to the $200,000 limitation is effected on January 1,
1990. If a plan determines Compensation on a period of time that contains
fewer than twelve calendar months, then the annual Compensation limit is
an amount equal to the annual Compensation limit for the calendar year in
which the Compensation period begins multiplied by the ratio obtained by
dividing the number of full months in the period by 12. In determining the
Compensation of a Participant for purposes of this limitation, the rules
of Section 414(q)(6) of the Code shall apply, except in applying such
rules, the term "family" shall include only the spouse of the Participant
and any lineal descendants of the Participant who have not attained age
nineteen (19) before the close of the year. If, as a result of the
application of such rules the adjusted two hundred thousand dollars
($200,000) limitation is exceeded, then (except for purposes of
determining the portion of Compensation up to the integration level if
this Plan provides for permitted disparity), the limitation shall be
prorated among the affected individuals in proportion to each such
individual's Compensation as determined under this Section prior to the
application of this limitation.
If Compensation for any prior Plan Year is taken into account in
determining an Employee's contributions or benefits for the current year,
the Compensation for such prior year shall be subject to the applicable
annual Compensation limit in effect for that prior year. For this purpose,
for years beginning after January 1, 1990, the applicable annual
Compensation limit shall be $200,000.
The term Compensation does not include (i) contributions made by the
Employer to a plan of deferred compensation to the extent that, before the
application of Code Section 415 limitations to that plan, the
contributions are not includable in the gross income of the Employee for
the taxable year in which contributed; (ii) Employer Contributions made on
behalf of an Employee to a simplified Employee pension described under
Code Section 408(k) are not considered as Compensation for the taxable
year in which contributed to the extent that such contributions are
deductible by the Employee under Code Section 219(b)(7); (iii)
distributions from a plan of deferred compensation are not considered as
Compensation herein, regardless of whether such amounts are includable in
the gross income of the Employee when distributed. However, any
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amounts received by the Employee pursuant to an unfunded nonqualified plan
of deferred compensation may be considered as Compensation herein in the
year such amounts are includable in the gross income of the Employee; (iv)
amounts realized from the exercise of a nonqualified stock option, or when
restricted stock (or property) held by an Employee either becomes freely
transferable or is no longer subject to a substantial risk of forfeiture;
(v) amounts realized from the sale, exchange or other disposition of stock
acquired under a qualified stock option; or (vi) other amounts which
receive special tax benefits, such as premiums for group term life
insurance (but only to the extent that the premiums are not includable in
the gross income of the Employee) or contributions made by an Employer
(whether or not under a salary reduction agreement) towards the purchase
of an annuity contract described under Section 403(b) of the Code, whether
or not the contributions are excludable from the gross income of the
Employee.
2.10 DEFINED BENEFIT PLAN FRACTION shall mean a fraction, the numerator of
which is the sum of the Participant's projected annual benefits under all
the defined benefit plans (whether or not terminated) maintained by the
Employer, and the denominator of which is the lesser of 125 percent of the
dollar limitation determined for the Limitation Year under Sections 415(b)
and (d) of the Code or 140 percent of the highest average Compensation,
including any adjustments under Section 415(b) of the Code.
Notwithstanding the above, if the Participant was a Participant as of the
first day of the first Limitation Year beginning after December 31, 1986,
in one or more defined benefit plans maintained by the Employer which were
in existence on May 6, 1986, the denominator of this fraction will not be
less than 125 percent of the sum of the annual benefits under such plans
which the Participant had accrued as of the close of the last Limitation
Year beginning before January 1, 1987, disregarding any changes in the
terms and conditions of the Plan after May 5, 1986. The preceding sentence
applies only if the defined benefit plans individually and in the
aggregate satisfied the requirements of Section 415 for all Limitation
Years beginning before January 1, 1987.
2.11 DEFINED CONTRIBUTION PLAN FRACTION shall mean a fraction, the numerator of
which is the sum of the Annual Additions to the Participant's account
under all the defined contribution plans (whether or not terminated)
maintained by the Employer for the current and all prior Limitation Years
(including the Annual Additions attributable to the Participant's
nondeductible Employee contributions to all defined benefit plans, whether
or not terminated, maintained by the Employer, and the Annual Additions
attributable to all welfare benefit funds, as defined in Section 419(e) of
the Code, and individual medical accounts, as defined in Section 415(1)(2)
of the Code, maintained by the Employer), and the denominator of which is
the sum of the maximum aggregate amounts for the current and all prior
Limitation Years of Service with the Employer (regardless of whether a
defined contribution plan was maintained by the Employer). The maximum
aggregate amount in any Limitation Year is the lesser of one hundred
twenty-five (125) percent of the dollar limitation determined under
Sections 415(b) and (d) of the Code in effect under
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Section 415(c)(1)(A) of the Code or thirty-five (35) percent of the
Participant's Compensation for such year.
If the Employee was a Participant as of the end of the first day of the
first Limitation Year beginning after December 31, 1986, in one or more
defined contribution plans maintained by the Employer which were in
existence on May 6, 1986, the numerator of this fraction will be adjusted
if the sum of this fraction and the defined benefit fraction would
otherwise exceed 1.0 under the terms of this Plan. Under the adjustment,
an amount equal to the product of (1) the excess of the sum of the
fractions over 1.0 times (2) the denominator of this fraction, will be
permanently subtracted from the numerator of this fraction. The adjustment
is calculated using the fractions as they would be computed as of the end
of the last Limitation Year beginning before January 1, 1987, and
disregarding any changes in the terms and conditions of the Plan made
after May 5, 1986, but using the Section 415 limitation applicable to the
first Limitation Year beginning on or after January 1, 1987. For prior
years calculations may be made as if the Tax Reform Act of 1986 was
applicable to such years.
The annual addition for any Limitation Year beginning before January 1,
1987, shall not be recomputed to treat all Employee contributions as
Annual Additions.
2.12 DETERMINATION DATE shall mean, with respect to any Plan Year, the last day
of the preceding Plan Year, or in case of the initial Plan Year, the last
day of such Plan Year.
2.13 EARNED INCOME shall mean the net earnings from self-employment in the
trade or business with respect to which the Plan is established, for which
personal services of the individual are a material income-producing
factor. Net earnings shall be determined with regard to the deduction
allowed to the Employer by Section 164(f) of the Code for taxable years
beginning after December 31, 1989. Net earnings shall be determined
without regard to items not included in gross income and the deductions
allocable to such items. Net earnings shall be reduced by contributions by
the Employer to a qualified plan to the extent deductible under Section
404 of the Code.
2.14 ELAPSED TIME: In the event that the "Elapsed Time" method is used to
determine a year of Service for Eligibility or Vesting as described in
Article One, an Employee will receive credit for the aggregate of all time
period(s) commencing with the Employee's first day of employment or
reemployment and ending on the date a Break in Service begins. The first
day of employment or reemployment is the first day the Employee performs
an Hour of Service. An Employee will also receive credit for any period of
severance of less than 12-consecutive months. Fractional periods of a year
will be expressed in terms of days.
Break in Service, for purposes of this Section, is a Period of Severance
of at least 12-consecutive months.
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Period of Severance is a continuous period of time during which the
Employee is not employed by the Employer. Such period begins on the date
the Employee retires, quits or is discharged, or if earlier, the 12-month
anniversary of the date on which the employee was otherwise first absent
from service.
An Employee who incurs a Break in Service under this Section 2.15, Elapsed
Time shall re-enter the Plan in accordance with the provisions of Section
3.5; however, the term "Break in Service" as used in Section 3.5 shall
have the meaning set forth herein.
In the case of an Employee who is absent from work for maternity or
paternity reasons, the 12-consecutive month period beginning on the first
anniversary of the first date of such absence shall not constitute a Break
in Service. For purposes of this Paragraph, an absence from work for
maternity or paternity reasons means an absence (1) by reason of the
pregnancy of the Employee, (2) by reason of a birth of a child of the
Employee, (3) by reason of the placement of a child with the Employee in
connection with the adoption of such child by such Employee, or (4) for
purposes of caring for such child for a period beginning immediately
following such birth or placement. The time credited under this Paragraph
shall be credited in the computation period in which the absence begins if
the crediting is necessary to prevent a Break in Service in that period,
or in all other cases, in the following computation period. No credit will
be given under this Section, however, unless the Employee returns to
covered employment and furnishes to the Administrative Committee such
timely information as the Committee may reasonably require to establish
that the absence from work is for reasons qualifying for the
maternity/paternity provision (as set forth above) and the number of days
for which there was an absence.
2.15 ELIGIBLE EMPLOYEE shall mean any Employee who meets the Eligibility
Requirements of Section 1.2(a).
2.16 EMPLOYEE shall mean any common-law Employee who is employed in any
capacity by the Employer maintaining the Plan or of any other Employer
required to be aggregated with such Employer under Sections 414(b), (c),
(m) or (o) of the Code.
Unless specifically excluded under Section 1.2(a), the term Employee shall
also include any leased Employee deemed to be an Employee of any Employer
described in Section 2.32 as provided in Sections 414(n) or (o) of the
Code.
2.17 EMPLOYEE CONTRIBUTIONS (AFTER-TAX) shall mean the amount, if any, which
the Participant contributes to the Plan, on an after-tax basis.
2.18 EMPLOYEE CONTRIBUTION ACCOUNT shall mean the account maintained to record
the Participant's Employee Contributions and adjustments relating thereto.
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2.19 EMPLOYEE DEFERRAL CONTRIBUTION shall mean the amount of Compensation
electively deferred by the Participant on a pre-tax basis to the Plan in
accordance with the provisions of Article Four.
2.20 EMPLOYEE DEFERRAL OR DEFERRED INCOME ACCOUNT shall mean the account of a
Participant to which are credited the Employee Deferral Contributions made
this Plan.
2.21 EMPLOYER shall mean the Employer adopting this Plan as signatory hereto
and any successor assuming the obligations created hereunder. The Employer
shall include all trades or businesses which are members of a controlled
group of corporations under common control or members of an affiliated
service group, as defined in Sections 414(b), (c) and (m) of the Code
(subject, however to the provisions of Code Section 415(h) when applying
the benefit limitations of Code Section 415). If subsequent to the
Employer's adoption of this Plan another employer adopts this Plan and/or
is required to be included within the meaning of "Employer", then for
purposes of Article Six "Employer" shall mean the initial adopting
Employer, unless otherwise stated herein. An AFFILIATED EMPLOYER shall
mean an entity described in the second sentence of this definition.
2.22 EMPLOYER CONTRIBUTIONS shall mean the amount contributed to the Trust Fund
by the Employer pursuant to the terms of this Plan. This term shall not
include Employee Deferral Contributions unless specifically noted but
shall include Employer Matching Contributions and Employer Non-elective
Contribution unless otherwise stated herein.
2.23 EMPLOYER CONTRIBUTION OR GENERAL ACCOUNT shall mean an account that is
credited with Employer Contributions and each Participant's share of any
net income or loss of the Trust, but shall not include amounts allocated
to the Employee Deferral Account and the earnings and losses therefrom.
2.24 EMPLOYER MATCHING CONTRIBUTION OR MATCHING CONTRIBUTION shall mean the
amount contributed to the Trust Fund by the Employer according to the
provisions of Article One and Section 4.10.
2.25 EMPLOYER MATCHING ACCOUNT shall mean an account that is credited with each
eligible Participant's share of any Employer Matching Contribution, and
any net income or loss of the Trust in relation to such contributions.
2.26 ERISA shall mean the Employee Retirement Income Security Act of 1974, as
amended.
2.27 FIDUCIARY shall mean a person who exercises any discretionary authority or
discretionary control affecting the management of the Plan; who exercises
any authority or control respecting the management or disposition of Plan
assets; who renders investment advice for a fee or other compensation,
direct or indirect, with respect to any money or other property of the
Plan or has any authority or responsibility to do so; who has any
discretionary authority or discretionary responsibility in the
administration of the Plan; or who, when designated by a Named Fiduciary
pursuant to authority granted by the Plan, acts to carry out a
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fiduciary responsibility, subject to any exceptions granted directly or
indirectly by ERISA or any regulations promulgated thereunder.
2.28 FISCAL YEAR shall mean the fiscal year of the Employer's business.
2.29 HIGHLY COMPENSATED EMPLOYEE shall mean any highly compensated active
Employees and highly compensated Former Employees.
(a) Highly compensated active Employee includes any Employee who performs
service for the Employer during the determination year and who,
during the look-back year: (i) received compensation from the
Employer in excess of $75,000 (as adjusted pursuant to Section 415(d)
of the Code); (ii) received compensation from the Employer in excess
of $50,000 (as adjusted pursuant to Section 415(d) of the Code) and
was a member of the top-paid group for such year; or (iii) was an
officer of the Employer and received compensation during such year
that was greater than fifty percent of the dollar limitation in
effect under Section 415(b)(1)(A) of the Code. The term Highly
Compensated Employee also includes: (i) Employees who are both
described in the preceding sentence if the term "determination year"
is substituted for the term "look-back year" and the Employee is one
of the 100 Employees who received the most compensation from the
Employer during the determination year; and (ii) Employees who are
five (5) percent owners at any time during the look-back year or
determination year.
(1) If no officer has satisfied the compensation requirement of
(iii) above during either a determination year or look-back
year, the highest-paid officer for such year shall be treated as
a Highly Compensated Employee.
(i) For this purpose, the determination year shall be the Plan
Year. The look-back year shall be as provided for in
Section 1.1(g).
(b) A highly compensated former Employee includes any Employee who
separated from service (or was deemed to have separated) prior to the
determination year, performs no service for the Employer during the
Determination Year, and was a highly compensated active Employee for
either the separation year or any Determination Year ending on or
after the Employee's fifty-fifth (55th) birthday.
(c) If an Employee is, during a determination year or look-back year, a
family member of either a five (5) percent owner who is an active or
former Employee or a Highly Compensated Employee who is one of the
ten (10) most highly compensated Employees ranked on the basis of
compensation paid by the Employer during such year, then the family
member and the five (5) percent owner or top-ten highly compensated
Employee shall be aggregated. In such case, the family member and
five (5) percent owner or top-ten (10) highly compensated Employee
shall be treated as a single Employee receiving compensation and plan
contributions or benefits equal to the sum of such compensation and
contributions or benefits of the
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family member and five (5) percent owner or top-ten (10) Highly
Compensated Employee. For purposes of this Section, family member
includes the spouse, lineal ascendants and descendants of the
Employee or former Employee and the spouses of such lineal ascendants
and descendants.
(d) The determination of who is a Highly Compensated Employee, including
the determinations of the number and identity of Employees in the
top-paid group, the top one-hundred (100) Employees, the number of
Employees treated as officers and the compensation that is
considered, will be made in accordance with Section 414(q) of the
Code and the Regulations thereunder.
2.30 HOUR OF SERVICE shall have the meaning set forth in Section 1.1(f) for the
performance of duties during the applicable computation period. An Hour of
Service shall also mean each hour for which back pay, irrespective of
mitigation of damages, has been either awarded or agreed to be awarded by
the Employer to the extent not otherwise credited to the Employee pursuant
to this Section. An Hour of Service shall also mean each hour for which an
Employee is paid, or entitled to payment, on account of a period of time
during which no duties are performed (irrespective of whether the
employment relationship has terminated) due to vacation, holiday, illness,
incapacity (including disability), lay-off, jury duty, military leave or
leave of absence; provided, however, that no hours shall be credited for a
payment which reimburses an Employee for medical expenses, and further
provided that no more than five hundred one (501) Hours of Service shall
be credited under this sentence to an Employee on account of any single
continuous period during which the Employee performs no duties. Hours for
nonperformance of duties shall be credited in accordance with Department
of Labor Regulations Section 2530.200b-2(b). Hours shall be credited to
the applicable computation period in accordance with Department of Labor
Regulations Section 2530.200b-2(c).
For purposes of determining whether a Break in Service, as defined herein,
for participation and vesting purposes has occurred in a computation
period, an Employee who is absent from work for maternity or paternity
reasons shall receive credit for the Hours of Service which would
otherwise have been credited to such Employee but for such absence, or in
any case in which such hours cannot be determined eight (8) Hours of
Service per day of such absence (but not to exceed five hundred one (501)
Hours of Service in any computation period). For purposes of this
Paragraph, an absence from work for maternity or paternity reasons means
an absence (1) by reason of the pregnancy of the Employee, (2) by reason
of a birth of a child of the Employee, (3) by reason of the placement of a
child with the Employee in connection with the adoption of such child by
such Employee, or (4) for purposes of caring for such child for a period
beginning immediately following such birth or placement. The Hours of
Service credited under this Paragraph shall be credited in the computation
period in which the absence begins if the crediting is necessary to
prevent a Break in Service in that period, or in all other cases, in the
following computation period. No credit will be given under this Section,
however, unless the Employee
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returns to covered employment and furnishes to the Administrative
Committee such timely information as the Committee may reasonably require
to establish that the absence from work is for reasons qualifying for the
maternity/paternity provision (as set forth above) and the number of days
for which there was an absence.
2.31 KEY EMPLOYEE shall mean any Employee or former Employee (and the
beneficiaries of such Employee) who at any time during the determination
period was an officer of the Employer if such individual's annual
compensation exceeds fifty (50) percent of the dollar limitation under
Section 415(b)(1)(A) of the Code, an owner (or considered an owner under
Section 318 of the Code) of one of the ten (10) largest interests in the
Employer if such individual's compensation exceeds one hundred (100)
percent of the dollar limitation under Section 415(c)(1)(A) of the Code, a
five (5) percent owner of the Employer, or a one (1) percent owner of the
Employer who has an annual compensation of more than one hundred fifty
thousand ($150,000). Annual compensation means compensation as defined in
Section 415(c)(3) of the Code, but including amounts contributed by the
Employer pursuant to a salary reduction agreement which are excludible
from the Employee's gross income under Section 125, Section 402(a)(8),
Section 402(h) or Section 403(b) of the Code. The determination period is
the Plan Year containing the Determination Date and the four (4) preceding
Plan Years.
The determination of who is a Key Employee will be made in accordance with
Section 416(i)(1) of the Code and Regulations thereunder.
2.32 LEASED EMPLOYEE shall mean any person (other than an Employee of the
recipient) who pursuant to an agreement between the recipient and any
other person ("leasing organization") has performed services for the
recipient (or for the recipient and related persons determined in
accordance with Section 414(n)(6) of the Code) on a substantially full
time basis for a period of at least one (1) year, and such services are
of a type historically performed by Employees in the business field of
the recipient Employer. Contributions or benefits provided a leased
Employee by the leasing organization which are attributable to services
performed for the recipient Employer shall be treated as provided by the
recipient Employer. If and to the extent, that there are contributions or
benefits provided by a leasing organization on behalf of a Leased
Employee, any reduction or offset which may be made under this Plan shall
be in accordance with Regulation Section 1.401(a)(26)-2(d)(9), and shall
not constitute a separate current or prior benefit structure.
A leased Employee shall not be considered an Employee of the recipient if:
(i) such Employee is covered by a money purchase pension plan providing:
(1) a nonintegrated Employer contribution rate of at least ten (10)
percent of compensation, as defined in Section 415(c)(3) of the Code, but
including amounts contributed pursuant to a salary reduction agreement
which are excludable from the Employee's gross income under Section 125,
Section 402(a)(8), Section 402(h) or Section 403(b) of the Code, (2)
immediate participation, and (3) full and immediate vesting; and (ii)
leased Employees do not constitute more than twenty (20) percent of the
recipient's nonhighly compensated workforce.
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2.33 NAMED FIDUCIARY shall mean the parties in Section 2.2.
2.34 NET PROFITS shall mean current and accumulated earnings of the Employer
before federal and state taxes based upon net income as determined by the
Employer's annual tax return and contributions to this and any other
qualified plan.
2.35 NON-KEY EMPLOYEE shall mean any Employee or Beneficiary of any Employee
or former Employee who is not a Key Employee.
2.36 OWNER-EMPLOYEE shall mean a self-employed individual who is either a sole
proprietor or a partner who owns more than ten percent (10%) of the
capital interest or profits interest in a partnership.
2.37 PARTICIPANT shall mean an Eligible Employee as defined in Section 1.2.
2.38 PARTICIPANT'S ACCOUNT OR ACCOUNTS shall mean the account(s) maintained to
record the Participant's Employee Deferral Account, Employee Contribution
Account, Employer Contribution Account, Employer Matching Account and any
other account maintained for the Participant, collectively or singly as
the context requires.
2.39 PARTY-IN-INTEREST shall mean any person or other entity defined as a
Party-in-interest under Section 3(14) of ERISA.
2.40 PRIOR PLAN shall mean any plan of the Employer which is superseded by this
Plan.
2.41 QUALIFIED JOINT AND SURVIVOR ANNUITY shall mean an immediate annuity for
the life of the Participant wit a survivor annuity for the life of the
spouse which is not less than fifty (50) percent and not more than one
hundred (100) percent of the amount of the annuity which is payable during
the joint lives of the Participant and the spouse, which is the amount of
benefit which can be purchased with the Participant's vested Account
Balance or, if greater, of any optional form of life annuity offered under
the Plan. The percentage of the Survivor Annuity under the Plan shall be
fifty percent (50%).
No Qualified Joint and Survivor Annuity shall provide that payments to the
spouse of a deceased Participant are terminated because of the spouse's
remarriage.
2.42 QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY shall mean an annuity for the
life of the spouse of a Participant, the actuarial equivalent of which is
not less than fifty percent (50%) of the Account Balance of the
Participant as of the date of death and which commences upon the death of
the Participant.
2.43 SELF-EMPLOYED INDIVIDUAL shall mean an individual who has Earned Income
for the taxable year from the trade or business for which the Plan is
established; also, an individual who would have had Earned Income but for
the fact that the trade or business had no Net Profits for the taxable
year.
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2.44 SHAREHOLDER-EMPLOYEE shall mean an Employee or officer of an electing
small business corporation who owns, or is considered as owning within the
meaning of Code Section 318(a)(1), on any day during the taxable year of
such corporation, more than five percent (5%) of the outstanding stock of
such corporation.
2.45 TAXABLE YEAR OR FISCAL YEAR shall mean the twelve (12) month period used
by the Employer for reporting income.
2.46 TOP-HEAVY GROUP shall mean any Aggregation Group if the sum (as of the
Determination Date) of (i) the present value of the cumulative Accrued
Benefits for Key Employees under all defined benefit plans included in
such group, and (ii) the aggregate of the accounts of Key Employees under
all defined contribution plans included in such group, exceed sixty
percent (60%) of a similar sum determined for all Employees, excluding
former Key Employees. For purposes of determining the present value of the
cumulative benefit for any Participant, or the amount of the account of
any Participant, such present value or amount shall be determined in
accordance with Regulations issued by the Department of Treasury and such
present value or amount shall be increased by the aggregate distributions
made with respect to such Participant under the Plan during the five (5)
year period ending on the Determination Date.
Account Balances shall be determined as of the most recent valuation date
occurring within a twelve (12) month period ending on the Determination
Date and shall be adjusted for contributions due or made as of the
Determination Date.
If an Aggregation Group includes two (2) or more defined benefit plans,
the same actuarial assumptions must be used with respect to all such plans
and must be specified in such plans.
2.47 TOP-HEAVY PLAN shall mean for any Plan Year beginning after December 31,
1983, this Plan is top-heavy if any of the following conditions exists:
(1) if the top-heavy ratio for this Plan exceeds sixty percent (60%) and
this Plan is not part of any required Aggregation Group or permissive
Aggregation Group of plans, or
(2) if this Plan is part of a required Aggregation Group of plans but not
part of a permissive Aggregation Group and the top-heavy ratio for
the group or plans exceeds sixty percent (60%), or
(3) if this Plan is part of a required Aggregation Group and part of a
permissive Aggregation Group of plans and the top-heavy ratio for the
permissive Aggregation Group exceeds sixty percent (60%).
2.48 TOTAL DISABILITY shall have the meaning set forth in Section 1.1.
2.49 TRUST OR TRUST FUND shall mean the Trust which is established by the
Employer in connection with the adoption of this Plan and which holds the
assets of the Plan for the benefit of the Participants and their
Beneficiaries. However, if all of the assets of the Plan are insurance
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contracts, within the meaning of ERISA Section 403, then all references to
Trust or Trust Fund shall refer to these assets.
2.50 TRUST AGREEMENT shall mean the agreement between the Employer and the
Trustee which provides for the administration of the Trust Fund. However,
if all of the assets of the Plan are insurance contracts, within the
meaning of ERISA Section 403, then all references to Trust Agreement shall
refer to these assets.
2.51 TRUSTEE shall mean the Trustee of the Trust Fund. However, if all of the
assets of the Plan are insurance contracts, within the meaning of ERISA
Section 403, then all references to Trustee shall refer to either the
Committee or the insurance company as appropriate.
2.52 YEAR OF SERVICE shall mean a relevant twelve (12) consecutive month period
(computation period) during which the Employee completes at least 1,000
Hours of Service with the Employer.
In the event that the Employer adopts and maintains the Plan of a
predecessor employer, service with such predecessor employer shall be
treated as Years of Service with the successor Employer.
The foregoing terms whenever used in this Plan shall have the meaning set
forth herein unless a different meaning is specifically provided for in this
Plan.
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ARTICLE THREE
PARTICIPATION
3.1 ELIGIBILITY TO PARTICIPATE
The Plan Administrator shall establish an application procedure for the
purpose of enrolling new Participants. Each Employee who is an Eligible
Employee (as defined in Section 1.2) shall become a Participant as of the
applicable Entry Date. Any Employee who does not elect to participate
hereunder at the time he initially becomes an Eligible Employee may become
a Participant on the next applicable Entry Date upon giving written notice
to the Administrator. The Committee may establish forms and requirements
through which an Eligible Employee may elect not to become a Participant.
3.2 TERMINATION
A Participant shall continue to participate hereunder until employment
with the Employer is terminated by Normal Retirement, Late Retirement,
Death, Total Disability or a Break in Service. An Employee whose
participation has ceased may resume Plan participation upon re-hire as
determined under Section 3.5 herein.
3.3 LEAVE OF ABSENCE AND MILITARY SERVICE
(a) A Participant's employment with the Employer shall not be deemed
terminated, and the Participant shall not incur a Break in Service,
if the Participant:
(1) Has been on a leave of absence, granted in writing by the
Employer in a nondiscriminatory manner before or after the
absence, for any purpose including, but not limited to,
sickness, accident or other casualty, or for the convenience of
the Employer, provided that the Participant returns to work
before or at the expiration of such leave of absence or any
extension thereof; or
(2) Has been in the service of the Armed Forces of the United States
or any of its allies during a period of declared national
emergency or in time of war, or in the compulsory military
service of the United States whether during time of war or
otherwise, provided that the Participant returns to work within
the period during which the Participant's employment rights are
guaranteed by applicable federal law following a discharge or
severance from such service; and
(3) Was in the employ of the Employer on the day immediately
preceding the period of absence.
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(b) If the Participant fails to return to work within the time required
following such period of absence, such individual shall be deemed to
have terminated employment with the Employer as of the first day of
such leave unless the failure to return was due to the Participant's
death, Total Disability, Late Retirement, or Normal Retirement during
such leave, in which event the Participant shall be deemed a
Participant up to the time of the Participant's death, Total
Disability, Late Retirement, or Normal Retirement.
3.4 INACTIVE PARTICIPANTS
Subject to the eligibility requirements in Section 1.2 and eligibility
requirements to receive an allocation of Employer contributions described
in Article One, Section 1.3(c) and Section 1.3(d), a Participant with more
than five hundred (500) Hours of Service but less than one thousand
(1,000) Hours of Service in any Plan Year shall be an inactive Participant
for such Plan Year. Amounts previously credited to the Participant's
Account shall continue to be held in trust for such Participant and the
Participant shall be entitled to benefits in accordance with the other
provisions of the Plan throughout the period during which the Participant
is an inactive Participant.
3.5 BREAK IN SERVICE RULES - ELIGIBILITY
(a) Except as otherwise provided in this Section, all of an Employee's
Years of Service with the Employer shall be taken into account when
determining whether such Employee is an Eligible Employee.
(b) In the case of an Employee who incurs a Break in Service, the
Employee's service before the Break in Service shall be disregarded
when determining the Employee's Years of Service for purposes of
eligibility until the Employee completes the eligibility requirements
set forth in Section 1.2 after such Break in Service.
(1) Such Years of Service will be measured by the twelve (12)
consecutive month period beginning on an Employee's reemployment
commencement date and, if necessary, Plan Years beginning with
the Plan Year which includes the first anniversary of the
reemployment commencement date.
(2) The reemployment commencement date is the first day on which the
Employee is credited with an Hour of Service for the performance
of duties after the first eligibility computation period in
which the Employee incurs a one year Break in Service.
(3) If a Participant completes the eligibility requirements in
Section 1.2 in accordance with this provision, the Participant's
participation will be reinstated as of the reemployment
commencement date.
(c) In the case of a Participant who does not have any nonforfeitable
right under the Plan to the Participant's Account Balance derived
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from Employer Contributions, Years of Service prior to a period of
consecutive one (1) year Breaks in Service shall be disregarded when
determining the Employee's Years of Service for purposes of
eligibility if the number of the Participant's consecutive one (1)
year Breaks in Service equals or exceeds the greater of five (5) or
the aggregate number of Years of Service prior to such period of
consecutive Breaks in Service. When computing the aggregate number of
Years of Service prior to such Break in Service, Years of Service
which could have been disregarded under this Paragraph by reason of
any prior Break in Service shall be disregarded.
(1) If a Participant's Years of Service are disregarded pursuant to
Section 3.5(c), such Participant will be treated as a new
Employee for eligibility purposes. If a Participant's Years of
Service may not be disregarded pursuant to Section 3.5(c), such
Participant shall continue to participate in the Plan, or, if
terminated, shall participate immediately upon reemployment.
3.6 ELIGIBILITY COMPUTATION PERIODS [Section 1.2(b)]
(a) Except as provided in Section 3.6(d), Hours of Service completed in
the Initial Eligibility Computation Period of the Employee shall be
used when determining whether the Employee has completed the
eligibility requirements of Section 1.2 for purposes of this Article.
If the Employee fails to complete the required number of Hours of
Service in the Initial Eligibility Computation Period, then the Hours
of Service completed within the Subsequent Eligibility Computation
Period shall be used.
(b) For purposes of determining Years of Service and Breaks in Service
for purposes of eligibility, the Initial Eligibility Computation
Period and Subsequent Eligibility Computation Period are those
periods defined in Section 1.2(b).
(c) For purposes of Section 3.5, Years of Service shall be computed by
reference to the Hours of Service performed within the Initial
Eligibility Computation Period and Subsequent Eligibility Computation
Period, if any, prior to the time that the Employee becomes an
Eligible Employee, plus the Vesting Computation Period beginning with
the Vesting Computation Period which includes the date upon which the
Employee becomes an Eligible Employee.
(d) Except as provided in Section 3.6(f) of this Section, the Hours of
Service completed within each Vesting Computation Period shall be
used when determining whether an Employee has incurred a Break in
Service.
(e) Years of Service and Breaks in Service will be measured on the same
eligibility computation period.
(f) When determining whether an Employee who is not a Participant is an
Eligible Employee, and for purposes of Section 3.6, a Break in
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Service shall be measured by Hours of Service completed within an
Eligibility Computation Period.
3.7 COMMENCEMENT OF PARTICIPATION
If the Plan provides for an eligibility requirement of a period equal to
or greater than six (6) months which elapses from a Participant's first
Hour of Service and/or the attainment of an age greater than twenty and
one-half (20-1/2) years, and does not provide a dual Entry Date in the
definition of Entry Date in Section 1.2(c) hereof, then the provisions of
this Article shall be construed and enforced so that it will be impossible
for an Eligible Employee to become a Participant later than the earlier of
the first day of the Plan Year which follows the date on which the
Employee satisfies the statutory requirements or the date six (6) months
after the date on which the Employee first satisfies such statutory
requirements, unless the Employee separates from service with the Employer
and does not return before the earlier of such dates. For purposes of
this Section, if an Employee's prior service is disregarded by the Break
in Service rules of the Plan, such service shall also be disregarded for
purposes of determining the date upon which such Employee first became an
Eligible Employee.
An Employee who has met the eligibility requirements but terminates
employment before becoming a Participant, will participate on the later of
the Employee's date of reemployment or the first Entry Date following the
date the Employee met the eligibility requirements, if such individual is
rehired prior to incurring a Break in Service.
3.8 PARTICIPATION UPON RETURN TO ELIGIBLE CLASS
(a) In the event a Participant is no longer a member of an eligible class
of Employees and becomes ineligible to participate but has not
incurred a Break in Service, such Employee will participate
immediately upon returning to an eligible class of Employees. If such
Participant incurs a Break in Service, eligibility will be determined
under the Break in Service rules of the Plan.
