<PAGE>
As filed with the Securities and Exchange Commission on February 5, 1997.
Registration No. 333-18351
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933,
AS AMENDED
----------------
RACOM SYSTEMS, INC.
(Exact Name of Small Business Issuer
As Specified In Its Charter)
DELAWARE 3674 84-1182875
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code No.) I.D. Number)
6080 GREENWOOD PLAZA BLVD.
GREENWOOD VILLAGE, CO 80111
(303) 771-2077
(Address, including zip code, and telephone number, in-
cluding area code, of Registrant's principal executive offices)
RICHARD L. HORTON, PRESIDENT
RACOM SYSTEMS, INC.
6080 GREENWOOD PLAZA BLVD.
GREENWOOD VILLAGE, CO 80111
(303) 771-2077
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies of all communications to:
Gary A. Agron, Esq. Michael J. Tauger, Esq.
5445 DTC Parkway, Suite 520 5445 DTC Parkway, Suite 520
Englewood, CO 80111 Englewood, CO 80111
(303) 770-7254 (303) 713-0363
(303) 770-7257 (Fax) (303) 770-7257 (Fax)
Approximate date of commencement of the Offering: As soon as practicable
after the date of the Offering.
<PAGE>
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,
check the following box: / /
CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------------------
Title of Each Class Amount To Proposed Amount of
of Securities Be Maximum Price Offering Registration
to be Registered Registered Per Security Price Fee
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units consisting of
one share of $.01 par
value Common Stock
and one Common
Stock Purchase 1,725,000
Warrant(1) Units $5.25 $ 9,056,250 $2,745
Common Stock, $.01
par value, underlying
Common Stock 1,725,000
Purchase Warrants(2) Shares $6.56 $11,316,000 $3,429
Units Underlying
Representative's Unit 150,000
Warrants(3) Units $6.30 $ 945,000 $ 287
Common Stock, $.01
par value, underlying
Common Stock
Purchase Warrants
included in
Representative's Unit 150,000
Warrants(2) Shares $6.56 $ 984,000 $ 298
Common Stock
Purchase Warrants
held by the Selling 260,000
Stockholders(4) Warrants $2.00 $ 520,000 $ 158
<PAGE>
Common Stock $.01
par value underlying
Common Stock
Purchase Warrants
issued to the Selling 260,000
Stockholders(2) Shares $6.56 $ 1,705,600 $ 517
----------- ------
Totals . . . . . . . . . . . . . . . . .. . . . . . . . . . . $24,526,850 $7,434
</TABLE>
(1) Includes the overallotment option granted to the Representative of 225,000
Units.
(2) The exercise price of the Common Stock Purchase Warrants ("Warrants") (and
Bridge Warrants as defined below) is equal to 125% of the price of the Units
("Unit Price") on the effective date. Pursuant to Rule 416 of the Securities
Act of 1933, as amended, the number of shares issuable upon exercise of Warrants
is subject to adjustment in accordance with anti-dilution provisions of such
Warrants.
(3) Each Unit consists of one share of Common Stock and one Warrant. The
exercise price of the Representative's Unit Warrant is equal to 120% of the Unit
Price on the effective date hereof.
(4) Represents the maximum anticipated aftermarket price of the common stock
purchase warrants ("Bridge Warrants") on the effective date hereof.
The Registrant hereby amends the 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.
(EXHIBIT INDEX LOCATED ON PAGE __ OF THIS FILING)
(ii)
<PAGE>
RACOM SYSTEMS, INC.
Cross Reference Sheet
<TABLE>
Item Caption Location or Caption in Prospectus
- ---- ------- ---------------------------------
<S> <C> <C>
1. Forepart of Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back Cover Pages
Cover Page of Prospectus
3. Summary Information and Risk Prospectus Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page; Risk Factors; Underwriting
6. Dilution Dilution
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Underwriting
9. Legal Proceedings Not Applicable
10. Directors, Executive Officers, Management; Principal Stockholders
Promoters and Control Persons
11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Not Applicable
Counsel
14. Disclosure of Commission Position Item 24; Item 28
on Indemnification for Securities
15. Organization Within Last Five Prospectus Summary; Certain Transactions
Years
16. Description of Business Risk Factors; Business
17. Management's Discussion and Management's Discussion and Analysis of
Analysis or Plan of Operations Financial Condition and Results of
Operations
18. Description of Property Business--Properties
(iii)
<PAGE>
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Description of Securities
Related Stockholder Matters
21. Executive Compensation Management--Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Not Applicable
Accountants on Accounting and
Financial Disclosure
</TABLE>
(iv)
<PAGE>
SUBJECT TO COMPLETION Preliminary Prospectus dated , 1997
1,500,000 UNITS
[LOGO]
RACOM SYSTEMS, INC.
Racom Systems, Inc. (the "Company") is offering (the "Offering") through
Spencer Edwards, Inc. as the representative (the "Representative") of the
underwriters herein named (the "Underwriters") 1,500,000 Units of the Company's
securities ("Unit(s)"), each Unit consisting of one share of $.01 par value
common stock ("Common Stock") and one redeemable common stock purchase warrant
("Warrant(s)"). It is currently anticipated that the initial public offering
price of the Units (the "Unit Price") will be between $4.25 and $5.25 per Unit.
The Common Stock and Warrants are separately transferable as of the date of the
Prospectus. Each Warrant is exercisable to purchase one share of Common Stock
at $_____ per share (125% of the Unit Price), for a period of two years from the
date hereof and may be redeemed by the Company for $.01 per Warrant on 30 days'
written notice to the Warrantholders if the closing price of the Common Stock on
the NASDAQ SmallCap Market ("NASDAQ") is at least $_____ per share (150% of the
Unit Price) for 20 consecutive trading days, ending not earlier than five days
before the Warrants are called for redemption. The Unit Price and Warrant
exercise price have been determined by negotiations between the Company and the
Representative and such prices are not necessarily related to the Company's
financial condition, net worth or other established criteria of value. For a
description of the factors considered in determining the Unit Price and the
exercise price of the Warrants, see "Risk Factors" and "Underwriting."
This Prospectus also covers 260,000 common stock purchase warrants (the
"Bridge Warrants") held by certain Bridge Warrantholders ("Selling
Stockholders") and 260,000 shares of Common Stock issuable upon exercise of the
Bridge Warrants. The terms and conditions of the Bridge Warrants are identical
to those of the Warrants. The Bridge Warrants and underlying Common Stock may
be sold from time to time after the date hereof in public or private open market
transactions directly to purchasers or through brokerage firms at prevailing
market prices less customary commissions. See "Selling Stockholders."
There is no trading market for Common Stock and Warrants and there can be
no assurance that a trading market will develop in any of these securities upon
completion of the Offering. The Common Stock and Warrants have been approved
for listing on NASDAQ under the symbols "RCOM" and "RCOMW," respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION
NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE
OF RISK AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED
ONLY BY PERSONS ABLE TO SUSTAIN A TOTAL LOSS OF THEIR INVESTMENT.
SEE "RISK FACTORS."
The Units are offered on a "firm commitment" basis by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain conditions, including the right of the
Underwriters to reject orders in whole or in part. It is expected that delivery
of certificates representing the Common Stock and Warrants will be made against
payment therefore in Greenwood Village, Colorado, on or about __________, 1997.
UNDERWRITING PROCEEDS
DISCOUNTS AND TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)(3)
Per Unit . . . . . $_____ $_____ $_____
Total(3) . . . . . $__________ $__________ $__________
(1) Excludes (i) a nonaccountable expense allowance payable to the
Representative of $__________ ($__________ if the Overallotment Option is
exercised) equal to 3% of the gross proceeds of the Offering, and (ii) the
issuance of warrants to the Representative (the "Representative's Unit
Warrant") to purchase up to 150,000 Units at $_____ per Unit (120% of the
Unit Price) at any time after 12 months from the date hereof and for a
period of four years thereafter. The Company has granted certain
antidilution and registration rights with respect to the Units underlying
the Representative's Unit Warrant and has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "1933 Act"). See "Underwriting."
(2) Before deducting costs of the Offering estimated to be $250,000, excluding
the Representative's nonaccountable expense allowance.
(3) Assumes no exercise of the Representative's option, exercisable within 30
days from the date of this Prospectus, to purchase from the Company up to
225,000 Units on the same terms as the Units offered hereby solely to cover
overallotments, if any (the "Overallotment Option"). If the Overallotment
Option is exercised in full, the Price to Public, Underwriting Discounts
and Commissions and Proceeds to Company will be $__________, $__________
and $__________, respectively. See "Underwriting."
SPENCER EDWARDS, INC.
The date of this Prospectus is __________, 1997.
2
<PAGE>
The Company will furnish annual reports to its stockholders which will
include audited financial statements. The Company may also furnish to its
stockholders quarterly financial statements and such other reports as may be
authorized by its Board of Directors. See "Available Information."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
WARRANTS AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING TRANSACTIONS MAY BE EFFECTED IN THE OVER THE COUNTER MARKET
AND, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
<PAGE>
PROSPECTUS SUMMARY
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS SET
FORTH IN THIS PROSPECTUS INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. THESE RISKS
AND UNCERTAINTIES ARE DETAILED THROUGHOUT THE PROSPECTUS AND WILL BE FURTHER
DISCUSSED FROM TIME TO TIME IN THE COMPANY'S PERIODIC REPORTS FILED WITH THE
COMMISSION. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THE PROSPECTUS SPEAK
ONLY AS OF THE DATE HEREOF.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION PRESENTED DOES NOT
REFLECT EXERCISE OF THE WARRANTS, THE OVERALLOTMENT OPTION OR THE
REPRESENTATIVE'S UNIT WARRANT. SEE "UNDERWRITING"
THE COMPANY
The Company is a leading developer and marketer of contactless smart card
systems ("Smart Card(s)" or "Smart Card System(s)") used primarily in electronic
commerce. Generally the size of a credit card, Smart Cards are used in a number
of consumer applications including (i) access to restricted areas (replacing
keys and identification cards), (ii) public transportation fare collection
(replacing bus tokens, taxi cab charge cards, airline and railway tickets),
(iii) point of sale purchases (replacing cash or credit cards at cafeterias,
news stands and related point of sale locations where speed of purchase is
important), and (iv) miscellaneous small monetary transactions (replacing coins
and cash at parking lots, in vending machines, public telephones, and the like).
Smart Card technology is also used in industrial applications such as attaching
a "tag" containing the Smart Card technology to a manufactured product in order
to track the product from the assembly line through quality control,
warehousing, inventory control, distribution and warranty.
The Company's Smart Cards are "contactless" and therefore do not require
the use of a magnetic stripe or insertion in a terminal as is required by
contacted cards ("Contacted Card(s)"). Instead, the Company's Smart Card System
involves direct wireless radio frequency communication between a ferroelectric
random access memory ("FRAM") chip in the Smart Card and a terminal. The
Company's FRAM chip does not require battery power and allows for processing the
Smart Card transaction in a fraction of a second by waving the Smart Card near
the terminal. Moreover, the Smart Card does not require insertion in the
terminal or the use of a keypad and therefore may be used by all members of the
population, regardless of age or physical health and in both indoor and outdoor
locations.
For consumers and goods and services providers, the Company's Smart Cards
offer the convenience and accuracy of high speed contactless transaction
processing without the requirement of carrying cash, checks or credit cards,
thereby reducing the threat of theft,
4
<PAGE>
inventory shrinkage, and payment fraud resulting from the handling of cash or
the counterfeiting of cash or credit cards. Goods and services providers do
not have to risk loss resulting from (i) accepting cash or checks which may
be subsequently stolen from them after payment by consumers or (ii) accepting
credit cards which may have been stolen prior to such payment. Consumer loss
is limited because the Smart Card is programmed to be used to purchase only
specific goods or services which is not as attractive to a thief when
compared to the broader illegal uses for stolen cash, checks or credit cards.
The Smart Card is designed to complement credit cards rather than replace
them in that Smart Card applications involve the storage and handling of
substantially more data than credit cards and can therefore be used for other
applications (rather than just purchase and sale transactions) such as
electronic purses, identification of the user and other portable data
functions.
The Company sells its Smart Card Systems through its own direct sales,
force through a combination of joint ventures and strategic alliances and
through selective licensing and distributorship arrangements and agreements with
independent sales representatives in foreign countries. Since 1993, the Company
has designed Smart Card Systems for over 100 customers in cities throughout the
world including Singapore, Macau, Hong Kong, Tokyo, Manchester, Paris, Milan,
Los Angeles, Chicago and Denver. The Company's Smart Card users have included
the new Hong Kong International Airport, the Los Angeles Department of
Transportation, the Lubbock International Airport, the Chicago Transit Authority
and Yamatake Honeywell Limited (Japan).
The Company's business strategy is to (i) expand the Company's Smart Card
Systems applications, (ii) grow revenues through strategic alliances, joint
ventures and selective licensing, (iii) emphasize marketing of the Company's
Smart Card products in North America, and (iv) continue to outsource
manufacturing to control fixed costs.
The Company was incorporated in Delaware in June 1991 and initially issued
2,000,000 shares of its Common Stock to each of Ramtron International
Corporation ("Ramtron"), Intag International Limited ("Intag") and AWA Limited
("AWA") in connection with the Company's organization. Subsequently, AWA sold
its 2,000,000 shares of the Company's Common Stock to Intag. As a result of
subsequent Common Stock sales, Ramtron and Intag (which are U.S. and
Australian publicly-held companies, respectively) currently own 4,800,000 shares
and 5,262,532 shares, respectively, of the Company's Common Stock representing
41.6% and 45.6%, respectively, of the total shares of Common Stock outstanding.
As indicated under "Certain Transactions," Ramtron and Intag have entered into
a number of related party transactions with the Company including the issuance
of license rights to the Company from Ramtron, the issuance of license rights
between Ramtron and Intag and the issuance of Common Stock and warrants to
Ramtron and Intag in exchange for loans and other financings extended by Ramtron
and Intag to the Company. Ramtron and Intag control the Company's operations,
elect all of the Company's directors and will continue to control the Company
upon completion of the Offering. See "Principal Stockholders" and "Certain
Transactions."
In December 1996, the Company completed the borrowing of an aggregate of
$1,040,000 from a group of lenders (the "Bridge Loan") evidenced by promissory
notes bearing interest at 2% over the prime interest rate and due the earlier of
December 1997 or the closing date of the Offering. As additional consideration
for the Bridge Loan, the Company issued one Bridge Warrant for each $4.00 loaned
to the Company or a total of 260,000 Bridge Warrants. Each Bridge Warrant
entitles the holder to purchase one share of Common Stock at $_____ per share
for a period of two years from the date hereof. The Bridge Warrants and the
Common Stock underlying the Bridge Warrants are being registered by this
Prospectus. See "Selling Stockholders."
The Company's executive offices are located at 6080 Greenwood Plaza Blvd.,
Greenwood Village, Colorado 80111 and its telephone number is (303) 771-2077.