(b) In the event an Employee who is not a member of an eligible class of
Employees becomes a member of an eligible class, such Employee will
participate immediately if such Employee has satisfied the minimum
age and service requirements and would have otherwise previously
become a Participant.
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ARTICLE FOUR
CONTRIBUTIONS AND ALLOCATIONS
4.1 COST OF PLAN
The entire cost of establishing the Plan shall be borne by the
Employer. No Participant shall be required to contribute hereunder.
4.2 EMPLOYER CONTRIBUTIONS
(a) Each Plan Year the Employer shall contribute an amount equal
to the Employee Deferral contributions. These contributions
shall be allocated in accordance with Section 4.18 among the
Employee Deferral Accounts. Unless other procedures are selected
by the Committee, Participant deferrals shall generally be made by
payroll deduction in accordance with procedures established by the
Committee and shall be paid to the Trustee as soon as reasonably
practicable after the close of the calendar month in which the
deferral was made, and in no event later than the close of the next
following calendar month.
(b) In the event that contributions shall be required in accordance
with Article One, Section 1.3 (e.g. required matching contributions
or mandatory non-elective contribution), or shall be deemed
mandatory or non-discretionary as provided in the various Articles
of this Plan, the Employer shall contribute an amount equal to such
required contributions into the Trust each Plan Year.
(c) In addition, each Fiscal Year the Employer shall contribute such
amounts as the Employer may determine in its sole discretion,
provided that (i) no contribution shall be made for any Fiscal Year
in excess of the maximum allowable tax deduction, including
carry-over amounts that are available, for a contribution to this
Plan for such Fiscal Year under the then current tax laws; and (ii)
the Fiscal Year for which each contribution is made shall be
designated at the time of the contribution.
(d) All contributions shall be made by the Employer no later than the
time prescribed by law for filing the federal income tax return of
the Employer, including extensions thereof, for the Fiscal Year for
which a deduction for such contribution is claimed. The Employer's
Contribution may be made either in cash or in kind, or partly in
both cash and kind, but it shall be the Employer's responsibility to
determine the fair market value of a contribution which is not made
entirely in cash.
(e) Notwithstanding anything herein to the contrary, for Plan Years in
which the Plan is deemed to be a Top-Heavy Plan, Employer
Contributions and allocations shall be subject to the requirements
of Article Fourteen herein.
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4.3 EMPLOYEE (AFTER-TAX) CONTRIBUTIONS
(a) Participants are not required to make any contribution
under this Plan. However, if permitted by the provisions of
Section 1.3(h), a Participant may, each Fiscal Year,
voluntarily contribute to this Plan and to all other qualified
plans of deferred compensation in which such individual is a
Participant, an amount which does not exceed the amount
provided for in Section 1.3(h). Further, all Employee Contributions
will be limited so as to meet the nondiscrimination test of
Section 401(m) of the Code. Employee Contributions may be made by
payroll deduction or by other methods and at other intervals in
accordance with rules established by the Committee. A Participant's
contribution shall be transmitted to the Trustee by the Employer
within sixty (60) days after the date on which the contribution was
made. The Employer shall promptly notify the Committee of any
amounts so paid by it to the Trustee.
(b) If nondeductible Employee Contributions were permitted
prior to the year in which this Plan was adopted, then, either a
separate account wi11 be maintained by the Trustee for the
nondeductible Employee contributions of each Participant, or the
Account Balance derived from nondeductible Employee contributions
is the Employee's total Account Balance multiplied by a fraction,
the numerator of which is the total amount of nondeductible Employee
contributions less withdrawals and the denominator of which is the
sum of the numerator and the total contributions made by the
Employer on behalf of the Employee less withdrawals. For this
purpose, contributions include contributed amounts used to provide
ancillary benefits and withdrawals include only amounts distributed
to the Employee and do not reflect the cost of any death benefits.
(c) A Participant may withdraw the Employee Contributions made
by him at any time upon thirty (30) days' written notice to the
Committee, which notice must be signed by the Participant's spouse
in the presence of a Notary Public or a Plan representative.
(d) No forfeitures will occur solely as a result of an Employee's
withdrawal of Employee contributions.
(e) If deductible Employee Contributions were permitted prior
to the Plan Year in which this Plan was adopted, then, the
Committee will not accept deductible Employee contributions
which are made for a taxable year beginning after December 31, 1986.
Contributions made prior to that date will be maintained in a
separate account which will be nonforfeitable at all times. The
account will share in the gains and losses of the Trust in the same
manner as described in Section 4.17 of the Plan. No part of the
deductible Employee Contribution account will be used to purchase
life insurance. Subject to Section 12.2, Joint and Survivor Annuity
requirements (if applicable), the Participant may withdraw any part
of the deductible Employee Contribution account by making a written
application to the Committee.
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4.4 EMPLOYEE DEFERRAL ELECTION
(a) Each Plan Year a Participant shall be entitled to defer a
portion of his Compensation (in an amount permitted under Section
4.4(d), below) and to have such deferred amount allocated to his
Employee Deferral Account in the Plan by submitting a written
election to the Committee (on forms provided by the Committee or
the Employer) which designates the amount of Compensation to be
deferred and which is signed by the Participant. No amount shall be
deferred for any pay period in excess of the Participant's
Compensation for services rendered while an active Participant. All
deferrals under this Section shall constitute Employer Contributions
to the Plan. Notwithstanding the above, in no event shall any
Participant defer his Compensation in an amount which exceeds the
amount permitted under Section 4.5 for any Plan Year.
(b) Except as otherwise permitted by the Administrative
Committee, elections under Section 4.4(a) may only be made according
to the options chosen in Section 1.3(d). If job positions are first
covered by the Plan during the course of the Plan Year, the
Administrative Committee may elect to apply the preceding sentence
to affected Employees as if the first day on which their job
positions are covered by the Plan was the first day of the Plan
Year. An Employee who transfers into a position covered by the Plan
shall be permitted to make a deferral election for the balance of
the Plan Year in which the transfer occurs if and to the extent
permitted under written personnel practices of the Employer
covering the facility to which the individual transferred. Such
practices shall be uniformly and consistently applied.
(c) An election made under Section 4.4(a) may be modified in
accordance with the provisions of Article One, Section 1.3(b)(2).
If an election is revoked while in effect during the Plan Year, no
further deferrals shall be made for the balance of the Plan Year
[unless otherwise noted in Section 1.3(b)(2)(iii)], effective as
soon as administratively practicable after the Employer receives
written notice of the revocation. A revocation shall not cause
amounts which were deferred before the revocation became effective
to become distributable. Any new deferral election made after a
revocation shall become effective as of the first day of the
immediately following Plan Year.
(d) Subject to Article One, each Plan Year a Participant shall
be entitled to defer his Compensation in a stated dollar amount
which complies with the percentage limitations above.
(e) All Participant elections under this Section shall be considered
permanent and shall be effective in subsequent Plan Years unless
otherwise stated in the Participant's written election to defer
annual compensation.
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4.5 Elective Deferrals-Contribution Limitation
No Participant shall be permitted to have Elective Deferrals
made under this Plan, or any other qualified plan maintained by the
Employer, during any taxable year, in excess of the dollar limitation
contained in Section 402(g) of the Code in effect at the beginning of
such taxable year.
4.6 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS
(a) A Participant may assign to this Plan any Excess Elective
Deferrals made during a taxable year of the Participant by
notifying the Plan Administrator on or before April 1st of the
following year of the amount of the Excess Elective Deferrals to be
assigned to the Plan.
Notwithstanding any other provisions of the Plan, Excess Elective
Deferrals, plus any income and minus any loss allocable thereto,
shall be distributed no later than April 15th to any Participant
to whose account Excess Elective Deferrals were assigned for the
preceding year and who claims Excess Elective Deferrals for such
taxable year.
(b) Definitions:
(1) "Elective Deferrals" shall mean any Employer contributions made
to the Plan at the election of the Participant, in lieu of
cash compensation, and shall include contributions made
pursuant to a salary reduction agreement or other deferral
mechanism. With respect to any taxable year, a Participant's
Elective Deferral is the sum of all Employer contributions
made on behalf of such Participant pursuant to an election to
defer under any qualified plan as described in Section 401(k)
of the Code, any simplified employee pension cash or deferred
arrangement as described in Section 402(h)(l)(B), any eligible
deferred compensation plan under Section 457, any plan as
described under Section 501(c)(18), and any Employer
contributions made on the behalf of a Participant for the
purchase of an annuity contract under Section 403(b) pursuant
to a salary reduction agreement.
(2) "Excess Elective Deferrals" shall mean those Elective
Deferrals that are includible in a Participant's gross income
under Section 402(g) of the Code to the extent such
Participant's Elective Deferrals for a taxable year exceed the
dollar limitation under such Code Section. Excess Elective
Deferrals shall be treated as Annual Additions under the Plan.
Excess Elective Deferrals shall be adjusted for any income or
loss up to the date of distribution. The income or loss
allocable to Excess Elective Deferrals is the sum of: (1)
income or loss allocable to the Participant's Elective
Deferral Account for the taxable year multiplied by a
fraction, the numerator of which is such Participant's Excess
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Elective Deferrals for the year and the denominator is the
Participant's Account Balance attributable to Elective
Deferrals without regard to any income or loss occurring
during such taxable year; and (2) ten percent of the amount
determined under (1) multiplied by the number of whole
calendar months between the end of the Participant's taxable
year and the date of distribution, counting the month of
distribution if distribution occurs after the 15th of such
month.
4.7 ACTUAL DEFERRAL PERCENTAGE TEST
(a) The Actual Deferral Percentage (hereinafter "ADP") for Participants
who are Highly Compensated Employees for each Plan Year and the
Actual Deferral Percentage for Participants who are Non-highly
Compensated Employees for the same Plan Year must satisfy one of
the following tests:
(1) The Actual Deferral Percentage for Participants who are Highly
Compensated Employees for the Plan Year shall not exceed the
Actual Deferral Percentage for Participants who are Non-highly
Compensated Employees for the same Plan Year multiplied by 1.25;
or
(2) The Actual Deferral Percentage for Participants who are Highly
Compensated Employees for the Plan Year shall not exceed the
Actual Deferral Percentage for Participants who are Non-highly
Compensated Employees for the same Plan Year multiplied by 2.0,
provided that the Actual Deferral Percentage for Participants
who are Highly Compensated Employees does not exceed the Actual
Deferral Percentage for Participants who are Non-highly
Compensated Employees by more than two (2) percentage points.
(b) Qualified Matching Contributions and Qualified Non-elective
Contributions (if any) may be taken into account as Elective
Deferrals for purposes of calculating the Actual Deferral
Percentages under this Plan or any other plan of the Employer, as
provided by regulations under the Code.
(c) The amount of Qualified Matching Contributions made and/or Qualified
Non-elective Contributions made under Sections 4.11 or 4.14 of this
Plan and taken into account as Elective Deferrals for purposes of
calculating the Actual Deferral Percentage, subject to such other
requirements as maybe prescribed by the Secretary of the Treasury,
shall be that amount necessary to meet the Actual Deferral
Percentage test stated in Section 4.7 of the Plan.
(d) Special Rules:
(1) The Actual Deferral Percentage for any Participant who is a
Highly Compensated Employee for the Plan Year and who is
eligible to have Elective Deferrals (and Qualified
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Non-elective Contributions or Qualified Matching Contributions,
or both, if treated as Elective Deferrals for purposes of the
Actual Deferral Percentage test) allocated to the Participant's
accounts under two or more arrangements described in Section
401(k) of the Code, that are maintained by the Employer, shall
be determined as if such Elective Deferrals (and, if applicable,
such Qualified Non-elective Contributions or Qualified Matching
Contributions, or both) were made under a single arrangement. If
a Highly Compensated Employee participates in two or more cash
or deferred arrangements that have different Plan Years, all
cash or deferred arrangements ending with or within the same
calendar year shall be treated as a single arrangement.
(2) In the event that this Plan satisfies the
requirements of Sections 401(k), 401(a)(4), or 410(b) of the
Code only if aggregated with one or more other plans, or if
one or more other plans satisfy the requirements of such
Sections of the Code only if aggregated with this Plan, then
this Section shall be applied by determining the Actual
Deferral Percentage of Employees as if all such plans were a
single plan. For Plan Years beginning after December 31, 1989,
plans may be aggregated in order to satisfy Section 401(k) of
the Code only if they have the same Plan Year.
(i) For purposes of determining the Actual
Deferral Percentage of a Participant who is a 5-percent
owner or one of the ten most highly-paid Highly
Compensated Employees, the Elective Deferrals (and
Qualified Non-elective Contributions or Qualified
Matching Contributions, or both, if treated as Elective
Deferrals for purposes of the Actual Deferral Percentage
test) and Compensation of such Participant shall include
the Elective Deferrals (and, if applicable, Qualified
Non-elective Contributions and Qualified Matching
Contributions, or both) and Compensation for the Plan
Year of Family Members (as defined in Section 414(q)(6)
of the Code). Family Members, with respect to such Highly
Compensated Employees, shall be disregarded as separate
Employees in determining the Actual Deferral Percentage
both for Participants who are Non-highly Compensated
Employees and for Participants who are Highly Compensated
Employees.
(ii) For purposes of determining the
Actual Deferral Percentage test, Elective Deferrals,
Qualified Non-elective Contributions and Qualified
Matching Contributions must be made before the last day
of the twelve-month period immediately following the Plan
Year to which contributions relate.
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(iii) The Employer shall maintain records sufficient to
demonstrate satisfaction of the Actual Deferral Percentage
test and the amount of Qualified Non-elective
Contributions or Qualified Matching Contributions, or
both, used in such test.
(iv) The determination and treatment of the Actual Deferral
Percentage amounts of any Participant shall satisfy such
other requirements as may be prescribed by the Secretary
of the Treasury.
(v) Section 4.12(b) Multiple Use of Alternative Limitation
and Correction of Multiple Use shall apply at the
discretion of the Plan Administrator.
(e) Definitions:
(1) "Actual Deferral Percentage" shall mean, for a specified group
of Participants for a Plan Year, the average of the ratios
(calculated separately for each Participant in such group) of
(1) the amount of Employer contributions actually paid over to
the Trust on behalf of such Participant for the Plan Year to
(2) the Participant's Compensation for such Plan Year (whether
or not the Employee was a Participant for the entire Plan Year).
Employer contributions on behalf of any Participant shall
include: (1) any Elective Deferrals made pursuant to the
Participant's deferral election, including Excess Elective
Deferrals, but excluding Elective Deferrals that are taken into
account in the Contribution Percentage test (provided the Actual
Deferral Percentage test is satisfied both with and without
exclusion of these Elective Deferrals); and (2) at the election
of the Employer, Qualified Non-elective Contributions and
Qualified Matching Contributions. For purposes of computing
Actual Deferral Percentages, an Employee who would be a
Participant but for the failure to make Elective Deferrals shall
be treated as a Participant on whose behalf no Elective
Deferrals are made.
4.8 DISTRIBUTION OF EXCESS CONTRIBUTIONS
(a) Notwithstanding any other provision of this Plan, Excess
Contributions, plus any income and minus any loss
allocable thereto, shall be distributed no later than the last
day of each Plan Year to Participants to whose accounts such
Excess Contributions were allocated for the preceding Plan Year.
If such excess amounts are distributed more than 2-1/2 months
after the last day of the Plan Year in which such excess amounts
arose, a ten (10) percent excise tax will be imposed on the
Employer maintaining the Plan with respect to such excess
contribution. Such distributions shall be made to Highly
Compensated Employees on the basis of the respective portions of
the Excess Contributions attributable to each of such Employees.
Excess Contributions shall be allocated to Participants who are
subject to the family member
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aggregation rules of Section 414(q)(6) of the Code in the manner
prescribed by the regulations.
(b) Excess Contributions (including the amounts recharacterized) shall
be treated as Annual Additions under the Plan. Excess Contributions
shall be adjusted for any income or loss up to the date of
distribution. The income or loss allocable to Excess Contributions
is the sum of: (1) income or loss allocable to the Participant's
Elective Deferral account (and, if applicable, the Qualified
Non-elective Contribution Account or the Qualified Matching
Contributions Account or both) for the Plan Year multiplied by a
fraction, the numerator of which is such Participant's Excess
Contributions for the year and the denominator is the Participant's
account balance attributable to Elective Deferrals (and Qualified
Non-Elective Contributions or Qualified Matching Contributions, or
both, if any of such contributions are included in the Actual
Deferral Percentage test) without regard to any income or loss
occurring during such Plan Year; and (2) ten percent of the amount
determined under (1) multiplied by the number of whole calendar
months between the end of the Plan Year and the date of distribution,
counting the month of distribution if distribution occurs after the
15th of such month.
(c) Accounting for Excess Contributions: Excess Contributions shall be
distributed from the Participant's Elective Deferral Account and
Qualified Hatching Contribution Account (if applicable) in proportion
to the Participant's Elective Deferrals and Qualified Hatching
Contributions (to the extent used in the Actual Deferral Percentage
test) for the Plan Year. Excess Contributions shall be distributed
from the Participant's Qualified Non-elective Contribution Account
only to the extent that such Excess Contributions exceed the balance
in the Participant's Elective Deferral Account and Qualified
Matching Contribution Account.
(d) Definition:
"Excess Contributions" shall mean, with respect to any Plan Year,
the excess of:
(i) The aggregate amount of Employer contributions actually taken
into account in computing the Actual Deferral Percentage of
Highly Compensated Employees for such Plan Year, over
(ii) The maximum amount of such contributions permitted by the
Actual Deferral Percentage test (determined by reducing
contributions made on behalf of Highly Compensated Employees
in order of the Actual Deferral Percentages, beginning with
the highest of such percentages).
4.9 RECHARACTERIZATION
(a) A Participant may treat his or her Excess Contributions as an
after-tax contribution to the Plan. Recharacterized amounts will
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remain nonforfeitable and subject to the same distribution
requirements as Elective Deferrals. Subject to the option chosen
in Section 1.3(e), amounts may not be recharacterized by a Highly
Compensated Employee to the extent that such amount in
combination with other Employee Contributions made by that
Employee would exceed any stated limit under the Plan on Employee
Contributions.
(b) Recharacterization must occur no later than two and
one-half months after the last day of the Plan Year in
which such Excess Contributions arose and is deemed to occur no
earlier than the date the last Highly Compensated Employee is
informed in writing of the amount recharacterized and
the consequences thereof. Recharacterized amounts will be
taxable to the Participant for the Participant's tax year in
which the Participant would have received them in cash.
4.10 EMPLOYER MATCHING CONTRIBUTIONS
If elected by the Employer in the Plan, the Employer may make Matching
Contributions to the Plan. Matching Contributions shall be vested in
accordance with Section 1.4(b) of the Plan. In any event, Matching
Contributions shall be fully vested at Normal Retirement Age, death,
Total Disability, upon the complete or partial termination of the Plan,
or upon the complete discontinuance of Employer contributions.
Forfeitures of Matching Contributions, other than Excess Aggregate
Contributions, shall be made in accordance with Section 1.3(c)(5).
4.11 QUALIFIED MATCHING CONTRIBUTIONS
(a) The Matching Contribution, if any, made by the Employer according
to Section 1.3(c)(l) and Section 4.10 above, may (at the direction
of the Plan Administrator) become a Qualified Matching Contribution
in part or in whole in the event that the Plan fails to meet the
Code Section 401(k) nondiscrimination tests as described in Section
4.12 of the Plan or the Employer may elect to make an additional
contribution as a Qualified Matching Contribution based on a
discretionary percentage, subject to the limitations of Section 4.12
and Code Section 401(m) and corresponding regulations.
(b) Definition:
"Qualified Matching Contributions" shall mean Matching
Contributions which are subject to the distribution and
nonforfeitability requirements under Section 401(k)(2)(B)(ii) of
the Code when made.
4.12 LIMITATIONS ON EMPLOYEE CONTRIBUTIONS AND MATCHING CONTRIBUTIONS
(effective for Plan Years beginning on or after January 1,1987)
(a) The Average Contribution Percentage for Participants who are Highly
Compensated Employees for each Plan Year and the Average Contribution
Percentage for Participants who are Non-highly
- 4-9 -
<PAGE>
Compensated Employees for the same Plan Year must satisfy one of
the following tests:
(1) The Average Contribution Percentage for Participants who are
Highly Compensated Employees for the Plan Year shall not exceed
the Average Contribution Percentage for Participants who are
Non-highly Compensated Employees for the same Plan Year
multiplied by 1.25; or
(2) The Average Contribution Percentage for Participants who are
Highly Compensated Employees for the Plan Year shall not
exceed the Average Contribution Percentage for Participants who
are Non-highly Compensated Employees for the same Plan Year
multiplied by two (2), provided that the Average Contribution
Percentage for Participants who are Highly Compensated Employees
does not exceed the Average Contribution Percentage for
Participants who are Non-highly Compensated Employees by more
than two (2) percentage points.
(b) Special Rules:
(1) Multiple Use of Alternative Limitation and Correction of
Multiple Use:
(i) There is a Multiple Use of the Alternative Limitation,
if one or more Highly Compensated Employees participate
in both a cash or deferred arrangement and a plan subject
to the Average Contribution Percentage test maintained by
the Employer and the sum of Actual Deferral Percentage
and Average Contribution Percentage of those Highly
Compensated Employees subject to either or both tests
exceeds the Aggregate Limit. The amount by which each
Highly Compensated Employee's Contribution Percentage
Amounts is reduced shall be treated as an Excess
Aggregate Contribution. The Actual Deferral Percentage
and Average Contribution Percentage of the Highly
Compensated Employees are determined after any
corrections required to meet the Actual Deferral
Percentage and Average Contribution Percentage tests.
Multiple use does not occur if either the Actual
Deferral Percentage or the Average Contribution
Percentage of the Highly Compensated Employees does
not exceed 1.25 multiplied by the Actual Deferral
Percentage or the Average Contribution Percentage of
the Non-highly Compensated Employees, respectively.
(ii) A Multiple Use shall be corrected by reducing the Actual
Deferral Percentage of the entire group of Highly
Compensated Employees eligible for the cash or deferred
arrangement in the manner described in Regulation
Section 1.401(k)-l(f)(1)(ii) [Regulation
Section 1.401(k)-1(f)(2)] and/or by reducing the actual
contribution
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<PAGE>
percentage of the entire group of Highly Compensated
Employees eligible to make Employee Contributions in
the manner described in Regulation Section
1.401(m)-1(e)(2), as described in Section 4.5, so that
there is no Multiple Use of the Alternative Limitation.
The Employer may elect to reduce the Actual Deferral
Ratios and/or the Actual Contribution Ratios, either for
all Highly Compensated Employees under this Plan and/or
the cash or deferred arrangement subject to the reduction
or for only those Highly Compensated Employees who are
eligible in both this Plan and the Code Section 401(k)
cash or deferred arrangement.
(iii) The required reduction for correction for Multiple Use
shall be treated as an excess contribution or excess
aggregate contribution under this Plan.
(2) For purposes of this Section, the Contribution Percentage for
any Participant who is a Highly Compensated Employee and who is
eligible to have Contribution Percentage Amounts allocated to
his or her account under two or more plans described in Section
401(a) of the Code, or arrangements described in Section 401(k)
of the Code that are maintained by the Employer, shall be
determined as if the total of such Contribution Percentage
Amounts was made under each plan. If a Highly Compensated
Employee participates in two or more cash or deferred
arrangements that have different plan years, all cash or
deferred arrangements ending with or within the same calendar
year shall be treated as a single arrangement.
(3) In the event that this Plan satisfies the requirements of
Sections 401(m), 401(a)(4) or 410(b) of the Code only if
aggregated with one or more other plans, or if one or more
other plans satisfy the requirements of such Sections of the
Code only if aggregated with this Plan, then this Section shall
be applied by determining the Contribution Percentage of
Employees as if all such plans were a single plan. For plan
years beginning after December 31, 1989, plans may be
aggregated in order to satisfy Section 401(m) of the Code only
if they have the same plan year.
(4) For purposes of determining the Contribution Percentage of a
Participant who is a five-percent owner or one of the ten most
highly-paid Highly Compensated Employees, and is thereby subject
to the family aggregation rules of Code Section 414(q)(6), the
Contribution Percentage Amounts for the family group (which is
treated as one Highly Compensated Employee) is the greater of
(1) the Contribution Percentage determined by combining the
contributions and Compensation of all eligible family members
who are highly compensated without regard to family aggregation,
and the Contribution Percentage Amounts determined by combining
the contributions and compensation of all eligible family
members. Except to the extent taken into
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<PAGE>
account in the preceding sentence, the contributions and
compensation of all family members are disregarded in
determining the Contribution Percentage for the groups of
Highly Compensated Employees and Non-highly Compensated
Employees.
(5) For purposes of determining the Contribution Percentage test,
Employee Contributions are considered to have been made in the
Plan Year in which contributed to the Trust. Matching
Contributions and Qualified Non-elective Contributions will be
considered made for a Plan Year if made no later than the end
of the twelve-month period beginning on the day after the close
of the Plan Year.
(6) The Employer shall maintain records sufficient to demonstrate
satisfaction of the Average Contribution Percentage test and
the amount of qualified Non-elective Contributions or Qualified
Matching Contributions, or both, used in such test.
(7) The determination and treatment of the Contribution Percentage
of any Participant shall satisfy such other requirements as may
be prescribed by the Secretary of the Treasury.
(8) In the event that the contribution of a full Matching
Contribution would cause the Plan to fail the Contribution
Percentage test, or the multiple use test the Matching
Contribution may be reduced in a manner which would permit the
Plan to satisfy the nondiscrimination requirements of this
Section 4.12.
(c) Definitions:
(1) "Aggregate Limit" shall mean the greater of:
(A) the sum of: (i) 1.25 times the greater of the Relevant
Actual Deferral Percentage of the non-highly compensated or
the Relevant, Average Contribution Percentage of the
non-highly compensated, and (ii) two percentage points plus
the lesser of the Relevant Actual Deferral Percentage or the
Relevant Actual Contribution Percentage. In no event,
however, shall this amount exceed twice the lesser of the
Relevant Actual Deferral Percentage or the Relevant Actual
Contribution Percentage; or
(B) the sum of: (i) 1.25 times the lesser of the Relevant
Actual Deferral Percentage or the Relevant Actual
Contribution Percentage, and (ii) two percentage points
plus the greater of the Relevant Actual Deferral Percentage
or the Relevant Actual Contribution Percentage. In no
event, however, shall this amount exceed twice the greater
of the Relevant Actual
- 4-12 -
<PAGE>
Deferral Percentage or the Relevant Actual Contribution
Percentage.
(2) "Alternative Limitation" shall mean the alternative methods
of compliance with Code Sections 401(k) and (m) contained in
Code Sections 401(k)(3)(A)(ii)(I) and 401(m)(2)(ii)
respectively.
(3) "Average Contribution Percentage" shall mean the average of
the Contribution Percentages of the Eligible Participants in
a group.
(4) "Compensation" for purposes of Code Section 401(m) and the
determination of Excess Aggregate Contributions shall mean
compensation, other than qualified or previously qualified
deferred compensation, that is currently includible in gross
income; and, for a Self-Employed Individual, as earned income
(within the meaning of Code Section 401(c)(1) derived from
the individual's trade or business. The Employer may elect
to include in this definition elective deferrals provided
this election is made on a uniform and consistent basis with
respect to all Employees and all plans of the Employer.
Notwithstanding the foregoing, the Employer may elect to
define "Compensation" in an alternative manner by using the
definition of compensation provided in Code Section 414(s)
provided this election is made on a uniform and consistent
basis with respect to all Employees and all plans of the
Employer.
(5) "Contribution Percentage" shall mean the ratio (expressed as
a percentage) of the Participant's Contribution Percentage
Amounts to the Participant's Compensation for the Plan Year
(whether or not the Employee was a Participant for the
entire Plan Year).
(6) "Contribution Percentage Amounts" shall mean the Employee
Contributions, Matching Contributions, Qualified Matching
Contributions (to the extent not taken into account for
purposes of the ADP test), Qualified Non-elective
Contributions and Elective Deferrals (as long as the ADP test
is met before the Elective Deferral are used in the ACP test
and continues to be met following the exclusion of those
Elective Deferrals that are used to meet the ACP test) made
under the Plan on behalf of the Participant for the Plan
Year. Such Contribution Percentage Amounts shall include
forfeitures of Excess Aggregate Contributions or Matching
Contributions allocated to the Participant's account which
shall be taken into account in the year in which such
forfeiture is allocated.
(7) "Eligible Participant" shall mean any Employee who is
eligible to make an Employee Contribution, or an Elective
Deferral (if the Employer takes such contributions into
account in the
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<PAGE>
calculation of the Contribution Percentage), or to receive
a Matching Contribution (including forfeitures) or a
Qualified Matching Contribution. If an Employee
Contribution is required as a condition of participation
in the Plan, any Employee who would be a Participant
in the Plan if such Employee made such a contribution
shall be treated as an eligible Participant on behalf
of whom no Employee Contributions are made.
(8) "Employee Contribution" shall mean any contribution made
to the Plan by or on behalf of a Participant that is included
in the Participant's gross income in the year in which made
and that is maintained under a separate account to which
earnings and losses are allocated.
(9) "Matching Contribution" shall mean an Employer Contribution
made to this or any other defined contribution plan on
behalf of a Participant on account of an Employee
Contribution made by such Participant, or on account of a
Participant's elective deferral, under a cash or deferred
plan maintained by the Employer.
(10) "Relevant Actual Deferral Percentage And Relevant Actual
Contribution Percentage" shall mean the Actual Deferral
Percentage of the group of Non-Highly Compensated Employees
eligible under the cash or deferred arrangement subject to
Code Section 401(k) for the Plan Year, and/or the Actual
Contribution Percentage of the group of Non-Highly
compensated Employees eligible under the plan subject to
Code Section 401(m) for the Plan Year beginning with or
within the Plan Year of the cash or deferred arrangement
subject to Code Section 401(k).
4.13 DETERMINATION OF EXCESS AGGREGATE CONTRIBUTIONS
(a) In computing the Average Contribution Percentage, the
Employer shall take into account, and include as Contribution
Percentage Amounts, Qualified Non-elective Contributions under
this Plan or any other plan of the Employer, as provided by
regulations.
(b) The amount of Qualified Non-elective Contributions that are made
under Section 4.14 of this Plan and taken into account as
Contribution Percentage Amounts for purposes of calculating the
Average Contribution Percentage, subject to such other requirements
as may be prescribed by the Secretary of the Treasury, shall be such
Qualified Non-elective Contributions that are needed to meet the
Average Contribution Percentage test stated in Section 4.12(a) of
the Plan.
(c) The amount of Elective Deferrals made under Section 4.4(a) of the
Plan and taken into account as Contribution Percentage Amounts for
purposes of calculating the Average Contribution Percentage, subject
to such other requirements as may be prescribed by the
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<PAGE>
Secretary of the Treasury, shall be all Elective Deferrals
available after satisfying the Actual Deferral Percentage test or
such Elective Deferrals that are needed to meet the Average
Contribution Percentage test stated in Section 4.12(a) of the Plan
and/or the 1.25 rule or a combination of the foregoing.
(d) By written election of the Employer, Forfeitures of Excess Aggregate
Contributions shall either be applied to reduce Employer
contributions or allocated, after all other forfeitures under the
Plan to each Participant's Matching Contribution Account in the
ratio which each Participant's Compensation for the Plan Year bears
to the total Compensation of all Participants for such Plan Year.
(e) The amount of excess aggregate contributions for a Highly
Compensated Employee under the Plan shall be subject to the
requirements of Code Section 401(m) and shall be determined in the
following manner:
(i) First, the actual contribution ratio of the of the Highly
Compensated Employee with the highest actual contribution
ratio is reduced to the extent necessary to satisfy the actual
contribution percentage test or cause such ratio to equal the
actual contribution ratio of the Highly Compensated Employee
with the next highest ratio.
(ii) Second, this process shall be repeated until the actual
contribution percentage test is satisfied. The amount of excess
aggregate contributions for a Highly Compensated Employee is
then equal to the total of the Employee Contributions, and
other contributions taken into account for the actual
contribution percentage test minus the product of the
Employee's contribution ratio as determined above the
Employee's Compensation.
(f) In the case of a Highly Compensated Employee whose actual
contribution ratio is determined under the family aggregation
rules, the determination of the amount of excess aggregate
contribution shall be made as follows:
(i) If the Highly Compensated Employee's actual contribution
ratio is determined by combining the contributions and
Compensation of all family members, then the actual
contribution ratio is reduced in accordance with the
"leveling" method described in Section 4.5(e) and the
excess aggregate contributions for the family unit are
allocated among the family member in proportion to the
contribution of each family member that have been combined.