5
<PAGE>
THE OFFERING
Securities offered............ 1,500,000 Units, each Unit consisting of one
share of Common Stock and one Warrant
Offering price ............... $_____ per Unit
Common Stock outstanding
prior to the Offering ...... 11,532,532 shares
Common Stock outstanding
after the Offering(l) ...... 13,032,532 shares
Description of the Warrants... Each Warrant is exercisable to purchase one
share of Common Stock at $_____ per share for
a period of two years from the date hereof
and may be redeemed by the Company for $.01
per Warrant on 30 days' written notice to the
Warrantholders if the closing price of the
Common Stock on NASDAQ is at least $_____ per
share for 20 consecutive trading days ending
not earlier than five days before the
Warrants are called for redemption.
Use of proceeds .............. Repayment of debt, sales and marketing expenses,
research and development expenses, and working
capital. See "Use of Proceeds."
NASDAQ symbols ............... RCOM (Common Stock)
RCOMW (Warrants)
Transfer and Warrant Agent ... American Securities Transfer, Inc.
- ----------
(1) Does not include shares issuable upon exercise of (i) the Warrants, the
Overallotment Option and the Representative's Unit Warrant, (ii) 1,559,000
stock options issued under the Company's 1993 Employee Stock Option Plan,
(iii) the 260,000 Bridge Warrants, or (iv) other outstanding stock options,
common stock purchase warrants and convertible securities. See "Dilution,"
"Capitalization" and "Management - 1993 Employee Stock Option Plan."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth certain summary financial data of the
Company. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the Financial Statements of the Company and Notes thereto
included elsewhere in this Prospectus. The summary financial data as of
December 31, 1995 and 1994, and for the years ended December 31, 1995 and 1994,
have been derived from the Company's financial statements which have been
audited by Arthur Andersen LLP, independent public accountants, and are included
elsewhere in this Prospectus. The summary financial data for the nine months
ended September 30, 1996 and 1995, have been derived from unaudited financial
statements which are also included elsewhere in this Prospectus. In the opinion
of management of the Company, the unaudited financial statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position and the results of
operations for these periods. Operating results for the nine months ended
September 30, 1996, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996.
<TABLE>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
----------------- --------------------
1995 1994 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................... $ 1,147,915 $ 354,586 $ 1,419,892 $ 692,016
Gross margin ............... 501,446 177,369 577,205 362,233
Loss from operations ....... (2,837,935) (2,682,589) (1,730,333) (2,240,062)
Net loss ................... (2,878,034) (3,480,171) (1,761,030) (2,223,109)
Weighted average shares
outstanding .............. 10,853,633 8,254,344 11,844,793 10,578,801
Net loss per share ......... $ (.27) $ (.42) $ (.15) $ (.21)
Supplemental net loss
per share(2).............. $ (.25) - $ (.14) $ (.20)
</TABLE>
<TABLE>
AS
HISTORICAL ADJUSTED(1)
---------- ----------
<S> <C> <C>
BALANCE SHEET DATA AT SEPTEMBER 30, 1996:
Working capital (deficit) ............................ $(1,827,603) $3,261,147
Total assets ......................................... 2,476,683 7,565,433
Total liabilities .................................... 2,699,612 1,839,612
Stockholders' equity (deficit) ....................... (222,929) 5,725,821
</TABLE>
(1) As adjusted to reflect $1,040,000 of proceeds from the Bridge Loan, and
$170,000 of loans from Intag and Ramtron both of which were incurred
subsequent to September 30, 1996, and the sale of 1,500,000 Units offered
hereby (after deducting underwriting discounts and commissions and
estimated Offering expenses) and the application of the net proceeds
therefrom for repayment of $2,070,000 of debt (including the approximate
$1,210,000 of debt, described above, incurred subsequent to September 30,
1996) and assuming a price of $4.75 per Unit. See "Use of Proceeds" and
"Capitalization."
(2) Reflects retirement of approximately $860,000 of debt outstanding at
September 30, 1996 at an assumed offering price of $4.75 per share, which
will be repaid with proceeds from the Offering. Retirement of debt is
assumed to occur at the beginning of each respective period.
7
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
following risk factors and the other information contained in this Prospectus
before making an investment in the Common Stock. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g., "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business - Strategy." No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The following
matters constitute cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
LIMITED OPERATING HISTORY AND LIMITED REVENUES; LOSSES; DEFICIT IN WORKING
CAPITAL AND GOING CONCERN QUALIFICATION. The Company began operations in
June 1991, and has a limited operating history upon which potential investors
may base an evaluation of its performance. Since inception, the Company has
focused its efforts and resources on developing its technology and on
identifying products and applications for introduction into the market. The
Company has only recently begun generating revenues from its operations and
therefore the Company has historically incurred significant operating losses and
cash flow deficits. For the year ended December 31, 1995 and the nine months
ended September 30, 1996, the Company had revenues of $1,147,915 and $1,419,892,
respectively, and net losses of $2,878,034 and $1,761,030, respectively.
Moreover, at September 30, 1996, the Company had a deficit in working capital of
$1,827,603. Accordingly, substantial doubt exists regarding the Company's
ability to continue as a going concern. The Report of Independent Public
Accountants covering the Company's December 31, 1995 financial statements,
included elsewhere in this Prospectus, contains a qualification about the
Company's ability to continue as a going concern. There can be no assurance
that the Company's operations will generate sufficient revenues to fund its
operations and to allow it to become profitable. The likelihood of the
Company's success must be considered relative to the problems, experiences,
difficulties, complications and delays frequently encountered in connection with
the operation and development of a new business and the competitive environment
in which the Company operates. See "Business" and "Financial Statements."
DEVELOPING MARKET; UNPROVEN MARKET FOR THE COMPANY'S SMART CARD PRODUCTS.
Smart Card products and markets have only recently begun to develop, are rapidly
evolving and are characterized by an increasing number of market entrants who
have developed or are developing a wide variety of products. As is typical in a
new and rapidly evolving industry, demand and market acceptance for new products
are subject to a high level of uncertainty. There can be no assurance that the
Smart Cards designed by the Company will become widely accepted. Because the
market for the Company's Smart Cards is new and evolving, it is also difficult
to predict
8
<PAGE>
with any assurance the future growth rate, if any, and size of the market.
If a market fails to develop, develops more slowly than expected or becomes
saturated with competitors, or if the Company's Smart Cards do not achieve
market acceptance, the Company's business, operating results and financial
condition will be materially adversely affected. See "Business -Marketing."
COMPETITION; FREQUENT PRODUCT INTRODUCTIONS. The market for Smart Card
products is new, intensely competitive, quickly evolving and subject to rapid
technological change. Competitors may develop superior Smart Card products or
products of similar quality for sale at lower prices. Moreover, there can be no
assurance that the Company's Smart Cards will not be rendered obsolete by
changing technology or new industry standards. The Company expects competition
to persist and increase in the future. The Company's current and potential
competitors are primarily subsidiaries of multinational companies with
established Contacted Card and contactless Smart Card businesses who have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than the
Company. This intense level of competition could materially adversely affect
the Company's future business, operating results and financial condition.
Competitive factors in the industry include transaction speed, the extent
and flexibility of Smart Card memory, reliability, transaction accuracy and
cost. Current competitors include such multinational firms as Gemplus,
Schlumberger and Group Bull which primarily offer Contacted Cards and Philips
GmbH, Sony Corporation and Micron Communications, Inc. which offer primarily
contactless Smart Cards. Moreover, Matsushita Electronics Corporation intends
to market a contactless ferroelectric chip-based Smart Card in the spring of
1997.
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. Many of the Company's competitors
have the financial resources necessary to enable them to withstand substantial
price and product competition, which are expected to increase, and to implement
extensive advertising and promotional programs, both generally and in response
to efforts by other competitors to enter into existing markets or introduce new
products. The industry is also characterized by frequent introductions of new
products. The Company's ability to compete successfully will be largely
dependent on its ability to anticipate and respond to various competitive
factors affecting the industry, including new products which may be introduced,
changes in customer preferences, demographic trends and pricing strategies by
competitors, which could adversely affect the Company's operating margins. See
"Business - Competition."
RISKS OF NEW PRODUCT DEVELOPMENT. The Company may experience difficulties
that could delay or prevent the development, introduction and marketing of new
Smart Card products. The Company will be substantially dependent in the near
future upon Smart Card products that are currently being developed. There can
be no assurance that, despite testing by the Company, errors will not be found
in the Company's Smart Card products, or, if errors are discovered, corrected in
a timely manner. If the Company is unable to develop on a timely basis existing
9
<PAGE>
or new Smart Card products or enhancements to existing products, or if its Smart
Card products do not achieve market acceptance, the Company's business,
operating results and financial condition will be materially adversely affected.
See "Business."
RISKS ASSOCIATED WITH EXPANSION. The Company will seek to develop and
expand its Smart Card products and increase its marketing operations using
proceeds from the Offering. Expansion will place substantial strains on the
Company's management and its operational, accounting and information resources
and systems. Successful management of growth will require the Company to
improve its financial controls, operating procedures and information systems,
and to hire, train, motivate and manage its employees. The Company's failure to
manage growth effectively would have a material adverse effect on its results of
operations and its ability to execute its business strategy. See "Business -
Strategy."
OBSOLESCENCE AND TECHNOLOGICAL CHANGE. The markets for Smart Card products
are characterized by rapidly changing technology and evolving industry standards
which result in product obsolescence and short product life cycles.
Accordingly, the Company's success is dependent upon its ability to anticipate
technological changes in the industry and to continually identify, develop and
successfully market new Smart Card products that satisfy evolving technologies,
customer preferences and industry requirements. There can be no assurance that
competitors will not market Smart Card products which have perceived advantages
over those of the Company or which render the Company's Smart Card products
obsolete or less marketable. See "Business - Marketing."
IMPEDIMENTS TO MARKET ACCEPTANCE OF PRODUCTS. As with other new products
designed to replace existing products or change product designs, potential
customers may be reluctant to integrate the Company's Smart Card products into
their systems unless the products are proven to be both reliable and available
at a competitive price in an assured quantity. Even assuming product
acceptance, the Company's customers may be required to redesign their systems to
effectively use the Company's Smart Card products. The time and costs necessary
for such redesign could delay or prevent market acceptance of the Company's
Smart Card products. A lack of, or delay in, market acceptance of one or more
of the Company's Smart Card products could adversely affect the Company's
operations. See "Business - Marketing."
DEPENDENCE ON MANUFACTURERS AND SUPPLIERS. The Company purchases FRAM
semiconductor chips for its Smart Card products from two affiliated
manufacturers, Ramtron and Rohm Co., Ltd. and purchases other components used in
assembly of its Smart Cards from other key suppliers. The Company has no
written agreements with any manufacturer or supplier. The Company's reliance
upon outside manufacturers and suppliers is expected to continue and involves
several risks, including limited control over the availability of components,
delivery schedules, pricing and product quality. The Company may also
experience, delays, expenses and lost sales should it be required to locate and
qualify alternative suppliers. See "Business - Manufacturing and Assembly."
10
<PAGE>
RELIANCE UPON PATENTS AND TRADE SECRETS. The Company relies on its
patents, trade secrets and copyrights and the patents, trade secrets and
copyrights of its licensors to protect its Smart Card technology. Although the
Company intends to enforce its patents, trade secrets and copyrights
aggressively, there can be no assurance that such protection will be available
in any particular instance or that the Company will have the financial resources
necessary to adequately enforce its rights. The unavailability of such
protection or the inability to enforce adequately such rights could materially
adversely affect the Company's business and operating results. The Company
operates in a competitive environment in which it would not be unlikely for a
third party to claim that certain of the Company's present or future Smart Card
products may infringe the patents or rights of such third parties. If any such
infringements exist or arise in the future, the Company may be exposed to
liability for damages and may be required to obtain licenses relating to
technology incorporated into the Company's products. The Company's inability to
obtain such licenses on acceptable terms or the occurrence of related litigation
could materially adversely affect the Company's operations. See "Business -
Patents and Trade Secrets."
NEED FOR ADDITIONAL FINANCING. The Company anticipates, based on currently
proposed plans and assumptions relating to its operations that the proceeds of
the Offering, together with projected cash flow from operations, will be
sufficient to satisfy its contemplated cash requirements for at least 12 months
following the Offering. In the event that the Company's plans change, its
assumptions prove to be inaccurate or if the proceeds of the Offering or its
cash flow prove to be insufficient (due to unanticipated expenses, inadequate
revenues, difficulties, problems or otherwise), the Company may be required to
seek additional financing or curtail its activities. Any issuance of equity
securities would result in dilution to the interests of the Company's
stockholders and any issuance of debt securities would subject the Company to
risks that interest rates may increase or cash flow may be insufficient to repay
such indebtedness. The Company has no arrangements or understandings for
additional financing and there can be no assurance that additional financing
will be available to the Company if required. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE UPON CUSTOM SYSTEM DEVELOPMENT PROJECTS. The Company relies
upon custom system development projects for a significant part of its revenues.
The inability of the Company to replace completed projects with new projects
would adversely affect the Company's operations. See "Business - Marketing."
OFFERING TO BENEFIT INSIDERS. A substantial portion of the proceeds of the
Offering will be used to repay outstanding indebtedness to the Company's two
principal stockholders (aggregating $1,030,000) and to the Selling Stockholders
(aggregating $1,040,000). See "Use of Proceeds."
DEPENDENCE UPON QUALIFIED PERSONNEL AND EXECUTIVE OFFICERS. The Company's
operations depend in part upon its ability to retain and hire qualified
personnel, of which there can be no assurance. The Company's operations are
also dependent upon the continued services of Richard L. Horton, its Chief
Executive Officer and President and certain other executive
11
<PAGE>
officers. The loss of services of any of the Company's executive officers,
whether as a result of death, disability or otherwise, could have a material
adverse effect upon the Company's operations. The Company does not have
employment agreements with any of its executive officers but intends to apply
for key person insurance upon Mr. Horton's life in the amount of $1,000,000.
See "Management."
CONTROL BY PRINCIPAL STOCKHOLDERS; AUTHORIZATION AND ISSUANCE OF PREFERRED
STOCK; PREVENTION OF CHANGES IN CONTROL. Upon completion of the Offering,
Ramtron and Intag will together own approximately 77.2% of the then issued and
outstanding shares of Common Stock (assuming no exercise of the Warrants, the
Representative's Overallotment option or the Representative's Unit Warrant) and
will continue to elect all of the Company's directors and control the affairs of
the Company. The Company's Certificate of Incorporation authorizes the issuance
of up to 5,000,000 shares of Preferred Stock with such rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly,
under the Certificate of Incorporation, the Board of Directors may, without
shareholder approval, issue Preferred Stock with dividend, liquidation,
conversion, voting, redemption or other rights which could adversely affect the
voting power or other rights of the holders of the Common Stock. The issuance
of any shares of Preferred Stock having rights superior to those of the Common
Stock may result in a decrease of the value or market price of the Common Stock
and could further be used by the Board of Directors as a device to prevent a
change in control of the Company. The Company has no other anti-takeover
provisions in its Certificate of Incorporation or Bylaws. Holders of the
Preferred Stock may have the right to receive dividends, certain preferences in
liquidation and conversion rights. See "Principal Stockholders" and
"Description of Securities."