(ii) If the Highly Compensated Employee's actual contribution
ratio is determined by combining the contribution and
compensation of only those family members who are highly
compensated without regard to family aggregation, then the
actual contribution ratio is reduced in accordance with the
- 4-15 -
<PAGE>
"leveling" method but not below the actual contribution ratio
of eligible non-highly compensated family members. Excess
aggregate contributions are determined by taking into account
the contributions of the eligible family members who are
highly compensated without regard to family aggregation and
are allocated among such members in proportion to their
contributions. If further reduction of the actual contribution
ratio is required, excess aggregate contributions resulting
from this reduction are determined by taking into account the
contributions of all eligible family members and are allocated
among such family members in proportion to their contributions.
(g) Notwithstanding any other provision of this Plan, Excess Aggregate
Contributions, plus any income and minus any loss allocable thereto,
shall be forfeited, if forfeitable. Or if not forfeitable, shall be
distributed no later than the last day of each Plan Year to
Participants to whose accounts such Excess Aggregate Contributions
were allocated for the preceding Plan Year. Excess Aggregate
Contributions shall be allocated to Participants who are subject to
the family member aggregation rules of Section 414(q)(6) of the Code
in the manner prescribed by the Regulations. If such Excess
Aggregate Contributions are distributed more than 2-1/2 months after
the last day of the Plan Year in which such excess amounts arose, a
ten (10) percent excise tax will be imposed on the Employer
maintaining the Plan with respect to those amounts. Excess Aggregate
Contributions shall be treated as Annual Additions under the Plan.
Furthermore, the distribution (or forfeiture, if applicable) of
excess aggregate contributions shall be made on the basis of the
respective portions of such amounts attributable to each Highly
Compensated Employee.
(h) Determination of Income or Loss: Excess Aggregate Contributions
shall be adjusted for any income or loss up to the date of
distribution. The income or loss allocable to Excess Aggregate
Contributions is the sum of: (1) income or loss allocable to the
Participant's Employee Contribution account, Matching Contribution
account (if any, and if all amounts therein are not used in the
Actual Deferral Percentage test) and, if applicable, Qualified
Non-elective Contribution account and Elective Deferral account of
the Plan Year multiplied by a fraction, the numerator of which is
such Participant's Excess Aggregate Contributions for the year and
the denominator is the Participant's account balance(s) attributable
to Contribution Percentage Amounts without regard to any income or
loss occurring during such Plan Year; and (2) ten percent of the
amount determined under (1) multiplied by the number of whole
calendar months between the end of the Plan Year and the date of
distribution, counting the month of distribution if distribution
occurs after the 15th of such month.
(i) Forfeitures of Excess Aggregate Contributions: Forfeitures of Excess
Aggregate Contributions may either be reallocated to the accounts of
Employees or applied to reduce Employer contributions.
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<PAGE>
(j) Accounting for Excess Aggregate Contributions: Excess Aggregate
Contributions shall be forfeited, if forfeitable or distributed on
a pro rata basis from the Participant's Employee Contribution
Account, Matching Contribution Account, and Qualified Matching
Contribution Account (and, if applicable, the Participant's
Qualified Non-elected Contribution Account or Elective Deferral
Account, or both).
(k) Definitions:
"Excess Aggregate Contributions" shall mean, with respect to any
Plan Year, the excess of:
(i) The aggregate Contribution Percentage Amounts taken into
account in computing the numerator of the Contribution
Percentage actually made on behalf of Highly Compensated
Employees for such Plan Year, over
(ii) The maximum Contribution Percentage Amounts permitted by the
Average Contribution Percentage test (determined by reducing
contributions made on behalf of Highly Compensated Employees
in order of their Contribution Percentages beginning with the
highest of such percentages).
4.14 QUALIFIED NON-ELECTIVE CONTRIBUTIONS
(a) The Non-elective Contribution, if any, made by the Employer
according to Section 1.3(d) above, may (at the direction of the
Plan Administrator) become a Qualified Non-elective Contribution
in part or in whole.
(b) In addition, in lieu of distributing Excess Contributions as
provided in Section 4.8(a) of the Plan, or Excess Aggregate
Contributions as provided in Section 4.13(a) of the Plan, and to
the extent elected by the Employer in the Plan, the Employer may
make Qualified Non-elective Contributions on behalf of Non-highly
Compensated Employees that are sufficient to satisfy either the
Actual Deferral Percentage test or the Average Contribution
Percentage Test, or both, pursuant to regulations under the Code.
(c) Definition: "Qualified Non-elective Contributions" shall mean
contributions (other than Matching Contributions or Qualified
Matching Contributions) made by the Employer and allocated to
Participants' accounts that the Participants may not elect to
receive in cash until distributed from the Plan; that are
nonforfeitable when made; and that are distributable only in
accordance with the distribution provisions that are applicable
to Elective Deferrals and Qualified Matching Contributions.
4.15 NONFORFEITABILITY AND VESTING
The Participant's account balance derived from Elective Deferrals,
Qualified Non-elective Contributions, Employee Contributions, and
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<PAGE>
Qualified Matching Contributions is nonforfeitable. Separate accounts
for Elective Deferrals, Qualified Non-elective Contributions, Employee
Contributions, Matching Contributions, and Qualified Matching
Contributions will be maintained for each Participant. Each account
will be credited with the applicable contributions and earnings thereon.
4.16 DISTRIBUTION REQUIREMENTS
(a) Elective Deferrals, Qualified Non-elective Contributions, and
Qualified Matching Contributions, and income allocable to each are
not distributable to a Participant or his or her Beneficiary or
Beneficiaries, in accordance with such Participant's or Beneficiary
or Beneficiaries election, earlier than upon separation from
service, death, or Total Disability.
(b) Such amounts may also be distributed upon:
(1) Termination of the Plan without the establishment of another
defined contribution plan.
(2) The disposition by a corporation to an unrelated corporation of
substantially all of the assets (within the meaning of Section
409(d)(2) of the Code) used in a trade or business of such
corporation if such corporation continues to maintain this Plan
after the disposition, but only with respect to Employees who
continue employment with the corporation acquiring such assets.
(3) The disposition by a corporation to an unrelated entity of such
corporation's interest in a subsidiary (within the meaning of
Section 409(d)(3) of the Code) if such corporation continues to
maintain this Plan, but only with respect to Employees who
continue employment with such subsidiary.
(4) The attainment of age 59-1/2.
(5) The hardship of the Participant as described in Section 11.9.
(c) All distributions that may be made pursuant to one or more of the
forgoing distributable events are subject to the Spousal and
Participant consent requirements (if applicable) contained in
Sections 401(a)(11) and 417 of the Code.
4.17 PARTICIPANTS' ACCOUNTS
(a) The Committee shall open and maintain a Employer Contribution
Account and, if applicable, an Employer Matching Account for each
Participant to which it shall credit the proper allocated share of
the annual contributions made to the Trust by the Employer (not
including contributions pursuant to Section 4.2(a), herein,) and
the earnings, losses, increases or decreases of the total Trust Fund
as herein provided.
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<PAGE>
(b) The Committee shall open and maintain a separate and distinct
Employee Contribution Account for each Participant to which it
shall credit the amount of the contributions made to the Trust by
the Participant and the earnings, losses, increases or decreases
thereon. The value of the Participant's Employee Contribution
Account shall be entirely nonforfeitable.
(c) The Committee shall open and maintain a separate and distinct
Employee Deferral Account for each Participant to which it shall
credit amounts equal to the Compensation deferred by the Participant
pursuant to Section 4.2(a), and the earnings, losses, increases or
decreases therein. The value of the Participant's Employee Deferral
Account shall be entirely nonforfeitable.
(d) The maintenance of individual accounts is only for accounting
purposes and, unless otherwise specifically provided herein or in
the Trust Agreement, a segregation of the assets of the Trust Fund
to each account shall not be required. The allocations, credits and
notifications shall not vest in any Participant any right, title or
interest in the Trust, except at the time or times and upon the
terms and conditions herein provided.
(e) If the Plan permits Participant directed accounts in Section 1.6(a),
each Participant will direct the Trustee(s) as to the type of
investment to be purchased with the Participant's account. The
Trustee(s) may decline to implement participant instructions which
would generate income that would be taxable to the Plan. The
Trustee(s) may charge a Participant's Account for the reasonable
expenses of carrying out the Participant's instructions. Otherwise,
each Employee will have a ratable interest in all assets of the
Trust. To the extent that the Participant directs the investment of
his Account(s), the Plan Administrator shall not have any fiduciary
responsibility with respect to such investments.
In the event that the Plan permits Participants to direct the
investment of their Accounts in some limited fashion (i.e. Plan
Administrator offers a selection of four investment funds in which
Participants may determine what percentage of their Account(s) shall
be invested in each of the four investments), such limited
investment direction shall not release the Plan Administrator or
other Plan Fiduciary from liability or responsibility for such
investments.
4.18 ALLOCAT1ONS TO PARTICIPANTS' ACCOUNTS
(a) Employer Contributions under Section 4.2(a) shall be allocated to
the respective Deferred Income Accounts in an amount equal to
Participant deferrals under Section 4.4(a), credited with Trust
Fund gains, losses, increases or decreases therein. Allocations
shall not be dependent upon participation in the Plan as of any date
subsequent to the date of allocation.
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<PAGE>
(b) Employer Contributions and other amounts described in Section 4.2(b)
for each Plan Year shall be allocated to the Employer Contribution
Account and, if applicable, the Employer Matching Account of each
Participant who is eligible to receive a contribution under
Section 1.3. The Employer Contribution shall be allocated as
provided for in Section 1.3 or Section 4.18(c).
Notwithstanding the foregoing or any provisions in Article One or
this Plan to the contrary, if the Plan would fail to meet the
coverage requirements under Code Section 410(b) for the Plan Year
and the correction procedures described in Section 1.3 of Article
One shall be implemented in regard to Matching or Non-elective
contributions, then the following rules shall apply in operation of
this section:
(1) The specific Non-Highly Compensated Participants who shall
become eligible under the terms of the last paragraph of
Section 1.3(c)(4) and/or Section 1.3(d)(3)(ii) shall be those
who are actively employed on the last day of the Plan Year.
(2) If after application of paragraph (1) above, Code Section 410(b)
is still not satisfied, then the group of Participants eligible
to share in the Employer's contribution and Forfeitures for the
Plan Year shall be further expanded to include the minimum
number of Non-Highly Compensated Participants who are not
actively employed on the last day of the Plan Year.
(c) If the Employer has chosen to allow permitted disparity in the
Plan (i.e. integrate the Plan) as specified in Section 1.3(d),
Employer Contributions for the Plan Year will be allocated to
Participants' accounts as follows:
STEP ONE: Contributions and forfeitures will be allocated to each
Participant's account in the ratio that the sum of each Participant's
total Compensation bears to all Participants' total Compensation, but
not in excess of 3% of each Participant's Compensation.
STEP TWO: Any contributions and forfeitures remaining after the
allocation in Step One will be allocated to each Participant's
Account in the ratio that each Participant's Compensation for the
Plan Year in excess of the integration level bears to the excess
Compensation of all Participants, but not in excess of 3%.
STEP THREE: Any contributions and forfeitures remaining after the
allocation in Step Two will be allocated to each Participant's
Account in the ratio that the sum of each Participant's total
Compensation and Compensation in excess of the Integration Level
bears to the sum of all Participants total Compensation and
Compensation in excess of the Integration Level, but not in excess
of the maximum profit sharing disparity rate.
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<PAGE>
STEP FOUR: Any remaining Employer Contributions or forfeitures will
be allocated to each Participant's account in the ratio that each
Participant's total Compensation for that year bears to all
Participants' total Compensation for that year.
The integration level shall be equal to the taxable wage base or such
lesser amount elected by the Employer in Section 1.3(d). The taxable
wage base ("TWB") is the maximum amount of earnings which may be
considered wages for a year under Section 3121 (a)(1) of the Code in
effect as of the beginning of the Plan Year.
Compensation shall mean Compensation as defined in Section 2.9 of
the Plan.
The maximum profit sharing disparity rate is equal to the lesser of:
(1) 2.7%; or
(2) the applicable percentage determined in accordance with the
table below -
If the Integration Level:
is more but not more the applicable percentage
than than is:
$0 X* 2.7%
X* of TWB 80% of TWB 1.3%
80% of TWB Y** 2.4%
*X = the greater of $10,000 or 20 percent of the TWB.
**Y = any amount more than 80% of the TWB but less than 100%
of the TWB.
If the Integration Level used is equal to the taxable wage
base, the applicable percentage is 2.7%.
If the Plan is Top-heavy for any Plan Year, Employer
Contributions for the Plan Year plus any forfeitures must be
allocated to Participants' accounts so that each Participant
receives the percentage of Compensation as indicated in
Section 1.3(d) or the highest percentage allocated to a Key
Employee, if less.
For Plan Years in which the Plan is not Top-Heavy, Step One and
Step Two above shall not apply and the applicable percentage shown
above as the maximum profit-sharing disparity rate shall be increased
by 3% (e.g. the applicable percentage for an integration
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<PAGE>
level equal to the taxable wage base shall be 5.7%, instead of 2.7%).
In the event that the Employer sponsors more than one plan which
involves permitted disparity (integration), then the maximum
disparity allowance shall not exceed one hundred percent (100%).
In the alternative an Employer may elect to only allow permitted
disparity in one of the plans sponsored by such Employer.
(d) As of each allocation date, the Committee shall determine the fair
market value of the net Trust Fund assets, excluding the Employer's
contribution due to the Trustee as of that date and any amounts
which are distributable to Participants whose participation has
terminated on or before such allocation date. Any increase or
decrease in the fair market value of such assets as of the preceding
allocation date shall be allocated to the Participant's Account(s)
of each Employee who is a party-in-interest on such allocation date.
The Employer and the Committee do not to any extent warrant or
represent that the value of a Participant's Account at any time will
equal the amount previously allocated thereto.
(e) The Participant's Account(s) of a Participant whose participation is
terminated on other than an allocation date shall be valued as
provided for in Section 1.5(g). The percentage thus determined shall
be applied to the Accounts of all Participants who terminate
following the selected valuation date and before the next valuation
date.
(f) Subject to Sections 1.3(c)(8) and 1.3(d)(5), all amounts held by the
Trustee representing the forfeited interest of a former Participant
shall be retained in the Trust Fund and allocated in accordance with
Sections 1.3(c)(6) and 1.3(d)(4) hereof. Such allocation of the
forfeited interest shall be made on the allocation date following
the date that such nonvested interest is forfeited. A nonvested
interest shall be forfeited (become a Forfeiture) for purposes of
this Section 4.18(f) on one of the following dates: (1) the date upon
which the Participant terminates employment; (2) the date upon which
a terminated Participant incurs a one-year Break in Service; (3) the
date upon which a terminated Participant incurs five consecutive
one-year Breaks in Service; or (4) the Anniversary Date following or
coincident with the date upon which the Participant terminates
employment. In the event that the former Participant is rehired by
the Employer and makes repayment in accordance with Section 11.11,
the forfeited amount shall be restored to such Participant's Account
from current Forfeitures or from contributions by the Employer.
(g) If through mistake a Participant either receives an allocation or
does not receive an allocation, the mistake shall be rectified upon
the next allocation following the discovery of the mistake. If an
allocation was not made, the Participant's account shall receive an
allocation which shall include the amount which should have been
- 4-22 -
<PAGE>
allocated plus an amount which will make the Participant's account
whole. If an allocation was made in an amount which exceeds the
amount which should have been made, the Participant's account will
be reduced by the appropriate amount.
4.19 LIMITATIONS OF BENEFITS AND CONTRIBUTIONS
(a) If the Participant does not participate in, and has never
participated in another qualified plan maintained by the Employer
or a welfare benefit fund, as defined in Section 419(e) of the Code
maintained by the Employer, or an individual medical account, as
defined in Section 415(l)(2) of the Code, maintained by the
Employer, which provides an annual addition as defined in Section
2.5, the amount of Annual Additions which may be credited to the
Participant's account for any Limitation Year will not exceed the
lesser of the maximum permissible amount or any other limitation
contained in this Plan. If the Employer contribution that would
otherwise be contributed or allocated to the Participant's account
would cause the Annual Additions for the Limitation Year to exceed
the maximum permissible amount, the amount contributed or allocated
will be reduced so that the Annual Additions for the Limitation
Year will equal the maximum permissible amount.
(b) Prior to determining the Participant's actual 415 Compensation for
the Limitation Year, the Employer may determine the maximum
permissible amount for a Participant on the basis of a reasonable
estimation of the Participant's 415 Compensation for the Limitation
Year, uniformly determined for all Participants similarly situated.
(c) As soon as is administratively feasible after the end of the
Limitation Year, the maximum permissible amount for the Limitation
Year wi11 be determined on the basis of the Participant's actual 415
Compensation for the Limitation Year.
(d) If pursuant to Section 4.19(c) or as a result of the allocation of
forfeitures, there is an excess Annual Addition amount, the excess
will be disposed of as follows:
(1) Any nondeductible voluntary Employee contributions, to the
extent they would reduce the excess amount, will be returned
to the Participant;
(2) If after the application of Section 4.19(d)(1) an excess amount
still exists, and the Participant is covered by the Plan at the
end of the Limitation Year: (i) Employee Deferrals relating to
the present Plan Year shall be returned within a one year period
following the relevant Plan Year end; and/or (ii) the excess
Annual Addition amount in the Participant's account will be used
to reduce Employer Contributions (including any allocation of
forfeitures) for such Participant in the next Limitation Year,
and each succeeding Limitation Year if necessary.
- 4-23 -
<PAGE>
(3) If after the application of Section 4.19(d)(l) an excess amount
still exists, and the Participant is not covered by the Plan at
the end of a Limitation Year, the excess amount will be held
unallocated in a suspense account. The suspense account will be
applied to reduce future Employer Contributions (including
allocation of any forfeitures) for all remaining Participants
in the next Limitation Year, and each succeeding Limitation
Year if necessary;
(4) If a suspense account is in existence at any time during a
Limitation Year pursuant to this Section, the suspense account
will not participate in the allocation of the Trust's investment
gains and losses. If a suspense account is in existence at any
time during a particular Limitation Year, all amounts in the
suspense account must be allocated and reallocated to
Participants' accounts before any Employer Contributions or any
Employee contributions may be made to the Plan for that
Limitation Year. Excess amounts may not be distributed to
Participants or former Participants.
(e) This Section applies, if in addition to this Plan, the Participant
is covered under another qualified defined contribution plan
maintained by the Employer, a welfare benefit fund, as defined in
Section 419(e) of the Code maintained by the Employer, or an
individual medical account, as defined in Section 415(l)(2) of the
Code, maintained by the Employer, which provides an annual addition
as defined in Section 2.5, during any Limitation Year. The Annual
Additions which may be credited to a Participant's account under
this Plan for any such Limitation Year will not exceed the maximum
permissible amount reduced by the Annual Additions credited to a
Participant's account under the other plans and welfare benefit
funds for the same Limitation Year. If the Annual Addition exceeds
the maximum permissible amount, the annual addition will be limited
in accordance with Sections 4.19(i) through 4.19(k).
(f) The Annual Addition to a Participant's Account shall be automatically
frozen to preclude the possibility that the limitations imposed by
Section 415(c) of the Code are exceeded.
(g) Prior to determining the Participant's actual 415 Compensation for
the Limitation Year, the Employer may determine the maximum
permissible amount for a Participant in the manner described in
Section 4.19(b).
(h) As soon as is administratively feasible after the end of the
Limitation Year, the maximum permissible amount for the Limitation
Year wi11 be determined on the basis of the Participant's actual 415
Compensation for the Limitation Year.
(i) If, pursuant to Section 4.19(h) or as a result of the allocation of
forfeitures, a Participant's Annual Additions under this Plan and
such other plans would result in an excess amount for a Limitation
Year, the excess amount will be deemed to consist of the Annual
- 4-24 -
<PAGE>
Additions last allocated, except that Annual Additions attributable
to a welfare benefit fund or individual medical account wi11 be
deemed to have been allocated first regardless of the actual
allocation date.
(j) If an excess amount was allocated to a Participant on an allocation
date of this Plan which coincides with an allocation date of another
plan, the excess amount attributed to this Plan will be the product
of,
(1) the total excess amount allocated as of such date, times
(2) the ratio of (i) the Annual Additions allocated to the
Participant for the Limitation Year as of such date under
this Plan to (ii) the total Annual Additions allocated to the
Participant for the Limitation Year as of such date under this
and all the other qualified defined contribution plans.
(k) Any excess amount attributed to this Plan will be disposed of in
the manner described in Section 4.19(d).
(l) If the Employer maintains, or at any time maintained, a qualified
defined benefit plan covering any Participant in this Plan, the sum
of the Participant's Defined Benefit Plan Fraction and Defined
Contribution Plan Fraction will not exceed 1.0 in any Limitation
Year. The Annual Additions which may be credited to the
Participant's account under this Plan for any Limitation Year will
be limited in accordance with Section 1.3(i).
(1) If the sum of such fractions exceeds 1.0 and neither plan has
either been terminated at any time including the last day of the
Limitation Year in which the fractions exceed 1.0 or determined
to be a multi-Employer plan (within the meaning of Section 414(f)
of the Code), the Employer may elect, in a manner determined by
the Commissioner of Internal Revenue Service, the plan that is
to be disqualified. Where a controlled group of businesses exist
(within the meaning of Section 414(b), (c) and (m) of the Code),
the Employers within the controlled or affiliated group may
elect, in a manner determined by the Commissioner of Internal
Revenue Service, the plan that is disqualified. However, such
election is not effective unless made by all of the Employers
within the controlled or affiliated group. For purposes of this
Section, the elected plan is deemed disqualified in the year in
which the fractions exceed 1.0.
(m) Definitions. The following definitions shall apply for purposes of
limitations of Benefits and Contributions:
(1) 415 Compensation or 415 Safe Harbor Compensation: A Participant's
earned income, wages, salaries, and fees for professional
services and other amounts received for personal services
actually rendered in the course of employment with
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<PAGE>
the Employer maintaining the Plan (including, but not limited
to, commissions paid salesmen, compensation for services on the
basis of a percentage of profits, commissions on insurance
premiums, tips, bonuses, fringe benefits, reimbursements and
expense allowances) and excluding the following:
(i) Employer Contributions to a plan of deferred compensation
which are not includible in the Employee's gross income
for the taxable year in which contributed, or Employer
Contributions under a simplified Employee pension plan to
the extent such contributions are deductible by the
Employee, or any distributions from a plan of deferred
compensation;
(ii) Amounts realized from the exercise of a nonqualified stock
option, or when restricted stock (or property) held by the
Employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
(iii) Amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock
option; and
(iv) Other amounts which received special tax benefits, or
contributions made by the Employer (whether or not
under a salary reduction agreement) towards the
purchase of an annuity described in Section 403(b) of
the Code (whether or not the amounts are actually
excludible from the gross income of the Employee).
For Limitation Years beginning after December 31, 1991,
for the purposes of applying the limitations of this
Article, Compensation for a Limitation Year is the
Compensation actually paid or includible in gross income
during such Limitation Year.
Notwithstanding the preceding sentence, Compensation for
a Participant in a defined contribution plan who is
permanently and totally disabled (as defined in Section
22(e)(3) of the Code) is the Compensation such Participant
would have received for the Limitation Year if the
Participant had been paid at the rate of Compensation
paid immediately before becoming permanently and totally
disabled; such imputed Compensation for the disabled
Participant may be taken into account only if the
Participant is not a Highly Compensated Employee (as
defined in Section 414(q) of the Code) and contributions
made on behalf of such Participant are nonforfeitable when made.
(2) Defined contribution dollar limitation: $30,000 or if greater,
one-fourth of the defined benefit dollar limitation set forth
in Section 415(b)(1) of the Code as in effect for the Limitation
Year.
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<PAGE>
(3) Employer: For purposes of this Article, Employer shall have the
same meaning as in Section 2.21.
(4) Excess amount: The excess of the Participant's Annual Additions
for the Limitation Year over the maximum permissible amount.
(5) Highest Average Compensation: The average Compensation for
the three consecutive Years of Service with the Employer that
produces the highest average. A Year of Service with the
Employer is the twelve (12) consecutive month period defined
in Section 2.52.
(6) Limitation Year: A calendar year, or the twelve (12)
consecutive month period elected by the Employer in Section
1.1(e). All qualified plans maintained by the Employer must
use the same Limitation Year. If the Limitation Year is
amended to a different twelve (12) consecutive month period,
the new Limitation Year must begin on a date within the
Limitation Year in which the amendment is made.
(7) Master or Prototype Plan: A plan the form of which is the
subject of a favorable opinion letter from the Internal
Revenue Service.
(8) Maximum permissible amount: The maximum annual addition that
may be contributed or allocated to a Participant's account
under the Plan for any Limitation Year shall not exceed the
lesser of:
(i) the defined contribution dollar limitation, or
(ii) 25 percent of the Participant's Compensation for the
Limitation Year.
The Compensation limitation referred to in Section
4.19(m)(8)(ii) shall not apply to any contribution for medical
benefits (within the meaning of Section 401(h) or Section
419A(f)(2) of the Code) which is otherwise treated as an
annual addition under Section 415(l)(1) or 419A(d)(2) of the
Code.
If a short Limitation Year is created because of an amendment
changing the Limitation Year to a different twelve (12)
consecutive month period, the maximum permissible amount for
such year will not exceed the defined contribution dollar
limitation multiplied by the following fraction:
Number of months in the short Limitation Year
---------------------------------------------
twelve (12)
(9) Projected Annual Benefit: The annual retirement benefit
(adjusted to an actuarially equivalent straight life annuity
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<PAGE>
if such benefit is expressed in a form other than a straight
life annuity or Qualified Joint and Survivor Annuity) to which
the Participant would be entitled under the terms of the Plan
assuming:
(i) the Participant will continue employment until Normal
Retirement Age under the Plan (or current age, if
later), and
(ii) the Participant's Compensation for the current
Limitation Year and all other relevant factors used to
determine benefits under the Plan will remain constant
for all future Limitation Years.
4.20 ROLLOVER CONTRIBUTIONS
If permitted in Article One, Section 1.3(f), the Plan may accept any
amounts received by a Participant from another qualified plan, either
directly within sixty (60) days after such receipt or through the medium
of an individual retirement account, provided that such individual
retirement account contains no assets other than those allowed by law
for a tax-free rollover contribution. Such amounts shall be held by
the Trustee and a separate accounting shall be made for them. All
such amounts shall be fully vested and their value shall be paid to the
Participant in the manner the Participant elects at the time the
Participant is entitled to a distribution of benefits hereunder. Amounts
so received by the Plan shall not be counted when determining whether
the limitations on contributions and benefits set forth in Section 4.19
has been exceeded. Rollover or transferred assets and the income or
other property derived therefrom may be held and administered by the
Trustee in a segregated Trust account. All such amounts may be withdrawn
by the Participant at any time.
4.21 DIRECT TRANSFERS
If permitted In Article One, Section 1.3(g), the Plan may accept any
amounts transferred directly to it by another qualified retirement plan
qualified pursuant to Code Section 401, or through the medium of an
individual retirement account provided that such individual retirement
account contains no assets other than those allowed by law for a tax
free rollover or transfer of assets. All such amounts may be withdrawn
by the Participant at any time. Notwithstanding the foregoing sentence,
elective deferrals [as defined in Code Section 402(g)] transferred into
this Plan directly from another qualified Code Section 401(k) cash or
deferred arrangement may not be withdrawn until a distributable event
occurs pursuant to the requirements of Section 4.16 of the Plan.
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<PAGE>
ARTICLE FIVE
VESTING OF EMPLOYER CONTRIBUTIONS
5.1 FULL VESTING
The full amount credited to a Participant's Account shall be
nonforfeitable when the Participant attains Normal Retirement Age or
when the Participant's participation terminates by death, a judicial
declaration of the Participant's incompetence, Total Disability, or
upon termination or partial termination of the Plan. Any amount
credited to a Participant's Account attributable to the Employer's
Contribution for the Plan Year in which occurs termination for one of
the reasons enumerated in the foregoing sentence shall also be
completely nonforfeitable at the time of such contribution. Employee
contributions and earnings thereon will be nonforfeitable at all times.
Any amount credited to a Participant's Deferred Income Account, if any,
will be nonforfeitable. In the event of a complete discontinuance of
contributions under the Plan, the Account Balance of each affected
Participant will be nonforfeitable.
A Participant shall not fail to attain Normal Retirement Age on the
earlier of: (a) the time a Plan Participant attains Normal Retirement
Age as specified in Section 1.5(a) of the Plan, or (b) the later of:
(i) the time a Plan Participant attains age 65, or (ii) the fifth
anniversary of the time a Plan Participant commenced participation in
the Plan.
5.2 INCREMENTAL VESTING
Except as otherwise provided herein, a Participant's Account shall vest
in accordance with the vesting schedule set forth in Section 1.4(b).
For Plan Years in which the Plan is deemed to be a Top-Heavy Plan, a
Participant's Account shall vest in accordance with the Top-Heavy
Vesting Schedule provided for under Section 1.4(b)(4).
5.3 YEAR OF SERVICE RULES -- VESTING
Subject to the provisions of Section 1.2(d), when computing the period
of service under the Plan for purposes of determining a Participant's
vested interest in the Participant's account, all of the Participant's
Years of Service with the Employer shall be taken into account except
as follows:
(a) A Year of Service which is not required to be taken into account by
reason of a Break in Service shall be disregarded.
(b) In the case of a Participant who has incurred a one (1) year Break
in Service, Years of Service before such break will not be taken
- 5-1 -
<PAGE>
into account until the Participant has completed a Year of Service
after such Break in Service.
(c) In the case of a Participant who has five (5) or more consecutive
one (1) year Breaks in Service all service after such Breaks in
Service will be disregarded for the purpose of vesting the
Employer-derived Account Balance that accrued before such Breaks
in Service. Such Participant's pre-break service will count in
vesting the post-break Employer-derived Account Balance only if
either:
(1) such Participant has any nonforfeitable interest in the
Account Balance attributable to Employer Contributions at the
time of separation from service; or
(2) upon returning to service the number of consecutive one (1)
year Breaks in Service is less than the number of Years in
Service.
Separate accounts will be maintained for the Participant's
pre-break and post-break Employer-derived Account Balance. Both
accounts will share in the earnings and losses of the fund.
(d) If the Plan makes a distribution to a Participant at a time when
the Participant is less than one hundred percent (100%) vested in
the Participant's Employer-derived benefits and there is no five
(5) consecutive one (1) year Breaks in Service prior to a "relevant
time" subsequent to such distribution,
(1) A separate account will be established for the Participant's
interest in the Plan as of the time of distribution, and
(2) At any relevant time the Participant's vested portion of the
separate account will not be less than an amount ("x")
determined by the following formula:
X = P(AB + (R X D)) - (R X D), where
P = vested percentage at the relevant time
AB = Account Balance at the relevant time
D = amount of distribution
R = ratio of the Account Balance at the relevant time to
the Account Balance after distribution.
(e) In the case of a Participant who has no vested right in
Employer-derived benefits at the time the Participant incurs a
Break in Service, Years of Service completed by such Participant
before such break shall not be taken into account for purposes of
determining the nonforfeitable percentage of the Participant's
- 5-2 -
<PAGE>
right to Employer-derived benefits if at such time the number of
consecutive one-year Breaks in Service included in the
Participant's most recent Break in Service equals or exceeds the
greater of five (5) or the aggregate number of the Participant's
Years of Service, whether or not consecutive, completed before
such break. In computing the aggregate number of Years of Service
prior to the Break in Service, Years of Service which are
disregarded under this Section by reason of any prior Break in
Service shall be disregarded.
5.4 EFFECT OF CERTAIN CASH-OUTS
(a) For purposes of determining the Participant's Account Balance
under the Plan, the Plan shall disregard Years of Service
performed by the Participant with respect to which the Participant
has received a distribution of the present value of the
Participant's entire nonforfeitable benefit if such distribution
was no more than Three Thousand Five Hundred Dollars ($3,500.00)
(or an amount permitted under regulations prescribed by the
Secretary of Treasury) or a distribution of the present value of
the Participant's nonforfeitable benefit attributable to such
service which the Participant elected to receive.
Any distribution under this Section 5.4(a) which exceeds $3,500.00
shall be subject to the consent of the Participant and, if any, the
Participant's Spouse. If the Account Balance at the time of any
distribution exceeds $3,500.00, then the Account Balance at any
subsequent time shall be deemed to exceed $3,500.00 and such
subsequent distribution shall be subject to the written consent of
the Participant and the Participant's Spouse, if applicable.