LACK OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE. Prior to the
Offering, there has been no public trading market for the Units, Common Stock or
Warrants. The Offering price of the Units and exercise price of the Warrants
were determined by negotiations between the Company and the Representative and
do not necessarily bear any relationship to recognized criteria for the
valuation of such securities. There can be no assurance that a regular trading
market for the Common Stock or Warrants will develop or continue after the
Offering or, if such a market develops, that the market prices of the component
securities will exceed the Unit Price. See "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION. The Offering involves an immediate and
substantial dilution of $4.44 per share of Common Stock or a 93.5% reduction
between the Offering price of $4.75 per share of Common Stock (ascribing no
value to the Warrants included in the Units) and the net tangible book value of
$.31 per share of Common Stock upon completion of the Offering, assuming no
exercise of the Warrants, the Overallotment Option, the Representative's Unit
Warrant or other outstanding stock options, common stock purchase warrants or
Convertible Securities. See "Dilution."
NO DIVIDENDS. The Company has not paid any dividends on its Common Stock
and does not intend to pay dividends in the foreseeable future. See
"Description of Securities-Dividends."
12
<PAGE>
POSSIBLE VOLATILITY OF SECURITIES PRICES. The market price of the Common
Stock and Warrants following the Offering may be highly volatile, as has been
the case recently with the securities of other companies completing initial
public offerings. Factors such as the Company's operating results or public
announcements by the Company or its competitors may have a significant effect on
the market price of the securities. In addition, market prices for the
securities of many small capitalization companies have experienced wide
fluctuations due to variations in quarterly operating results, general economic
conditions and other factors beyond the Company's control.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the open market or the availability of such shares for sale following
the Offering could adversely affect the market price of the securities offered
hereby. Following the Offering, all 1,500,000 shares of Common Stock offered
hereby together with 1,500,000 Warrants and 260,000 Bridge Warrants may be
purchased and sold in the open market without restriction or further
registration under the 1933 Act. The currently outstanding 11,532,532 shares of
Common Stock are "restricted securities" as that term is defined under Rule 144
of the 1933 Act and are comprised of 10,032,532 shares which are currently
eligible for resale under Rule 144, 1,000,000 shares which become eligible for
resale in February 1997 and 500,000 shares which will become eligible for resale
in August 1997. However, all of the Company's officers, directors and 5% or
greater stockholders have agreed, pursuant to a lock-up agreement with the
Representative, not to sell or otherwise dispose of any of their shares of
Common Stock for a period of 12 months from the date of this Prospectus and to
sell no more than 50% of their shares of Common Stock during the following
12-month period without the prior written consent of the Representative.
There are no arrangements, agreements or understandings with respect to a
release of the lock-up agreement by the Representative and it is not the
Representative's general policy to grant such a release. Nevertheless, the
Representative will consider requests for such releases on an individual
basis and may in the future grant such requests in connection with this or
other offerings. See "Description of Securities-Common Stock Eligible for
Future Sale" and "Underwriting."
UNDERWRITERS' INFLUENCE ON THE MARKET. A significant amount of the Common
Stock and Warrants offered hereby may be sold to customers of the Representative
and the Underwriters. Such customers subsequently may engage in transactions
for the sale or purchase of these securities through or with the Underwriters.
Although it has no obligation to do so, the Representative intends to make a
market or otherwise effect transactions in the securities, although this
market-making activity may terminate at any time. The Representative may
exert a dominating influence on the market, if one develops, for the
securities. The price and liquidity of the securities may be significantly
affected by the degree, if any, of the Underwriters' participation in such
market.
LIMITATIONS ON LIABILITY OF DIRECTORS. The Company's Certificate of
Incorporation substantially limits the liability of the Company's directors to
the Company and its stockholders for breach of fiduciary or other duties to the
Company. See "Description of Securities - Limitation on Liabilities."
13
<PAGE>
REDEMPTION OF WARRANTS. The Warrants may be redeemed by the Company under
certain circumstances upon 30 days' written notice to the Warrantholders at $.01
per Warrant. In such event, the Warrants will be exercisable until the close of
business on the date fixed for redemption in such notice. Any Warrants not
exercised by that time will cease to be exercisable, and the holders will be
entitled only to the redemption price, which is likely to be substantially less
than the market value of the Warrants. Accordingly, such redemption could force
the Warrantholders to exercise the Warrants and pay the exercise price at a time
when it might be disadvantageous for them to do so or sell the Warrants at the
then market price when they might otherwise prefer to hold the Warrants. See
"Description of Securities - Warrants."
NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES OF COMMON STOCK
UNDERLYING THE WARRANTS AND BRIDGE WARRANTS. The Warrants and Bridge Warrants
are not convertible or exercisable unless, at the time of exercise, the Company
has a current prospectus covering the shares of Common Stock issuable upon
exercise of the Warrants and Bridge Warrants and such shares of Common Stock
have been registered, qualified or deemed to be exempt under the securities laws
of the states of residence of the holders of such Warrants and Bridge Warrants.
There can be no assurance that the Company will have or maintain a current
prospectus or that the securities will be qualified or registered under any
state laws.
The Common Stock and the Warrants, which comprise the Units offered hereby,
are detachable and separately transferable as of the date hereof. Purchasers of
the Warrants or Bridge Warrants may reside in jurisdictions in which the shares
of Common Stock underlying the Warrants and Bridge Warrants are not registered
or qualified during the period that the Warrants and Bridge Warrants are
exercisable. In this event, the Company would be unable to issue Common Stock
to those persons desiring to exercise their Warrants and Bridge Warrants unless
and until such shares could be qualified for sale in jurisdictions in which the
purchasers reside, or an exemption from qualification exists in such
jurisdiction. Accordingly, Warrantholders would have no choice but to attempt
to sell the Warrants or Bridge Warrants in a jurisdiction where such sale is
permissible, or allow them to expire unexercised. See "Description of
Securities - Warrants."
REPRESENTATIVE'S LIMITED UNDERWRITING EXPERIENCE. The Representative was
organized in Colorado in June 1992, and was registered as a broker-dealer under
the name World Securities Corporation in March 1994. In April 1994, the
Representative changed its name to Spencer Edwards, Inc. To date, the
Representative's business has primarily been limited to open market purchases
and sales of securities as a broker-dealer on behalf of its customers. The
Representative has acted as a representative of underwriters in only one prior
public offering although it has participated as a dealer in offerings
underwritten by others. The Representative's limited underwriting experience
may (i) adversely affect the development or continuation of a trading market for
the Company's Common Stock, (ii) limit the effectiveness of the Representative's
due diligence responsibilities to review and verify the information in the
Prospectus, or (iii) influence the after market price of the Common Stock. The
Representative had no material relationship with the Company or its promoters
prior to the Offering except for acting as the Selling Agent for the Bridge
Loan. See "Selling Stockholders," "Description of Securities - Bridge Warrants"
and "Underwriting."
14
<PAGE>
DILUTION
At September 30, 1996, the negative net tangible book value of the
Company's Common Stock was $(1,979,586) or $(.17) per share. Net tangible book
value per share represents the total amount of tangible assets of the Company,
less the total amount of liabilities of the Company, divided by the number of
shares of Common Stock outstanding. Without taking into account any changes in
net tangible book value after September 30, 1996, other than to give effect to
the sale by the Company of the 1,500,000 Units offered hereby, less underwriting
discounts and commissions and estimated costs of the Offering, the net tangible
book value of the Company at September 30, 1996 would have been $3,969,164, or
approximately $.31 per share. This represents an immediate increase in net
tangible book value of $.48 per share of Common Stock to existing stockholders
and an immediate dilution of $4.44 per share to new stockholders. "Dilution"
per share represents the difference between the price to be paid by the new
stockholders of $4.75 per share (ascribing no value to the Warrants included in
the Units) and the net tangible book value per share of Common Stock immediately
after the Offering.
The preceding discussion is illustrated in the following table:
Public offering price per share of Common Stock
included in the Units...................................... $4.75
Negative net tangible book value per share of Common
Stock before the Offering................................ $(.17)
Increase in net tangible book value
per share of Common Stock attributable
to new investors purchasing
in the Offering.......................................... $ .48
Net tangible book value per share of Common Stock
after the Offering......................................... $ .31
Dilution of net tangible book value per share of
Common Stock to new investors.............................. $4.44
-----
-----
The following table sets forth the number of shares of Common Stock
purchased, the total consideration and the average price per share paid by
existing stockholders of the Company as of September 30, 1996, and by new
investors purchasing the shares of Common Stock included in the Units offered
hereby:
<TABLE>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
New investors........... 1,500,000 11.5% 7,125,000 41.7% $4.75
Existing stockholders... 11,532,532 88.5% 9,958,798 58.3% $ .86
---------- ----- ---------- -----
Totals.............. 13,032,532 100.0% 17,083,798 100.0%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
15
<PAGE>
The preceding discussion and tables do not include shares issuable upon
exercise of (i) the Warrants, the Overallotment Option and the Representative's
Unit Warrant, (ii) 1,559,000 stock options issued under the Company's 1993
Employee Stock Option Plan, (iii) the 260,000 Bridge Warrants, or (iv) other
outstanding stock options, common stock purchase warrants and convertible
securities issuable into an aggregate of 817,653 shares. See "Dilution,"
"Capitalization" and "Management - 1993 Employee Stock Option Plan."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996, as adjusted to give effect to the sale by the Company of
1,500,000 Units offered hereby at $4.75 per Unit and application of the
estimated net proceeds, without giving effect to the exercise of (i) the
Warrants, the Overallotment Option and the Representative's Unit Warrant,
(ii) an aggregate of 1,559,000 shares issuable under the Company's 1993
Employee Stock Option Plan, (iii) the 260,000 Bridge Warrants, or (iv) other
outstanding stock options, common stock purchase warrants and convertible
securities issuable into an aggregate of 817,653 shares. See "Use of
Proceeds" and "Description of Securities."
PRO FORMA
HISTORICAL AS ADJUSTED
---------- -----------
Stockholders' equity (deficit)
Preferred Stock, 5,000,000 no par value
shares authorized, none issued.............. $ -- $ --
Common Stock, 20,000,000 $.01 par value
shares authorized, 11,532,532
issued and outstanding,
13,032,532 shares issued and
outstanding, as adjusted.................... 115,325 130,325
Additional paid in capital.................... 10,272,591 16,206,341
Accumulated deficit........................... (10,610,845) (10,610,845)
------------ ------------
Total stockholders' equity (deficit)........ (222,929) 5,725,821
Total capitalization...................... $ (222,929) $ 5,725,821
------------ ------------
------------ ------------
17
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offering are estimated to be $5,948,750
($6,878,563 if the Overallotment Option is exercised) assuming a price of
$4.75 per Unit. The Company intends to use the net proceeds of the Offering
in the following order of priority:
PERCENT
OF NET
PURPOSE AMOUNT PROCEEDS
- ------- ------ --------
Repayment of debt(1).................................. 2,070,000 34.8%
Sales and Marketing expenses(2)....................... 1,600,000 26.9%
Research and development expenses..................... 1,530,000 25.7%
Working capital....................................... 748,750 12.6%
--------- ------
TOTALS............................................ 5,948,750 100.0%
--------- ------
--------- ------
__________
(1) Comprised of $934,000 principal and interest due on promissory notes
payable to Intag, $96,000 principal and interest due on promissory notes
payable to Ramtron and $1,040,000 of bridge loans payable to the Selling
Stockholders. The Intag and Ramtron promissory notes bear annual interest
at 10% and prime plus 2%, respectively, and are due on demand. The funds
borrowed were used for working capital. Intag and Ramtron are principal
stockholders of the Company. Does not include repayment of a $400,000
non-interest bearing convertible note issued to Intag which is due if and
only if the Company receives sublicense revenue from Intag. See "Certain
Transactions."
(2) Includes salaries, wages, advertising and travel expenses to be incurred in
connection with the expansion of the Company's North American marketing
activities. See "Business - Strategy."
The Company estimates that the net proceeds of the Offering together with
its anticipated operating revenues will be sufficient to fund its cash
requirements for at least 12 months from the date of the Prospectus. There may
be changes in the Company's proposed use of net proceeds due to the availability
of other business opportunities or modifications to the Company's plan of
operation. Management is not currently aware of any such business opportunities
or planned modifications to its operations. Pending use, the net proceeds will
be invested in bank certificates of deposit and other fully insured investment
grade securities.
Any funds received by the Company upon exercise of the Warrants, the
Overallotment Option or the Representative's Unit Warrant and any funds not
applied to sales and marketing or research and development expenses will be
added to working capital. The Company will not receive any proceeds from the
sale of the Bridge Warrants by the Selling Stockholders. Any proceeds received
by the Company upon exercise of the Warrants, the Overallotment Option, the
Representative's Unit Warrant or the Bridge Warrants will be added to working
capital.
18
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth certain selected financial data of the
Company. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the Financial Statements of the Company and Notes thereto
included elsewhere in this Prospectus. The selected financial data as of
December 31, 1995 and 1994, and for the years ended December 31, 1995 and 1994,
have been derived from the Company's financial statements which have been
audited by Arthur Andersen LLP, independent public accountants, and are included
elsewhere in this Prospectus. The selected financial data for the nine months
ended September 30, 1996 and 1995, have been derived from unaudited financial
statements which are also included elsewhere in this Prospectus. In the opinion
of management of the Company, the unaudited financial statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position and the results of
operations for these periods. Operating results for the nine months ended
September 30, 1996, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996.
<TABLE>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------ -------------------
1995 1994 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 1,147,915 $ 354,586 $ 1,419,892 $ 692,016
Gross margin..................... 501,446 177,369 577,205 362,233
Loss from operations............. (2,837,935) (2,682,589) (1,730,333) (2,240,062)
Net loss......................... (2,878,034) (3,480,171) (1,761,030) (2,223,109)
Weighted average shares
outstanding.................... 10,853,633 8,254,344 11,844,793 10,578,801
Net loss per share............... $(.27) $(.42) $(.15) $(.21)
Supplemental net loss per
share(2)....................... $(.25) - $(.14) $(.20)
</TABLE>
<TABLE>
AS
HISTORICAL ADJUSTED(1)
---------- -----------
<S> <C> <C>
BALANCE SHEET DATA AT SEPTEMBER 30, 1996:
Working capital (deficit)........................................ $(1,827,603) $3,261,147
Total assets..................................................... 2,476,683 7,565,433
Total liabilities................................................ 2,699,612 1,839,612
Stockholders' equity (deficit)................................... (222,929) 5,725,821
</TABLE>
(1) As adjusted to reflect $1,040,000 of proceeds from the Bridge Loan, and
$170,000 of loans from Intag and Ramtron both of which were incurred
subsequent to September 30, 1996 and the sale of 1,500,000 Units offered
hereby (after deducting underwriting discounts and commissions and
estimated Offering expenses) and the application of the net proceeds
therefrom for repayment of $2,070,000 of debt (including the approximate
$1,210,000 of debt, described above, incurred subsequent to September 30,
1996) and assuming a price of $4.75 per Unit. See "Use of Proceeds" and
"Capitalization."
(2) Reflects retirement of approximately $860,000 of debt outstanding at
September 30, 1996 at an assumed offering price of $4.75 per share, which
will be repaid with proceeds from the Offering. Retirement of debt is
assumed to occur at the beginning of each respective period.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading developer and marketer of contactless smart card
systems ("Smart Card(s)" or "Smart Card System(s)") used primarily in electronic
commerce. Generally the size of a credit card, Smart Cards are used in a number
of consumer applications including (i) access to restricted areas (replacing
keys and identification cards), (ii) public transportation fare collection
(replacing bus tokens, taxi cab charge cards, airline or railway tickets and the
like), (iii) point of sale purchases (replacing cash or credit cards at
cafeterias, news stands and related point of sale locations where speed of
purchase is important), and (iv) miscellaneous small monetary transactions
(replacing coins and cash at parking lots, in vending machines and public
telephones, etc.). Smart Card technology is also used in industrial
applications by attaching a "tag" containing the Smart Card technology to the
manufactured product in order to track the product from the assembly line
through quality control, warehousing, inventory control, distribution and
warranty.
The Company principally generates revenues from licensing, fee based
custom product development projects and sale of its Smart Card products. In
the future, the Company anticipates that a substantial portion of its
revenues will be generated from custom product development projects and the
sale of its Smart Card products. For instance, revenues from one licensing
transaction (which involved the sale of a FRAM technology license to Racom
Japan, a joint venture with Nittetsu Shoji Co., Ltd. of Japan) and one
product development contract (which involved the development for Bull CP8, a
division of Group Bull, of a Smart Card which can be used as a contacted or
contactless card), represented 36.2% and 42.3% respectively of the Company's
revenues for the nine months ended September 30, 1996. See "--Nine Months
Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995--Revenues" and ""Business--Current Operations" for a discussion of both
the licensing transaction and the product development project. If the
Company is unable to continually replace larger custom product development
projects as these projects are completed, its operations will be adversely
affected. Custom product development projects are billed in stages based on
certain agreed upon performance milestones. Accordingly, financial results
for any calendar quarter may fluctuate widely depending on the stage of a
custom product development project or the amount of licensing payments in a
particular quarter.
As reflected in the Company's Financial Statements, the Company has
generated substantial operating losses since inception and has yet to generate
sufficient revenues to fund its operations. To date, the Company has completed
a series of smaller scale projects; however, the Company has not yet completed a
significant number of larger projects and as a result it is uncertain whether
the Company will be able to successfully market and sell its Smart Card products
in sufficient quantities and at sufficient prices and volumes to fund its
operations. During 1995, the Company experienced significant cash flow deficits
and liquidity shortages and funded its operations primarily through the sale of
nonexclusive sublicenses to its technology, through proceeds from the sale of
its Common Stock and through borrowings from affiliates.
During 1996 and 1997, the Company anticipates that increased operating
revenues will be achieved through a combination of product sales, custom product
development projects and the sale of non-exclusive licenses. In addition, the
Company anticipates incurring increased
20
<PAGE>
operating and research and development expenditures in order to further
develop and market its Smart Card products.
All of the Company's custom product development revenues for the
years ended December 31, 1995 and 1994, were the result of a
development contract with Nippon Steel Information and Communications
Systems, Inc. All custom product development revenues for the nine
months ended September 30, 1996, were the result of a development
contract with Bull CP8, a division of Group Bull. For the years ended
December 31, 1995 and 1994 and the nine months ended September 30,
1996, three customers, three customers and three customers,
respectively, accounted for 10% or more of the Company's revenues.
See "Business--Marketing."
Prospective purchasers of the Common Stock should carefully consider the
following risk factors and the other information contained in this Prospectus
before making an investment in the Common Stock. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by the
use of forward-looking terminology such as "believes," expects," "may," "should"
or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g., "Business -
Strategy." No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors could also cause actual results
to vary materially from the future results covered in such forward-looking
statements.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data expressed as a
percentage of revenues for the periods indicated:
<TABLE>
Years Ended Nine Months Ended
December 31, September 30,
---------------------------------- --------------------
1995 1994 1993 1996 1995
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue..................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues............ 56.3 % 50.0 % 22.9 % 59.3 % 47.7 %
Gross margin................ 43.7 % 50.0 % 77.1 % 40.7 % 52.3 %
Research and development
expenses.................. 91.4 % 244.6 % 477.4 % 28.5 % 104.6 %
General and administrative
expenses.................. 109.2 % 350.8 % 449.7 % 46.1 % 153.4 %
Sales and marketing
expenses.................. 61.7 % 138.8 % 214.6 % 45.7 % 75.0 %
Equity in loss of joint
venture................... 13.9 % 37.8 % -- % 32.9 % 23.0 %
Amortization expense........ 14.7 % 34.6 % 106.4 % 9.3 % 20.0 %
Loss from operations........ (247.2)% (756.6)% (1,171.0)% (121.8)% (323.7)%
Other income (expense)...... (3.5)% (224.9)% 8.9 % (2.2)% 2.4 %
Net loss.................... (250.7)% (981.5)% (1,162.1)% (124.0)% (321.3)%
</TABLE>
21
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
REVENUES. Revenues increased 105.2% to $1,419,892 for the nine months ended
September 30, 1996 ("interim 1996") from $692,016 for the nine months ended
September 30, 1995 ("interim 1995"). This increase reflects the initial payment
and completion of one milestone under a custom product development contract
totaling $600,000 and recognition of revenues on a license from Racom Japan
("RJ") the Company's joint venture with Nittetsu Shoji Co., Ltd. ("NS"), for the
manufacture and sale of FRAM based radio frequency products in Japan of
$513,682. The amount received for the license was $933,968. At the time of
sale, the Company owned a 50% interest in RJ and, accordingly, 50% of this
amount (representing the Company's intercompany profit due to its 50% equity
ownership in RJ on the date of the sublicense) was deferred and is being
recognized over the life of the related technology license asset owned by RJ,
which is five years, commencing on the date of sale, of which $46,698 had been
recognized as of September 30, 1996. (See "Certain Transactions").
COST OF REVENUES AND GROSS MARGIN. As a percentage of revenues, gross margin
decreased to 40.7% in interim 1996 from 52.3% in interim 1995. The gross margin
is primarily a result of license revenues which have no associated cost of
revenues. The Company has not generated high profit margins on product sales in
part because of competition the Company encounters with Contacted Cards which
typically are sold at a lower price than the Company's Smart Cards. The Company
expects to be able to lower its prices to compete more directly on price with
Contacted Card products as it builds manufacturing volumes for its Smart Cards
and ferroelectric technology becomes available from additional licensed
semiconductor manufacturers. Cost of revenues for interim 1996 also includes
$387,765 of costs associated with a custom product development project.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). R&D decreased 44.0% to $405,341 in
interim 1996 from $723,659 in interim 1995. R&D efforts relating to the
Company's Smart Card expanded significantly in 1995 and continued through 1996.
During 1996, the Company began work on a joint development project with Bull
CP8. Engineering personnel resources and development costs totalling $292,857
were directly related to the project and are included in cost of revenues for
interim 1996.
GENERAL AND ADMINISTRATIVE ("G&A"). G&A decreased 38.4% to $654,075 for interim
1996 from $1,061,527 for interim 1995. For interim 1995, the Company incurred
salary, travel and consulting expenses of approximately $465,000 including
$105,848 of consolidated expenses of ISI which was sold in June 1995. In
addition, the Company's legal fees decreased $31,264 between the interim
periods. Finally, the Company eliminated monthly fee payments to directors in
early 1995, resulting in a decrease of expenses of $12,000.
SALES AND MARKETING. Sales and marketing expenses increased 25.1% to $649,438
in interim 1996 from $518,944 in interim 1995. This increase is due to the
hiring of the Vice President of Product Development in June 1996. The Company
also increased its travel spending in
22
<PAGE>
conjunction with sales activities by $27,000 between interim periods.
Additionally, the Company paid $5,000 per month beginning in July 1995 for
consulting fees related to developing its products for use in the airline
industry.
EQUITY IN LOSS OF JOINT VENTURE. The Company currently owns 40% of RJ,
decreased from 50% as of March 29, 1996. RJ was formed in 1993 for the purpose
of marketing, distributing and supporting the Company's Smart Card products to
be sold in Japan. The Company accounts for its investment on the equity method
and has recorded its share of RJ's losses in its financial statements to the
extent of capital invested in RJ by the Company. The equity in the losses of RJ
increased 193.0% in interim 1996 to $466,984 from $159,403 in interim 1995. In
early 1996, the Company and NS invested an additional $466,984 each in RJ.
Subsequently, third parties also invested in RJ reducing the Company's ownership
to 40%. During both interim periods, the Company's portion of the net losses in
RJ exceeded the carrying value of the investment. During interim 1996, the
Company recognized $141,953 of previously unrecognized losses from the prior
year in excess of its investment through December 31, 1995. As of September 30,
1996, the Company's unrecognized share of RJ losses in excess of its investment
was $48,314. RJ's losses were primarily related to ongoing research and
development activities as well as longer sales cycles and trial tests demanded
by Japanese customers.
AMORTIZATION EXPENSE. The Company's primary asset is a technology license
("Technology License") related to the design and manufacture of its Smart Card
products. The Company originally purchased the technology from Ramtron pursuant
to a technology license agreement (See "Certain Transactions.") for $2,000,000
in cash and 2,000,000 shares of the Company's Common Stock. The technology
license was recorded at the original cash acquisition cost of $2,000,000. In
interim 1995, the Company acquired certain additional rights with respect to the
technology. The net cost of obtaining the additional rights was $400,000 and
was capitalized in 1995. The asset is amortized over its estimated useful life
on a straight line basis.
OTHER INCOME (EXPENSE). During interim 1996, the Company incurred $42,154 in
interest expense on various notes payable to Intag International Limited
("Intag") and Ramtron. The notes are due on demand and bear annual interest of
10% and prime plus 2%, respectively. Other income and expense in interim 1995
primarily included $130,438 in interest expense related to the notes payable to
Intag, a $170,647 gain on the sale of Intag Systems, Inc., a wholly-owned
subsidiary ("ISI") to Intag and $25,000 in taxes withheld by Australia related
to the foreign licensing revenues earned by the Company.
NET LOSS. The Company is a C Corporation under the Internal Revenue Code and
for income tax reporting purposes as of December 31, 1995 has approximately
$8,400,000 of net operating loss carryforwards that expire at various dates
through the year 2010. The Tax Reform Act of 1986 contains provisions which may
limit the net operating loss carryforwards available to the Company in any given
year if certain events occur, including significant changes in ownership
interests.
23
<PAGE>
YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1994
The results of operations for the year ended December 31, 1994 consolidate
ISI which was formed in October, 1994, had limited operations and generated no
significant revenues from its inception until its sale to Intag in June, 1995.
REVENUES. Revenues increased 223.7% to $1,147,915 for the year ended December
31, 1995 ("1995") from $354,586 for the year ended December 31, 1994 ("1994").
This increase reflects the completion of a development contract of $90,000,
initial payments of $500,000 on the sale of a license to Rohm for the
manufacture and sale of FRAM based radio frequency products in Japan only and
increased sales of the Company's Smart Card products.
COST OF REVENUES AND GROSS MARGIN. As a percentage of revenues, gross margin
decreased to 43.7% in 1995 from 50.0% in 1994. During 1995, the gross margin is
primarily a result of the license revenues which have no associated cost of
revenues. The Company has not generated high profit margins on product sales.
Additionally, the Company incurred increased manufacturing overhead as it hired
the Director of Manufacturing and Quality during 1995.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). R&D increased 21.0% to $1,049,162 in
1995 from $867,237 in 1994. R&D efforts relating to the Company's Smart Card
products significantly expanded in 1995, and efforts relating to the Company's
newer Smart Card products began in 1995. Additionally, the Company incurred
$182,000 in development costs related to a joint development project with a
related party. See "Certain Transactions."
GENERAL AND ADMINISTRATIVE ("G&A"). G&A was consistent between 1995 and 1994,
with expenses of $1,253,252 and $1,244,016 in each year, respectively. Salaries
and wages increased as a result of the hiring of a Chief Financial Officer in
April 1994, and an Accounting Manager in July 1994. Consulting and professional
fees decreased between 1995 and 1994 upon the resignation of the Company's
former Chairman.
SALES AND MARKETING. Sales and marketing expenses increased 44.0% to $708,566
in 1995 from $492,053 in 1994. The increase was attributable to the hiring of a
Vice President of Sales and Marketing and a Marketing/Communications manager in
late 1994. Marketing efforts were expanded through trade shows, public
relations efforts, the establishment of an Internet web site and e-mail
capability.
EQUITY IN LOSS OF JOINT VENTURE. The Company's equity in the losses of RJ were
consistent between 1995 and 1994 with equity in losses of RJ of $159,403 and
$133,862, respectively. As of December 31, 1995, the Company's unrecognized
share of RJ's losses in excess of its investment was $141,953. RJ's losses
increased 125.1% as a result of operations including expanded research and
development as well as sales and marketing activities. RJ began operations in
1994.
AMORTIZATION EXPENSE. As discussed above, the Company's cash acquisition cost
of the Technology License is amortized over its estimated useful life on a
straight line basis.
24
<PAGE>
OTHER INCOME (EXPENSE). In 1995, other income and expense included $143,645 in
interest expense related to the notes payable to Intag, $170,647 gain on the
sale of ISI to Intag and $70,000 in taxes withheld by Australia and Japan
related to the foreign licensing revenues earned by the Company. Other income
and expense in 1994 included $108,864 in interest expense on notes payable to
Intag. 1994 also included a bad debt write off of $753,317 from a note
receivable from a related party. In February 1995, Concord Services, Inc.
("CSI"), a corporation owned by a significant stockholder of Ramtron, filed for
protection under Chapter 11 of the United States Bankruptcy Code. Prior to the
bankruptcy filing, the Company had numerous transactions with CSI, including
advances to and repayments from CSI under the terms of various secured note
agreements. Under United States bankruptcy laws, certain repayments received by
the Company may have been deemed to be preferential transfers. If such
repayments had been deemed to be preferential transfers and subject to any
defenses or counterclaims of the Company, the Company could have been required
to repay certain material amounts. During 1996, the Company returned the
security granted under the notes in consideration for the bankruptcy court
releasing the Company from any potential claims for preferential transfer.
YEAR ENDED DECEMBER 31, 1994, COMPARED TO YEAR ENDED DECEMBER 31, 1993
The results of operations for the year ended December 31, 1994 consolidate
the wholly owned subsidiary, ISI. The subsidiary was formed on October 17,
1994. The subsidiary had limited operations and generated no significant
revenues from its inception until its sale to Intag on June 30, 1995.
REVENUES. Revenues increased 207.2% to $354,586 for the year ended December 31,
1994 ("1994") from $115,412 for the year ended December 31, 1993 ("1993"). This
increase reflects the initial payment on a development contract of $45,000 and
the introduction to the market of the Company's second generation Smart Card
products.
COST OF REVENUES AND GROSS MARGIN. As a percentage of revenues, gross margin
decreased to 50.0% in 1994 from 77.1% in 1993. The decrease is primarily due to
the increased production costs of newer Smart Card products. Additionally, the
Company expanded its manufacturing capabilities during 1994 by adding two
manufacturing technicians and increasing the lab facilities. License revenues
and custom product development projects were not material during 1994 and 1993.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). R&D increased 57.4% to $867,237 in
1994 from $550,988 in 1993. R&D efforts relating to the Company's Smart Card
products began in 1994, and included the hiring of several engineers. The
Company also incurred $256,298 for consulting and professional fees.
GENERAL AND ADMINISTRATIVE ("G&A"). G&A increased 139.7% to $1,244,016 in 1994
from $519,024 in 1993. During 1994 the Company incurred approximately $640,000
in consulting,
25
<PAGE>
management and professional fees and hired a Chief Financial Officer and an
Accounting Manager.