(b) In order for a distribution to be considered a "cash out" under
this Plan, a Participant receiving such distribution must have
terminated employment with the Employer. All Participants who have
been "cashed-out" under the provision of Section 5.4(a) above,
shall have the opportunity to repay the full amount of the
distribution upon resumption of employment with the Employer in
accordance with the provisions of Section 11.11 herein.
(c) If a distribution is made at a time when a Participant has a
nonforfeitable right to less than 100 percent of the Account
Balance derived from Employer Contributions and the Participant may
increase the nonforfeitable percentage in the account:
(1) A separate account will be established for the Participant's
interest in the Plan as of the time of the distribution, and
(2) At any relevant time the Participant's nonforfeitable portion
of the separate account will be equal to an amount ("X")
determined by the formula:
X P(AB + (R x D)) - (R x D)
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<PAGE>
For purposes of applying the formula: P is the nonforfeitable
percentage at the relevant time, AB is the Account Balance at
the relevant time, D is the amount of the distribution, and R
is the ratio of the Account Balance at the relevant time to
the Account Balance after distribution.
5.5 VESTING COMPUTATION PERIOD
The Vesting Computation Period shall mean the twelve consecutive-month
period (or its equivalent) as defined in Article One. Hours of Service
completed within each Vesting Computation Period shall be used when
determining whether a Participant has completed a Year of Service or
has incurred a Break in Service for purposes of this Article.
Nothwithstanding the foregoing, in the event that a Year of Service for
Eligibility or Vesting is based on Elapsed Time using a 365-day period
of service, then the Vesting Computation Period shall mean Year of
Service as defined in Article One, Section 1.1.
In the event of a short Plan Year, there shall be overlapping Vesting
Computation Periods. The first Vesting Computation Period shall begin
on the first day of the short Plan Year and end twelve months thereafter
and the overlapping Vesting Computation Period shall begin on the first
day of the new Plan Year and end on the last day of the new Plan Year.
5.6 AMENDMENT TO VESTING SCHEDULE
(a) If the vesting schedule of this Plan is amended, the new vesting
schedule shall satisfy the requirements set forth in Code
Section 411(a)(2)(A), (B) or (C) for all Years of Service.
(b) If the vesting schedule of this Plan is amended, then in the case
of an Employee who is a Participant on the date the amendment is
adopted or the date the amendment is effective, if later, the
vested percentage of the Participant's right to the Participant's
Employer-derived benefit, determined as of such date, shall not be
less than the Participant's percentage computed under the Plan
without regard to such amendment.
(c) If the Plan's vesting schedule is amended, or the Plan is amended
in any way that directly or indirectly affects the computation of
the Participant's nonforfeitable percentage or if the Plan is
deemed amended by an automatic change to or from a top-heavy
vesting schedule, each Participant with at least three (3) Years of
Service with the Employer may elect, within a reasonable period
after the adoption of the amendment or change, to have the
nonforfeitable percentage computed under the Plan without regard to
such amendment or change. For Participants who do not have at
least one (1) Hour of Service in any Plan Year beginning after
December 31, 1988, the preceding sentence shall be applied by
substituting "five (5) Years of Service" for "three (3) Years of
Service" where such language appears.
- 5-4 -
<PAGE>
The period during which the election may be made shall commence
with the date the amendment is adopted or deemed to be made and
shall end on the latest of:
(1) 60 days after the amendment is adopted;
(2) 60 days after the amendment becomes effective; or
(3) 60 days after the Participant is issued written notice of the
amendment by the Employer or Committee.
(d) No amendment to the Plan shall be effective to the extent that it
has the effect of decreasing a Participant's Account Balance.
Notwithstanding the preceding sentence, a Participant's Account
Balance may be reduced to the extent permitted under Section
412(c)(8) of the Code. For purposes of this Section 5.6(c), a Plan
amendment which has the effect of decreasing a Participant's
Account Balance or eliminating an optional form of benefit, with
respect to benefits attributable to service before the amendment
shall be treated as reducing an Account Balance. Furthermore, if
the vesting schedule of this Plan is amended, in the case of an
Employee who is a Participant as of the later of the date such
amendment is adopted or the date it becomes effective, the
nonforfeitable percentage (determined as of such date) of such
Employee's Employer-derived Account Balance wi11 not be less than
the percentage computed under this Plan without regard to such
amendment.
- 5-5 -
<PAGE>
ARTICLE SIX
THE ADMINISTRATIVE COMMITTEE
6.1 COMMITTEE MEMBERSHIP
The Plan shall be administered by an Administrative Committee appointed
by and serving at the pleasure of the Employer. Any Employee may serve
as a member of the Committee, although members need not be Employees.
Any member of the Committee may be removed by the Employer, and members
shall hold office until resignation, death, removal or disqualification.
Vacancies in the Committee arising for whatever reason shall be filled
by the Employer as soon as is reasonably possible after the vacancy
occurs, and until a new appointment is made the remaining member or
members shall have full authority to act. The Employer shall file with
the Trustee written notice of the names of the members of the Committee
together with specimen signatures, and as changes take place in
membership, that fact and the names and specimen signatures of the new
members shall be filed by the Employer with the Trustee.
6.2 COMMITTEE ACTION
The Committee shall choose a Secretary who shall keep minutes of the
Committee's proceedings and all data, records and documents pertaining
to the Committee's administration of the Plan. The Committee shall act
by a majority of its members at the time in office and such action may
be taken by a vote either at a meeting or in writing without a meeting.
The Committee may by such majority action authorize its Secretary or any
one or more of its members to execute any document or documents on
behalf of the Committee, in which event the Committee shall notify the
Trustee in writing of such action and the name or names of those so
designated. The Trustee thereafter shall accept and rely conclusively
upon any direction or document executed by such Secretary, member or
members as representing action by the Committee until the Committee
files with the Trustee a written revocation of such designation.
6.3 ADMINISTRATIVE RULES
The Committee shall exercise all discretionary powers in the
administration of any matters which come under its functions and may,
from time to time, formulate such rules for the administration of the
Plan as it may deem necessary so long as such rules are not inconsistent
with the terms of the Plan itself.
6.4 POWERS OF THE COMMITTEE
The Committee, on behalf of the Participants and their Beneficiaries, is
hereby designated as the Named Fiduciary referred to in Section 402(a)
of ERISA. The Committee shall enforce the Plan in accordance with its
terms, shall be charged with the general administration of the Plan, and
shall have all powers necessary to accomplish those objectives,
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<PAGE>
including, but not by way of limitation, the following:
(a) To determine all questions relating to the eligibility of Employees
to participate;
(b) To compute and certify to the Trustee the amount and kind of
benefit payable to Participants and their Beneficiaries;
(c) To authorize a11 disbursements by the Trustee from the Trust Fund;
(d) To maintain all the records necessary for the administration of the
Plan other than those maintained by the Trustee;
(e) To make and publish such rules for the regulation of the Plan as
are not inconsistent with the terms hereof;
(f) To authorize the Trustee to purchase contracts of life insurance on
the lives of Key Employees whose death might adversely affect the
earnings of the Employer. Any such contract shall be owned by the
Trustee, and any and all benefits, including any amounts payable
upon the death of the insured Employee, shall be payable to the
Trustee and considered as an investment for the benefit of the
Trust as a whole;
(g) To authorize the Trustee to purchase, for the benefit of the
individual Participants, contracts of life insurance or annuities
on an annual or single premium basis at retirement or prior
thereto, and on such terms and conditions as the Committee may
prescribe.
(h) To direct the Trustee to sell any assets held in the Trust and to
direct the Trustee in all respects concerning investments to be
made with funds available to the Trust for that purpose.
(i) To accept service of legal process on behalf of the Plan.
(j) To file with the appropriate government agency (or agencies) the
annual report, plan description, summary plan description, and
other pertinent documents which may be duly requested.
(k) To furnish each Employee and each beneficiary receiving benefits
hereunder a summary plan description explaining the Plan.
(1) To file such terminal and supplementary reports as may be necessary
in the event of termination of the Plan; and to allocate the assets
of the Plan available to provide benefits to Employees in the event
the Plan should terminate.
6.5 EMPLOYMENT OF ADVISERS
The Committee may, in its discretion, employ agents, brokers, attorneys
(including attorneys for the Employer), accountants, investment counsel,
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<PAGE>
or such other assistants as it may deem proper to discharge its
responsibilities, and the Employer agrees to pay all fees and expenses
incurred in connection therewith. However, such fee may be paid by the
Trustee upon written direction of the Committee.
6.6 INFORMATION TO BE COMMUNICATED
In order to enable the Committee to perform its functions, the Employer
shall supply full and timely information to the Committee, including all
pertinent facts as the Committee may require. The Committee shall
advise the Trustee of such of the foregoing facts as may be pertinent to
the Trustee's administration of the Plan.
6.7 COMPENSATION AND INDEMNITY
(a) The members of the Committee shall serve without compensation for
their services thereunder. All expenses of the Committee shall be
paid by the Employer or by the Plan, and the Employer shall furnish
the Committee with such clerical and other assistance as is
necessary in the performance of its duties.
(b) The Employer shall indemnify and hold harmless the members of the
Committee from and against any and all liabilities, claims,
demands, costs and expenses (including attorneys' fees), arising
out of an alleged breach in the performance of their fiduciary
duties under the Plan and under ERISA, other than such liabilities,
claims, demands, costs and expenses as may result from the gross
negligence or willful misconduct of such persons. The Employer
shall have the right, but not the obligation, to conduct the
defense of such persons in any proceeding to which this Paragraph
applies. In lieu of the foregoing, the Employer may satisfy its
obligations under this Paragraph through the purchase of a policy
or policies of insurance providing equivalent protection.
6.8 DUTY OF CARE
In discharging each of the duties and responsibilities assigned to it
under this Plan, the Committee shall act solely in the interests of the
Participants and Beneficiaries of the Plan and with the care, skill,
prudence and diligence under the circumstances then prevailing that a
prudent man acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with
like aims. In the exercise of any discretion, the Committee shall not
discriminate in favor of Participants who are officers, stockholders or
Highly Compensated Employees. No member of the Committee may
participate in any decision which involves solely the member's interest
as a Participant separate and distinct from the member's status as a
member of the group of Participants.
6.9 ESTABLISHMENT OF FUNDING POLICY
The Committee from time to time shall establish a funding policy and
method for the Plan which is consistent with the objectives of the Plan
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and the requirements of ERISA. The funding policy and method, as
established and amended from time to time, shall be communicated to the
Trustee in order that the Trustee may coordinate the investment policies
of the Trust Fund consistent with such funding policy and method.
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ARTICLE SEVEN
THE TRUST AGREEMENT
7.1 TRUST AGREEMENT
The Employer shall enter into a Trust Agreement to effectuate the
purposes of the Plan as it may be in force from time to time. The
duties, responsibilities and powers of the Trustee shall be limited as
specifically provided in the Plan and the Trust Agreement.
7.2 RELATIONSHIP OF COMMITTEE AND TRUSTEE
(a) The Committee shall direct the administration of the Plan and the
Trustee shall follow the written directions of the Committee, or
any member of the Committee who shall be designated from time to
time, which are communicated to the Trustee. The Committee shall
notify the Trustee of any changes in the membership of the
Committee. The Trustee shall follow directions of the member whose
authority to act on behalf of the Committee was last certified to
the Trustee, regardless of changes in membership of the Committee.
Any direction or notification by the Committee or member thereof to
the Trustee shall be effective upon delivery in writing to the
Trustee.
(b) If it is necessary to perform some act hereunder and there is
neither direction in this Plan nor direction of the Committee on
file with the Trustee, and no such direction can be obtained after
reasonable inquiry, the Trustee shall have full power and direction
to act.
(c) The Employer will indemnify and hold harmless the Trustee of and
from any liability, loss, cost or expense arising from or in any
way connected with its acting upon a direction of the Committee, or
failing to act because of the lack of any direction from the
Committee where the Trustee has no duty to act in the absence of
direction from the Committee.
(d) The Trustee shall have no duty to enforce collection or payment to
it of any contribution nor to determine or verify the accuracy
thereof.
7.3 RULE AGAINST PERPETUITIES
Unless sooner terminated in accordance with other provisions of this
Plan, the Plan and Trust Agreement shall in any event terminate upon the
death of the last survivor of such of the Participants who are living on
the day of execution of this Plan.
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ARTICLE EIGHT
THE INSURANCE COMPANY
8.1 INSURER NOT A PARTY HERETO
No Insurer issuing a life insurance policy in connection with this Plan
shall be deemed to be a party hereto.
8.2 NOTIFICATION OF CHANGES IN PLAN
The Insurer may assume, in dealing with the Trustee, that no
modification or alteration has been made in the terms of the Plan until
notice of such modification or alteration has been given to the Insurer.
8.3 OWNERSHIP OF POLICIES
The Insurer shall deal with the Trustee as owner of all policies and
shall accept the signature of the Trustee in connection with any
application, changes or any action under the policies. The Insurer is
authorized at all times to deal with the Trustee of the Plan.
8.4 ACTION OF INSURER
No such Insurer shall be required to concern itself with the terms of
this Plan or question any action of the Trustee and/or of the Committee,
or be responsible to see that any action of the Trustee and/or the
Committee is authorized by the terms of this Plan.
8.5 EXECUTION OF DOCUMENTS
Any and all certificates or other documents requiring signature of the
Trustee shall be executed in its name as Trustee. Any documents which
may require the signature of the Committee shall be executed in its name
by a majority of its members thereof or by any member thereof who has
been authorized to sign on its behalf under the terms of this Plan.
When so executed, any such documents may be received by the Insurer as
conclusive evidence of any of the matters mentioned in this Plan, and
the Insurer shall be fully protected in taking or permitting any action
to be taken on the strength thereof and shall incur no liability or
responsibility for so doing.
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<PAGE>
ARTICLE NINE
TYPE OF INSURANCE CONTRACT
9.1 PURCHASE OF CONTRACT
(a) If permitted by the provisions of Section 1.6(c), and in the event
that the Committee elects life insurance as a Plan investment, the
Trustee, as directed by the Committee, shall purchase at standard
rates individual level-premium whole life insurance or term
insurance contracts.
(b) The Trustee shall apply for and will be the owner of any insurance
contract purchased under the terms of this Plan. The insurance
contract(s) must provide that proceeds will be payable to the
Trustee, however the Trustee shall be required to pay over all
proceeds of the contract(s) to the Participant's designated
Beneficiary in accordance with the distribution provisions of this
Plan. A Participant's spouse will be the designated Beneficiary
of the proceeds in a11 circumstances unless a qualified election
has been made in accordance with Section 12.2(a), Joint and
Survivor Annuity Requirements, if applicable. In the event of any
conflict between the terms of this Plan and the terms of any
insurance contract purchased hereunder, the Plan provisions shall
control.
9.2 UNINSURABLE PARTICIPANTS
For each Participant who is found by the Insurer to be uninsurable or
not insurable at standard rates, the Trustee, as directed by the
Committee, shall purchase either a similar life insurance contract for
the same amount of premium but containing a lesser death benefit as
specified in a schedule attached to the contract, or a retirement
annuity contract on the life of such Participant with a death benefit on
death before Normal Retirement Date in an amount equal to the total of
premiums paid or the cash surrender value of such contract, whichever is
greater.
9.2.1 VOLUNTARY WAIVER OF INSURANCE CONTRACT
Once eligible, a Participant may voluntarily elect to waive his right to
purchase or to have insurance purchased on his life in the Plan. A
Participant shall be deemed to waived his right to insurance in the
event that he (or his spouse, if applicable) refuses to execute a waiver
form and fails to comply with the requirements of the insurer for
issuance of an insurance contract.
Upon the death of a Participant who has waived (or deemed to have
waived) his right under this section, the designated Beneficiary shall
only be entitled to receive an amount equal to the Participant's
Accounts.
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9.3 APPLICATION FOR CONTRACTS
The original applications for contract or contracts to be issued
hereunder shall be made to the Insurer as designated by the Employer.
The Employer, in its sole discretion, may thereafter designate any
insurance company to which subsequent applications may be made. The
type of such contracts or any features thereof or supplements or
additions thereto shall be determined by the Committee. The failure of
the Employer to obtain any contract applied for shall not give rise to
any right, claim or benefit to any Employee. The contract or contracts
shall be applied for by the Employer at or on the Effective Date and by
the Trustee at any Anniversary Date as directed by the Committee.
9.4 PAYMENT OF PREMIUMS
The Trustee shall be under no duty to pay premiums on contracts of life
insurance or annuities held by the Trustee as an investment hereunder
unless adequate funds are available therefor, and only upon direction by
the Committee. When the Committee directs the Trustee to make such
premium payments, the Committee shall direct the Trustee with respect to
the source of funds for such payment.
9.5 APPLICATION OF DIVIDENDS
(a) If the Plan is a fully insured Plan, any dividends or credits
earned on insurance contracts will be applied, within the taxable
year of the Employer in which received or within the next
succeeding taxable year, toward the next premium due before any
further Employer Contributions are so applied.
(b) If the Plan is a Trusteed Plan, any dividends or credits earned on
insurance contracts will be allocated to the Participant's account
derived from Employer Contributions for whose benefit the contract
is held.
9.6 PARTICIPANT'S ELECTION
Subject to Section 1.6(c) and Section 9.1, each Participant may direct
the Committee with respect to the amount, if any, of each contribution
made by the Employer on behalf of said Participant which shall be
applied to the purchase, as an investment and for the benefit of said
Participant, of a life insurance contract or contracts. Upon such
direction, the Committee shall direct the Trustee to pay premiums and
apply for and secure said life insurance contract or contracts, subject
to the restrictions provided herein and provided that the total premiums
paid or due for life insurance on the life of any Participant shall not
exceed the amounts stated in Section 9.8 of this Plan. A new
Participant may give direction in writing upon entry into the Plan, and
an existing Participant shall give direction in writing within the
thirty (30) day period preceding the Anniversary Date of the Plan.
These directions may be changed, amended or revoked only by a further
direction in writing in the same manner as the initial direction
aforesaid and the initial direction shall remain in effect until
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changed, amended or revoked. Upon the failure of said Participant to
give direction, the Committee shall make its own determination as to the
amount, if any, of the Employer's Contribution made on behalf of said
Participant which shall be so applied.
9.7 DISTRIBUTION OF INSURANCE CONTRACTS
Subject to Article Twelve, Joint and Survivor Annuity Requirements, the
contracts on a Participant's life will be converted to cash or an
annuity or distributed to the Participant upon commencement of benefits.
9.8 LIMITATIONS
(a) The Administrator shall limit the premiums invested in ordinary
life insurance on the life of each Participant to less than fifty
percent (50%) of the aggregate of all contributions and Forfeitures
allocated to each such Participant's Accounts.
(b) The Administrator shall limit the premiums invested in term life
insurance on the life of each Participant to less than twenty-five
percent (25%) of the aggregate of all contributions and Forfeitures
allocated to each such Participant's Accounts.
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<PAGE>
ARTICLE TEN
APPLICATIONS FOR BENEFITS
10.1 APPLICATION PROCEDURE
Participants should submit applications for benefits under the Plan to
the Committee at the principal office of the Employer. Applications
for benefits should be in writing on the forms prescribed by the
Committee and must be signed by the Participant and the Participant's
spouse (if applicable), or in the case of a death benefit, by the
Beneficiary or legal representative of the deceased Participant. The
Committee reserves the right to require that the Participant furnish
proof of his age and that of his joint annuitant, if any, prior to
processing any application. Each application shall be acted upon and
approved or disapproved within sixty (60) days following its receipt
by the Committee. In the event any application for benefits is denied
in whole or in part, the Committee shall notify the applicant in
writing of such denial and of the applicant's right to a review of
such denial, and shall set forth in a manner calculated to be
understood by the applicant specific reasons for such denial, specific
references to pertinent Plan provisions on which the denial is based,
a description of any additional material or information necessary for
the applicant to perfect the application, an explanation of why such
material or information is necessary, and an explanation of the Plan's
review procedure.
10.2 REVIEW PROCEDURE
Any person or duly authorized representative whose application for
benefits is denied in whole or in part may appeal from such denial to
the Committee for a review of the decision by submitting to the
Committee, within sixty (60) days after receiving written notice of
the denial of the application for benefits, a written statement
requesting a review of the application for benefits by the Committee,
setting forth all of the grounds upon which the request for a review
is based and any facts in support thereof, and setting forth any
issues or comments which the applicant deems pertinent to the
application.
10.3 COMMITTEE ACTION
(a) The Committee shall meet from time to time to review applications
for benefits submitted pursuant to this Article. The Committee
shall act upon each application within sixty (60) days following
receipt of the applicant's request for review by the Committee,
unless special circumstances require an extension. Such
extension cannot extend beyond one hundred twenty (120) days
after receipt of the appeal by the Committee. If the Committee
fails to act within sixty (60) days or, if special circumstances
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extend it to one hundred twenty (120) days, the application will
be treated as denied and the applicant may appeal for a review.
(b) The Committee shall make a full and fair review of each such
application and any written materials submitted by the applicant
or the Employer in connection therewith, and may require the
Employer or the applicant to submit such additional facts,
documents, or other evidence as the Committee, in its sole
discretion, deems necessary or advisable in making such a review.
On the basis of this review, the Committee shall make an
independent determination of the applicant's eligibility for
benefits under the Plan. The decision of the Committee on any
application for benefits shall be final and conclusive upon all
persons if supported by the substantial evidence in the record.
(c) In the event the Committee denies an application in whole or in
part, the applicant shall be given written notice of the decision
setting forth in a manner calculated to be understood by the
applicant the specific reasons for such denial and specific
references to the pertinent Plan provisions upon which the
Committee based its decision.
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<PAGE>
ARTICLE ELEVEN
DISTRIBUTION OF BENEFITS
11.1 RETIREMENT BENEFITS
When a Participant reaches his Early Retirement Date or Normal
Retirement Date, the Participant shall be entitled to retirement
income and benefits which shall be based upon the value of the
Participant's Account(s). Participants who meet the service
requirement for Early Retirement but who separate from service prior
to satisfying the age requirement, shall be entitled to receive the
benefit when the age requirement is satisfied.
11.2 MODES OF DISTRIBUTION
The Trustee, when so directed by the Committee, shall make
distribution in a form provided for in Section 1.5(e), provided that
each such mode shall have the same present value. The alternative
modes of settlement are:
(a) A cash lump sum. However, a Participant's benefit may not be
cashed out without the Participant's written consent if the
present value of any Participant's nonforfeitable Account Balance
exceeds Three Thousand Five Hundred Dollars ($3,500.00), and if
such benefits are paid in the form of a cash lump sum, the
provisions of Section 11.12 hereof shall apply. The Three
Thousand Five Hundred Dollars ($3,500.00) shall be determined by
using both employer and employee contributions, but not
accumulated deductible contributions.
Any distribution under Section 5.4(a) which exceeds $3,500.00
shall be subject to the consent of the Participant and, if any,
the Participant's Spouse. If the Account Balance at the time of
any distribution exceeds $3,500.00, then the Account Balance at
any subsequent time shall be deemed to exceed $3,500.00 and such
subsequent distribution shall be subject to the written consent
of the Participant and the Participant's Spouse, if applicable.
(b) Substantially equal installments with or without a period
certain, payable not less frequently than annually. However, the
benefits to which the Participant is entitled must be paid over a
period not exceeding the life expectancy of the Participant
determined at the date of the Participant's retirement or the
joint life expectancy of the Participant and a designated
Beneficiary. If the distribution is to be made in the form of
installments, the Committee may direct the Trustee to segregate
in a separate account an amount equal to the lump sum value and
to invest it in United States obligations or to deposit it in an
interest-bearing savings account of any bank, including the
Trustee's own banking department, or to deposit it in an
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<PAGE>
interest-bearing savings account of a federal savings and loan
association. If a separate segregated account is established,
any interest received thereon shall be distributed with the final
installment of benefits. In the event a Participant dies prior
to complete distribution of the Participant's installments, the
Participant's Beneficiary shall be entitled to the balance.
(c) An annuity payable over the life of the Participant or the joint
lives of the Participant and a designated Beneficiary with or
without a period certain.
(d) A nontransferable deferred annuity contract purchased from a
legal reserve life insurance company selected by the Committee,
which provides for annuity payments to commence at the
Participant's Normal Retirement Date. Any annuity contract
distributed herefrom must be nontransferable and the terms of any
annuity contract purchased and distributed by this Plan to a
Participant or spouse shall comply with the requirements of this
Plan.
(e) Upon written request of the Participant or the Participant's
Beneficiary, shares issued by a regulated investment company
registered under the Investment Company Act of 1940, or shares of
stock listed on a national stock exchange.
(f) Upon written request of the Participant or the Participant's
Beneficiary, approved by the Committee, in kind or any assets
held by the Trustee as an investment, or partly in cash and
partly in kind.
11.3 LATE RETIREMENT
A Participant may remain in the employ of the Employer and, if he
remains in the employ of the Employer, shall continue to be entitled
to benefits/contributions according to the terms of this Plan beyond
the Normal Retirement Date. If a Participant elects, he may commence
distribution from the Plan at Normal Retirement Age.
11.4 TERMINATION PRIOR TO RETIREMENT
(a) If a Participant ceases to be employed by the Employer for any
reason other than retirement, military service, or death, the
Committee shall certify that fact to the Trustee, giving the date
of such termination. In this event, the Participant shall have a
vested right in the account held for the Participant's benefit as
determined under Article Five hereof. The benefits to which the
Participant is entitled shall be provided by the value of the
Participant's Account. The benefits shall only be distributed to
the Participant under the provisions of Section 1.5(h). The cash
surrender value of any insurance contracts insuring the
Participant's life must be included in the value of the
Participant's account.
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<PAGE>
(b) The Trustee shall, as directed by the Committee, assign, transfer
and set over to such Participant a11 contracts on the
Participant's life in such form or with such endorsements, if
any, as the Committee may, in its discretion, direct, restricting
the Participant to surrender, assign or otherwise realize cash on
the contract or contracts prior to the Participant's Normal
Retirement Date.
(c) If the Participant and the Participant's spouse elect not to
receive benefits in a form having the effect of a Qualified Joint
and Survivor Annuity or a Qualified Pre-retirement Annuity, the
Committee shall direct the Trustee to distribute the amount
required from the Participant's Account, subject to the
provisions of Sections 1.5(e) and 11.2 of this Plan.
11.5 LEAVE OF ABSENCE AND NILITARY SERVICE
(a) A Participant on temporary absence from the service of the
Employer may, for purposes of this Article, be deemed to have
continued in the employ of the Employer during such absence,
provided such absence does not continue for a period longer than
one (1) year, and further provided that such Participant shall
pay all premiums necessary to keep policies in the Participant's
account effective during such absence, if any are required. In
granting temporary leaves of absence, the Employer shall not
discriminate between the various Participants.
(b) A Participant on temporary absence from the service of the
Employer because of service in the Armed Forces of the United
States shall be deemed to be continued in the employ of the
Employer during such absence, provided that such Participant
shall pay all premiums necessary to keep policies in the
Participant's account effective during such absence, if any are
required.
(c) If any Employee or Participant on military leave voluntarily
fails to return to employment within ninety (90) days after the
Employee's or the Participant's discharge from the service, such
facts shall be treated as though the Employee or the Participant
had voluntarily left the employment of the Employer as of the
date of discharge. In the event of death during such military
service leave, it shall be treated as though the Employee or the
Participant had died during employment with the Employer, and in
the event of any Total Disability arising from military service,
such disability shall be treated as though it were a Total
Disability arising during employment, and all of the
Participant's rights under the Plan shall become fully vested as
of the date of inability to return to employment.
11.6 VALUE OF BENEFITS
Any payment to any Participant, the Participant's Beneficiary or legal
representative, in accordance with the provisions of the Plan, shall
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<PAGE>
to the extent thereof be in full satisfaction of all claims hereunder
against the Trustee, the Committee and the Employer, any of whom may
require such Participant, Beneficiary or legal representative, as a
condition precedent to such payment, to execute a receipt therefor in
such form as shall be determined by the Trustee, the Committee or the
Employer, as the case may be. The Employer does not guarantee the
Trustee, the Participants, former Participants or their Beneficiaries
against loss of or depreciation in the value of any right or benefit
that any of them may acquire under the terms of this Plan. All the
benefits payable hereunder shall be paid or provided for solely from
the Trust and the Employer does not assume any liability or
responsibility therefor.
11.7 COMMENCEMENT OF BENEFITS
Unless the Participant elects otherwise, distribution of benefits will
begin as soon as administratively feasible but no later than the 60th
day after the latest of the close of the Plan Year in which:
(1) the Participant attains age 65 (or Normal Retirement Age, if
earlier);
(2) occurs the 10th anniversary of the year in which the Participant
commenced participation in the Plan; or,
(3) the Participant terminates service with the Employer.
Notwithstanding the foregoing, the failure of a Participant and spouse
to consent to a distribution while a benefit is immediately
distributable, within the meaning of Section 12.8 of the Plan, shall
be deemed to be an election to defer commencement of payment of any
benefit sufficient to satisfy this Section.
A Participant who elects to defer receipt of benefits may not do so to
the extent that such deferral creates a death benefit that is more
than incidental.
11.8 DISTRIBUTION OF BENEFIT RULES
(a) General Rules.
(1) Subject to Article Twelve, Joint and Survivor Annuity
Requirements, the requirements of this Article shall apply
to any distribution of a Participant's interest and will
take precedence over any inconsistent provisions of this
Plan. Unless otherwise specified, the provisions of this
Article apply to calendar years beginning after December 31,
1984.
(2) All distributions required under this Article shall be
determined and made in accordance with the proposed
regulations under Section 401(a)(9), including the minimum
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<PAGE>
distribution incidental benefit requirement of Section
1.401(a)(9)-2 of the proposed regulations.
(b) Required beginning date. The entire interest of a Participant
must be distributed or begin to be distributed no later than
April 1st of the calendar year following the calendar year in
which the Participant attains age 70-1/2.
(c) Limits on Distribution Periods. As of the first distribution
calendar year, distributions, if not made in a single-sum, may
only be made over one of the following periods (or a combination
thereof):
(1) the life of the Participant,
(2) the life of the Participant and a designated Beneficiary,
(3) a period certain not extending beyond the life expectancy of
the Participant, or
(4) a period certain not extending beyond the joint and last
survivor expectancy of the Participant and a designated
Beneficiary.
(d) Death Distribution Provisions.
(1) Distribution beginning before death. If the Participant dies after
distribution of the Participant's interest has begun, the
remaining portion of such interest will continue to be distributed
at least as rapidly as under the method of distribution being used
prior to the Participant's death.
(2) Distribution beginning after death. If the Participant dies before
distribution of the Participant's interest begins, distribution of
the Participant's entire interest shall be completed by
December 31 of the calendar year containing the fifth anniversary
of the Participant's death except to the extent that an election
is made to receive distributions in accordance with 11.8(d)(2)(i)
or 11.8(d)(2)(ii) below:
(i) if any portion of the Participant's interest is payable to a
designated Beneficiary, distributions may be made over the
life or over a period certain not greater than the life
expectancy of the designated Beneficiary commencing on or
before December 31st of the calendar year immediately
following the calendar year in which the Participant died;
(ii) if the designated Beneficiary is the Participant's surviving
spouse, the date distributions are required to begin in
accordance with Section 11.8(d)(2)(i) above shall not be
earlier than the later of (1)
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<PAGE>
December 31st of the calendar year immediately following
the calendar year in which the Participant died and (2)
December 31st of the calendar year in which the Participant
would have attained age 70-1/2.
(iii) If the Participant has not made an election pursuant to this
Section 11.8(d)(2) by the time of the Participant's death,
the Participant's designated Beneficiary must elect the
method of distribution no later than the earlier of (1)
December 31st of the calendar year in which distributions
would be required to begin under this Section, or (2)
December 31st of the calendar year which contains the fifth
anniversary of the date of death of the Participant. If the
Participant has no designated Beneficiary, or if the
designated Beneficiary does not elect a method of
distribution, distribution of the Participant's entire
interest must be completed by December 31st of the calendar
year containing the fifth anniversary of the Participant's
death.
(3) For purposes of Section 11.8(d)(2) above, if the surviving spouse
dies after the Participant, but before payments to such spouse
begin, the provisions of Section 11.8(d)(2), with the exception of
Section 11.8(d)(2)(ii) therein, shall be applied as if the
surviving spouse were the Participant.
(4) For purposes of this Section 11.8(d), any amount paid to a child of
the Participant will be treated as if it had been paid to the
surviving spouse if the amount becomes payable to the surviving
spouse when the child reaches the age of majority.
11.9 HARDSHIP WITHDRAWALS
Subject to the options chosen in Article One, Section 1.5(k) in the
event a Participant incurs a "hardship" prior to the occurrence of an
event allowing distribution from this Plan, he may request a withdrawal
from his Employee Deferral Account for the following reasons:
a) Medical expenses (not covered by insurance) incurred by the
Participant, the Participant's spouse, or any dependents of the
Participant.
b) Purchase (excluding mortgage payments) of a principal residence
for the Participant.
c) Payment of tuition for the next semester or quarter of
post-secondary education for the Participant, the Participant's
spouse, or any dependents of the Participant.
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<PAGE>
d) Payment of a sum of money in order to prevent the eviction of the
Participant from his principal residence or foreclosure on the
mortgage of the Participant's principal residence.
e) Funeral expenses.
A Participant must file a written request for a withdrawal and
establish, to the satisfaction of the Administrator, that he has a
financial need. A financial need shall be deemed established if the
following conditions exist:
a) The distribution is not in excess of the amount of the immediate
and heavy financial need of the Participant; and,
b) The Participant has borrowed a11 funds available through the
provisions relating to Participants loans, if permitted in Article
One of the Plan; and
c) The Participant agrees that a11 Employee Deferral Contributions
shall be suspended for a 12-month period after the receipt of the
hardship distribution; and
d) The Participant agrees that Employee Deferral Contributions during
the tax year immediately following the taxable year of the
withdrawal may not exceed the $7,000 limit (as adjusted by the
Secretary of the Treasury) less the amount of the Participant's
Employee Savings Contributions made during the taxable year of the
hardship distribution.
11.10 In-Service Distributions -- Withdrawal of Employer Contributions
(1) If permitted by Section 1.5(i), the Committee may at any time
permit any Participant to request in writing a withdrawal from
the Participant's Account.
(a) A request For a withdrawal shall be made, in writing, to the
Administrator. The Administrator shall have absolute
discretion in approving or denying the request and shall act
in a uniform, and non-discriminatory manner. Any such request
received by the Administrator shall be acted upon within
sixty (60) days of actual receipt.
(b) The withdrawal shall not exceed the vested amount of the
Participant's Account. Any amount withdrawn must have been in
the Participant's Account and in the Trust for at least
two (2) full years. If a Participant has sixty (60) months
of Plan participation, he may withdraw monies in the Trust
that have been in the Trust for less than a two (2) year
period.
(c) In the event the Administrator grants a request for such
withdrawal, the Participant shall continue his participation
in the Plan uninterupted.
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<PAGE>
(d) If an in-service distribution shall only be permitted in the
event of a hardship, the requirements set forth in
Section 11.9 shall apply.
(2) If permitted by Section 1.5(j), a Participant may request a
distribution subject to the provisions of Section 1.5(j)
notwithstanding the provisions of Section 11.10(l).
11.11 LOANS TO PARTICIPANTS
(a) If loans to Participants are permitted by the provisions of
Section 1.6(b), loans shall be made available to all Participants
and beneficiaries on a reasonably equivalent basis. Loans to
Participants shall be governed by the written policies and
procedures adopted by the Employer.
(b) Loans shall not be made available to Highly Compensated Employees
(as defined in Section 414(q) of the Code) in an amount greater
than the amount made available to other Employees.
(c) Loans must be adequately secured and bear a reasonable interest
rate.
(d) A Participant must obtain the written consent of the Participant's
spouse, if any, to use of the Account Balance as security for the
loan. Spousal consent shall be obtained no earlier than the
beginning of the 90-day period that ends on the date on which the
loan is to be so secured. The consent must be in writing, must
acknowledge the effect of the loan, and must be witnessed by a Plan
representative or notary public. Such consent shall thereafter be
binding with respect to the consenting spouse or any subsequent
spouse with respect to that loan. A new consent shall be required
if the Account Balance is used for renegotiation, extension,
renewal, or other revision of the loan.
(e) If a valid spousal consent has been obtained in accordance with
Section 11.10(d), then, notwithstanding any other provision of this
Plan, the portion of the Participant's vested Account Balance used
as a security interest held by the Plan by reason of a loan
outstanding to the Participant shall be taken into account for
purposes of determining the amount of the Account Balance payable
at the time of death or distribution, but only if the reduction is
used as repayment of the loan.
(f) No loan to any Participant or Beneficiary can be made to the extent
that such loan when added to the outstanding balance of all other
loans to the Participant or Beneficiary would exceed the lesser of
(a) $50,000 reduced by the excess (if any) of the highest
outstanding balance of loans during the one-year period ending on
the day before the loan is made, over the outstanding balance of
loans from the Plan on the date the loan is made, or (b) one-half
the present value of the nonforfeitable Account
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Balance of the Participant or, if greater, the total Account
Balance up to $10,000.
(1) For the purpose of the above limitation, all loans from all plans
of the Employer and other members of a group of Employers described
in Sections 414(b), 414(c), and 414(m) of the Code are aggregated.
(2) Furthermore, any loan shall by its terms require that repayment
(principal and interest) be amortized in level payments, not less
frequently than quarterly. All loans must be repaid over a period
not extending beyond five years from the date of the loan, unless
such loan is used to acquire dwelling unit which within reasonable
time (determined at the time the loan is made) will be used as the
principal residence of the Participant.
(3) An assignment or pledge of any portion of the Participant's
interest in the Plan and a loan, pledge, or assignment with respect
to any insurance contract purchased under the Plan, will be treated
as a loan under this Paragraph.
(4) Notwithstanding the foregoing, the Plan may make a loan for more
than $50,000, however, such a loan will be deemed a taxable
distribution.
(g) The Committee shall be responsible for administering the loan
program and shall establish written procedures for the
application process for loans, the basis on which loans will be
approved or denied, the procedure for determining a reasonable
rate of interest, the limitations on amount or type of loans
offered, the types of collateral which may secure a loan, and the
events constituting default and the steps that will be taken to
preserve the Plan assets in the event of default.
11.12 REPAYMENT OF DISTRIBUTED BENEFITS
(a) Any Participant who has received a distribution of the vested
interest in his account due to the termination of employment with
the Employer may repay the full amount of such distribution to
the Plan if:
(1) the distribution was received in a Plan Year which commenced
after December 31, 1975;
(2) the distribution was less than the present value of the
Participant's Account Balance when distributed;
(3) the Participant resumes employment with the Employer covered
under the Plan; and
(4) the Participant repays the full amount of distribution before
the earlier of five (5) years after the first date on
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which the Participant is subsequently re-employed by the
Employer, or the close of the first period of five (5)
consecutive one-year Breaks in Service commencing after the
distribution.
Upon repayment of the distributed benefits, the Participant's Account
Balances shall be recomputed by taking into account service performed
by the Participant to which the repaid benefits are attributable, to
the extent such service had been disregarded in determining the
Account Balances because of the distribution.
(c) No repayments under this Section shall be subject to the
limitation on contributions stated in Section 4.19 of this Plan.
(d) In the event of any other withdrawal, the repayment period shall
be five (5) years after the date of the withdrawal.
11.13 Total Disability
If a Participant suffers a Total Disability, said Participant shall be
fully vested in his Participant Account and the Committee may either
make a distribution in any mode described in Section 1.5(e) or may
defer payment until the Participant's Normal Retirement Date.
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ARTICLE TWELVE
ANNUITY ELECTION
12.1 APPLICATION OF ARTICLE
The provisions of this Article shall apply to any Participant who is
credited with at least one Hour of Service with the Employer on or
after August 23, 1984, and such other Participants as provided in
Section 12.7.
12.2 QUALIFIED JOINT AND SURVIVOR ANNUITY
If annuities are permitted as a form of benefit pursuant to Section
1.5(e) and unless an optional form of benefit is selected within the
election period described in the second paragraph of Section 12.4(a), a
married Participant's vested Account Balance will be paid in the form
of a Qualified Joint and Survivor Annuity and an unmarried
Participant's vested Account Balance will be paid in the form of a life
annuity. The Participant may elect to have such annuity distributed
upon attainment of the earliest retirement age under the Plan.
Notwithstanding the foregoing, if this Plan accepts a transfer from
another qualified plan which must be paid in the form of an annuity,
such transferred amount will be paid as an annuity.
12.3 QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY
Unless an optional form of benefit has been selected within the
election period pursuant to a qualified election, if a Participant
dies before the annuity starting date then the Participant's vested
Account Balance shall be applied toward the purchase of an annuity for
the life of the surviving spouse. The surviving spouse may elect to
have such annuity distributed within a reasonable period after the
Participant's death.
12.4 DEFINITIONS FOR PURPOSES OF SURVIVOR ANNUITIES
(a) Election period: For purposes of the Pre-retirement Survivor
Annuity, the period which begins on the first day of the Plan Year
in which the Participant attains age 35 and ends on the date of the
Participant's death. If a Participant separates from service prior
to the first day of the Plan Year in which age 35 is attained, with
respect to the Account Balance as of the date of separation, the
election period shall begin on the date of separation.
For purposes of the Qualified Joint and Survivor Annuity, the
election period shall mean the ninety (90) day period prior to the
Annuity Starting Date.
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Pre-age 35 waiver: A Participant who will not yet attain age 35 as
of the end of any current plan year may make a special qualified
election to waive the Qualified Pre-retirement Survivor Annuity for
the period beginning on the date of such election and ending on the
first day of the Plan Year in which the Participant will attain age
35. Such election shall not be valid unless the Participant
receives a written explanation of the Qualified Pre-retirement
Survivor Annuity in such terms as are comparable to the explanation
required under Section 12.5(a). Qualified Pre-retirement Survivor
Annuity coverage will be automatically reinstated as of the first
day of the Plan Year in which the Participant attains age 35. Any
new waiver on or after such date shall be subject to the full
requirements of this Article.
(b) Earliest retirement age: The earliest date on which, under the
Plan, the Participant could elect to receive retirement benefits.
(c) Qualified election: A waiver of a Qualified Joint and Survivor
Annuity or a Qualified Pre-retirement Survivor Annuity. Any waiver
of a Qualified Joint and Survivor Annuity or a Qualified
Pre-retirement Survivor Annuity shall not be effective unless: (1)
the Participant's spouse consents in writing to the election; (2)
the Participant has designated a specific Beneficiary, including
any class of beneficiaries or any contingent beneficiaries, which
may not be changed without spousal consent (or the spouse expressly
permits designations by the Participant without any further spousal
consent); (3) the spouse's consent acknowledges the effect of the
election; and (4) the spouse's consent is witnessed by a Plan
representative or notary public. Additionally, a Participant's
waiver of the Qualified Joint and Survivor Annuity shall not be
effective unless the election designates a form of benefit payment
which may not be changed without spousal consent (or the spouse
expressly permits designations by the Participant without any
further spousal consent). If it is established to the satisfaction
of a Plan representative that there is no spouse or that the spouse
cannot be located, a waiver will be deemed a qualified election.
Any consent by a spouse obtained under this provision (or
establishment that the consent of a spouse may not be obtained)
shall be effective only with respect to such spouse. A consent that
permits designations by the Participant without any requirement of
further consent by such spouse must acknowledge that the spouse has
the right to limit consent to a specific Beneficiary, and a
specific form of benefit where applicable, and that the spouse
voluntarily elects to relinquish either or both of such rights. A
revocation of a prior waiver may be made by a Participant without
the consent of the spouse at any time before the commencement of
benefits. The number of revocations shall not be limited. No
consent obtained under this provision shall be valid unless the
Participant has received notice as provided in Section 12.5 below.
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<PAGE>
(d) Spouse (surviving spouse): The spouse or surviving spouse of the
Participant, provided that a former spouse will be treated as the
spouse or surviving spouse and a current spouse will not be treated
as the spouse or surviving spouse to the extent provided under a
qualified domestic relations order as described in Section 414(p)
of the Code.
(1) Notwithstanding the above, a Qualified Joint and Survivor
Annuity, or a Qualified Pre-retirement Survivor Annuity, will
not be provided unless the Participant and spouse had been
married throughout the one (1) year period ending on the
earlier of (i) the Participant's "annuity starting date," or
(ii) the date of the Participant's death; provided, however,
that if a Participant marries within one (1) year before the
"annuity starting date," and the Participant and the
Participant's spouse in such marriage have been married for at
least a one (1) year period ending on or before the date of the
Participant's death, such Participant and such spouse shall be
treated as having been married throughout the one (1) year
period ending on the Participant's "annuity starting date."
(e) Annuity starting date: The first day of the first period for which
an amount is paid as an annuity or any other form.
(f) Vested Account Balance: The aggregate value of the Participant's
vested Account Balances derived from Employer and Employee
contributions (including rollovers), whether vested before or upon
death, including the proceeds of insurance contracts, if any, on
the Participant's life. The provisions of this Article shall apply
to a Participant who is vested in amounts attributable to Employer
Contributions, Employee contributions (or both) at the time of
death or distribution.
(g) Applicable Election Period: In the case of an election to waive the
Qualified Joint and Survivor Annuity form of benefit, the Annuity
Election Period, or in the case of an election to waive the
Qualified Pre-retirement Survivor Annuity form of benefit, the
Survivor Annuity Election Period.
12.5 NOTICE REQUIREMENTS
(a) In the case of a Qualified Joint and Survivor Annuity, the
Committee shall, no less than 30 days and no more than 90 days
prior to the annuity starting date, provide each Participant a
written explanation of: (i) the terms and conditions of a Qualified
Joint and Survivor Annuity; (ii) the Participant's right to make
and the effect of an election to waive the Qualified Joint and
Survivor Annuity form of benefit; (iii) the rights of a
Participant's spouse; and (iv) the right to make, and the effect
of, a revocation of a previous election to waive the Qualified
Joint and Survivor Annuity.
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<PAGE>
(b) In the case of a Qualified Pre-retirement Survivor Annuity as
described in Section 12.3 of this Article, the Committee shall
provide each Participant within the applicable period for such
Participant, a written explanation of the Qualified Pre-retirement
Survivor Annuity in such terms and in such manner as would be
comparable to the explanation provided for meeting the requirements
of Section 12.5(a) applicable to a qualified Joint and Survivor
Annuity.
(c) The applicable period for a Participant is whichever of the
following periods ends last: (i) the period beginning with the
first day of the Plan Year in which the Participant attains age 32
and ending with the close of the Plan Year preceding the Plan Year
in which the Participant attains age 35; (ii) a reasonable period
ending after the individual becomes a Participant; (iii) a
reasonable period ending after the Annuity is no longer fully
subsidized; (iv) a reasonable period ending after this Article
first applies to the Participant. Notwithstanding the foregoing,
notice must be provided within a reasonable period ending after
separation from service in the case of a Participant who separates
from service before attaining age 35.
(d) For purposes of applying the preceding Section 12.5(c), a
reasonable period ending after the enumerated events described in
(ii), (iii) and (iv) is the end of the two-year period beginning
one year prior to the date the applicable event occurs, and ending
one year after that date. In the case of a Participant who
separates from service before the Plan Year in which age 35 is
attained, notice shall be provided within the two-year period
beginning one year prior to separation and ending one year after
separation. If such a Participant thereafter returns to employment
with the Employer, the applicable period for such Participant shall
be redetermined.
(e) Notwithstanding the other requirements of this Section 12.5, the
respective notices prescribed by this Section need not be given to
a Participant if (1) the Plan "fully subsidizes: the costs of a
Qualified Joint and Survivor Annuity or Qualified Pre-retirement
Survivor Annuity and does not allow a married Participant to
designate a nonspouse beneficiary. For purposes of this Section, a
plan fully subsidizes the costs of a benefit if no increase in
cost, or decrease in benefits to the Participant may result from
the Participant's failure to elect another benefit.
12.6 SAFE HARBOR RULES
(a) This Section shall apply to a Participant in a profit sharing plan,
and to any distribution, made on or after the first day of the
first Plan Year beginning after December 31, 1988, from or under a
separate account attributable solely to accumulated deductible
Employee contributions, as defined in Section 72(o)(5)(B) of the
Code, and maintained on behalf of a
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<PAGE>
Participant in a money purchase pension plan, (including a target
benefit plan) if the following conditions are satisfied: (1) the
Participant does not or cannot elect payments in the form of a life
annuity; and (2) on the death of a Participant, the Participant's
vested account balance will be paid to the Participant's surviving
spouse, but if there is no surviving spouse, or if the surviving
spouse has consented in a manner conforming to a qualified
election, then to the Participant's designated Beneficiary. The
surviving spouse may elect to have distribution of the vested
account balance commence within the 90-day period following the
date of the Participant's death. The account balance shall be
adjusted for gains or losses occurring after the Participant's
death in accordance with the provisions of the Plan governing the
adjustment of account balances for other types of distributions.
This Section shall not be operative with respect to a Participant
in a profit sharing plan if the plan is a direct or indirect
transferee of a defined benefit plan, money purchase plan, a target
benefit plan, stock bonus, or profit sharing plan which is subject
to the survivor annuity requirements of Section 401(a)(11) and
Section 417 of the Code. If this Section is operative, then the
provisions of this Article, other than Section 12.7, shall be
inoperative.
(b) The Participant may waive the spousal death benefit described in
this Section at any time provided that no such waiver shall be
effective unless it satisfies the conditions (described in Section
12.4(c)) that would apply to the Participant's waiver of the
Qualified Pre-retirement Survivor Annuity.
(c) For purposes of this Section, vested account balance shall mean, in
the case of a money purchase pension plan or a target benefit plan,
the Participant's separate account balance attributable solely to
accumulated deductible Employee contributions within the meaning of
Section 72(o)(5)(B) of the Code. In the case of a profit sharing
plan, vested account balance shall have the same meaning as
provided in Section 12.4(f).
12.7 TRANSITIONAL RULES
(a) Any living Participant not receiving benefits on August 23, 1984,
who would otherwise not receive the benefits prescribed by the
previous Sections of this Article must be given the opportunity to
elect to have the prior Sections of this Article apply if such
Participant is credited with at least one Hour of Service under
this Plan or a predecessor plan in a Plan Year beginning on or
after January 1, 1976, and such Participant had at least ten (10)
years of vesting service when the Participant separated from
service.
(b) Any living Participant not receiving benefits on August 23, 1984,
who was credited with at least one Hour of Service under this Plan
or a predecessor plan on or after September 2, 1974, and who is not
otherwise credited with any service in a Plan Year
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<PAGE>
beginning on or after January 1, 1976, must be given the
opportunity to have the Participant's benefits paid in accordance
with Section 12.7(d) of this Article.
(c) The respective opportunities to elect (as described in Section
12.7(a) and Section 12.7(b) above) must be afforded to the
appropriate Participants during the period commencing on August 23,
1984, and ending on the date benefits would otherwise commence to
said Participants.
(d) Any Participant who has elected pursuant to Section 12.7(b) of this
Article and any Participant who does not elect under Section
12.7(a) or who meets the requirements of Section 12.7(a) except
that such Participant does not have at least ten (10) years of
vesting service when the Participant separates from service, shall
have the Participant's benefits distributed in accordance with all
of the following requirements if benefits would have been payable
in the form of a life annuity:
(1) Automatic joint and survivor annuity. If benefits in the form
of a life annuity become payable to a married Participant who:
(i) begins to receive payments under the Plan on or after
Normal Retirement Age; or
(ii) dies on or after Normal Retirement Age while still working
for the Employer; or
(iii) begins to receive payments on or after the qualified early
retirement age; or
(iv) separates from service on or after attaining Normal
Retirement Age (or the qualified early retirement age) and
after satisfying the eligibility requirements for the
payment of benefits under the Plan and thereafter dies
before beginning to receive such benefits;
then such benefits will be received under this Plan in the form
of a Qualified Joint and Survivor Annuity, unless the
Participant has elected otherwise during the election period.
The election period must begin at least 6 months before the
Participant attains qualified early retirement age and end not
more than 90 days before the commencement of benefits. Any
election hereunder will be in writing and may be changed by the
Participant at any time.
(2) Election of early survivor annuity. A Participant who is
employed after attaining the qualified early retirement age will
be given the opportunity to elect, during the election period,
to have a survivor annuity payable on death. If the Participant
elects the survivor annuity, payments under such
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<PAGE>
annuity must not be less than the payments which would have been
made to the spouse under the Qualified Joint and Survivor
Annuity if the Participant had retired on the day before the
Participant's death. Any election under this provision will be
in writing and may be changed by the Participant at any time.
The election period begins on the later of (1) the 90th day
before the Participant attains the qualified early retirement
age, or (2) the date on which participation begins, and ends on
the date the Participant terminates employment.
(3) For purposes of this Section 12.7(d):
(i) Qualified early retirement age is the latest of:
(a) the earliest date, under the Plan, on which the
Participant may elect to receive retirement benefits,
(b) the first day of the 120th month beginning before the
Participant reaches Normal Retirement Age, or
(c) the date the Participant begins participation.
(ii) Qualified Joint and Survivor Annuity is an annuity for the
life of the Participant with an survivor annuity for the
life of the spouse as described in Section 2.41 of Article
Two.
12.8 CASH-OUTS
(a) If the value of a Participant's vested account balance derived From
Employer and Employee contributions exceeds (or at the time of any
prior distribution exceeded) $3,500, and the account balance is
immediately distributable, the Participant and the Participant's
spouse (or where either the Participant or the spouse has died, the
survivor) must consent to any distribution of such account balance.
The consent of the Participant and the Participant's spouse shall
be obtained in writing within the 90-day period ending on the
annuity starting date. The annuity starting date is the first day
of the first period for which an amount is paid as an annuity or
any other form. The Committee shall notify the Participant and the
Participant's spouse of the right to defer any distribution until
the Participant's account balance is no longer immediately
distributable. Such notification shall include a general
description of the material features, and an explanation of the
relative values of, the optional forms of benefit available under
the Plan in a manner that would satisfy the notice requirements of
Section 417(a)(3) of the Code, and shall be provided no less than
30 days and no more than 90 days prior to the annuity starting date.
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<PAGE>
(b) Notwithstanding the foregoing, only the Participant need consent to
the commencement of a distribution in the form of a Qualified Joint
and Survivor Annuity while the account balance is immediately
distributable. (Furthermore, if payment in the form of a Qualified
Joint and Survivor Annuity is not required with respect to the
Participant pursuant to Section 12.2 of the Plan, only the
Participant need consent to the distribution of an account balance
that is immediately distributable.) Neither the consent of the
Participant nor the Participant's spouse shall be required to the
extent that a distribution is required to satisfy Section 401(a)(9)
or Section 415 of the Code. In addition, upon termination of this
Plan if the Plan does not offer an annuity option (purchased from a
commercial provider), the Participant's account balance may,
without the Participant's consent, be distributed to the
Participant or transferred to another defined contribution plan
(other than an Employee stock ownership plan as defined in Section
4975(e)(7) of the Code) within the same controlled group.
(c) An account balance is immediately distributable if any part of the
account balance could be distributed to the Participant (or
surviving spouse) before the Participant attains (or would have
attained if not deceased) the later of Normal Retirement Age or age
62.
(d) For purposes of determining the applicability of the foregoing
consent requirements to distribution made before the first day of
the first Plan Year beginning after December 31, 1988, the
Participant's vested account balance shall not include amounts
attributable to accumulated deductible Employee contributions
within the meaning of Section 72(o)(5)(B) of the Code.
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ARTICLE THIRTEEN
PAYMENTS UPON DEATH
13.1 SELECTION OF BENEFICIARY
If the Participant does not designate a Beneficiary, then the Committee
shall select a Beneficiary in accord with the provisions of Section 2.6
to receive proceeds payable upon the death of such Participant and
shall select any available method of payment. If the Beneficiary
designated by the Participant is other than the Participant's spouse,
the Participant must furnish to the Committee the written consent of
the Participant's spouse in accordance with Section 12.4(c) of the Plan.
13.2 PROCEDURE UPON DEATH
(a) Subject to Article One, upon the death of a Participant, or a
terminated or retired Participant for whom benefits are still held
hereunder by the Trustee, the Beneficiary or legal representative
of the decedent shall make an application for benefits to the
Committee. If the application for benefits is granted, the
Committee shall cooperate with the Beneficiary so that the
Beneficiary may receive the benefits so held by the Trustee for
such present or former Participant and shall suitably direct the
Trustee as to the action to be taken by the Trustee hereunder. If
the death of a Participant occurs prior to the Participant's Normal
Retirement Date and before receipt of any payment hereunder, the
benefit payable to the surviving spouse or other Beneficiary
designated in accordance with the terms of the Plan shall be (i)
the amount payable under any insurance and annuity contracts, and
(ii) an amount equal to the Participant's Account and Employee
Contribution Account not attributable to such insurance or annuity
contracts. Such death benefit shall be incidental and shall take
into account amounts paid as a Qualified Pre-Retirement Survivor
Annuity or a Qualified Joint and Survivor Annuity, if applicable
under the Plan.
(b) The Committee shall direct the Trustee to distribute the benefits
so determined to the Beneficiary designated, if any, otherwise to
the surviving spouse of the deceased Participant, if any, otherwise
to the executor or administrator of the Participant's estate in a
form equivalent to a Qualified Pre-retirement Survivor Annuity,
unless otherwise elected in accordance with Article Twelve hereof.
If so elected, then such distribution shall be in the form of an
optional mode in accordance with Section 11.2 of the Plan.
(c) If the Participant dies after distribution of the Participant's
interest has commenced, the remaining portion of such interest will
continue to be distributed at least as rapidly as under the
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method of distribution being used prior to the Participant's death.
(d) If the Participant dies before distribution of the Participant's
interest commences, the Participant's entire interest will be
distributed no later than five (5) years after the Participant's
death unless distribution is made in accordance with the following
options:
(i) if any portion of the Participant's interest is payable to a
designated Beneficiary, distributions may be made in
substantially equal installments over the life or life
expectancy of the designated Beneficiary commencing no later
than one (1) year after the Participant's death;
(ii) if the designated Beneficiary is the Participant's surviving
spouse, the date distributions are required to begin in
accordance with (i) above shall not be earlier than the date
on which the Participant would have attained age seventy and
one-half (70-1/2), and, if the spouse dies before payments
begin, subsequent distributions shall be made as if the spouse
had been the Participant.
(e) For purposes of Section 13.2(d) above, payments will be calculated
by use of the return multiples specified in Section 1.72-9 of the
Regulations under the Code. Life expectancy of a surviving spouse
may be recalculated annually, however, in the case of any other
designated Beneficiary, such life expectancy will be calculated at
the time payment first commences without further recalculation.
(f) For purposes of this Section, any amount paid to a child of the
Participant will be treated as if it had been paid to the surviving
spouse if the amount becomes payable to the surviving spouse when
the child reaches the age of majority.
13.3 PAYMENT OF TAXES
If the whole or any portion of the Trust Fund shall become liable for
the payment of any income, estate, inheritance or other tax, charge or
assessment which the Trustee may be required to pay, the Trustee is
hereby authorized to pay any such tax, charge or assessment from any
money or other property held for the account of the person whose
interest in the Trust Fund is still liable. At least ten (10) days
prior to any such payment, the Trustee shall notify the Committee in
writing of its intention to make such payment, and the Trustee may
require such receipts, releases or other document from the taxing
authority as it may deem necessary.
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ARTICLE FOURTEEN
SPECIAL RULES FOR TOP-HEAVY PLANS
14.1 CONTINGENT RULES
If the Plan is or becomes top-heavy in any Plan Year beginning after
December 31, 1983, the provisions of Sections 14.1(a), 14.1(d) and
14.1(h) will supersede any conflicting provisions in the Plan.
(a) For any Plan Year in which this Plan is top-heavy, the minimum
vesting schedule of Section 1.4(c) will automatically apply to the
Plan. In no event shall the vesting schedule in Section 1.4(c) fail
to satisfy the requirements of Code Section 416(b). The minimum
vesting schedule applies to all benefits within the meaning of
Section 411(a)(7) of the Code except those attributable to Employee
contributions, including benefits accrued before the Effective Date
oF Section 416 and benefits accrued before the Plan became
top-heavy. Further, no decrease in a Participant's nonforfeitable
percentage may occur in the event the Plan's status as top-heavy
changes for the Plan Year. However, this Section does not apply to
the account balances of any Employee who does not have an Hour of
Service after the Plan has initially become top-heavy and such
Employee's vested account balance attributable to Employer
Contributions and forfeitures will be determined without regard to
this Paragraph.
(b) Except to the extent inconsistent with the provisions of this
Section, the rules of Article Five shall apply for purposes of this
Section. All Account Balances must be subject to the minimum
vesting schedule including benefits accrued before January 1, 1984
and benefits accrued before the Plan becomes a Top-Heavy Plan.
(c) In any Plan Year in which the Plan ceases to be a Top-Heavy Plan,
the vesting schedule may change to the vesting schedule set forth
in Section 1.4(b) herein. However, any portion of the Account
6balance that was nonforfeitable before the Plan ceased to be a
Top-Heavy Plan must remain nonforfeitable and any Participant with
three (3) or more Years of Service must be given the option of
remaining under the prior minimum vesting schedule set forth in
this Article. An election by the Participant will be in accordance
with the period provided under Section 5.6 of this Plan.
(d) Except as otherwise provided in Sections 14.1(f) and 14.1(g) below,
the Employer Contributions and forfeitures allocated on behalf of
any Participant who is not a Key Employee shall not be less than
the lesser of the amount set forth in Section 1.3(j) or in the case
where the Employer has no defined benefit plan which designates
this Plan to satisfy Section 401 of the Code, the largest
percentage of Employer Contributions and forfeitures,
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which is allocated on behalf of any Key Employee for that year. The
minimum allocation is determined without regard to any Social
Security contribution. This minimum allocation shall be made even
though, under other Plan provisions, the Participant would not
otherwise be entitled to receive an allocation, or would have
received a lesser allocation for the year because of (i) the
Participant's failure to complete 1,000 Hours of Service (or any
equivalent provided in the Plan), or (ii) the Participant's failure
to make mandatory Employee contributions to the Plan, or (iii)
Compensation less than a stated amount.
(e) For purposes of computing the minimum allocation, Compensation
shall mean 415 Compensation as defined in Section 4.19(m)(l) of the
Plan. However, the Employer may elect, on a uniform, consistent and
nondiscriminatory basis, to define Compensation for purposes of
this Section 14.1(e) as W-2 Compensation.
For purposes of determining who is a Key Employee, Compensation shall
be defined as Code Section 415(c)(3) compensation, including within
such compensation amounts contributed by the Employer pursuant to a
cash or deferred arrangement.
(f) The provision in Section 14.1(d) above shall not apply to any
Participant who was not employed by the Employer on the last day of
the Plan Year unless otherwise required by Section 1.3(c)(5) and
Section 1.3(d)(3).
(g) The provision in 14.1(d) above shall not apply to any Participant
to the extent the Participant is covered under any other plan or
plans of the Employer and the Employer has provided in Section
1.3(e) that the minimum allocation or benefit requirement
applicable to Top-Heavy Plans will be met in the other plan or
plans.
(1) For purposes of this subsection, all defined contribution plans
required to be included in an Aggregation Group shall be
treated as one plan.
(2) This Paragraph shall not apply if the Plan is required to be
included in an Aggregation Group and the Plan enables a defined
benefit plan required to be included in such group to meet the
requirements of Section 401(a)(4) or Section 410 of the Code.
(3) All Employer Contributions attributable to salary reduction,
Participant deferral or similar arrangement shall be taken into
account in determining minimum contributions under this Section.
(h) With respect to limitation on Compensation, the Plan meets the
requirements of this Paragraph if the Compensation of each
Participant taken into account under the Plan does not exceed the
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first Two Hundred Thousand Dollars ($200,000.00) for each Top-Heavy
Plan Year.
(i) The limitation on Compensation shall be automatically adjusted in
accordance with Regulations under Section 416 of the Code.
(j) The minimum allocation required (to the extent required to be
nonforfeitable under Section 416(b) of the Code) may not be
forfeited under Section 411(a)(3)(D) or 411(a)(3)(D) of the Code.
14.2 NO IMPUTED SOCIAL SECURITY BENEFITS
A Top-Heavy Plan shall not be treated as meeting the minimum vesting
and benefit requirements under this Article unless such Plan meets the
requirements without taking into account contributions or benefits
under Chapters 2 or 21 of the Code, Title II of the Social Security
Act, or any other Federal or State law.
14.3 COORDINATION OF TWO OR MORE PLANS OF EMPLOYER
A minimum contribution equal to the amount stated in Section 1.3(k)
shall be made for all eligible Non-Key Employees. In the event that no
election has been made under Section 1.3(k), where the Employer
maintains a defined benefit plan and a defined contribution plan,
Non-Key Employees who participate under both plans will be entitled to
a guaranteed minimum contribution equal to five percent (5%) of
Compensation from the defined contribution plan on a non-integrated
basis; however, if no defined contribution plan is maintained by the
Employer, or if the required defined contribution plan contribution is
less than five percent (5%) of Compensation, then Non-Key Employees
will be entitled to guaranteed minimum benefits from the Employer's
defined benefit pension plan.