SALES AND MARKETING. Sales and marketing expenses increased 98.7% to $492,053
in 1994 from $247,654 in 1993. The increase was partially attributable to the
hiring of a Director of Sales in late 1993. The Company also hired a
Marketing/Communications manager and two sales managers and expanded its sales
and marketing efforts through trade shows, magazine articles, and the product
data sheets. Travel expenses increased as a result of increased product
inquiries.
EQUITY IN LOSS OF JOINT VENTURE. The Company made its initial investment in RJ
in 1993. The operations of RJ were not material until 1994, when the Company
recognized its equity in the losses of RJ of $133,862.
AMORTIZATION EXPENSE. As discussed above, the Company's cash acquisition cost
of the technology license is amortized over its estimated useful life on a
straight line basis.
OTHER INCOME (EXPENSE). Other income and expense in 1994 primarily included the
bad debt write off of $753,317 described above and $108,864 in interest expense
on notes payable to Intag. In 1993, the other income and expense included
$8,768 in interest expense related to the notes payable to Intag, and $19,117 in
interest income on notes receivable and other income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for capital has been to finance expansion of
research and development of new Smart Card products, sales and marketing of its
products and operations. Annual product revenues growth has been limited due to
limited financial resources and an inability to expand receivables, build
inventory and effectively sell and market Smart Card products. The following
table sets forth for the periods presented certain items from the Statement of
Cash Flows of the Company.
<TABLE>
Nine months ended
September 30 Years ended December 31,
------------------------- ------------------------------------------
1996 1995 1995 1994 1993
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash used in
Operating Activities $(338,130) $(1,758,271) $(2,089,990) $(2,410,354) $(1,161,243)
Net Cash used in
Investing Activities (491,011) (21,765) (25,410) (1,779,133) (130,197)
Net Cash provided by
Financing Activities 344,358 1,799,262 2,399,160 4,358,089 1,222,531
</TABLE>
26
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
OPERATING ACTIVITIES. Net cash used in operations decreased to $338,130 in
interim 1996 from $1,758,271 in interim 1995. This is a result of the improved
operating results (see "Results of Operations") in addition to the funding of
approximately $249,844 of the Company's FRAM chip purchases by Ramtron.
INVESTING ACTIVITIES. Net cash used in investing activities increased to
$491,011 in interim 1996 from $21,765 in interim 1995. During interim 1996, the
Company invested an additional $466,984 in RJ and $24,624 in fixed assets. In
interim 1995, the Company increased its investment in the Ramtron technology
license by $400,000, purchased $59,795 in fixed assets, and received $237,116
from a related party on repayments of notes receivable. The Company also
received $200,000 from Intag for a technology sublicense.
FINANCING ACTIVITIES. Net cash provided by financing activities decreased to
$344,358 in interim 1996 from $1,799,262 in interim 1995. During interim 1996,
the Company borrowed $90,000 and $255,000 from Ramtron and Intag, respectively.
During interim 1995, the Company sold 300,000 shares of its Common Stock at
$3.00 per share. Also, the Company borrowed $900,000 (net of repayments) from
Intag on short term convertible notes bearing interest at 10% during interim
1995.
YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1994
OPERATING ACTIVITIES. Net cash used in operations decreased to $2,089,990 for
the year ended December 31, 1995 ("1995") from $2,410,354 for the year ended
December 31, 1994 ("1994"). The decrease is consistent with the improved
operating results (see "Results of Operations"). Similar to interim 1996,
Ramtron funded the Company's FRAM chip purchases during 1995, increasing related
party payables by $193,253.
INVESTING ACTIVITIES. Net cash used in investing activities decreased to
$25,410 in 1995 from $1,779,133 in 1994. In 1995, the Company increased its
investment in the Ramtron technology license $400,000, purchased $63,440 in
fixed assets, received $200,000 from Intag on sublicense revenues and received
$237,116 on repayments of notes receivable. In 1994, the Company increased its
investment in RJ by $153,000, purchased fixed assets related to its facilities
expansion of $236,225, made a deposit of $400,000 with Intag on a technology
license and loaned $990,433 (net of repayments) to a related party.
FINANCING ACTIVITIES. Net cash provided by financing activities decreased to
$2,399,160 in 1995 from $4,358,089 in 1994. During 1995, the Company sold
500,000 shares of its Common Stock at $3.00 per share. Also, the Company
borrowed $900,000 (net of repayments) from Intag on short term convertible notes
bearing interest at 10%. During 1994, the Company completed a private placement
of 970,000 shares of its Common Stock at $2.50 per share, for net proceeds
27
<PAGE>
of $2,154,118, borrowed $1,203,971 (net of repayments) from Intag and received
$1,000,000 on a deposit for a technology license from Intag.
YEAR ENDED DECEMBER 31, 1994, COMPARED TO YEAR ENDED DECEMBER 31, 1993
OPERATING ACTIVITIES. Net cash used in operations increased to $2,410,354 for
the year ended December 31, 1994 ("1994") from $1,161,243 for the year ended
December 31, 1993 ("1993") The increase is consistent with increased operations
in terms of labor costs, consulting and professional fees, production and
marketing of the Company's Smart Card products.
INVESTING ACTIVITIES. Net cash used in investing activities increased to
$1,779,133 in 1994 from $130,197 in 1993. In 1994, the Company increased its
investment in RJ in Japan by $153,000, purchased fixed assets related to its
facilities expansion of $236,225, made a deposit of $400,000 with Intag on a
technology license and loaned $990,433 (net of repayments) to a related party.
In 1993 the Company made its initial investment in RJ in Japan of $140,265,
purchased fixed assets totaling $43,959 and received $54,027 on loans made to a
related party.
FINANCING ACTIVITIES. Net cash provided by financing activities increased to
$4,358,089 in 1994 from $1,222,531 in 1993. During 1994, the Company
successfully completed a private placement of 970,000 shares of its Common Stock
at $2.50 per share, for net proceeds of $2,154,118, borrowed $1,203,971 (net of
repayments) from Intag and received $1,000,000 on a deposit for a technology
license from Intag. In 1993, the Company borrowed $497,531 from Intag and
received $725,000 on the sales of its Common Stock.
The Company currently has minimal capital expenditure requirements.
Management plans to continue to outsource substantially all of its
manufacturing operations for the foreseeable future. Management believes
that the Company's cash reserves and the net proceeds of the Offering are
sufficient to fund its cash requirements for the next 12 months. If and only
if such funds are insufficient to satisfy the Company's needs will the
Company seek to offer additional equity or debt securities or obtain new
credit facilities. The Company has no current intention to seek any such
financings. The sale of additional equity securities will result in dilution
to the Company's stockholders and the sale of debt securities will involve
ongoing interest expense and the risk of loss of assets if such debt is not
repaid.
In December 1996, the Company completed the borrowing of an aggregate of
$1,040,000 from a group of lenders (the "Bridge Loan") evidenced by promissory
notes bearing interest at 2% over the prime interest rate and due the earlier of
December 1997 or the closing date of the Offering. As additional consideration
for the Bridge Loans, the Company issued one Bridge Warrant for each $4.00
loaned to the Company or a total of 260,000 Bridge Warrants. Each Bridge
Warrant entitles the holder to purchase one share of Common Stock at $_____ per
share for a period of two years from the date hereof. The Bridge Warrants and
the Common Stock underlying the Bridge Warrants are being registered by this
Prospectus.
In October 1996, the Company consented to allow RJ to enter into a custom
product development contract with Fujitsu of Japan, pursuant to the technology
license granted to RJ in March 1996 under which the Company is entitled to 50%
of all sublicense revenues earned by
28
<PAGE>
RJ. The sublicense is for a specified amount, as defined in the contract, a
portion of which is to be paid to RJ upon execution of the agreement and the
remainder to be paid upon RJ meeting certain performance criteria.
Additionally, certain discounts will be granted to RJ for purchases of
specified products related to the sublicense. Under the agreement, RJ will
be entitled to royalties as defined in the contract, over the next five years.
29
<PAGE>
BUSINESS
CURRENT OPERATIONS
The Company is a leading developer and marketer of contactless smart card
systems ("Smart Card(s)" or "Smart Card System(s)") used primarily in electronic
commerce. Generally the size of a credit card, Smart Cards are used in a number
of consumer applications including (i) access to restricted areas (replacing
keys and identification cards), (ii) public transportation fare collection
(replacing bus tokens, taxi cab charge cards, airline or railway tickets),
(iii) point of sale purchases (replacing cash or credit cards at cafeterias,
news stands and related point of sale locations where speed of purchase is
important), and (iv) miscellaneous small monetary transactions (replacing coins
and cash at parking lots, in vending machines and public telephones and the
like). Smart Card technology is also used in industrial applications such as
attaching a "tag" containing the Smart Card technology to a manufactured product
in order to track the product from the assembly line through quality control,
warehousing, inventory control, distribution and warranty.
The Company's Smart Cards are "contactless" and therefore do not require
the use of a magnetic stripe or insertion in a terminal as is required by
contacted cards ("Contacted Card(s)"). Instead, the Company's Smart Card System
involves direct wireless radio frequency communication between a ferroelectric
random access memory ("FRAM") chip in the Smart Card and a terminal. The
Company's FRAM chip does not require battery power and allows for processing the
Smart Card transaction in a fraction of a second by waving the Smart Card near
the terminal. Moreover, the Smart Card does not require insertion in the
terminal or the use of a keypad and therefore may be used by all members of the
population, regardless of age or physical health and in both indoor and outdoor
locations.
For consumers and goods and services providers, the Company's Smart Cards
offer the convenience and accuracy of high speed transaction processing
without the requirement of carrying cash, checks or credit cards, thereby
reducing the threat of theft, inventory shrinkage, and payment fraud
resulting from the handling of cash or the counterfeiting of cash or credit
cards. Goods and services providers do not have to risk loss resulting from
(i) accepting cash or checks which may be subsequently stolen from them after
payment by consumers or (ii) accepting credit cards which may have been
stolen prior to such payment. Consumer loss is limited because the Smart Card is
programmed to be used to purchase only specific goods or services which is
not as attractive to a thief when compared to the broader illegal uses for
stolen cash, checks or credit cards. The Smart Card is designed to complement
credit cards rather than replace them in that Smart Card applications involve
the storage and handling of substantially more data than credit cards and can
therefore be used for other applications (rather than just purchase and sale
transactions) such as electronic purses, identification of the user and other
portable data functions.
30
<PAGE>
The Company sells its Smart Card Systems through its own direct sales
force, through a combination of joint ventures and strategic alliances and
through selective licensing and distributorship arrangements and agreements with
independent sales representatives in foreign countries. Since 1993, the Company
has designed Smart Card Systems for over 100 customers in cities throughout the
world including Singapore, Macau, Hong Kong, Tokyo, Manchester, Paris, Milan,
Los Angeles, Chicago and Denver. Examples of the Company's Smart Card projects
(the first three of which are discussed below as representative of the Company's
projects) include the following:
<TABLE>
USER (LOCATION) DESCRIPTION OF INSTALLATION
--------------- ---------------------------
<S> <C>
Chep Lap Kok International Airport-
(Hong Kong) access control, point of sale and payroll
City of Lompoc and Ventura County, California-
(United States) automatic fare collection
Lubbock International Airport-(United States) parking facility fee collection
Chicago Transit Authority-(United States) automatic fare collection
Yamatake Honeywell Limited-(Japan) factory automation
City of Winston-Salem Transit Authority-
(United States) automatic fare collection
LWD, Inc.-(United States) hazardous waste tracking
Microlise Engineering Limited-(United Kingdom) access control
Boreal Ridge Corp.-(United States) maintenance tracking
Nittetsu Shoji Co., Ltd.-(Japan) point of sale/cafeteria and access control
ST Electronic & Engineering Limited-(Singapore) access control
UVM s.r.l. Ufficio Vendita Macchine-(Italy) point of sale
Transmac Transportes Urbanos DeMacau,
S.A.R.L.-(Macau) automatic fare collection
</TABLE>
The Company implemented a Smart Card System at the Chep Lap Kok
International Airport under construction in Hong Kong which accepts Smart Cards
as a form of access by employees onto the airport site and is the only form of
payment accepted at airport cafeterias, in vending machines, and at other
employee facilities. The Smart Cards may be used to charge expenses to the
employee's employer and offer an additional purse for the employee's own
purchases.
A Smart Card System installed by the Company in the City of Lompoc and in
Ventura County, California collects bus fares using a Smart Card. Passengers
purchase Smart Cards loaded with bus fares and wave the Smart Card near a
terminal as they board the bus. The Company has been advised that bus dwell
time has been reduced and passenger boarding has become more efficient.
A parking facility payment system developed by the Company at Lubbock
International Airport uses Smart Cards for access into parking areas and for fee
collection. The Smart Card
31
<PAGE>
System allows parkers to enter the facility by presenting the Smart Card at
the gate. When leaving, the customer again presents the Smart Card, which is
debited for the parking fees. The Company has been advised that the Smart
Card System has lowered overhead costs and decreased waiting times at the
parking gates.
In April 1996, the Company began customer testing a new Smart Card,
designed to be used for both contacted and contactless applications. The
Company believes the new Smart Card will be of interest to Smart Card System
providers who wish to install contactless systems without substantially
modifying their Contacted Card applications software or eliminating expensive
Contacted Card terminals and related hardware.
SMART CARD INDUSTRY OVERVIEW
Smart card products including the Company's Smart Card (collectively
referred to as "generic smart cards"), are credit card size pieces of plastic
containing an integrated circuit chip ("chip") which can process and store
information. Today's generic smart cards typically have the processing power of
an early 1980's vintage personal computer, minus a keyboard and display.
Because generic smart cards are really portable computers, they can be
programmed to perform virtually any function which can be implemented by
software. Generic smart cards benefit directly from ongoing advances in
semiconductor technology making available continuously increasing performance
and features at declining cost.
There are two basic types of generic smart cards, memory cards and
microprocessor cards, each of which can interface between the generic smart card
and a terminal on a contacted or contactless basis. Memory cards are typically
used to store and retrieve information only and do not have the capability of
performing complex processing of information. Microprocessor cards are true
"smart" cards in that they contain a central processing unit within a chip which
can perform a number of functions, including complex arithmetic operations
required for security. In excess of 90% of all generic smart cards sold in 1995
were memory cards with contacted interfaces requiring alignment and insertion of
the generic smart card into a terminal to complete an electrical circuit with
the metal contacts on the surface of the card. While contacted generic smart
cards have found broad use in high volume, cost sensitive applications such as
pay phones, systems using contacted generic smart cards are expensive to
maintain, less reliable and are too slow for applications such as
transportation. To address the perceived shortcomings of the contacted generic
smart card, a contactless generic smart card was first developed and introduced
in the early 1990's.
According to the U.S. Federal Reserve, 68% of the approximately 360 billion
financial transactions completed in 1995 were for transactions of less than
$2.00 each. Electronic commerce using electronic funds transfer, magnetic
stripe cards and generic smart cards accounted for less than ten percent of all
such transactions with an annual growth rate of seventeen percent versus one
percent growth for transactions using cash, coin and checks. The Company
believes that the evolution of personal computers, the Internet and generic
smart cards represent technologies which will contribute to the growth of
electronic commerce in the future.