14.4 BENEFITS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF DETERMINING WHETHER SUCH
PLAN IS A TOP-HEAVY PLAN
In determining whether such Plan is a Top-Heavy Plan (or whether any
Aggregation Group which includes such Plan is a Top-Heavy Group), the
following benefits shall not be taken into account:
(a) Except to the extent provided in Regulations under the Code, any
rollover contribution (or similar transfer) initiated by the
Participant and made after December 31, 1983, to a Plan shall not
be taken into account with respect to the transferee Plan; and
(b) If any Participant is a Non-Key Employee with respect to the Plan
for any Plan Year, but such Participant was a Key Employee with
respect to such Plan for any prior Plan Year, the account of such
Participant shall not be taken into account.
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14.5 ADJUSTMENT TO SECTION 415 LIMITATIONS FOR TOP-HEAVY PLANS
In any Plan Year in which the Plan is a Top-Heavy Plan, and the
Employer maintains both a defined benefit and a defined contribution
plan, the Plan fractions, as set forth in the definitions of Defined
Benefit Plan Fraction and Defined Contribution Plan Fraction hereof,
shall be applied by substituting "1.0" for "1.25".
14.6 EXCEPTION WHERE BENEFITS FOR KEY EMPLOYEES DO NOT EXCEED 90% OF TOTAL
BENEFITS AND ADDITIONAL CONTRIBUTIONS ARE MADE FOR NON-KEY EMPLOYEES
Plan Section 14.5 shall not apply with respect to any Plan Year in
which the Plan is a Top-Heavy Plan if the requirements of Sections
14.6(a) and 14.6(b) below are met with respect to this Plan:
(a) With respect to minimum benefit requirements, the Employer
Contributions for the Plan Year for each Participant who is a
Non-Key Employee shall not be less than four percent (4%) of such
Participant's Compensation.
Except to the extent inconsistent with the provisions of this
subsection, the rules of Section 14.1 of this Plan shall apply for
purposes of this subsection.
(b) With respect to minimum total benefits for Key Employees, the Plan
will meet the requirements of this Section if the Plan would not be
a Top-Heavy Plan if "90%" were substituted for "60%" each place it
appears in the definition of Top-Heavy Plan herein.
14.7 TRANSITIONAL RULE
If, but for this Section, Section 14.5 would begin to apply with
respect to any Plan Year in which the Plan is a Top-Heavy Plan, the
application of Section 14.5 shall be suspended with respect to any
Participant so long as there are no Employer Contributions, forfeitures
or voluntary nondeductible contributions allocated to such Participant.
14.8 TOP-HEAVY DEFINITIONS
(a) Top-heavy ratio:
(1) If the Employer maintains one or more defined contribution
plans (including any simplified employee pension plan) and the
Employer has not maintained any defined benefit plan which
during the 5-year period ending on the Determination Date(s)
has or has had accrued benefits, the top-heavy ratio for this
Plan alone or for the required or permissive Aggregation Group
as appropriate is a fraction, the numerator of which is the sum
of the account balances of all Key Employees as of the
Determination Date(s) (including any part of any account
balance distributed in the 5-year period ending on the
Determination Date(s)), and the
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denominator of which is the sum of all account balances
(including any part of any account balance distributed in the
5-year period ending on the Determination Date(s)), both
computed in accordance with Section 416 of the Code and the
regulations thereunder. Both the numerator and denominator of
the top-heavy ratio are increased to reflect any contribution
not actually made as of the Determination Date, but which is
required to be taken into account on that date under Section
416 of the Code and the regulations thereunder.
(2) If the Employer maintains one or more defined contribution
plans (including any simplified employee pension plan) and the
Employer maintains or has maintained one or more defined
benefit plans which during the 5-year period ending on the
Determination Date(s) has or has had any accrued benefits, the
top-heavy ratio for any required or permissive Aggregation
Group as appropriate is a fraction, the numerator of which is
the sum of account balances under the aggregated defined
contribution plan or plans for all Key Employees, determined in
accordance with (a) above, and the present value of accrued
benefits under the aggregated defined benefit plan or plans for
all Key Employees as of the Determination Date(s), and the
denominator of which is the sum of the account balances under
the aggregated defined contribution plan or plans for all
Participants, determined in accordance with (a) above, and the
present value of accrued benefits under the defined benefit
plan or plans for all Participants as of the Determination
Date(s), all determined in accordance with Section 416 of the
Code and the regulations thereunder. The accrued benefits under
a defined benefit plan in both the numerator and denominator of
the top-heavy ratio are increased for any distribution of an
accrued benefit made in the five-year period ending on the
Determination Date.
(3) For purposes of (a) and (b) above the value of account balances
and the present value of accrued benefits will be determined as
of the most recent valuation date that falls within or ends
with the twelve (12) month period ending on the Determination
Date, except as provided in Section 416 of the Code and the
Regulations thereunder for the first and second plan years of a
defined benefit plan. The account balances and accrued benefits
of a Participant (1) who is not a Key Employee but who was a
Key Employee in a prior year, or (2) who has not been credited
with at least one Hour of Service with any Employer maintaining
the Plan at any time during the 5-year period ending on the
Determination Date will be disregarded. The calculation of the
top-heavy ratio, and the extent to which distributions,
rollovers, and transfers are taken into account will be made in
accordance with Section 416 of the Code and the Regulations
thereunder. Deductible Employee contributions will not be taken
into account for purposes of computing the top-heavy ratio. When
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aggregating Plans the value of account balances and accrued
benefits will be calculated with reference to the Determination
Dates that fall within the same calendar year.
The accrued benefit of a Participant other than a Key Employee
shall be determined under (a) the method, if any, that
uniformly applies for accrual purposes under all defined
benefit plans maintained by the Employer, or (b) if there is no
such method, as if such benefit accrued not more rapidly than
the slowest accrual rate permitted under the fractional rule of
Section 411(b)(1)(C) of the Code.
(4) Permissive Aggregation Group: The required Aggregation Group of
Plans plus any other plan or plans of the Employer which, when
considered as a group with the required Aggregation Group,
would continue to satisfy the requirements of Sections
401(a)(4) and 410 of the Code.
(5) Required Aggregation Group: (1) Each qualified plan of the
Employer in which at least one Key Employee participates or
participated at any time during the determination period
(regardless of whether the Plan has terminated), and (2) any
other qualified plan of the Employer which enables a plan
described in (1) to meet the requirements of Sections 401(a)(4)
or 410 of the Code.
(6) Determination Date: For any Plan Year subsequent to the first
Plan Year, the last day of the preceding Plan Year. For the
first Plan Year of the Plan, the last day of that year.
(7) Top-Heavy Group: Any Aggregation Group if the sum (as of the
Determination Date) of (i) the present value of the cumulative
accrued benefits for Key Employees under all defined benefit
plans included in such group, and (ii) the aggregate of the
accounts of Key Employees under all defined contribution plans
included in such group, exceed sixty percent (60%) of a similar
sum determined for all Employees, excluding former Key
Employees. For purposes of determining the present value of the
cumulative benefit for any Participant, or the amount of the
account of any Participant, such present value or amount shall
be determined in accordance with Regulations issued by the
Department of Treasury and such present value or amount shall
be increased by the aggregate distributions made with respect
to such Participant under the Plan during the five (5) year
period ending on the Determination Date.
Account balances shall be determined as of the most recent
valuation date occurring within a twelve (12) month period
ending on the Determination Date and shall be adjusted for
contributions due or made as of the Determination Date.
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If an Aggregation Group includes two (2) or more defined
benefit plans, the same actuarial assumptions must be used with
respect to all such plans and must be specified in such plans.
(8) Top-heavy Plan shall mean for any Plan Year beginning after
December 31, 1983, this Plan is top-heavy if any of the
following conditions exists:
(i) if the top-heavy ratio for this Plan exceeds 60 percent
and this Plan is not part of any required Aggregation
Group or permissive Aggregation Group of plans, or
(ii) if this Plan is part of a required Aggregation Group of
plans but not part of a permissive Aggregation Group and
the top-heavy ratio for the group or plans exceeds sixty
(60) percent, or
(iii) if this Plan is part of a required Aggregation Group and
part of a permissive Aggregation Group of plans and the
top-heavy ratio for the permissive Aggregation Group
exceeds 60 percent.
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ARTICLE FIFTEEN
AMENDMENT, TERMINATION AND MERGER
15.1 AMENDMENT OF PLAN
The Employer shall have the right to amend this Plan from time to time,
and to amend or cancel any amendments. Such amendments shall be stated
in an instrument in writing, executed by the Employer in the same
manner as this Plan. This Plan shall be amended in the manner and at
the time therein set forth, and all Participants shall be bound
thereby, subject to the following:
(a) No amendment shall cause any of the assets of the Trust to be used
for or diverted to purposes other than for the exclusive benefit of
Participants or their Beneficiaries.
(b) No amendment shall have any retroactive effect which deprives any
Participant of any benefit already vested, except that such
changes, if any, as may be required to permit the Plan to meet the
requirements of the Code, or of the corresponding provisions of any
subsequent revenue law, may be made to assure the deductibility for
tax purposes of any Employer Contributions.
(c) No amendment shall have the effect of reducing early retirement
benefits or other optional retirement benefits under the Plan
accrued to the date of the amendment for any Participant who at any
time on or after the amendment satisfied the pre-amendment
conditions for such benefits.
(d) No amendment shall have the effect of eliminating "Code Section
411(d)(6) protected benefits" without preserving such benefits as
of the later of the adoption or effective date of such amendment.
(e) No amendment shall create or effect any discrimination in favor of
Participants who are officers, shareholders or Highly Compensated
Employees.
(f) No amendment shall increase the duties or liabilities of the
Trustee without the Trustee's written consent.
(g) No amendment shall decrease a Participant's Account balance or
eliminate an optional mode of distribution except to the extent
permitted under Section 412(c)(8) of the Code.
15.2 DISCONTINUANCE AND TERMINATION
(a) This Plan is irrevocable and it is the expectation of the Employer
that this Plan and the payment of contributions hereunder will be
continued indefinitely, but continuance of the Plan is not assumed
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<PAGE>
as a contractual obligation of the Employer, and the right is
reserved at any time to reduce, suspend or discontinue
contributions hereunder. In the event of a complete discontinuance
of Employer Contributions, each Participant shall have a one
hundred percent (100%) vested interest in his Account.
(b) The Employer may terminate this Plan at any time upon fifteen (15)
days' written notice to the Trustee. Upon termination, or partial
termination, of the Plan or upon complete discontinuance of
contributions to the Plan, the entire interest of each of the
Participants shall immediately vest one hundred percent (100%). The
Trustee shall, with reasonable promptness, liquidate all assets
remaining in the Trust. Upon the liquidation of all assets and
after deducting estimated expense for liquidation and distribution,
the Committee shall make the allocations required under Article
Four, where applicable, with the same effect as though the date of
completion of liquidation was an Anniversary Date of the Plan.
Following these allocations, the Trustee shall promptly distribute
to each former Participant a benefit equal to the amount credited
to the Participant's accounts as of the date of completion of
liquidation, after receipt of appropriate instructions from the
Committee.
15.3 MERGER AND CONSOLIDATION
In the event that this Plan merges or consolidates with, or transfers
its assets or liabilities to, any other qualified plan of deferred
compensation, no Participant shall, solely on account of such merger,
consolidation or transfer, be entitled to a benefit on the day
following such event which is less than the benefit to which the
Participant was entitled on the day preceding such event. For the
purpose of this Section, the benefit to which a Participant is entitled
shall be calculated based upon the assumption that a Plan termination
and distribution of assets occurred on the day as of which the amount
of the Participant's entitlement is being determined.
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<PAGE>
ARTICLE SIXTEEN
MISCELLANEOUS PROVISIONS
16.1 LIMITATION ON EMPLOYEES' RIGHTS
Participation in this Plan shall not give any Employee the right to be
retained in the Employer's employ or any right or interest in the Plan
or Trust other than as herein provided. The Employer reserves the right
to dismiss any Employee without any liability for any claim either
against the Plan or Trust, except to the extent provided herein, or
against the Employer.
16.2 NON-ASSIGNABILITY
(a) The policies and benefits hereunder are intended for the protection
of the Participants and their Beneficiaries. No retirement income
insurance or annuity policy or Trust property shall be transferable
except by the Trustee as directed by the Committee. No part of or
interest in or under this Trust shall be transferable or assignable
in any manner, either by voluntary or involuntary act of such
Employee or Beneficiary or by operation of law, nor shall the same
be liable or be taken for any debt, liability, contract or any
other obligation of any such Employee or Beneficiary, except that
the Committee may permit the voluntary, revocable assignment of up
to ten percent (10%) of any benefit payment by any Participant who
is receiving benefits under the Plan.
(b) No benefit or interest available hereunder will be subject to
assignment or alienation, either voluntarily or involuntarily. The
preceding sentence shall also apply to the creation, assignment, or
recognition of a right to any benefit payable with respect to a
Participant pursuant to a domestic relations order, unless such
order is determined to be a qualified domestic relations order, as
defined in Section 414(p) of the Code, or any domestic relations
order entered before January 1, 1985.
16.3 QUALIFIED DOMESTIC RELATIONS ORDERS
In the case of any domestic relations order, regardless of whether such
order is a "qualified domestic relations order", within the meaning of
Section 414(p) of the Code, received by the Plan, the Committee shall
notify the Participant to whom the order relates and any "alternate
payee" of the receipt of such order and the Plan's procedures for
determining whether such order is a "qualified domestic relations
order", within the meaning of Section 414(p) of the Code. Within
eighteen 18 months after receipt of such order, the Committee shall
determine whether such order is a "qualified domestic relations order",
within the meaning of Section 414(p) of the Code, and shall notify the
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Participant to whom the order relates and each "alternate payee" of
such determination.
(b) During any period in which the issue of whether a domestic
relations order is a "qualified domestic relations order", within
the meaning of Section 414(p) of the Code, is being determined (by
the Committee, by a court of competent jurisdiction or otherwise),
the Committee shall direct the Trustee to segregate in a separate
account in the Plan or in an escrow account the amounts which would
have been payable to the "alternate payee" during such period if
the order had been determined to be a "qualified domestic relations
order", within the meaning of Section 414(p) of the Code. Such
segregation is not required for amounts that would not otherwise be
paid during the period of the determination.
(c) If, within eighteen (18) months after receipt by the Plan of a
domestic relations order, the order (or modification thereof) is
determined to be a "qualified domestic relations order", within the
meaning of Section 414(p) of the Code, the Committee shall direct
the Trustee to pay the amounts segregated pursuant to Section
16.3(b) (plus any interest thereon) to the person or persons
entitled thereto. If, however, within such eighteen (18) month
period (i) it is determined that such order is not a "qualified
domestic relations order", within the meaning of Section 414(p) of
the Code, or (ii) the issue as to whether such order is a
"qualified domestic relations order" is not resolved, the Committee
may direct the Trustee: (1) to return the segregated amounts to the
Participant's (Non-alternate payee) Account(s) --in the case of an
active Participant; (2) to set up an account for the benefit of the
alternate payee for such money until such time the issue is
resolved ; or, (3) to pay the amounts segregated pursuant to
Section 16.3(b) (plus any interest thereon) to the person or
persons who would have been entitled to such amounts if there had
been no order, subject to the payee executing a release exempting
the Plan and Trust from any future obligations resulting from the
domestic relations proceedings. Any determination that an order is
a "qualified domestic relations order" which is made after the
close of such eighteen (18) month period shall be applied
prospectively only.
(d) The Committee shall establish reasonable procedures to determine
whether domestic relations orders are "qualified domestic relations
orders", within the meaning of Section 414(p) of the Code, and to
administer distributions under "qualified domestic relations
orders". Such procedures (i) shall be in writing, (ii) shall
provide for the notification, at the address included in the
domestic relations order, of each person specified in a domestic
relations order as entitled to payment of benefits under the Plan
of such procedures promptly upon receipt of the Plan of the
domestic relations order and (iii) shall permit an "alternative
payee" to designate a representative for receipt of copies of
notices that are sent to the "alternate payee" with respect to a
domestic relations order.
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(e) To the extent provided in any "qualified domestic relations order",
within the meaning of Section 414(p) of the Code, the former spouse
of a Participant shall be treated as a surviving spouse of such
Participant for purposes of Sections 12.2 through Section 12.7 of
this Plan (relating to Qualified Pre-retirement Survivor Annuities
and Qualified Joint and Survivor Annuities) and, if married to the
Participant for at least one (1) year, the surviving spouse shall
be treated as meeting the requirements of Section 12.4(d) of this
Plan.
(f) Special Definitions- For purposes of this Section 16.3, the
following terms are defined as follows:
(1) "Alternate payee" shall mean any spouse, former spouse, child
or other dependent of a Participant who is recognized by a
domestic relations order as having a right to receive all, or a
portion, of the Account Balances payable under this Plan with
respect to such Participant.
(2) "Domestic relations order" shall mean any judgment, decree or
order (including approval of a property settlement agreement)
which (A) relates to the provision of child support, alimony
payments, or marital property rights to a spouse, former
spouse, child, or other dependent of a Participant and (B) is
made pursuant to a State domestic relations law (including a
community property law).
(3) "Qualified domestic relations order" shall mean a domestic
relations order which creates or recognizes the existence of an
alternate payee's right to, or assigns to an alternate payee
the right to, receive all or a portion of the Account Balances
payable with respect to a Participant under this Plan and which
meets the requirements set forth in Sections 414(p)(2) and (3)
of the Code.
16.4 CONTINUATION OF BUSINESS
In the event of the termination of the business conducted by the
Employer for any reason, this Trust may be terminated unless a
successor to such business, by whatever form or manner results,
notifies the Trustee and all of the Participants that it elects to
continue this Plan and Trust, in which event it shall continue without
the necessity of executing a supplemental agreement. The successor
shall thereupon succeed to all rights, powers and duties of the
Employer hereunder, and the employment of any Participant who is
continued in the employ of such successor shall not be deemed to have
terminated or severed for any purpose hereunder. Notwithstanding the
foregoing, the Trustee shall have the right at any time to require any
such successor to execute a supplemental agreement continuing the Plan
and Trust.
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16.5 CONTRIBUTIONS NOT RECOVERABLE
(a) It shall be impossible at any time prior to the satisfaction of all
liabilities with respect to Participants and their Beneficiaries
for any part of the principal or income to be used for, or diverted
to, purposes other than the exclusive benefit of Participants or
their Beneficiaries. Under no circumstances or conditions
whatsoever shall any Trust revert to or inure to the Employer's
interest prior to the satisfaction of all liabilities under this
Plan. Any cash or property of any kind in this Trust which is not
payable to a Participant or to the Participant's Beneficiary or
estate shall be applied by the Trustee toward the payment of the
next succeeding premiums as they may become due.
(b) Any contribution made by the Employer because of a mistake of fact
may be returned to the Employer within one year of the contribution.
(c) The Employer reserves the right to recover at termination of the
Plan and Trust any balance remaining in the Trust which is due to
erroneous actuarial computation. Further, amounts properly
allocated to a suspense account may be returned to the Employer
upon termination.
(d) In the event that the Commissioner of Internal Revenue determines
that the Plan is not initially qualified under the Code, any
contribution made incident to that initial qualification by the
Employer must be returned to the Employer within one year after the
date the initial qualification is denied, but only if the
application for the qualification is made by the time prescribed by
law for filing the Employer's return for the taxable year in which
the Plan is adopted, or such later date as the Secretary of the
Treasury may prescribe.
16.6 PAYMENTS TO DISABLED PERSONS
The Trustee may make payments or assign policies to Participants or
Beneficiaries under disability by making said payment or assigning said
policies to the conservator or guardian of the persons of such
Employees or Beneficiaries without the intervention of any Court, and
the Trustee is hereby exonerated of and from all liability or
responsibility for or by reason thereof.
16.7 FIDUCIARY RESPONSIBILITY
(a) Each Fiduciary of the Plan shall discharge the Fiduciary's duties
solely in the interests of the Participants and their
Beneficiaries. Each Fiduciary of the Plan shall act with the care,
skill, prudence and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in conducting an enterprise of
like character and with like aims. Fiduciaries shall diversify
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Plan assets to minimize risk of large losses, unless under the
circumstances it is clearly prudent not to do so.
(b) A Fiduciary of the Plan shall be liable for the breach of the
Fiduciary standard of conduct by another Fiduciary if the Fiduciary
knowingly participates in a breach of such standard committed by
the other Fiduciary. A Fiduciary of the Plan shall be liable for
breach of the Fiduciary standard of conduct by another Fiduciary of
the Plan if the Fiduciary knowingly undertakes to conceal a breach
committed by the other.
(c) Except as otherwise allowed by law or provided in this Plan, a
Fiduciary shall not cause the Plan to engage in a transaction if
such transaction is not exempt from the prohibited transaction
rules of ERISA and if the Fiduciary knows or should know that such
transaction constitutes a direct or indirect:
(1) Sale or exchange, or leasing, of any property between the Plan
and a Party-in-Interest;
(2) Lending of money or other extension of credit between the Plan
and a Party-in-Interest;
(3) Furnishing of goods, services, or facilities between the Plan
and a Party-in-Interest;
(4) Transfer to, or use by or for the benefit of, a Party-in
Interest, of any assets of the Plan; or
(5) Acquisition, on behalf of the Plan, of any Employer security or
Employer real property in violation of Section 407(a) of ERISA.
(d) Except as otherwise allowed by law or provided in this Plan, a
Fiduciary shall not:
(1) Deal with the assets of the Plan in the Fiduciary's own
interest or for the Fiduciary's own account;
(2) In the fiduciary, individual or in any other capacity, act in
any transaction involving the Plan on behalf of a party (or
represent a party) whose interests are adverse to the interests
of the Plan or the interests of the Plan's Participants or
Beneficiaries; or
(3) Receive any consideration for the Fiduciary's personal account
from any party dealing with the Plan in connection with a
transaction involving the assets of the Plan.
16.8 CONDITIONAL CONTRIBUTIONS
Notwithstanding anything to the contrary herein contained, as of
July 1, 1976, contributions of the Employer shall be, and hereby are,
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made subject to the conditions that (i) the Plan and Trust qualify as a
tax exempt Plan under Section 401 of the Code and (ii) such
contributions are deductible under Section 404 of the Code. In the
event that it is determined that the Plan and Trust shall not so
qualify, any contribution of the Employer made while the Plan and Trust
shall not have qualified shall be repaid to the Employer, in whole or
in part, by the Trustee within one (1) year after the date of the
denial of qualification of the Plan and Trust. In the event that there
is a determination that a deduction for the Employer's contribution
shall be disallowed, the excess of such contribution over the amount
that would have been contributed had there not occurred a mistake in
determining the deductibility of the contribution shall be repaid to
the Employer, in whole or in part, by the Trustee, within one (1) year
after the disallowance of the deduction. In the case of a contribution
of the Employer which is made by reason of mistake of fact, the excess
of such contribution over the amount that would have been contributed
had there not occurred a mistake of fact shall be repaid to the
Employer, in whole or in part, by the Trustee, within one (1) year
after the payment of the contribution. With respect to contributions
for which a deduction is disallowed (or could be disallowed) or made by
reason of mistake of fact, (i) earnings attributable to the excess
contribution shall not be returned to the Employer, (ii) losses
attributable thereto shall reduce the amount to be repaid and (iii) if
the repayment of the excess would cause the balance of a Participant's
account to be reduced to less than the amount of the Participant's
account had the excess contributions not been made, the amount of the
repayment shall be limited to the excess of the excess contribution
over the amount of the Participant's account had the excess
contribution not been made. Any amounts repaid to the Employer by the
Trustee pursuant to this Paragraph shall be repaid without liability
therefor on the part of the Trustee, to any Participant, Beneficiary or
any other person whomsoever.
16.9 FORFEITURE OF BENEFITS UPON FAILURE TO LOCATE RECIPIENT
In the event that the Committee, after reasonable effort, is unable to
locate a Participant or Beneficiary entitled to a distribution of
benefits hereunder, the Committee shall direct the Trustee that the
amount that would otherwise be distributable be treated as a
forfeiture. Should such Participant or Beneficiary subsequently notify
the Committee of such individual's location and apply for benefits in
accordance with Article Ten of the Plan, said Participant or
Beneficiary may reclaim the amount which had been treated as a
forfeiture hereunder. When said application to reclaim benefits is
approved, the Committee shall direct that such amount, not including
gains and losses that would otherwise be attributable thereto, be
reinstated on behalf of such Participant or Beneficiary from Employer
Contributions for the first Plan Year following such reclaim for which
Employer Contributions are made. Distribution of such amount shall be
made in accordance with Article Eleven of the Plan.
- 16-6 -
<PAGE>
16.10 PARTICIPATING EMPLOYERS
Notwithstanding anything herein to the contrary, with the consent of
the Employer and Trustee, any other corporation or entity, whether an
Affiliated Employer or not, may adopt this Plan and all of the
provisions hereof, and participate herein and be known as a
Participating Employer, by properly executing a document evidencing
said intent and will of such Participating Employer to participate and
by meeting the requirements set forth herein:
(a) Each Participating Employer shall be required to select the same
provisions as those selected by the Employer other than the Plan
Year, the Fiscal Year, and such other items that must, by
necessity, vary among employers.
(b) Each such Participating Employer shall be required to use the same
Trustee as provided in this Plan, or amendments thereto.
(c) The transfer of any Participant from or to an Employer
participating in this Plan, whether he be an Employee of the
Employer or a Participating Employer, shall not affect such
Participant's rights under the Plan, and all amounts credited to
such Participant's Accounts as well as his accumulated service time
with the transferor or predecessor, and his length of participation
in the Plan, shall continue to his credit. The Participating
Employer to which the Employee is transferred shall thereupon
become obligated hereunder with respect to such Employee in the
same manner as was the Participating Employer from whom the
Employee was transferred.
(d) Any expenses of the Plan which are to be paid by the Employer or
reimbursed to the Trust by the Employer shall be paid by each
Participating Employer in the same proportion that the total amount
standing to the credit of all Participants employed by such
Employer bears to the total standing to the credit of all
Participants.
(e) Each Participating Employer shall be deemed to be a part of this
Plan and, unless indicated to the contrary, shall authorize the
initial adopting Employer to act as its agent.
(f) Amendment of this Plan by the Employer at any time when there shall
be a Participating Employer hereunder shall only be by the written
action of each and every Participating Employer and with the
consent of the Trustee where such consent is necessary in
accordance with the terms of the Plan.
(g) Any Participating Employer shall be permitted to discontinue or
revoke its participation in the Plan at any time. The Participating
Employer must deliver such notice of discontinuance or revocation
in writing to the Trustee. The Trustee shall thereafter take such
action as shall be necessary to transfer the
- 16-7 -
<PAGE>
Trust assets allocable to the Participants of such Participating
Employer to the new retirement Trust established for such assets.
No such transfer of assets shall be made in the event the newly
established plan would eliminate or reduce any "Section 411(d)(6)
protected benefits". In the event that the Participating Employer
has not established a successor retirement trust, the assets
allocable to the Participants of such Participating Employer shall
be maintained in this Trust and distributed in accordance with
Article Eleven hereof.
(h) In the event a Participating Employer, which is a member of an
affiliated group (as defined in Code Section 1504), is prevented
from making a contribution which it would otherwise would have made
under the Plan, then pursuant to Code Section 404(a)(3)(B), so much
of the contribution of such Participating Employer may be made up
by other Participating Employers, as may be decided by such other
Employers. The Participating Employer(s) on whose behalf a
contribution shall be made under this Section 16.10(h) shall not be
required to reimburse the contributing Participating Employer(s).
16.11 HEADINGS NO PART OF AGREEMENT
Headings and subheadings in this Plan are inserted for convenience of
reference only. They constitute no part of the Plan.
16.12 INSTRUMENT IN COUNTERPARTS
This Agreement has been executed in several counterparts, each of which
shall be deemed an original, and said counterparts shall constitute but
one and the same instrument, which may be sufficiently evidenced by any
one counterpart.
16.13 SUCCESSORS AND ASSIGNS
This Plan shall inure to the benefit of, and be binding upon, the
parties hereto and their successors and assigns.
16.14 GENDER
The masculine gender shall include the feminine, and where appropriate,
the singular shall include the plural or the plural may be read as the
singular.
16.15 STATE LAW GOVERNS
This Plan, and its corresponding Trust shall be construed, administered
and governed in all respects under and by the laws of the State or
Commonwealth in which the Employer's principal office is located, to
the extent not pre-empted by federal law. If any provisions are
susceptible to more than one interpretation, such interpretation shall
be given thereto as is consistent with this Plan being a qualified Plan
of deferred compensation within the meaning of the Code, or
- 16-8 -
<PAGE>
corresponding provisions of subsequent revenue laws. If any provisions
of this instrument shall be held by a court of competent jurisdiction
to be invalid or unenforceable, the remaining provisions hereof shall
continue to be fully effective.
- 16-9 -
<PAGE>
EXECUTION
To record the adoption of this Plan, the Employer has caused this Plan to be
executed on this 19th day of December, of 1991.
Mitek Systems, Inc.
By: /s/ ??? ILLEGIBLE NAME ???
-------------------------------------
By:
-------------------------------------
- ---------------------------------------
Counsel for the Company
<PAGE>
CERTIFICATE OF
MITEK SYSTEMS, INC.
MITEK SYSTEMS, INC., the Sponsoring Employer of MITEK SYSTEMS, INC. 401(K)
SAVINGS PLAN ("Plan"), hereby adopts the attached Amendments to the Plan and
through this Certificate and Amendments modifies the Plan in accordance with
(1) Revenue Procedure 94-13 by adding the model language for the $150,000
annual compensation limit under Internal Revenue Code Section 401(a)(17) as
amended by the Omnibus Budget Reconciliation Act of 1993 ("OBRA '93"); (2)
Revenue Procedure 93-47, by adding the model language for waiver of the
30-day notice requirement by participants with respect to certain plan
distributions to which Internal Revenue Code Sections 401(a)(11) and 417 do
not apply; (3) Revenue Procedure 92-41, for the final regulations issued
under Internal Revenue Code Sections 401(a)(30), 401(k), 401(m), 402(g)
414(s), and 415; and (4) such other provisions as have been added or
clarified by the sponsor of the Plan's volume submitter specimen plan for
compliance with applicable law and regulations and for the efficient
administration of the Plan.
For the Employer:
By: /s/ JOHN F. KESSLER Date: 12/24/94
---------------------------------------------- -----------------------
Approved by the Plan Administrator:
By: /s/ DIANA DEWALT Date: 12/24/94
---------------------------------------------- -----------------------
Approved by Attorney:
By: Date:
---------------------------------------------- -----------------------
<PAGE>
AMENDMENT
TO THE
PLAN
Upon the execution of the Certificate adopting the following Amendment, said
Amendment shall become part (and amend related sections) of the Plan
document, and any attachments thereto affecting such related provisions.
l. Article 2 shall be amended by the addition of the following paragraph
before the last paragraph of Section 2.9 as Follows:
"In addition to other applicable limitations set forth in the Plan,
and notwithstanding any other provision of the Plan to the contrary,
for Plan Years beginning on or after January 1, 1994, the annual
Compensation of each Employee taken into account under the Plan shall
not exceed the OBRA '93 annual compensation limit. The OBRA '93
annual compensation limit is $150,000, as adjusted by the
Commissioner for increases in the cost of living in accordance with
Code Section 401(a)(17)(B). The cost-of-living adjustment in effect
for a calendar year applies to any period, not exceeding 12 months,
over which Compensation is determined (determination period)
beginning in such calendar year. If a determination period consists
of fewer than 12 months, the OBRA '93 annual compensation limit shall
be multiplied by a fraction, the numerator of which is the number of
months in the determination period, and the denominator of which is
12.
"For Plan Years beginning on or after January 1, 1994, any reference
in this Plan to the limitation under Code Section 401(a)(17) shall
mean the OBRA '93 annual compensation limit set forth in this
provision.
"If Compensation for any prior determination period is taken into
account in determining an Employee's benefits accruing in the current
Plan Year, the Compensation for that prior determination period is
subject to the OBRA '93 annual compensation limit in effect for that
prior determination period. For this purpose, for determination
periods beginning before the first day of the first Plan Year
beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000."
2. Effective January 1, 1994, a subsection (f) shall be added to Section 12.5
of Article 12 to read as follows:
"(f) If a distribution is one to which Code Sections 401(a)(11) and
417 do not apply, such distribution may commence less than 30 days
after the notice required under IRS Reg. Section 1.411(a)-ll(c) is
given, provided that:
(1) the Plan Administrator clearly informs the Participant that the
Participant has a right to a period of at least 30 days after
receiving the notice to consider the decision of whether or not
to elect a distribution
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<PAGE>
(and, if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively elects
a distribution."