32
<PAGE>
By the year 2000, over four billion generic smart cards are expected to be
in circulation worldwide, up from approximately 500 million in 1996. In the
United States an estimated 25 percent of households are expected to be using
generic smart cards to access information from computers or television sets, to
communicate by cell phones, to access healthcare and to make electronic
payments. Generic smart card based phone cards are now being used in over 60
countries accounting for the issuance of over 200 million such cards per year.
According to the SMART CARD GROWTH FORECAST, by the year 2000, generic
smart cards used in transportation are expected to increase from 2 million to
150 million and identity/access generic smart cards are expected to increase
from 3 million to 300 million.
STRATEGY
The Company's business strategy is to:
CONTINUE TO DEVELOP NEW SMART CARD SYSTEMS. The Company believes it was the
first to introduce contactless Smart Cards using FRAM technology and batteryless
powered radio frequency communication. The Company intends to continue to
design and develop Smart Card Systems in order to maintain what it believes to
be its leadership in Smart Card technology. The Company's research and
development efforts will focus on developing new Smart Card products for
automating financial transactions and further enhancing Smart Card performance,
reliability and cost effectiveness.
EXPAND THE COMPANY'S SMART CARD SYSTEMS APPLICATIONS. The Company will seek to
expand the applications for its existing Smart Card products and to develop new
Smart Card products. Emphasis will be placed on developing Smart Card products
outside the fare collection and access control industries, including new point
of sale Smart Card products as well as expanded industrial applications.
GROW REVENUES THROUGH STRATEGIC ALLIANCES, JOINT VENTURES AND SELECTIVE
LICENSING. The Company will continue to pursue strategic alliances, joint
ventures and licensing agreements with firms such as Nippon Steel Information
and Communication Systems, Inc., Perot Systems Corporation, General Signal, Inc.
and Rohm Co., Ltd. in order to gain access to new markets. The Company will
also continue to license its technology in order to generate revenue from
operations, develop royalty income and gain access to the manufacturing
facilities and complimentary technologies of its licensees.
EMPHASIZE MARKETING OF THE COMPANY'S SMART CARD PRODUCTS IN NORTH AMERICA.
Although the Smart Card market, as well as the Company's own marketing efforts,
has generally been focused on Europe and Asia, the Company will seek to
participate in new Smart Card projects being developed in such North American
cities as Los Angeles, San Francisco and Seattle. In order to enhance the
Company's efforts in the North American market, the Company recently reorganized
its North American sales activities along industry market segments including
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<PAGE>
(i) transportation, (ii) automation and control in industrial applications, and
(iii) point of sale for entertainment and leisure.
CONTINUE TO OUTSOURCE MANUFACTURING TO CONTROL FIXED COSTS. Since inception,
the Company has subcontracted substantially all of its manufacturing operations.
The Company will continue to contract with third parties to manufacture the
Company's Smart Card products in order to avoid capital intensive investments
and to focus the Company's limited resources on new product applications and
software development.
COMPETITION
The market for Smart Card products is new, intensely competitive, quickly
evolving and subject to rapid technological change. Competitors may develop
superior products or products of similar quality for sale at lower prices.
Moreover, there can be no assurance that the Company's Smart Card will not be
rendered obsolete by changing technology or new industry standards. The Company
expects competition to persist and increase in the future. The Company's
current and potential competitors are primarily subsidiaries of multinational
companies with established Contacted Card and contactless Smart Card businesses
who have longer operating histories, greater name recognition, larger customer
bases and significantly greater financial, technical and marketing resources
than the Company. This intense level of competition could materially adversely
affect the Company's future business, operating results and financial condition.
Competitive factors in the industry include transaction speed, the extent
and flexibility of Smart Card memory, reliability, transaction accuracy and
cost, all of which are discussed below. 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. Many of the Company's competitors have the financial resources
necessary to enable them to withstand substantial price and product competition,
which are expected to increase, and to implement extensive advertising and
promotional programs, both generally and in response to efforts by other
competitors to enter into existing markets or introduce new products. The
industry is also characterized by frequent introductions of new products. The
Company's ability to compete successfully will be largely dependent on its
ability to anticipate and respond to various competitive factors affecting the
Smart Card industry, including new products which may be introduced, changes in
customer preferences, demographic trends, pricing strategies by competitors and
consolidation in the industry where smaller companies with leading edge
technologies may be acquired by larger multinational companies.
Contacted Cards represent the Company's primary competition in electronic
commerce applications. Contacted Card competitors include such multinational
firms as Gemplus, Schlumberger and Group Bull. The Company believes that it is
able to compete favorably against Contacted Cards because the Company's
contactless Smart Cards (i) operate at higher speeds, (ii) do not require the
time and effort involved in inserting the Smart Card in a terminal
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<PAGE>
or removing the Smart Card from a wallet or purse, (iii) use reliable solid
state electronics with no moving parts, exposed contact points or magnetic
stripes which can be erased by a magnetic field, and (iv) are lower in cost
over the product life.
The Company also competes against contactless Smart Cards designed by
Philips GmbH, Sony Corporation, Gemplus and Micron Communications, Inc., which
use contactless technologies other than the Company's FRAM technology. The
Company believes that its Smart Cards compete favorably against these other
contactless technologies because the Company's contactless Smart Cards operate
at higher speeds and do not require batteries for power.
The Company's Smart Cards are priced at parity with competitors'
contactless Smart Card products but sell at a premium to Contacted Cards. The
Company expects, but cannot assure, that its Smart Card manufacturing costs will
diminish as anticipated volumes increase and as other semiconductor
manufacturers begin to offer FRAM chips for use in the Company's Smart Cards.
Recently, Matsushita Electronics Corporation ("Matsushita"), a
multinational semiconductor manufacturer, announced it intends to market a
ferroelectric chip-based Smart Card which will also communicate by radio
frequency. The Company believes that Matsushita's initial Smart Cards will
offer smaller memories than those of the Company, but there can be no assurance
that the introduction of these competitive Smart Cards (anticipated in Spring
1997) will not materially adversely affect the Company's operations.
MARKETING
The Company sells its Smart Card Systems through its direct sales force
based at its corporate headquarters in Greenwood Village, Colorado, through a
combination of joint ventures and strategic alliances and through selective
licensing and distributorship arrangements and agreements with independent
sales representatives in foreign countries.
In North America, the Company's direct sales force is organized by market
segment with primary emphasis on the transportation industry and to a lesser
extent industrial applications, health care and entertainment and leisure. At
September 30, 1996, the Company's direct sales force included nine full-time
employees.
Examples of the Company's joint ventures and strategic alliances include
(i) the Company's arrangement with Perot Systems Corporation and the GFI-GENFARE
unit of General Signal, Inc. to develop automatic fare collection systems and
services for public transportation projects in North America which combine the
subsystems of each company, and (ii) a joint product development agreement with
Rohm Co., Ltd. ("Rohm") to design custom FRAM based Smart Card products solely
in Japan.
In Japan, the Company has formed Racom Japan, Inc. ("RJ"), a joint venture
based in Tokyo, with Nittetsu Shoji Co., Ltd. ("NS"), a subsidiary of Nippon
Steel Information and
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Communication Systems, Inc., to market and sell the Company's Smart Card
Systems in Japan. RJ is 40% owned by the Company and acts as the exclusive
distributor in Japan of certain of the Company's Smart Card products.
In France, the Company has entered into a non-exclusive distribution
agreement with Bull CP8, a division of Group Bull. Bull CP8 distributes the
Company's Smart Card products worldwide, with emphasis on the European market.
In Canada, Mexico, Germany, Italy, the Netherlands, the United Kingdom
and South America, the Company uses commissioned independent sales
representatives.
The Company also markets its Smart Card Systems through participation in
trade shows, publication of trade articles, participation in industry forums
and technological standard-setting organizations, and through distribution of
sales literature. The Company also encourages customer referrals and has
used certain customer Smart Card installations as demonstration sites for its
Smart Card products.
Three customers (Bull CPB, Impulse Enterprises, Inc. and Echelon
Industries, Inc.) accounted for 10% or more of the Company's product sales
for the year ended December 31, 1995; three customers (Intag International,
Inc., Deutsche Aerospace AG and Nittetsu Shoji Co., Ltd.) accounted for 10%
or more of such sales for the year ended December 31, 1994; and three
customers (Impulse Enterprises, Inc., Racom Japan and Transmac) accounted for
10% or more of such sales for the nine months ended September 30, 1996.
The selling process for the Company's Smart Card Systems often involves a
team comprised of individuals from the Company's sales, marketing,
engineering and operations departments as well as senior management. Teams
frequently engage in combined sales efforts directed toward a variety of
customers such as systems integrators, financial services providers and end
users. The selling period often exceeds a year because some customers
require Smart Card Systems to be tested against various performance standards
and competitive products. The Company is also frequently required to
complete field trials of its Smart Card Systems as a pre-condition to
purchase.
MANUFACTURING AND ASSEMBLY
The Company's manufacturing and assembly operations consist primarily of
final assembly, test, burn-in and quality control of Smart Card terminals as
well as programming, testing and quality control of the Smart Cards
themselves (and tags in the case of industrial applications). The Company
subcontracts assembly of Smart Cards, terminals and card lamination to
multiple United States, Japanese, and Asian based companies who specialize in
this kind of contract work. Should production volumes increase, the Company
intends to consolidate its outside contract manufacturing in order to gain
greater economies of scale and to better control product quality. The
Company's current capacity through its contract manufacturers is
approximately 25,000 Smart Cards/tags and 200 terminals per month. The
Company also operates its own prototype Smart Card manufacturing facility to
support new product introductions and lower volume customer requirements.
The Company purchases a wide variety of electrical and mechanical
components as well as sub-assemblies for integration into the Company's Smart
Card Systems. With two notable exceptions, most materials are available from
several supply sources. The FRAM chips used in the Company's Smart Cards and
tags are currently supplied by two sources, Ramtron located
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<PAGE>
in Colorado Springs, Colorado, and Rohm located in Kyoto, Japan. Ramtron and
Rohm own 41.6% and 4.3% respectively of the Company's Common Stock. By 1998,
the Company expects that two additional semiconductor manufacturers will be
available to supply the Company's FRAM chips. The Company is dependent on
maintaining at least one reliable source of supply for its FRAM chips and its
business would be materially adversely affected if no such source was
available. Currently, all of the Company's terminals include a component
manufactured by only one United States company. If necessary, the Company
could redesign its terminals to use a similar component available from other
semiconductor manufacturers, although such a redesign would be time-consuming
and expensive and would adversely affect the Company's operations. The
Company has no written agreements with any manufacturer or supplier.
PATENTS AND TRADE SECRETS
The Company relies on its own patents, trade secrets and copyrights as
well as the patents, trade secrets and copyrights of its licensors to protect
its Smart Card technology. Due to rapid changes in the generic smart card
industry, the Company believes that development of trade secrets and
unpatented proprietary knowledge in connection with new products and
technologies are generally as important as patent and copyright protection in
establishing and maintaining a competitive advantage. Nevertheless, the
Company has obtained patents and copyrights on certain of its Smart Card
technologies and will continue to aggressively pursue patents and copyrights
when available. To date the Company has been awarded six United States
patents and is pursuing additional patents, both in the U.S. and in certain
foreign countries.
There can be no assurance that any of the Company's future patent
applications will be granted, that any current or future patent or patent
application will provide significant protection for the Company's products or
technology, be of commercial benefit to the Company, or that the validity of
such patents or patent applications will not be challenged. Moreover, there
can be no assurance that foreign patent, trade secret or copyright laws will
protect the Company's technologies or that the Company will not be vulnerable
to competitors who attempt to copy or use the Company's Smart Card products
or processes.
The Company has a license with certain exclusive rights, including the
right to grant a limited number of sublicenses, to use Ramtron's FRAM chip
technology, patents and improvements specifically for the development,
manufacture and sale of radio frequency identification devices, including the
Company's contactless Smart Cards. The exclusive provisions of the Company's
license with Ramtron become non-exclusive on January 1, 2006.
REGULATION
The Company's Smart Card products use radio frequency communications and
other technologies which make them subject to regulation by the Federal
Communications Commission ("FCC") in the United States and to export
licensing by the United States Government when sold
37
<PAGE>
internationally. Smart Card products are subject to similar regulation by
some foreign governments for use within their countries. All of the
Company's products currently comply with FCC regulations, similar regulations
of the foreign countries in which the Company sells its products and United
States export license requirements. Future compliance with FCC regulations,
similar regulations in foreign countries and United States export license
requirements may be costly and time-consuming. Moreover, a failure to comply
with such regulations and requirements could result in the Company being
denied the right to sell its Smart Card products in the jurisdiction of
non-compliance.
Market needs and competitive pressures will require that the Company's
products contain certain regulated cryptographic algorithms in order to
protect information and cash substitutes stored in the Smart Cards. Export,
import and usage of such cryptographic algorithms is covered by a large and
rapidly changing body of regulations in the United States.
Contactless Smart Cards and terminal devices produced by the Company emit
radio frequency energy in order to function. Such emissions are governed by
federal and other regulations in most countries including the United States.
The Company's products currently comply with United States regulations.
While similar regulations exist in most countries where sales of the
Company's products are anticipated, regulations can vary significantly from
country to country and can change frequently. Approvals can only be obtained
after product development is complete and therefore variations with United
States regulations or significant changes in each country's regulations could
hinder product sales to that country and thereby adversely affect the
Company's business and operating results.
Federal, state and local regulations impose various environmental
controls on the discharge of chemicals and gases which may be used in the
Company's present or future assembly processes. Moreover, changes in such
environmental rules and regulations may require the Company to invest in
capital equipment and implement compliance programs in the future. Any
failure by the Company to comply with environmental rules and regulations,
including the discharge of hazardous substances, could subject it to serious
liabilities and could materially adversely affect its operations.
PROPERTIES
The Company's headquarters are located in an 8,900 square foot leased
facility in Greenwood Village, Colorado, a suburb of Denver, Colorado. The
current lease (with a nonaffiliated landlord) requires a base monthly rental
of $8,419 and expires in November 1998. The Company has the right to renew
the lease for an additional three years at then-current rental market rates
on 180 days prior written notice to the landlord. The Company has no rights of
first refusal or purchase options under the lease. The base rental may be
increased during the term of the lease to reflect the Company's share of any
increases in specified operating expenses for the facility, such as real
estate taxes, insurance, utilities and the like. The Company believes its
existing facility is adequate for its current needs and that suitable
additional or substitute space will be available as needed on commercially
reasonable terms.
EMPLOYEES
The Company employs an aggregate of 26 employees including its five
salaried executive officers and believes its relations with its employees are
satisfactory.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows.
OFFICER/DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------- ----------------
Charles A. Fear(1) 43 Chairman of the Board of Directors 1995
Richard L. Horton 51 Chief Executive Officer, President, 1992
Chief Financial Officer and Director
Mark R. Davison 51 Director 1995
L. David Sikes 56 Director 1995
George J. Stathakis(1) 65 Director 1995
Charles R. Broshous 56 Vice President of Transportation 1996
Michael M. Malmer 56 Vice President of Engineering 1992
William H. Jacobs 40 Vice President of Business Development 1996
Douglas J. Sheldon 37 Vice President of Operations 1996
__________
(1) Members of the Compensation Committee
Directors are elected at the Company's annual meeting of shareholders and
serve a term of one year or until their successors are elected and qualified.