- A-2 -
<PAGE>
92-41 AMENDMENT
Upon the execution of the Certificate adopting the following Amendment, said
Amendment shall become part (and amend related sections) of the Plan
document, and any attachments thereto affecting such related provisions.
l. If Section 1.3(a)'s definition of Compensation is defined as "W-2
earnings," then Section 1.3(a) of the Plan shall be amended as follows:
"COMPENSATION shall mean the W-2 earnings [paid and/or accrued,
as previously defined] unless the Employer has made the election
to use the alternate definition described in Section 2.9."
2. Section 2.9 of the Plan is hereby amended by adding thereto a new
paragraph four which incorporates the "Model Compensation Amendment" of
Revenue Ruling 92-41, Section 4 and Section 5.05(1), into the Plan as
follows:
"As an alternative to the definition of "W-2 earnings" as stated
above, an Employer may, by written resolution or certificate, elect
to use the definition contained in Internal Revenue Regulation
1.415-2(d)(11)(i) which means that Compensation shall be defined as
wages within the meaning of Section 3401(a) of the Code and all other
payments of Compensation to an Employee by his Employer (in the
course of the Employer's trade or business) for which the Employer is
required to furnish the Employee with a written statement under Code
Sections 6041(d), 6051(a)(3), and 6052. The Employer may choose to
modify the definition further by excluding amounts paid or reimbursed
by the Employer for moving expenses incurred by an Employee, but only
to the extent that at the time of the payment it is reasonable to
believe that that these amounts are deductible by the Employee under
Code Section 217. Compensation shall be determined without regard to
any rules under Code Section 3401(a) that limit the remuneration
included in wages based on the nature or the location of the
employment or the services performed. This is the amount which is
shown on the "W-2" as earnings."
3. Section 2.9 is further amended by the insertion of a new paragraph five
which incorporates the amendment described in Revenue Ruling 92-41, Section
5.05(7) into the Plan as follows:
"For Plan Years beginning after December 31, 1986, for purposes of
the Code Sections 401(k) and 401(m) testing in Sections 4.7 and 4.12
of the Plan, an Employer may limit the amount of Compensation taken
into consideration to that portion of the Plan Year or calendar year
in which the Employee was an eligible Employee, provided that this
limit is applied uniformly to all eligible Employees under the Plan
for the Plan Year."
4. Section 3.5 of the Plan is amended by deleting sub-section (b) and making
sub-section (c) the new sub-section (b) for ease of administration as
follows:
- B-l -
<PAGE>
"3.5 BREAK IN SERVICE RULES - ELIGIBILITY
(a) Except as otherwise provided in this Section, all of an Employee's
Years of Service with the Employer shall be taken into account when
determining whether such Employee is an Eligible Employee.
(b) In the case of a Participant who does not have any nonforfeitable
right under the Plan to the Participant's Account Balance derived
from Employer Contributions, Years of Service prior to a period of
consecutive one (1) year Breaks in Service shall be disregarded when
determining the Employee's Years of Service for purposes of
eligibility if the number of the Participant's consecutive one (1)
year Breaks in Service equals or exceeds the greater of five (5) or
the aggregate number of Years of Service prior to such period of
consecutive Breaks in Service. When computing the aggregate number
of Years of Service prior to such Break in Service, Years of Service
which could have been disregarded under this Paragraph by reason of
any prior Break in Service shall be disregarded.
(1) If a Participant's Years of Service are disregarded pursuant to
Section 3.5(b), such Participant will be treated as a new
Employee for eligibility purposes. If a Participant's Years of
Service may not be disregarded pursuant to Section 3.5(b), such
Participant shall continue to participate in the Plan, or, if
terminated, shall participate immediately upon reemployment."
5. Sections 4.6(a), (b)(1) and first paragraph of (2) are amended by the
insertion of the underlined language described in Section V. of the
"Listing of Required Modifications" prepared by the Internal Revenue
Service in December of 1991 and also incorporates the amendments described
in Revenue Ruling 92-41, Sections 5.05(5), and (3) into the Plan as
follows:
"4.6 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS
(a) A Participant may assign to this Plan any Excess Elective Deferrals
made during a taxable year of the Participant by notifying the Plan
Administrator on or before April 1st of the following year of the
amount of the Excess Elective Deferrals to be assigned to the Plan.
A PARTICIPANT IS DEEMED TO NOTIFY THE PLAN ADMINISTRATOR OF ANY
EXCESS ELECTIVE DEFERRALS THAT ARISE BY TAKING INTO ACCOUNT ONLY
THOSE ELECTIVE DEFERRALS MADE TO THIS PLAN AND ANY OTHER PLANS OF
THIS EMPLOYER.
Notwithstanding any other provisions of the Plan, Excess Elective
Deferrals, plus any income and minus any loss allocable thereto,
shall be distributed no later than April 15th to any Participant to
whose account Excess Elective Deferrals were assigned for the
preceding year and who claims Excess Elective Deferrals for such
taxable year.
(b) Definitions:
(1) "Elective Deferrals" shall mean any Employer contributions made
to the Plan at the election of the Participant, in lieu
- B-2 -
<PAGE>
of cash compensation, and shall include contributions made
pursuant to a salary reduction agreement or other deferral
mechanism. With respect to any taxable year, a Participant's
Elective Deferral is the sum of all Employer contributions made
on behalf of such Participant pursuant to an election to defer
under any qualified plan as described in Section 401(k) of the
Code, any simplified employee pension cash or deferred
arrangement as described in Section 402(h)(1)(B), any eligible
deferred compensation plan under Section 457, any plan as
described under Section 501(c)(18), and any Employer
contributions made on the behalf of a Participant for the
purchase of an annuity contract under Section 403(b) pursuant to
a salary reduction agreement. ELECTIVE DEFERRALS SHALL NOT
INCLUDE ANY DEFERRALS PROPERLY DISTRIBUTED AS EXCESS ANNUAl
ADDITIONS.
(2) "Excess Elective Deferrals" shall mean those Elective Deferrals
that are includible in a Participant's gross income under
Section 402(g) of the Code to the extent such Participant's
Elective Deferrals for a taxable year exceed the dollar
limitation under such Code section. Excess Elective Deferrals
shall be treated as Annual Additions under the Plan, unless such
amounts are distributed no later than the first April 15
following the close of the Participant's taxable year."
6. The second paragraph of Section 4.6(b)(2) et seq. is amended in accordance
with the amendments described in Revenue Ruling 92-41, Sections 5.05(4) for
calculating income or loss on excess amounts as follows:
"Determination of income or loss: Excess Elective Deferrals
shall be adjusted for any income or loss up to the date of
distribution. The income or loss allocable to Excess Elective
Deferrals shall be determined using (i) or (ii) as a reasonable
method. Income or loss allocable to the period between the end
of the taxable year and the date of distributions may be
disregarded or may be determined using the method described in
(iii). The method chosen shall be: (1) nondiscriminatory; (2)
used for all the Plan's corrective distributions for the Plan
Year; and (3) for purposes of (2)(ii) of this Section, used for
allocating income to Participant's Accounts. The reasonable
methods are:
(i) The income or loss allocable to Excess Elective Deferrals is the
sum of: (1) income or loss allocable to the Participant's
Elective Deferral account for the taxable year multiplied by a
fraction, the numerator of which is such Participant's Excess
Elective Deferrals for the year and the denominator is the
Participant's Account Balance attributable to Elective Deferrals
without regard to any income or loss occurring during such
taxable year.
(ii) The income or loss allocable to Excess Elective Deferrals shall
be determined by first calculating the total allocable income
for the Plan Year attributable to Elective Deferrals, then
multiplying the total allocable income by a fraction.
- B-3 -
<PAGE>
The numerator of the fraction is the total excess amount
distributable to the highly compensated employee and the
denominator shall be the sum of the Participant's Account
Balance attributable to Elective Deferrals, determined as of the
beginning of the Plan Year.
(iii) Safe Harbor Method of Determining Gap Period Income: The
Employer may choose to determine the income during the period
between the end of the Plan Year and the date of distribution
under the methods in this sub-section or sub-sections (i) or
(ii) above, or such income may be disregarded in determining
income or loss.
Gap Income allocable can be determined by using ten percent
(10%) of the income allocable to Excess Elective Deferrals for
the Plan Year multiplied by the number of whole calendar months
between the end of the Plan Year and the date of distribution,
counting the month of distribution if distribution occurs after
the 15th of such month.
7. Sections 4.7(d)(1) and (e) are amended by the insertion of the underlined
language described in Section VI. of the "Listing of Required Modifications"
prepared by the Internal Revenue Service in December of 1991 as follows:
"(d) Special Rules:
(1) The Actual Deferral Percentage for any Participant who is a
Highly Compensated Employee for the Plan Year and who is
eligible to have Elective Deferrals (and Qualified Non-elective
Contributions or Qualified Matching Contributions, or both, if
treated as Elective Deferrals for purposes of the Actual
Deferral Percentage test) allocated to the Participant's
accounts under two or more arrangements described in Section
401(k) of the Code, that are maintained by the Employer, shall
be determined as if such Elective Deferrals (and, if
applicable, such Qualified Non-elective Contributions or
Qualified Matching Contributions, or both) were made under a
single arrangement. If a Highly Compensated Employee
participates in two or more cash or deferred arrangements that
have different Plan Years, all cash or deferred arrangements
ending with or within the same calendar year shall be treated
as a single arrangement. NOTWITHSTANDING THE FOREGOING, CERTAIN
PLANS SHALL BE TREATED AS SEPARATE IF MANDATORILY DISAGGREGATED
UNDER REGULATIONS UNDER CODE SECTION 401(K).
(2) In the event that this Plan satisfies the requirements of
Sections 401(k), 401(a)(4), or 410(b) of the Code only if
aggregated with one or more other plans, or if one or more
other plans satisfy the requirements of such Sections of the
Code only if aggregated with this Plan, then this Section shall
be applied by determining the Actual Deferral Percentage of
Employees as if all such plans were a single plan. For Plan
Years beginning after December 31, 1989, plans may be
- B-4 -
<PAGE>
aggregated in order to satisfy Section 401(k) of the Code only
if they have the same Plan Year.
(i) For purposes of determining the Actual Deferral
Percentage of a Participant who is a 5-percent owner or
one of the ten most highly-paid Highly Compensated
Employees, the Elective Deferrals (and Qualified
Non-elective Contributions or Qualified Matching
Contributions, or both, if treated as Elective Deferrals
for purposes of the Actual Deferral Percentage test) and
Compensation of such Participant shall include the
Elective Deferrals (and, if applicable, Qualified
Non-elective Contributions and Qualified Matching
Contributions, or both) and Compensation for the Plan
Year of Family Members (as defined in Section 414(q)(6)
of the Code). Family Members, with respect to such Highly
Compensated Employees, shall be disregarded as separate
Employees in determining the Actual Deferral Percentage
both for Participants who are Non-highly Compensated
Employees and for Participants who are Highly Compensated
Employees.
(ii) For purposes of determining the Actual Deferral
Percentage test, Elective Deferrals, Qualified
Non-elective Contributions and Qualified Matching
Contributions must be made before the last day of the
twelve-month period immediately following the Plan Year
to which contributions relate.
(iii) The Employer shall maintain records sufficient to
demonstrate satisfaction of the Actual Deferral
Percentage test and the amount of Qualified Non-elective
Contributions or Qualified Matching Contributions, or
both, used in such test.
(iv) The determination and treatment of the Actual Deferral
Percentage amounts of any Participant shall satisfy such
other requirements as may be prescribed by the Secretary
of the Treasury.
(v) Section 4.12(b) Multiple Use of Alternative Limitation
and Correction of Multiple Use shall apply at the
discretion of the Plan Administrator.
(e) Definitions:
(1) "Actual Deferral Percentage" shall mean, for a specified group
of Participants for a Plan Year, the average of the ratios
(calculated separately for each Participant in such group) of
(1) the amount of Employer contributions actually paid over to
the Trust on behalf of such Participant for the Plan Year to
(2) the Participant's Compensation for such Plan Year (whether
or not the Employee was a Participant for the entire Plan
Year). Employer contributions on behalf of any Participant
shall include: (1) any Elective Deferrals made pursuant to
- B-5 -
<PAGE>
the Participant's deferral election (including Excess Elective
Deferrals OF HIGHLY COMPENSATED EMPLOYEES), but excluding (a)
EXCESS Elective Deferrals OF NON-HIGHLY COMPENSATED EMPLOYEES
THAT ARISE SOLELY FROM ELECTIVE DEFERRALS MADE UNDER THE PLAN OR
PLANS OF THIS EMPLOYER AND (b) ELECTIVE DEFERRALS that are
taken into account in the Contribution Percentage test
(provided the Actual Deferral Percentage test is satisfied both
with and without exclusion of these Elective Deferrals); and
(2) at the election of the Employer, Qualified Non-elective
Contributions and Qualified Matching Contributions. For
purposes of computing Actual Deferral Percentages, an Employee
who would be a Participant but for the failure to make Elective
Deferrals shall be treated as a Participant on whose behalf no
Elective Deferrals are made."
8. Section 4.8(a) is amended by the insertion of the underlined language
described in Section VII. of the "Listing of Required Modifications"
prepared by the Internal Revenue Service in December of 1991 and
incorporates the amendment described in Section 5.05(6) of Revenue
Procedure 92-41 as follows:
"4.8 DISTRIBUTION OF EXCESS CONTRIBUTIONS
(a) Notwithstanding any other provision of this Plan, Excess
Contributions, plus any income and minus any loss allocable thereto,
shall be distributed FOLLOWING THE CLOSE OF THE PLAN YEAR IN WHICH
THE EXCESS CONTRIBUTIONS AROSE, BUT NO LATER THAN THE LAST DAY OF
THE SUCCEEDING PLAN YEAR to Participants to whose accounts such Excess
Contributions were allocated for the preceding Plan Year. If such
excess amounts are distributed more than 2-1/2 months after the last
day of the Plan Year in which such excess amounts arose, a ten (10)
percent excise tax will be imposed on the Employer maintaining the
Plan with respect to such excess contribution. Such distributions
shall be made to Highly Compensated Employees on the basis of the
respective portions of the Excess Contributions attributable to each
of such Employees. EXCESS CONTRIBUTIONS OF PARTICIPANTS WHO ARE
SUBJECT TO THE FAMILY MEMBER AGGREGATION RULES SHALL BE ALLOCATED
AMONG THE FAMILY MEMBERS IN PROPORTION TO THE ELECTIVE DEFERRALS
(AND AMOUNTS TREATED AS ELECTIVE DEFERRALS) OF EACH FAMILY MEMBER
THAT IS COMBINED TO DETERMINE THE COMBINED ADP."
9. Section 4.8(c) is amended in accordance with the amendments described in
Revenue Ruling 92-41, Sections 5.05(4) for calculating income or loss on
excess amounts as follows:
(c) DETERMINATION OF INCOME OR LOSS: Excess Contributions shall be
adjusted for any income or loss up to the date of distribution. The
income or loss allocable to Excess Contributions SHALL BE DETERMINED
USING (i) OR (ii AS A REASONABLE METHOD. THE GAP INCOME MAY BE
DISREGARDED OR DETERMINED IN THE MANNER SET FORTH IN (iii) BELOW.
THE METHOD CHOSEN SHALL BE: (1) NONDISCRIMINATORY; (2) USED FOR ALL
THE PLAN'S CORRECTIVE DISTRIBUTIONS FOR THE PLAN YEAR; AND (3) FOR
PURPOSES OF (c)(ii) OF THIS SECTION, USED FOR ALLOCATING INCOME TO
PARTICIPANT'S ACCOUNTS. THE REASONABLE METHODS ARE:
-B-6-
<PAGE>
(i) The income or loss allocable to Excess Contributions is the
sum of: (1) income or loss allocable to the Participant's
Elective Deferral account (and, if applicable, the Qualified
Non-elective Contribution Account or the Qualified Matching
Contributions Account or both) for the Plan Year multiplied by
a fraction, the numerator of which is such Participant's
Excess Contributions for the year and the denominator is the
Participant's account balance attributable to Elective
Deferrals (and Qualified Non-Elective Contributions or
Qualified Matching Contributions, or both, if any of such
contributions are included in the Actual Deferral Percentage
test) without regard to any income or loss occurring during
such Plan Year.
(ii) THE INCOME OR LOSS ALLOCABLE TO EXCESS CONTRIBUTIONS SHALL BE
DETERMINED BY FIRST CALCULATING THE TOTAL ALLOCABLE INCOME FOR
THE PLAN YEAR ATTRIBUTABLE TO ELECTIVE DEFERRALS, THEN
MULTIPLYING THE TOTAL ALLOCABLE INCOME BY A FRACTION. THE
NUMERATOR OF THE FRACTION IS THE TOTAL EXCESS AMOUNT
DISTRIBUTABLE TO THE HIGHLY COMPENSATED EMPLOYEE AND THE
DENOMINATOR SHALL BE THE SUM OF THE PARTICIPANT'S ACCOUNT
BALANCE ATTRIBUTABLE TO ELECTIVE DEFERRALS, DETERMINED AS OF
THE BEGINNING OF THE PLAN YEAR.
(iii) SAFE HARBOR METHOD OF DETERMINING GAP PERIOD INCOME: THE
EMPLOYER MAY CHOOSE TO DETERMINE THE INCOME DURING THE PERIOD
BETWEEN THE END OF THE PLAN YEAR AND THE DATE OF DISTRIBUTION
UNDER THE METHODS IN THIS SUB-SECTION OR SUB-SECTIONS (i) OR
(ii) ABOVE, OR SUCH INCOME MAY BE DISREGARDED IN DETERMINING
INCOME OR LOSS.
GAP INCOME ALLOCABLE CAN BE DETERMINED BY USING TEN PERCENT
(10%) OF THE INCOME ALLOCABLE TO EXCESS CONTRIBUTIONS FOR THE
PLAN YEAR MULTIPLIED BY THE NUMBER OF WHOLE CALENDAR MONTHS
BETWEEN THE END OF THE PLAN YEAR AND THE DATE OF DISTRIBUTION,
COUNTING THE MONTH OF DISTRIBUTION IF DISTRIBUTION OCCURS
AFTER THE 15TH OF SUCH MONTH.
10. Section 4.8(c) of the Plan is amended by adding the underlined text for
ease of administration as follows:
"(c) Accounting for Excess Contributions: EXCESS CONTRIBUTIONS SHALL BE
DISTRIBUTED BY FIRST RETURNING ANY AMOUNT OF UNMATCHED ELECTIVE
DEFERRALS WHICH EXCEED THE LIMITATION PERCENTAGE SPECIFIED IN
SECTION 1.3(c)(2), IF APPLICABLE. SECONDLY, Excess Contributions
shall be distributed from the Participant's Elective Deferral
Account and Qualified Matching Contribution Account (if applicable)
in proportion to the Participant's remaining Elective Deferrals and
Qualified Matching Contributions (to the extent used in the Actual
Deferral Percentage test) for the Plan Year. Excess Contributions
shall be distributed from the Participant's Qualified Non-elective
Contribution Account only to the extent that such Excess
Contributions exceed the balance in the Participant's Elective
Deferral Account and Qualified Matching Contribution Account."
- B-7 -
<PAGE>
11. Section 4.9(a) is amended by the insertion of the underlined language
described in Section VIII. of the "Listing of Required Modifications"
prepared by the Internal Revenue Service in December of 1991 as follows:
4.9 RECHARACTERIZATION
"(a) IN THE EVENT THE PLAN PERMITS PARTICIPANTS TO MAKE EMPLOYEE
VOLUNTARY (AFTER-TAX) CONTRIBUTIONS IN SECTION 1.3(e) OF ARTICLE
ONE, a Participant may treat his or her Excess Contributions as an
after-tax contribution to the Plan. Recharacterized amounts will
remain nonforfeitable and subject to the same distribution
requirements as Elective Deferrals. Amounts may not be
recharacterized by a Highly Compensated Employee to the extent that
such amount in combination with other Employee Contributions made by
that Employee would exceed any stated limit under the Plan on
Employee Contributions."
12. Section 4.12(b)(2) is amended by the insertion of the underlined language
described in Section XII. of the "Listing of Required Modifications"
prepared by the Internal Revenue Service in December of 1991 and
incorporates the amendment described in Section 5.05(8) of Revenue
Procedure 92-41 as follows:
"(2) For purposes of this Section, the Contribution Percentage for
any Participant who is a Highly Compensated Employee and who is
eligible to have Contribution Percentage Amounts allocated to
his or her account under two or more plans described in Section
401(a) of the Code, or arrangements described in Section 401(k)
of the Code that are maintained by the Employer, shall be
determined as if the total of such Contribution Percentage
Amounts was made under each plan. If a Highly Compensated
Employee participates in two or more cash or deferred
arrangements that have different plan years, all cash or
deferred arrangements ending with or within the same calendar
year shall be treated as a single arrangement. NOTWITHSTANDING
THE FOREGOING, CERTAIN PLANS SHALL BE TREATED AS SEPARATE IF
MANDATORILY DISAGGREGATED UNDER REGULATIONS UNDER SECTION 401(m)
OF THE CODE."
13. Section 4.12(c)(6) is amended by the insertion of the underlined language
described in Section XII. of the "Listing of Required Modifications"
prepared by the Internal Revenue Service in December of 1991 as follows:
"(6) "Contribution Percentage Amounts" shall mean the Employee
Contributions, Matching Contributions, Qualified Matching
Contributions (to the extent not taken into account for
purposes of the ADP test), Qualified Non-elective Contributions
and Elective Deferrals (as long as the ADP test is met before
the Elective Deferral are used in the ACP test and continues to
be met following the exclusion of those Elective Deferrals that
are used to meet the ACP test) made under the Plan on behalf of
the Participant for the Plan Year. SUCH CONTRIBUTION PERCENTAGE
AMOUNTS SHALL NOT INCLUDE MATCHING CONTRIBUTIONS THAT ARE
FORFEITED EITHER TO CORRECT EXCESS AGGREGATE CONTRIBUTIONS OR
BECAUSE THE CONTRIBUTIONS TO WHICH THEY RELATE ARE EXCESS
DEFERRALS, EXCESS CONTRIBUTIONS,
- B-8 -
<PAGE>
OR EXCESS AGGREGATE CONTRIBUTIONS. Such Contribution Percentage
Amounts shall include forfeitures of Matching Contributions
allocated to the Participant's account which shall be taken
into account in the year in which such forfeiture is allocated,
BUT ONLY IF SUCH FORFEITURES ARE ALLOCATED IN PROPORTION TO
DEFERRALS OR MATCHING CONTRIBUTIONS."
14. Section 4.13(g) is amended by the insertion of the underlined language
described in Section XIII. of the "Listing of Required Modifications"
prepared by the Internal Revenue Service in December of 1991 and amendment
in Section 5.05(6) described in Revenue Procedure 92-41 as follows:
(g) DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS
"Notwithstanding any other provision of this Plan, Excess Aggregate
Contributions, plus any income and minus any loss allocable thereto,
shall be forfeited, if forfeitable. Or if not forfeitable, shall be
distributed no later than the last day of each Plan Year to
Participants to whose accounts such Excess Aggregate Contributions
were allocated for the preceding Plan Year. Excess Aggregate
Contributions OF PARTICIPANTS WHO ARE SUBJECT TO THE FAMILY MEMBER
AGGREGATION RULES SHALL BE ALLOCATED AMONG THE FAMILY MEMBERS IN
PROPORTION TO THE EMPLOYEE AND MATCHING CONTRIBUTIONS (OR AMOUNTS
TREATED AS MATCHING CONTRIBUTIONS) OF EACH FAMILY MEMBER THAT IS
COMBINED TO DETERMINE THE COMBINED ACP. If such Excess Aggregate
Contributions are distributed more than 2-1/2 months after the last
day of the Plan Year in which such excess amounts arose, a ten (10)
percent excise tax will be imposed on the Employer maintaining the
Plan with respect to those amounts. Excess Aggregate Contributions
shall be treated as Annual Additions under the Plan. Furthermore, the
distribution (or forfeiture, if applicable) of excess aggregate
contributions shall be made on the basis of the respective portions
of such amounts attributable to each Highly Compensated Employee."
15. Section 4.13(h) is amended in accordance with the amendments described in
Revenue Ruling 92-41, Sections 5.05(4) for calculating income or loss on
excess amounts as follows:
"(h) Determination of Income or Loss: Excess Aggregate Contributions
shall be adjusted for any income or loss up to the date of
distribution. The income or loss allocable to Excess Aggregate
Contributions SHALL BE DETERMINED USING (i) OR (ii) AS A REASONABLE
METHOD. INCOME OR LOSS ALLOCABLE TO THE PERIOD BETWEEN THE END OF
THE TAXABLE YEAR AND THE DATE OF DISTRIBUTIONS MAY BE DISREGARDED OR
MAY BE DETERMINED USING THE METHOD DESCRIBE IN (iii). THE METHOD
CHOSEN SHALL BE: (1) NONDISCRIMINATORY; (2) USED FOR ALL THE PLAN'S
CORRECTIVE DISTRIBUTIONS FOR THE PLAN YEAR; AND (3) FOR PURPOSES
OF (2)(ii) OF THIS SECTION, USED FOR ALLOCATING INCOME TO
PARTICIPANT'S ACCOUNTS. THE REASONABLE METHODS ARE:
(i) The income or loss allocable to Excess Aggregate Contributions
is the sum of: (1) income or loss allocable to the
Participant's Employee Voluntary (After-Tax) Contribution
- B-9 -
<PAGE>
Account, Matching Contribution Account, Qualified Matching
Contribution Account (if any, and if all amounts therein are
not used in the ADP test) and, if applicable, Qualified
non-elective Contribution Account and Elective Deferral
Account for the Plan Year multiplied by a fraction, the
numerator of which is such Participant's Excess Aggregate
Contributions for the year and the denominator is the
Participant's Account Balance attributable to Contribution
Percentage Amounts without regard to any income or loss
occurring during such Plan Year.
(ii) THE INCOME OR LOSS ALLOCABLE TO EXCESS AGGREGATE CONTRIBUTIONS
SHALL BE DETERMINED BY FIRST CALCULATING THE TOTAL ALLOCABLE
INCOME FOR THE PLAN YEAR ATTRIBUTABLE TO PARTICIPANT'S
EMPLOYEE VOLUNTARY (AFTER-TAX) CONTRIBUTION ACCOUNT, MATCHING
CONTRIBUTION ACCOUNT, QUALIFIED MATCHING CONTRIBUTION ACCOUNT
(IF ANY, AND IF ALL AMOUNTS THEREIN ARE NOT USED IN THE ADP
TEST) AND, IF APPLICABLE, QUALIFIED NON-ELECTIVE CONTRIBUTION
ACCOUNT AND ELECTIVE DEFERRALS, THEN MULTIPLYING THE TOTAL
ALLOCABLE INCOME BY A FRACTION. THE NUMERATOR OF THE FRACTION
IS THE TOTAL EXCESS AMOUNT DISTRIBUTABLE TO THE HIGHLY
COMPENSATED EMPLOYEE AND THE DENOMINATOR SHALL BE THE SUM OF
THE PARTICIPANT'S ACCOUNT BALANCE ATTRIBUTABLE TO ELECTIVE
DEFERRALS, DETERMINED AS OF THE BEGINNING OF THE PLAN YEAR.
(iii) SAFE HARBOR METHOD OF DETERMINING GAP PERIOD INCOME: THE
EMPLOYER MAY CHOOSE TO DETERMINE THE INCOME DURING THE PERIOD
BETWEEN THE END OF THE PLAN YEAR AND THE DATE OF DISTRIBUTION
UNDER THE METHODS IN THIS SUB-SECTION OR SUB-SECTIONS (i) OR
(ii) ABOVE, OR SUCH INCOME MAY BE DISREGARDED IN DETERMINING
INCOME OR LOSS.
GAP INCOME ALLOCABLE CAN BE DETERMINED BY USING TEN PERCENT
(10%) OF THE INCOME ALLOCABLE TO EXCESS AGGREGATE
CONTRIBUTIONS FOR THE PLAN YEAR MULTIPLIED BY THE NUMBER OF
WHOLE CALENDAR MONTHS BETWEEN THE END OF THE PLAN YEAR AND THE
DATE OF DISTRIBUTION, COUNTING THE MONTH OF DISTRIBUTION IF
DISTRIBUTION OCCURS AFTER THE 15TH OF SUCH MONTH."
16. Section 4.14 of the Plan is amended by adding a new sub-section (d) as
shown through the underlined text for ease of administration as follows:
"(d) ELIGIBILITY TO RECEIVE AN ALLOCATION OF QUALIFIED NON-ELECTIVE
CONTRIBUTIONS
AN EMPLOYER MAY, THROUGH RESOLUTION OF THE BOARD OR EMPLOYER
CERTIFICATION, CHOOSE THE FOLLOWING METHOD OF ALLOCATING QUALIFIED
NON-ELECTIVE CONTRIBUTIONS AS AN ALTERNATIVE TO THE METHOD CHOSEN IN
SECTION 1.3(d):
THE QUALIFIED NON-ELECTIVE CONTRIBUTION SHALL BE ALLOCATED TO
NON-HIGHLY COMPENSATED EMPLOYEES (BASED ON THEIR COMPENSATION
CREDITED DURING THE PLAN YEAR, RANKED IN DESCENDING ORDER) IN THE
FOLLOWING MANNER: FIRST THE LESSER OF THE AMOUNT NEEDED TO SATISFY
THE ACTUAL DEFERRAL PERCENTAGE TEST OR THE AMOUNT WHICH DOES NOT
EXCEED CODE SECTION 415 LIMITS SHALL BE ALLOCATED TO THE
- B-10 -
<PAGE>
PARTICIPANT WITH THE LEAST AMOUNT OF COMPENSATION IN THE PLAN YEAR.
SECOND, THIS PROCEDURE SHALL BE REPEATED FOR ONLY AS MANY NON-HIGHLY
COMPENSATED EMPLOYEES AS SHALL BE NEEDED TO SATISFY THE ACTUAL
DEFERRAL PERCENTAGE TEST."
17. Section 4.15 is amended by the insertion of the underlined language
described in Section XV. of the "Listing of Required Modifications"
prepared by the Internal Revenue Service in December of 1991:
"4.15 NONFORFEITABILITY AND VESTING
The Participant's account balance derived from Elective Deferrals,
Qualified Non-elective Contributions, Employee Contributions, and
Qualified Matching Contributions is nonforfeitable. Separate accounts
for Elective Deferrals, Qualified Non-elective Contributions, Employee
Contributions, Matching Contributions, and Qualified Matching
Contributions will be maintained for each Participant. Each account
will be credited with the applicable contributions and earnings thereon.
MATCHING CONTRIBUTIONS (INCLUDING QUALIFIED MATCHING CONTRIBUTIONS) MAY
BE FORFEITED IF THE CONTRIBUTION TO WHICH THEY RELATE ARE EXCESS
DEFERRALS, EXCESS CONTRIBUTIONS, OR EXCESS AGGREGATE CONTRIBUTIONS."
18. Section 4.16 is amended by the insertion of the underlined language
described in Section XVI. of the "Listing of Required Modifications"
prepared by the Internal Revenue Service in December of 1991:
"4.16 DISTRIBUTION REQUIREMENTS
(a) Elective Deferrals, Qualified Non-elective Contributions, and
Qualified Matching Contributions, and income allocable to each are
not distributable to a Participant or his or her Beneficiary or
Beneficiaries, in accordance with such Participant's or Beneficiary
or Beneficiaries election, earlier than upon separation from
service, death, RETIREMENT or Total Disability.
(b) Such amounts may also be distributed upon:
(1) Termination of the Plan without the establishment of another
defined contribution plan, OTHER THAN AN EMPLOYEE STOCK
OWNERSHIP PLAN (AS DEFINED IN SECTION 4975(e)(7) OR SECTION 409
OF THE CODE) OR A SIMPLIFIED EMPLOYEE PENSION PLAN AS DEFINED
IN SECTION 408(K).
(2) The disposition by a corporation to an unrelated corporation of
substantially all of the assets (within the meaning of Section
409(d)(2) of the Code) used in a trade or business of such
corporation if such corporation continues to maintain this Plan
after the disposition, but only with respect to Employees who
continue employment with the corporation acquiring such assets.
(3) The disposition by a corporation to an unrelated entity of such
corporation's interest in a subsidiary (within the meaning of
Section 409(d)(3) of the Code) if such corporation
- B-11 -
<PAGE>
continues to maintain this Plan, but only with respect to
Employees who continue employment with such subsidiary.
(4) The attainment of age 59-1/2.
(5) The hardship of the Participant as described in Section 11.9.
(c) All distributions that may be made pursuant to one or more of the
forgoing distributable events are subject to the Spousal and
Participant consent requirements (if applicable) contained in
Sections 411(a)(11) and 417 of the Code. IN ADDITION, DISTRIBUTIONS
AFTER MARCH 31, 1988, THAT ARE TRIGGERED BY ANY OF THE FIRST THREE
EVENTS ENUMERATED ABOVE MUST BE MADE IN A LUMP SUM."
19. Section 4.19(d)(4) of the Plan is amended by adding the following text
for ease of administration as follows:
"(4) If the Participant is not covered by the Plan at the end of a
Limitation Year, the excess amount will be held unallocated in
a suspense account. The suspense account will be applied to
reduce current or succeeding Employer Contributions (including
allocation of any forfeitures) for all remaining Participants
in the next Limitation Year, and each succeeding Limitation
Year if necessary;"
20. Section 11.9 is amended as follows by the insertion of the language
described in Section XVII. of the "Listing of Required Modifications"
prepared by the Internal Revenue Service in December of 1991 and
incorporates the amendment described in Revenue Ruling 92-41,
Section 5.05(2) into the Plan as follows:
"11.9 HARDSHIP WITHDRAWALS
Subject to the options chosen in Article One, Section 1.5(k) in the
event a Participant incurs a "hardship" prior to the occurrence of an
event allowing distribution from this Plan, he may request a withdrawal
from his Employee Deferral Account (including, if applicable, any
earnings credited to a Participant's Account as of the end of the last
Plan Year ending before July 1, 1989), for the following reasons:
a) Medical expenses (not covered by insurance, described in Code
Section 213(d)) incurred by the Participant, the Participant's
spouse, or any dependents (as defined in Code Section 152) of the
Participant or necessary medical expenses for aforementioned persons
to obtain medical care (described in Section 213(d) of the Code).
b) Purchase (excluding mortgage payments) of a principal residence for
the Participant.
c) Payment of tuition and related educational expenses for the next
twelve months of post-secondary education for the Participant, the
Participant's spouse, or any dependents of the Participant (as
defined in Code Section 152).
- B-12 -
<PAGE>
d) Payment of a sum of money in order to prevent the eviction of the
Participant from his principal residence or foreclosure on the
mortgage of the Participant's principal residence.
e) Funeral expenses.
The amount of the hardship withdrawal may include any amounts
necessary to pay any federal, state or local income taxes or penalties
reasonably anticipated to result from such hardship distribution.
A Participant must file a written request for a withdrawal and
establish, to the satisfaction of the Administrator, that he has a
financial need. A financial need shall be deemed established if the
following conditions exist:
a) The distribution is not in excess of the amount of the immediate and
heavy financial need of the Participant; and,
b) The Participant has obtained all distributions, other than hardship
distributions, and all nontaxable funds (nontaxable at the time of
the loan) available through the provisions relating to Participants
loans, if permitted in Article One of the Plan; and
c) The Participant agrees and elects in a written agreement that all
Employee Deferral Contributions shall be suspended for a 12-month
period after the receipt of the hardship distribution; and
d) The Participant agrees that Employee Deferral Contributions during
the tax year immediately following the taxable year of the
withdrawal may not exceed the $7,000 limit (as adjusted by the
Secretary of the Treasury) less the amount of the Participant's
Employee Savings Contributions made during the taxable year of the
hardship distribution."
21. A new Section 11.16 is added to the Plan for ease of administration of
Qualified Domestic Relations Orders as follows:
11.16 DISTRIBUTIONS PURSUANT TO A QUALIFIED DOMESTIC RELATIONS ORDER
"NOTWITHSTANDING ANY PROVISIONS IN THE PLAN AND THIS ARTICLE ELEVEN TO
THE CONTRARY, ALL DISTRIBUTIONS UNDER THIS PLAN AND TRUST SHALL BE
SUBJECT TO THE RIGHTS GIVEN TO AN "ALTERNATE PAYEE" UNDER A QUALIFIED
DOMESTIC RELATIONS ORDER (DEFINED IN SECTION 16.3 OF THE PLAN). A
DISTRIBUTION TO AN "ALTERNATE PAYEE" SHALL BE PERMITTED UPON THE
DETERMINATION OF QUALIFICATION OF A DOMESTIC RELATIONS ORDER BY THE
PLAN ADMINISTRATOR IN ACCORDANCE WITH THE ESTABLISHED POLICY, REGARDLESS
OF WHETHER OR NOT THERE IS A DISTRIBUTABLE EVENT FOR THE PARTICIPANT.
SUCH DISTRIBUTION MAY TAKE PLACE UPON THE "EARLIEST RETIREMENT AGE" OR IF
THE POLICY PERMITS, IN THE EVENT THAT THE PARTICIPANT HAS NOT REACHED THE
"EARLIEST RETIREMENT AGE" PURSUANT TO CODE SECTION 414(p)(10). NO
AMENDMENT TO THE PLAN SHALL BE NECESSARY TO IMPLEMENT THE RIGHTS OF AN
"ALTERNATE PAYEE" IN ACCORDANCE WITH THE FOREGOING; PROVIDED THAT THE
QUALIFIED ORDER DOES NOT SPECIFICALLY REQUIRE THE PLAN TO BE AMENDED FOR
SPECIAL CIRCUMSTANCES (FOR EXAMPLE, PERMITTING THE "ALTERNATE PAYEE" TO
HAVE INDIVIDUAL INVESTMENT DIRECTION OF A SEGREGATED ACCOUNT)."
- B-13 -
<PAGE>
INTERNAL REVENUE SERVICE DEPARTMENT OF THE TREASURY
DISTRICT DIRECTOR
EP/EO DIVISION
2 CUPANIA CIRCLE
MONTEREY PARK, CA 91755-7406
Date: April 22, 1994 ADVISORY LETTER NUMBER:
V1950129
TYPE OF PLAN:
Dun & Bradstreet Pension Services 401(k) Plan
3415 Sepulveda Blvd., Suite 800 PERSON TO CONTACT:
Los Angeles, CA 90034 David L. Beckerman
TELEPHONE NUMBER:
213-725-0164
REFER REPLY TO:
EP/EO:TB:TSS:DLB
Dear Applicant:
We have reviewed the AMENDMENT to your specimen document identified
above as part of our Volume Submitter Program. It is our opinion that the
amended document meets the requirements of the Internal Revenue Code as
amended by the Tax Reform Act of 1986.
This opinion may change based on the release of temporary and/or final
regulations or other enhancements of the tax law, which would affect deferred
compensation plans issued after the date of this letter, In the event this
occurs, you will be notified by this office of the need for amendments to
your document.
This letter relates only to the amendment to the form of the plan. It is
not a determination of any other amendment or of the form of the plan as a
whole, or on the effect of other Federal or local statutes.
This letter covers the provisions of Revenue Procedure 92-41.
The acceptability of the form of this document does not constitute a
determination of the qualification of an adopting employer's plan under
section 401(a) of the Internal Revenue Code, or of the exemption of the
related trust or custodial account under section 501(a). The qualification of
the adopting employer may also be affected by the options or variables
selected by the employer.
An employer adopting this specimen document who wants such a
determination and reliance on the volume submitter letter must file Form
5307, Short Form Application For Determination For Employee Benefit Plan,
with the Key District Director. Adopting employers must individually amend
the plan to remain in compliance. A copy of this letter must be submitted
with each application. Any alteration made to the specimen document after the
date of this letter must be indicated in a cover letter.
This letter supersedes our letter dated May 29, 1991.
If you have any questions, please contact the person whose name and
telephone number are shown above.
Sincerely,
/s/ Sharon L. Camarillo
Chief, Technical Branch
EP/EO Division
Los Angeles Key District
<PAGE>
ADDITIONAL INFORMATION
14. Detailed instructions regarding the requirements for notification of
interested parties may be found in Sections 17, 18, and 19 of Revenue
Procedure 94-6. Additional information concerning this amendment
(including, where applicable, a description of the provisions providing
for nonforfeitable benefits; a description of the circumstances which may
result in ineligibility or loss of benefits; a description of the source
of financing of the Plan; and copies of Section 17 of Revenue Procedure
94-6) are available at the Office of the Plan Administrator, at the
address described above, during office hours of business operation for
inspection and copying. (There is a nominal charge for copying and/or
mailing.)
- C-3 -
<PAGE>
EXHIBIT 10.7
MARKETING LICENSE AGREEMENT
THIS MARKETING LICENSE AGREEMENT (hereinafter Agreement) is effective as of
the 26 day of March, 1996, between VALIData Sistemas de Captura, de C.V.,
(hereafter referred to as Validata), a Mexico corporation, having principle
offices at Puebla, Puebla, Mexico, and Mitek Systems, Inc., (hereafter
referred to as Mitek), a Delaware corporation, having principle offices at
San Diego, California.
WITNESSETH:
WHEREAS, Validata is the owner of all U.S. and foreign copyrights and other
proprietary rights in certain computer programs that are the subject of this
Agreement (hereinafter defined as the Code);
WHEREAS, Mitek desires to modify the Code in order to develop and market
certain further computer programs and related documentation (hereinafter
defined as the Products); and
WHEREAS, each party hereto represents that it is ready, willing, and able to
undertake the responsibilities and obligations set forth in this Agreement,
and that is possesses the rights, resources, and capabilities to perform its
responsibilities under this Agreement;
NOW, THEREFORE, in consideration of the premises, and of the obligations
herein made and undertaken, the parties hereto do hereby covenant and agree
as follows:
Section 1
DEFINITIONS
For the purposes of this Agreement, the definitions set forth in this Section
shall apply to the respective capitalized terms:
1.1 "Adaptations." A change or modification to the Code including the
adaptation of the Code for a specific market or application. Adaptations
shall not include programs that have a value and utility separate from the
use of the Code and that, as a practical matter, may be priced and offered
separately from the Code.
1.2 "Agreement Territory." World-Wide.
1.3 "Authorized End-User Copy." A copy of a Product that may be used by
customers of Mitek under the Mitek License. Backup copies for use only in the
event of loss or destruction of an Authorized End-User Copy are not counted
as Authorized End-User Copies.
1.4 "Code." Computer programming code, including source code (i.e.,
human-readable), and object code (i.e., machine-readable), and associated
procedural code, as more fully described in the Specifications attached
hereto as Exhibit A.
1.5 "Derivative Work." A work that is based upon one or more preexisting
works, such as a revision, modification, translation, abridgement,
condensation, expansion, or any other form in which a preexisting work may be
recast, transformed, or adapted, and that, if prepared without the
authorization of the owner of the preexisting work, would constitute a
copyright infringement.
1.6 "End User." A prospective customer of Mitek to whom Mitek offers
Products for use in the regular course of such customer's business and not
for resale.
1.7 "Enhancement." A change or addition to the Code, other than an Error
Correction, that improves its function, adds new function, or substantially
enhances its performance Enhancements shall
<PAGE>
not include programs that have a value and utility separate from the use of
the Code and that, as a practical matter, may be priced and offered
separately from the Code.
1.8 "Error." A defect in the Code that prevents the Code from
functioning in material conformity with the Specifications.
1.9 "Error Correction." A change to the Code that is in a form that
allows its application to the Code to reestablish material conformity with
the Specifications. All Error Correction shall be considered part of Code for
all purposes under this Agreement.
1.10 "Mitek License." A license agreement between Mitek and Mitek's
customers under which copies of the Product will be provided to such
customers. The Mitek License shall contain terms limiting the use of Products
to designated Central Processing Units (CPUs), allowing only one backup copy
for each CPU, prohibiting further copying and/or transfer of the Products by
such customers, and prohibiting reverse assembly, reverse compiling, or
reverse engineering of the Products.
1.11 "Product." English language computer programs that contain, or are
Derivative Works of, the Code, and that are completed in marketable form
(with appropriate end-user Documentation) by Mitek and are offered by Mitek
to its customers or potential customers, in object code form, under the terms
of the Mitek License. Spanish language versions of the Code, and/or Spanish
language versions o Derivative Works of the Code, remain under the sole
control of Validata and are not within this definition.
Section 2
CERTIFICATIONS
2.1 Marketing. Mitek certifies and agrees that, in consideration of the
benefits of this Agreement, including the Code provided to Mitek under this
Agreement, Mitek will add value to, and enhance the functionality and/or
capability of, the Code by modifying the Code to produce an English language
version and other Derivative Works of the Code (hereinafter Products), and
Mitek shall market such Products and related services, including (without
limitation) training, installation assistance, and other forms of customer
support.
2.2 Accounts. Mitek further certifies and agrees that it will market
the Products for its own account in the normal course of its business. In the
event that any of the foregoing representations and undertakings prove untrue
at any time during the term of this Agreement, Validata shall have the right
to terminate this Agreement as to any or all further shipments to Mitek or as
to any or all further copying and distribution of Products by Mitek in the
manner prescribed in Section 13 hereof.
2.3 Co-ownership. Validata certifies and agrees that for reasonable
compensation, it will create a right of joint ownership in certain agreed
Code portions to be specified at a later date. This agreement does not create
any joint ownership rights nor shall it be construed to create any implied
joint ownership rights in the Code or Products.
2.4 Further Licenses. Validata further certifies that for reasonable
compensation, it will grant Mitek a non-exclusive license to use, reproduce
and distribute the Code for use in products unrelated to this Agreement. Such
further licenses are not included within this Agreement.
<PAGE>
Section 3
VALIDATA'S OBLIGATIONS
3.1 Initial Delivers. To the extent performance has not already been
completed, Validata shall deliver to Mitek one (1) copy of the Code (in
object code and source code form) within thirty (30) days following the date
of this Agreement.
3.2 Support Services. Validata shall provide support services in
accordance with Section 11 hereof for the Code (and Derivative Works thereof)
for development relating to the Products.
3.3 Enhancements. Validata shall offer Enhancements as proposed
additions to the Code in accordance with Section 7 hereof.
Section 4
MITEK'S OBLIGATIONS
4.1 Development of Products. Mitek shall use all reasonable efforts to
develop the Products, as Derivative Works of the Code within one (1) month of
the effective date of this Agreement. Upon completion of development of the
Products, Mitek shall test and evaluate the Products and assess their
usefulness, performance, quality and marketability.
4.2 Marketing. Mitek shall use all reasonable efforts to market the
Products in accordance with this Agreement. Mitek shall use all reasonable
efforts to package Products that Mitek determines to be commercially reasonable
offerings and to market such Products to potential customers under the Mitek
License within the Agreement Territory. Mitek shall submit a copy of its
proposed Mitek License to Validata for approval and shall make changes
reasonably required by Validata to protect Validata's interests.
4.3 Customers. Except as otherwise provided in this Agreement, Mitek
shall assume all responsibility and liability to customers with respect to
the Products and shall assume all responsibility and liability for related
support and assistance.
4.4 Royalties. Mitek shall pay royalties and other compensation to
Validata in accordance with Section 6.
4.5 Enhancements. Mitek shall offer Enhancements as proposed additions
to the Code in accordance with Section 7 hereof.
4.6 Intellectual Property. Mitek shall take reasonable precautions to
protect Validata's proprietary rights in Code and Products as set forth in
Section 8 hereof.
Section 5
GRANT OF LICENSE
Validata hereby grants to Mitek, only in the Agreement Territory, a
nonexclusive right and license to take the following actions:
5.1 Use and reproduce the Code and prepare Derivative Works thereof, in
object code or source code form, for the purposes of development, technical
support, maintenance, and warranty service of Products;
<PAGE>
5.2 Use, reproduce, and distribute copies of the Code or Derivative
Works thereof, in object code form only, as Products or parts of Products, in
furtherance of the marketing of Products to customers of Mitek under the
terms of the Mitek License; and
5.3 Use and copy the Code or Derivative Works thereof, for marketing,
training, and demonstration purposes with respect to the Products.
Section 6
ROYALTIES AND PAYMENT
6.1 Percentage Royalties. Mitek shall pay to Validata a royalty in the
amount of 50% of the total imputed price of all Products sold each month.
Such imputed price may only be discounted according to the Volume Discount
Table shown in Exhibit B. Such revenues include, without limitation, all
amounts received as license fees and charges under the Mitek License.
Royalties accrue when revenue for each Authorized End-User Copy is received
or is first placed in use by a customer, whichever comes first, and are
payable monthly, with payment due within 10 days after the last day of each
month.
6.2 Audit. Upon Validata's request, at mutually agreeable times no more
frequently than twice annually, Validata or an agent or accounting firm
chosen by Validata shall be provided reasonable access during normal business
hours to the records of Mitek for purposes of audit of royalties due.
Records sufficient to verify the revenue received, copies of Products
authorized to be made, copies of Products made, and Authorized End-User
Copies sold, leased, or otherwise distributed or transferred shall be
maintained by Mitek and made available for audit. Persons conducting the
audit shall be provided a reasonable opportunity to interview customers of
Mitek and any employees of Mitek who have engaged in the development and/or
marketing of Products in order to corroborate the information contained in
such records.
6.3 Credit for Uncollectible Accounts. Mitek may take as a credit
against future royalty payments a charge due to the uncollectability of
licenses or fees with respect to which royalties have been paid. Such charge
shall be supported by the written statement of Mitek showing a good-faith
effort to collect such accounts receivable and stating why further collection
efforts are not commercially reasonable.
Section 7
AVAILABILITY OF ENHANCEMENTS
7.1 Enhancements by Validata. Validata may from time to time offer
Enhancements or Adaptations, to the extent developed or acquired by Validata,
to Mitek for inclusion in the Code. If the parties agree on inclusion of any
Enhancements or Adaptations, appropriate changes in the Specifications shall
be set forth in a written amendment to this Agreement, and thereupon the
Enhancements shall become part of the Code for purposes of this Agreement.
Validata shall provide such Enhancements and Adaptations to Mitek at no cost
to either party.
7.2 Enhancements by Mitek. Mitek may from time to time make
Enhancements and/or Adaptations to the Code. Mitek shall provide such
Enhancements and Adaptations to Validata at no cost to either party and
perform such other obligations as set forth in Section 8 hereof. If at any
time Validata decides to market the Code to another company, Mitek shall be
entitled to a portion of the revenue received from such sale corresponding to
Mitek's relative contribution to the development of the Code, as measured in
man hours, with respect to Validata's.
<PAGE>
Section 8
CONFIDENTIALITY OF INFORMATION; PROTECTION AND SECURITY
8.1 Confidentiality. Mitek shall treat all information provided by
Validata as confidential, except as indicated by Validata, if in the public
domain through no fault of Mitek, already in the possession of Mitek,
obtained from a third party without similar obligations of confidentiality,
or independently developed by Mitek. Mitek shall use all reasonable efforts
to protect and defend the proprietary nature of the Code (including
Enhancements and any derivative works of the Code). Except as expressly
provided otherwise in this Agreement, Mitek shall not copy, modify,
transcribe, store, translate, sell, lease, or otherwise transfer or distribute
any of the Code (including Enhancements), in whole or in part, without prior
authorization or agreement in writing from Validata.
8.2 Title and Ownership of Work Product by Mitek. Title to all Code
(including any Enhancements or Adaptations) shall at all times remain and
vest solely with Validata. Mitek agrees that it will not claim or assert
title to any such materials or attempt to transfer any title to End Users or
any third parties. All Products shall be owned by Validata and shall be
considered works made for hire by Mitek for Validata. Validata shall own all
United States and international copyrights in the Products.
8.3 Vesting of Rights. Mitek agrees to assign, and upon creation of
each Product automatically assigns, to Validata, its successors and assigns,
ownership of all United States and international copyrights in each and every
Product, insofar as any such Product, by operation of law, may not be
considered work made for hire by Mitek from Validata. From time to time upon
Validata's request, Mitek and/or its personnel shall confirm such assignment
by execution and delivery of such assignments, confirmations or assignment,
or other written instruments as Validata may request. Validata, its
successors and assigns, shall have the right to obtain and hold in its or
their own name(s) all copyright registrations and other evidence of rights
that may be available for the Products.
8.3.1. Employee Agreements. Mitek shall obtain and maintain in effect
agreements with each of its employees who participate in any of Mitek's work
under this Agreement. Such agreements shall contain terms sufficient for
Mitek to comply with all provisions of the Agreement and to support all
grants and assignments of rights and ownership hereunder. Such agreements
also shall impose an obligation of confidence on such employees with respect
to Validata's confidential information.
8.4 Copyright Markings. All Code, including any Enhancements, shall be
marked with Validata's copyright notice. All Products offered by Mitek shall
display Validata's copyright notice, except that Mitek may mark with its own
copyright notice to the extent that preexisting Mitek code is combined,
provided that appropriate identification is made in such notice and in such
registrations of Mitek's preexisting works. The parties agree to cooperate in
any such registration and to provide necessary information and prepare and
deliver duly executed documents reasonably required in such regard.
8.5 Trademarks. The Products may be sold using trademarks of Mitek's
choice and Validata generally makes no claim to ownership of such marks.
However, if Mitek should utilize the same mark as previously used by Validata
anywhere in the world, such use shall be considered to be a licensed use by
Mitek and all goodwill shall inure to Validata and Validata shall have the
right to request Mitek to make changes in any such use or in the Product so
as not to diminish the goodwill or standards of Validata.
<PAGE>
Section 9
LIMITED WARRANTY AND LIMITATION OF LIABILITY
9.1 Ownership and Authority. Validata warrants that it is the
exclusive owner of all U.S. and foreign copyrights in the Code or that it has
all rights necessary for the grant of the right and license granted by this
Agreement.
9.2 Conformity to Specifications. Validata warrants that the Code
will, at the time of delivery, conform in all material respects to the
Specifications.
9.3 Disclaimer. The Code is provided "AS IS" for Mitek's evaluation
and, as between the parties, Mitek assumes responsibility for determining the
suitability of the Code, for its use in Products, and for results obtained.
Validata makes no warranty that all Errors have been or can be eliminated
from the Code, except as expressly stated above, and Validata shall in no
event be responsible for losses of any kind resulting from the use of the
Code in Products, including, without limitation, any liability for business
expense, machine downtime, or damages caused to Mitek or Mitek's customers by
any deficiency, defect, error, or malfunction. EXCEPT AS SPECIFICALLY SET
FORTH HEREIN, VALIDATA DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, ARISING
OUT OF OR RELATING TO THE CODE OR ANY USE THEREOF, INCLUDING, WITHOUT
LIMITATION, ANY WARRANTY WHATSOEVER AS TO THE FITNESS FOR A PARTICULAR USE OR
THE MERCHANTABILITY OF THE CODE.
9.4 Limitation of Liability. In no event shall Validata be liable to
Mitek or Mitek's customers for any indirect, special, incidental, or
consequential damages, including lost profits.
Section 10
OBLIGATION FOR EXPENSES
Validata shall have no obligation or requirement whatsoever to reimburse
Mitek for any expenses or costs incurred by Mitek in the performance of, or
otherwise by reason of, this Agreement. Mitek's incursion of costs or
expenses under this Agreement is at its sole risk and upon its independent
business judgement that such costs and expenses are appropriate.
Section 11
SUPPORT SERVICES
11.1 Technical Support and Training; Error Correction. Validata shall
provide, during the term of this Agreement, the following support services to
Mitek:
1. Ongoing technical support and training in the use of the Code, and
for adaptation of the Code for the Agreement Territory, but not including
Enhancements; and
2. Reasonable efforts to prepare Error Corrections of the Code upon
reasonable notice of the nature of any identified Errors.
11.2 Personal Development Services. It is understood and agreed that
the personal development assistance of Validata and the Validata's technical
experts may be required by reason of Validata's authorship and unique
familiarity with the Code and by reason of their unique understanding of the
underlying programming theories and specialized methods and practices used.
It is also understood and agreed that if the development assistance of
Validata and/or Validata's technical experts are required for certain
Enhancements undertaken by Mitek, that Validata will make such services
available to Mitek, provided reasonable compensation for such services is
agreed to under a separate development agreement.
<PAGE>
Section 12
TERM OF AGREEMENT
The term of this Agreement shall commence on the date hereof and continue for
a period of 1 year, with automatic renewal, unless sooner terminated under
Section 13.
Section 13
TERMINATION; EFFECT OF TERMINATION
13.1 Certification. Validata may terminate this Agreement if Mitek at
any time fails to comply with the certification required under Section 2
hereof.
13.2 Expiration. This Agreement shall terminate automatically upon
expiration of its term, unless extended or renewed in writing by the parties
hereto.
13.3 Breach. Should either party commit a material breach in its
obligations hereunder, or should any of the representations of either party
prove to be untrue in any material respect, the other party may, at its
option, provide written notice to the other party. Such notice shall identify
and describe the default upon which the breach is based. The defaulting party
shall have 180 days to cure such default, which, if effected, shall prevent
termination by virtue of such default. If such default is not cured within
180 days, the noticing party may terminate this Agreement by written notice.
13.4 Insolvency. Should either party admit in writing its inability to
pay its debts generally as they become due, or make a general assignment for
the benefit of creditors, or institute proceedings to be adjudicated a
voluntary bankrupt, or consent to the filing of a petition of bankruptcy
against it, or be adjudicated by a court of competent jurisdiction as
bankrupt or insolvent; or should either party seek reorganization under any
bankruptcy act, or consent to the filing of a petition seeking such
reorganization; or should either party have a decree entered against it by a
court of competent jurisdiction appointing a receiver, liquidator, trustee,
or assignee in bankruptcy or in insolvency covering all or substantially all
of such party's property or providing for the liquidation of such party's
property or business affairs; then the other party may, at its option and
without notice, terminate this Agreement, effective immediately.
13.5 Consequences. Upon the termination of this Agreement, Mitek shall
immediately cease all use of the Code and any Derivative Works thereof, and
shall make no further copies of any of the foregoing. Mitek shall also
discontinue all promotion, marketing, support, training, licensing, or other
activities, except with respect to Authorized End-User Copies to the extent
they have been placed in use by customers pursuant to the Mitek License prior
to the effective date of termination.
13.6 Survival. Notwithstanding the foregoing, and notwithstanding
termination of this Agreement, Mitek shall retain the right to continue to
support Authorized End-User Copies that have been completed, marketed, and
installed pursuant to the Mitek License prior to the effective date of
termination, subject to continued payment of applicable royalties to
Validata.
13.7 Nonpayment Termination Rights. Notwithstanding the foregoing, and
notwithstanding any other provision of this Agreement, Validata may terminate
this Agreement and any rights that otherwise would survive termination hereof
for nonpayment of royalties, upon 10 days' written notice. In the event of
such termination for nonpayment, all rights and licenses granted Mitek
hereunder shall terminate, and Validata shall be entitled to recover for
breach of contract, tort, and copyright infringement, and shall have all
available remedies at law or in equity, including injunction, damages
(direct, consequential, or punitive), and the right to recover attorney fees
and all costs of suit.
<PAGE>
13.8 Return of Materials. Upon the termination of this Agreement, Mitek
shall immediately return to Validata all copies of the Code, including any
Enhancements, and shall destroy any Derivative Works of any and all of the
foregoing and all sales materials produced pursuant to this Agreement, except
for those items that are Authorized End-User Copies of Products completed,
marketed, and installed pursuant to a Development License prior to the
effective date of termination and except for one archival copy of material
deemed by Mitek to be necessary in enforcement of Mitek's rights (which
archival copy shall be sealed and placed in the hands of a bonded,
independent custodian for use only in the assertion of rights and defenses by
Mitek). Mitek shall warrant in writing, upon request of Validata, that no
copies of any such material, except that consisting of the above-described
finished Products, have been retained or are within the control of Mitek or
its customers.
Section 14
INDEMNIFICATION
14.1 Validata Indemnification. Validata agrees to, and does hereby,
indemnify and hold harmless Mitek from any and all claims, demands, or
actions alleging that the Code, including any Enhancements, in the form
delivered by Validata infringes or abridges any third-party rights in
copyright, trade secret, or other intellectual property rights.
14.2 Mitek Indemnification. Mitek agrees to, and does hereby, indemnify
and hold harmless Validata from any and all claims, demands, or actions from
or relating to Products, or use by customers of Products, and based on or
related to Mitek's performance, nonperformance, infringement of third-party
intellectual property rights, representations or statements made, or other
actions with respect to Products, which claims are not based on infringement
solely by the Code.
14.3 Conditions. The foregoing indemnities shall be contingent upon the
party seeking to enforce the indemnity against the other party (1) giving
written notice to the other party of any claim, demand, or action for which
indemnity is sought; (2) fully cooperating in the defense or settlement of
any such claim, demand, or action; and (3) obtaining the prior written
agreement of the indemnifying party to any settlement or proposal of
settlement.
Section 15
MISCELLANEOUS
15.1 No Assertion of Rights. It is expressly understood and agreed that,
as between Validata and Mitek, all right, title, and interest in and to the
Code, including any Enhancements, and any other material furnished to Mitek
under this agreement vests solely and exclusively in Validata, and Mitek
shall neither derive nor assert any title or interest in or to such materials
except for the rights of use or licenses granted under this Agreement.
15.2 Independent Contractor Status. Mitek is an independent contractor
under this Agreement, and nothing herein shall be construed to create a
partnership, joint venture, or agency relationship between the parties
hereto, with the sole exception that Mitek acts as a licensing agent of
Validata with respect to Products as provided herein. Mitek shall have no
authority to enter into agreements of any kind on behalf of Validata, other
than with respect to sublicensing of Products in strict accordance with the
terms of this Agreement, and shall have no further power or authority to bind
or obligate Validata in any manner to any third party.
15.3 No Conflict of Interest. Mitek represents and warrants that it has
full power and authority to undertake the obligations set forth in this
Agreement and that it has not entered into any other agreements that would
render it incapable of satisfactorily performing its obligations hereunder, or
that would place it in a position of conflict of interest or be inconsistent
or in conflict with its obligations hereunder.
<PAGE>
15.4 Compliance with Law. Mitek agrees that it shall comply with all
applicable laws and regulations of governmental bodies or agencies in its
performance under this Agreement.
15.5 No Assignment. Mitek represents that it is acting on its own
behalf and is not acting as an agent for or on behalf of any third party and
further agrees that it may not assign or otherwise transfer by merger or
otherwise its rights or obligations under this Agreement without the prior
written consent of Validata.
15.6 Notices. All notices and other communications required or
permitted to be given under this Agreement shall be in writing and shall be
considered effective when deposited in the U.S. mail as registered mail,
return receipt requested, postage prepaid, and addresssed to the party at the
address as follows, unless by such notice a different address shall have been
designated in writing.
Notice to: VALIData Sistemas de Captura, S.A. de C.V.
Callejon del Cristo I-1
San Jose del Puente
Puebla, Puebla, Mexico 72000
Attn: Fernando Macias Garza
Notice to: Mitek Systems, Inc.
10070 Carrol Canyon Rd
San Diego, CA 92131
Attn: John F. Kessler
15.7 Governing Laws. All questions concerning the validity, operation,
interpretation, and construction of this Agreement will be governed by and
determined in accordance with the laws of the State of California.
15.8 No Waiver. Neither party shall by mere lapse of time, without
giving notice or taking other action hereunder, be deemed to have waived any
breach by the other party of any of the provisions of this Agreement.
Further, the waiver by either party of a particular breach of this Agreement
by the other shall not be construed or constitute a continuing waiver of such
breach or of other breaches of the same or other provisions of this Agreement.
15.9 Force Majeure. Neither party shall be in default if failure to
perform any obligation hereunder is caused solely by supervening conditions
beyond that party's control, including acts of God, civil commotion, strikes,
labor disputes, and governmental demands or requirements.
15.10 Scope of Agreement; Amendment. The parties hereto acknowledge
that each has read this Agreement, understands it, and agrees to be bound by
its terms. The parties further agree that this Agreement is the complete and
exclusive statement of agreement and supersedes all proposals (oral or
written), understandings, representations, conditions, warranties, covenants,
and other communications between the parties relating hereto. This Agreement
may be amended only by a subsequent writing that specifically refers to this
Agreement and is signed by both parties, and no other act, document, usage,
or custom shall be deemed to amend this Agreement.
15.11 Attorney's Fees. Reasonable attorney's fees shall be awarded to
the prevailing party in any litigation relating to this Agreement.
15.12 Headings. The headings contained in this Agreement are intended
for convenience or reference only and shall not control or affect the meaning
or construction of any provisions of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective duly authorized representatives as set forth
below.
Validata
By: /s/Fernando Macias Garza
Title: President
Date: 4/19, 1996
Mitek
By: /s/John F. Kessler
Title: President & CEO
Date: 4/24, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Mitek Systems, Inc. on
Form SB-2 of our report dated November 10, 1995, appearing in the Prospectus,
which is part of this Registration Statement. We also consent to the reference
to us under the headings "Selected Consolidated Financial Data" and "Experts"
in such Prospectus.
San Diego, California
July 8, 1996