Officers are appointed by the Board of Directors and serve at the discretion
of the Board of Directors, subject to the bylaws of the Company.
The Company's Compensation Committee administers the Company's 1993
Employee Stock Option Plan and makes recommendations to the full Board of
Directors concerning compensation, including incentive arrangements, of the
Company's officers and key employees. The Compensation Committee is
comprised of at least two independent directors.
Upon the closing of the Offering, the Company will establish an Audit
Committee composed of at least two independent directors. The Audit
Committee will review the engagement and independence of the Company's
independent accountants, the audit and non-audit fees of the independent
accountants and the adequacy of the Company's internal accounting controls.
The Company has agreed with the Representative that, for a period of 24
months from the date of closing of the Offering, the Company will allow an
observer designated by the Representative and acceptable to the Company to
attend all meetings of the Board of Directors. The observer will have no
voting rights, will be reimbursed for out-of-pocket expense incurred
39
<PAGE>
in attending meetings and will be indemnified against any claims arising out
of participation at the meetings, including claims based on liabilities
arising under the securities laws.
The principal occupation of each director and executive officer of the
Company, for at least the past five years, is as follows:
CHARLES A. FEAR was appointed Chairman of Intag International Limited
("Intag"), a publicly-held Australian developer and marketer of data capture
technologies in April 1995. Intag was a promoter and founder of the Company,
is currently one of its principal stockholders and also holds an exclusive
license from the Company to use the Company's FRAM technology in connection
with certain airline, postal and courier applications. Since 1992 Mr. Fear
has been an Executive Director of Poynton Corporate Limited, the corporate
advisory arm of Hartley Poynton Limited, a regional Australian stockbroker,
of which he is also a shareholder. He is a director of Intag Systems Pty
Limited and Intag Microelectronics Pty Limited. Mr. Fear is a Fellow of the
Institute of Chartered Accountants and a Fellow of the Australian Institute
of Company Directors. From 1985 to 1992 he was a partner of KPMG Peat
Marwick ("KPMG") where he provided corporate advisory services for KPMG
clients involving business valuations, mergers, acquisitions, corporate
reconstructions and capital raisings.
RICHARD L. HORTON joined the Company as President in June 1992 and has
acted as its Chief Executive Officer since May 1995 and its Chief Financial
Officer since January 1996. From 1988 to June 1992, he was President of
Ramtron International Corporation ("Ramtron"), a publicly-held specialty
semiconductor manufacturer. Ramtron was a promoter and founder of the
Company and is currently a principal stockholder and licensor to the Company
of the FRAM technology upon which the Company's Smart Card products are
based. From 1981 to 1987, Mr. Horton founded two start-up ventures in the
computer systems and semiconductor industries which were subsequently
acquired by other firms. From 1985 to 1987, Mr. Horton also acted as the
Director of the digital products division for Honeywell, Inc. Mr. Horton
served in the United States Navy from 1962 to 1966 and earned B.S.E.E. and
M.B.A. degrees from Southern Methodist University and Pepperdine University,
respectively.
MARK R. DAVISON was a partner with the law firm of Freehill Hollingdale &
Page from 1978 to 1984, a Director of Rothschild Australia Limited from 1984
to 1985 and a founding Director of Gresham Partners Limited from 1985 to
1991. He has been a director of Intag since July 1992. In December 1991 Mr.
Davison founded the AusAsean Group which provides investment banking,
development and venture capital funds management. Mr. Davison is also a
director of BRL Hardy Limited, Tasmanian Univalve Pty Limited and other
Australian public and private companies. Mr. Davison is an investment banker
and has been a solicitor of the Supreme Court of New South Wales. He holds a
degree in Arts (1971) and Law (1973) from the Australian National University,
a Masters of Laws from the University of London (1976) and has completed the
Advanced Management Programme at Harvard School of Business Administration
(1983).
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<PAGE>
L. DAVID SIKES became Chairman of the Board and Chief Executive Officer of
Ramtron in April 1995 and has been a director of Ramtron since September 1992.
Prior to becoming Chairman of the Board and Chief Executive Officer of Ramtron,
he was its President and Chief Operating Officer from July 1992 until
January 1995, at which time he left Ramtron and joined Micro Component
Technology Inc., a semiconductor equipment manufacturer, as Chairman, President
and Chief Executive Officer from January 1995 until April 1995. Mr. Sikes was
President and Chief Executive Officer of ASM America, Inc. ("ASM America"), a
semiconductor equipment company, from January 1991 until June 1992, and
Executive Vice President and General Manager of ASM Epitaxy, a semiconductor
equipment manufacturer, from February 1989 until December 1990. Prior to his
tenure with ASM, Mr. Sikes spent 18 years with Motorola, Inc. ("Motorola"), in
various management and executive positions including Vice President and Director
of the Semiconductor Research and Development Lab. His experience also includes
several management and engineering roles with Eastman Kodak and National
Semiconductor Corporation. Mr. Sikes received his Bachelor of Science degree in
Electrical Engineering from the Massachusetts Institute of Technology.
GEORGE J. STATHAKIS has been a director of Ramtron since March 1990.
Mr. Stathakis also served as Chairman of the Board and Chief Executive Officer
of Ramtron from March 1990 until June 1994 and, in an interim capacity, from
February 1995 until April 1995. Since 1991, he has acted as a consultant to
Calpine Corporation, a publicly-held independent power company. From 1986 until
1989, Mr. Stathakis served as Chairman of the Board and Chief Executive Officer
of International Capital Corporation, a subsidiary of American Express.
Mr. Stathakis retired from General Electric Corporation ("GE") after 32 years in
management and executive positions. In 1971, he was appointed Vice President of
GE and General Manager of the Nuclear Energy Division. His responsibilities
included technology research and development, engineering design, manufacturing,
construction and marketing, as well as strategic business planning and
investments for an organization of approximately 10,000 people. In 1977, he was
appointed General Manager of GE's International Trading Operations, an
organization of approximately 35,000 people. Mr. Stathakis founded the General
Electric Trading Company in 1982 and was appointed its first President and Chief
Executive Officer. The General Electric Trading Company was instrumental in
developing export opportunities for countertrade and barter. Mr. Stathakis
graduated from the University of California at Berkeley with Bachelor of Science
and Master of Science degrees in engineering. In 1985, Mr. Stathakis was
appointed by President Reagan as a member of the President's Export Council, and
he served on such Council until 1987.
CHARLES R. BROSHOUS, the Company's Vice President for Transportation is
responsible for managing the Company's transportation related Smart Card
business, including its automated fare collection (AFC) systems for public
transit. From August 1993 until he joined the Company in January 1996,
Mr. Broshous served as the first President of the MTA Card Company, a fare
collection subsidiary of the New York Metropolitan Transportation Authority
("Authority"). From 1982 to August 1993, Mr. Broshous served the Authority in a
variety of capacities, completing service as its Senior Vice President for
Operations Support. In this capacity, Mr. Broshous managed the logistics
portfolio of the Authority, overseeing among other
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functions a $2 billion per year fare collection operation which covered
approximately 60% of the Authority's operating expenses. During his tenure,
he converted the Authority from its historic reliance on tokens to a new,
all-electronic AFC system. Mr. Broshous is a West Point graduate and U.S.
Army veteran who holds Masters degrees in civil engineering and in economics
from Princeton University.
MICHAEL L. MALMER is the Company's Vice President of Engineering and is
responsible for the engineering development of the Company's Smart Card
products. Prior to joining the Company in February 1992, he was Engineering
Vice President of Destron/IDI, an early participant in radio frequency
identification technologies from July 1986 to October 1991. In 1980, he was a
founder of Prolink Corporation and acted as its Vice President from 1980 to
1984. Mr. Malmer held engineering positions at Unisys and Boeing from 1961 to
1973. He holds a B.S.E.E. degree from Case Institute of Technology and engaged
in computer engineering masters degree work at the University of Michigan (Ann
Arbor) and other universities.
WILLIAM H. JACOBS is the Company's Vice President of Business Development
and is responsible for the development and marketing of new Smart Card products.
From March 1990 until he joined the Company in June 1996 he was Director of
Product Marketing for Netwise, Inc. Mr. Jacobs marketed the Netwise, Inc. line
of network software integration tools to support personal computers, UNIX
systems and IBM mainframes systems until the line was sold to Microsoft in
November of 1995. Prior to his employment with Netwise, Inc., Mr. Jacobs
managed computer operating system product lines for 11 years as an employee of
Apple Computer, Inc. and Hewlett Packard Co. He holds a B.S.E.E. degree from
the University of Missouri.
DOUGLAS J. SHELDON is the Company's Vice President of Operations. Prior to
joining the Company in August 1995 he had over 14 years experience in the
semiconductor manufacturing industry. From 1994 to 1995, he led the
manufacturing engineering activities of a family of advanced nonvolatile memory
products for Atmel Corporation and from 1988 to 1994 he was the Manager of
Reliability and Quality Assurance for Ramtron. Mr. Sheldon has a Bachelors and
Masters degree in Physics from University of Colorado and University of Oregon,
respectively, and is completing a Doctorate degree in Systems Management.
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EXECUTIVE COMPENSATION
The following table discloses certain compensation paid to the Company's
executive officers for the years ended December 31, 1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
ANNUAL COMPENSATION(1)
(a) (e) (f)
NAME AND PRINCIPAL (b) (c) (d) STOCK OTHER ANNUAL
POSITION YEAR SALARY($) BONUS($) OPTIONS COMPENSATION($)
-------- ---- --------- -------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Richard L. Horton, President 1995 158,244 0 0 0
1994 158,244 0 0 0
1993 126,122 0 500,000 0
Michael M. Malmer,
Vice President of Engineering 1995 104,200 0 0 0
1994 102,200 0 0 0
1993 99,275 0 250,000 0
John Shoemaker,
Vice President of Sales and
Marketing 1995 104,958 0 150,000 0
1994 0 0 0 0
1993 0 0 0 0
</TABLE>
__________
(1) The Company has not paid or granted any long-term compensation awards or
payouts.
The Company's independent directors do not receive compensation for
attending Board meetings but are reimbursed for out-of-pocket expenses incurred
in connection therewith.
1993 EMPLOYEE STOCK OPTION PLAN
In May 1993, the Company's stockholders adopted the Company's 1993 Employee
Stock Option Plan (the "Plan") which provides for the grant of stock options
intended to qualify as "incentive stock options" and "nonqualified stock
options" (collectively "stock options") within the meaning of Section 422 of the
United States Internal Revenue Code of 1986 (the "Code"). Stock options are
issuable to any officer, director, key employee or consultant of the Company.
The Plan also allows for the granting of limited stock appreciation rights upon
a change of control as defined in the Plan, although no such rights have been
granted.
The Company has reserved 1,700,000 shares of Common Stock for issuance
under the Plan. The Plan is administered by the Compensation Committee of the
Board of Directors, which, subject to approval by the Board of Directors,
determines which individuals shall receive stock options, the time period during
which the stock options may be exercised, the number of shares of Common Stock
that may be purchased under each stock option and the stock option price.
The per share exercise price of incentive stock options may not be less
than the fair market value of the Common Stock on the date the option is
granted. The aggregate fair market
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value (determined as of the date the stock option is granted) of the Common
Stock that any person may purchase under an incentive stock option in any
calendar year pursuant to the exercise of incentive stock options may not
exceed $100,000. No person who owns, directly or indirectly, at the time of
the granting of an incentive stock option, more than 10% of the total
combined voting power of all classes of stock of the Company is eligible to
receive incentive stock options under the Plan unless the stock option price
is at least 110% of the fair market value of the Common Stock subject to the
stock option on the date of grant.
No incentive stock options may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the stock option may only be exercisable by the optionee. Stock
options may be exercised only if the stock option holder remains continuously
associated with the Company from the date of grant to the date of exercise. The
exercise date of a stock option granted under the Plan cannot be later than 10
years from the date of grant. Any stock options that expire unexercised or that
terminate upon an optionee's ceasing to be employed by the Company become
available once again for issuance. Shares issued upon exercise of a stock
option will rank equally with other shares then outstanding.
As of the date of this Prospectus, 1,559,000 stock options have been
granted under the Plan, including an aggregate of 1,090,000 stock options
granted to officers and directors of the Company at exercise prices ranging from
$1.00 to $2.50 per share.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
ownership of the Company's Common Stock as of the date of the Prospectus, by (i)
each person who is known by the Company to own of record or beneficially more
than 5% of the Company's Common Stock, (ii) each of the Company's directors and
(iii) all directors and officers of the Company as a group. The stockholders
listed in the table have sole voting and investment powers with respect to the
shares of Common Stock.
PERCENTAGE OF CLASS(1)
----------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
- ---------------- ------------------ -------- --------
Charles A. Fear(2).................... 25,000 .2% .2%
Level 22 Allendale Square
77 St. Georges Terrace
Perth, Western Australia 6000
Richard L. Horton(3).................. 500,000 4.2% 3.7%
6080 Greenwood Plaza Blvd.
Greenwood Village, CO 80111
Mark R. Davison(4).................... 25,000 .2% .2%
9th Floor, Kyle House
27-31 Macquarie Place
Sydney NSW 2000
Australia
L. David Sikes(5)..................... 25,000 .2% .2%
1850 Ramtron Drive
Colorado Springs, CO 80921
George J. Stathakis(5)................ 25,000 .2% .2%
One Bush Street, 15th Floor
San Francisco, CA 94104
Intag International Limited(6)........ 5,828,733 48.2% 42.9%
9th Floor, Kyle House
27-31 Macquarie Place
Sydney NSW 2000
Australia
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<PAGE>
PERCENTAGE OF CLASS(1)
----------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
- ---------------- ------------------ -------- --------
Ramtron International Corporation(7).. 5,051,452 42.9% 38.0%
1850 Ramtron Drive
Colorado Springs, CO 80921
All directors and officers as a group
(9 persons)(2)(3)(4)(5)............. 860,000 6.9% 6.2%
(1) Does not include shares issuable upon exercise of the Warrants, the
Representative's Overallotment Option or the Representative's Unit Warrant.
Includes all stock options and common stock purchase warrants exercisable
within 60 days from the date hereof.
(2) Includes options to purchase 25,000 shares of Common Stock at $2.50 per
share until October 26, 2000, or 90 days after termination, whichever is
earlier, issued under the Company's 1993 Employee Stock Option Plan. Does
not include 5,262,532 shares or 321,766 common stock purchase warrants held
by Intag, a publicly-held Australian company for which Mr. Fear serves as
Chairman.
(3) Comprised of options to purchase 500,000 shares of Common Stock at $1.00
per share until June 30, 1997 issued under the Company's 1993 Employee
Stock Option Plan.
(4) Includes options to purchase 25,000 shares of Common Stock at $2.50 per
share until May 15, 2001, or 90 days after termination, whichever is
earlier, issued under the Company's 1993 Employee Stock Option Plan. Does
not include 5,262,532 shares or 321,766 common stock purchase warrants held
by Intag, a publicly-held Australian company for which Mr. Davison serves
as a director. See "Management - Directors and Executive Officers."
(5) Includes options to purchase 25,000 shares of Common Stock at $2.50 per
share until October 26, 2000, or 90 days after termination, whichever is
earlier, issued under the Company's 1993 Employee Stock Option Plan. Does
not include 4,800,000 shares or 251,452 common stock purchase warrants held
by Ramtron, a publicly-held company for which Mr. Sikes serves as Chairman
and Chief Executive Officer and for which Mr. Stathakis serves as a
director. See "Management - Directors and Executive Officers."
(6) Includes 200,000 common stock purchase warrants exercisable at $2.50 per
share at any time until June 13, 1999 and 121,766 common stock purchase
warrants exercisable at $2.50 per share at any time until October 4, 2001.
(7) Includes 251,452 common stock purchase warrants exercisable at $2.50 per
share at any time until October 4, 2001.
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<PAGE>
SELLING STOCKHOLDERS
In December 1996, the Company completed the borrowing of an aggregate of
$1,040,000 from a group of lenders (the "Bridge Loan") evidenced by promissory
notes bearing interest at 2% over the prime interest rate and due the earlier of
December 1997 or the closing date of the Offering. As additional consideration
for the Bridge Loans, the Company issued one Bridge Warrant for each $4.00
loaned to the Company or a total of 260,000 Bridge Warrants. Each Bridge
Warrant entitles the holder to purchase one share of Common Stock at $_____ per
share for a period of two years from the date hereof.
The Company is registering by this Prospectus all 260,000 Bridge Warrants
and the 260,000 shares of Common Stock issuable upon exercise of the Bridge
Warrants. The Bridge Warrants and underlying shares of Common Stock may be sold
from time to time after the date hereof in public or private open market
transactions directly to purchasers or through brokerage firms at prevailing
market prices less customary commissions. The Underwriters and Selling
Stockholders have no plans, proposals, arrangements or understandings with
respect to any transactions involving the Selling Stockholders' securities. The
names and addresses of the Selling Stockholders who hold the Bridge Warrants and
the number of Bridge Warrants held by them are set forth below. None of the
Selling Stockholders are officers or directors of the Company or own any other
securities of the Company and all Selling Stockholders intend to sell all Bridge
Warrants and/or Common Stock underlying the Bridge Warrants following completion
of the Offering. The Selling Stockholders may be deemed to be "underwriters"
within the meaning of the 1933 Act.
NUMBER OF NUMBER OF
BRIDGE WARRANTS AND BRIDGE WARRANTS AND
UNDERLYING SHARES UNDERLYING SHARES
NAME AND ADDRESS OWNED AND TO BE OWNED
OF SELLING STOCKHOLDER OFFERED FOR SALE AFTER OFFERING
- ---------------------- ------------------- -------------------
Michael M. Arnouse 25,000 0
Three Edward Lane
Syosset, NY 11791
William P. Bennett 12,500 0
P.O. Box 4240
Boulder, CO 80306
Steven Bloechl 6,250 0
4540 S. Decatur Street
Englewood, CO 80110
Roland J. Christensen 12,500 0
192 E. 100N
Fayette, UT 84630
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<PAGE>
NUMBER OF NUMBER OF
BRIDGE WARRANTS AND BRIDGE WARRANTS AND
UNDERLYING SHARES UNDERLYING SHARES
NAME AND ADDRESS OWNED AND TO BE OWNED
OF SELLING STOCKHOLDER OFFERED FOR SALE AFTER OFFERING
- ---------------------- ------------------- -------------------
Ellis V. Couch 6,250 0
2926 Rocky Oak Street
San Antonio, TX 78232
Thomas L. Dutcher 6,250 0
P.O. Box 897
Montrose, CO 81402-0897
John A. Duke Trust 25,000 0
9100 Boyd Road
P.O. Box 430
Rogue River, OR 97537
Frederick M. Galloway 6,250 0
375 Ammons Street
Lakewood, CO 80226
John R. Hannifan 12,500 0
1366 S.W. Tamarind Way
Boca Raton, FL 33486
Arthur Kassoff 6,250 0
7600 State Street
E. St. Louis, IL 62203
Kaufmann Survivors Trust 6,250 0
(c/o Carl J. Kaufmann)
2000 Royal Marco Way #906
Marco Island, FL 34145-1800
Gary A. Mosko 12,500 0
234 Garfield
Denver, CO 80206
Heribert Obser 12,500 0
P.O. Box 697
Quogue, NY 11959
48
<PAGE>
NUMBER OF NUMBER OF
BRIDGE WARRANTS AND BRIDGE WARRANTS AND
UNDERLYING SHARES UNDERLYING SHARES
NAME AND ADDRESS OWNED AND TO BE OWNED
OF SELLING STOCKHOLDER OFFERED FOR SALE AFTER OFFERING
- ---------------------- ------------------- -------------------
Mitchell & Elizabeth Pearlman 6,250 0
27157 Highlands Lane
Valencia, CA 91354
Robert R. Peterson 6,250 0
P.O. Box 3460
Estes Park, CO 80517
Max Quimby & Armond Quimby 6,250 0
Revocable Living Trust
(c/o Max Quimby)
10409 Riverside Drive #302
Toluca Lake, CA 91602
S. G. Construction Company 12,500 0
(c/o Ronald W. Massner)
2850 Mt. Pleasant St., Suite 102
Burlington, IA 52601
David M. Schneider 12,500 0
721 Redwood Drive
Lincoln, NE 68510-5219
Shepler & Thomas, Inc. 6,250 0
Profit Sharing Plan FBO
(c/o William R. Bell)
28650 Cavan Lane
Evergreen, CO 80439
Deloris J. Sherwood 6,250 0
15111 Bushard Street #84
Westminster, CA 92683
Charles W. Wafer 37,500 0
P.O. Box 2174
Rancho Santa Fe, CA 92067
49
<PAGE>
NUMBER OF NUMBER OF
BRIDGE WARRANTS AND BRIDGE WARRANTS AND
UNDERLYING SHARES UNDERLYING SHARES
NAME AND ADDRESS OWNED AND TO BE OWNED
OF SELLING STOCKHOLDER OFFERED FOR SALE AFTER OFFERING
- ---------------------- ------------------- -------------------
David Wank 10,000 0
5200 White Oak Ave. #35
Encino, CA 91316
Barbara L. Westrick 6,250 0
11786 Decatur Drive
Denver, CO 80234-2554
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<PAGE>
CERTAIN TRANSACTIONS
In January 1992, the Company initially issued 2,000,000 shares of its
Common Stock to each of Ramtron International Corporation ("Ramtron"), Intag
International Limited ("Intag") and AWA Limited ("AWA") in connection with
the Company's organization. In June 1993, AWA sold its 2,000,000 shares to
Intag for $1.50 per share. Ramtron and Intag, which are publicly-held
companies, are founders, promoters and principal stockholders of the Company.
Subsequently, in November 1994, Ramtron sold 200,000 shares of the Company's
Common Stock to Intag for $3.00 per share. See "Principal Stockholders."
In October 1991, the Company entered into a technology license agreement
with Ramtron (the "Technology License") which was amended in March 1994,
February 1995 and May 1995. Under the Technology License and amendments
thereto, Ramtron granted the Company the worldwide, nonexclusive,
nontransferable right to design, manufacture, sell, lease and distribute
products which incorporate FRAM and contactless technologies regardless of
memory size (the "Contactless Products"). As a part of the Technology
License, the Company also acquired the rights to any and all improvements in
the FRAM technology developed by Ramtron and the right, through December 31,
2006, on an exclusive basis, to design, manufacture, sell, lease and
distribute certain contactless products which functionally incorporate a
microprocessor.
In February 1995, the Company agreed to pay $1,000,000 and agreed to issue
1,000,000 shares of its Common Stock to Ramtron in connection with a
February 1995 amendment to the Technology License which provided the Company
with certain additional rights thereunder. The Company paid $400,000 in cash
and was relieved of the $600,000 balance owed on the transaction upon Intag
paying $600,000 to Ramtron under the MOU discussed below.
In May 1995, the Company signed and executed a Memorandum of
Understanding ("MOU") with Intag and Ramtron relating to certain amendments
to the Technology License, the granting of certain rights to Intag and the
conversion to equity of certain of Intag's loans to the Company. Under the
MOU, the Company consented to Ramtron granting to Intag, a principal
stockholder of the Company, an exclusive right to use (but not manufacture)
the FRAM and contactless technology solely for use in conveyor fed or tunnel
reader equipped airline, postal and courier applications which do not
incorporate a microprocessor. In turn, Ramtron agreed to pay the Company
royalties, as defined in the Agreement, on any contactless products which
Ramtron sells, leases or distributes to third parties. Ramtron is also
obligated to pay the Company 50% of any license fees it receives on
contactless products. The Company may sublicense its rights up to five times
with Ramtron's consent and to date has sublicensed its rights two times. The
Company is required to purchase certain minimum quantities of FRAM chips from
Ramtron. As consideration for the rights granted to Intag under the MOU,
Intag agreed to pay a total of $1,200,000. Intag paid Ramtron $600,000, paid
the Company $200,000 and agreed to pay $400,000 to the Company upon further
sub-licensing of the technology to third parties. As additional consideration
for the Company approving the granting of rights to Intag under the MOU,
Intag converted an aggregate of $2,033,798 of debt due from the Company in
exchange for the issuance of 1,062,532 shares of the Company's Common Stock
at the respective fair market values of the Company's Common Stock at the
date the debt was converted (an average price of $1.91 per share). The
$600,000 paid to Ramtron by Intag on behalf of the Company together with an
unrealized deposit from Intag of $100,000 resulted in a $700,000 increase in
the Company's paid-in capital.
In July 1993, the Company entered into a joint venture agreement with
Nittetsu Shoji Co. Ltd. ("NS") pursuant to which the Company and NS each
purchased a 50% ownership interest in Racom Japan ("RJ"), a Japanese
corporation. RJ was formed for the purpose of marketing, distributing and
supporting the Company's FRAM technology in Japan. Under the terms of the
joint venture agreement, the Company and NS each invested $140,265 in RJ.
Subsequently, in August 1994, both parties invested an additional $153,000.
In March 1996 the Company entered into a technology licensing supply
agreement (the "Supply Agreement") with RJ pursuant to which RJ paid the
Company $933,968 for the nonexclusive right and license to use the Company's
FRAM technology and for the limited right to design, develop and manufacture
FRAM Smart Card products for sale and use in Japan only. The license
specifically excludes the right to use FRAM technology in connection with the
airline, postal and courier applications granted to Intag. Under the Supply
Agreement, RJ is obligated to pay a portion of its sublicense revenues and a
royalty on net sales of FRAM Smart Card products to the Company. Also in
March 1996, the Company and NS each made a further equity investment in RJ of
$466,984 each, and third parties invested $373,587 in RJ, reducing the
Company's ownership of RJ to 40%.
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<PAGE>
Between April and December 1994, Intag loaned the Company $300,000 which
was repaid by the Company in December 1994.
In February 1995, the Company sold a license to Intag covering marketing
rights to sell FRAM technology for Smart Cards in certain Middle Eastern
countries.
In August and December 1995, the Company sold an aggregate of 500,000
shares of its Common Stock to Rohm as a part of a license agreement pursuant
to which the Company granted to Rohm a nonexclusive, nonsublicensable,
nontransferable right and license to use the FRAM technology in connection
with the design, development, manufacture and sale of custom FRAM Smart Card
products, solely in Japan. In addition to the Common Stock purchased, Rohm
agreed to pay a $1,000,000 license fee to the Company in four equal
installments upon reaching certain sales milestones. As of September 30,
1996, the Company had received $500,000 in license fees from Rohm.
Between August and October 1996, Intag loaned the Company $255,000 and
deferred payments of miscellaneous payables due to Intag totalling $49,414 in
exchange for which Intag received warrants to purchase 121,766 shares of the
Company's Common Stock at $2.50 per share any time until October 4, 2001.
During the same time period, Ramtron loaned the Company an aggregate of
$175,000 and deferred payments for product purchases which, to date, have
totalled $453,630 in exchange for which Ramtron received warrants to purchase
251,452 shares of the Company's Common Stock at $2.50 per share at any time
until October 4, 2001.
At September 30, 1996, the Company was indebted to Intag and Ramtron in
the aggregate amount of $1,002,300 and $90,833, respectively. The Company
will repay to Intag and Ramtron from proceeds of the Offering $934,000 and
$96,000, respectively, which represents the net amounts due as of the date
hereof. See "Use of Proceeds."
The Company owes Intag $400,000 for funds it borrowed in order to pay
Ramtron a fee in connection with an amendment to the Technology License. The
loan is to be repaid upon the
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<PAGE>
Company receiving $400,000 in sublicense revenues from Intag as discussed
above. However, as the Company believed it will not receive the sublicense
revenues from Intag and thus will not repay the loan, the Company recorded
the $400,000 as a reduction in the Technology License as of December 31,
1995. The loan is convertible into the Company's Common Stock at $2.50 per
share at any time, but in no event later than, June 30, 1997. Accrued
interest on loans previously converted of $55,452 and $93,380 is also
convertible into Common Stock at $2.50 and $1.50 per share, respectively.
The Company believes the terms of the above transactions were fair,
reasonable and consistent with terms that could be obtained from
nonaffiliated third parties. Any future transactions with affiliates of the
Company will be approved by the disinterested members of the Company's Board
of Directors. Moreover, the Company's securities (other than stock options
under the Company's 1993 Employee Stock Option Plan) may not be issued to
management, promoters or their respective associates or affiliates without
obtaining (i) a fairness opinion from a qualified brokerage firm or appraiser
confirming the fairness of the consideration to be received by the Company
for the issuance of any such securities and (ii) the written approval of the
transaction by a majority of the Company's disinterested directors.
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<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each Unit offered hereby consists of one share of Common Stock and one
Warrant. The Common Stock and Warrants have been approved for listing on
NASDAQ and are separately transferable as of the date of this Prospectus.
The Units have not been listed with, and will not trade on, NASDAQ.
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of $.01 par value
Common Stock of which 11,532,532 shares are outstanding as of the date of
this Prospectus. Upon issuance, the shares of Common Stock are not subject
to further assessment or call. The holders of Common Stock are entitled to
one vote for each share held of record on each matter submitted to a vote of
stockholders. Cumulative voting for election of directors is not permitted.
Subject to the prior rights of any series of preferred stock which may be
issued by the Company in the future, holders of Common Stock are entitled to
receive ratably such dividends that may be declared by the Board of Directors
out of funds legally available therefor, and, in the event of the
liquidation, dissolution or winding up of the Company, are entitled to share
ratably in all assets remaining after payment of liabilities. Holders of
Common Stock have no preemptive rights or rights to convert their Common
Stock into any other securities. The outstanding Common Stock is, and the
Common Stock to be outstanding upon completion of the Offering will be,
validly issued, fully paid and nonassessable.
WARRANTS
Each Warrant represents the right to purchase one share of Common Stock
at an initial exercise price of $_____ per share for a period of two years
from the date hereof. The exercise price and the number of shares issuable
upon exercise of the Warrants are subject to adjustment in certain events,
including the issuance of Common Stock as a dividend on shares of Common
Stock, subdivisions or combinations of the Common Stock or similar events.
The Warrants do not contain provisions protecting against dilution resulting
from the sale of additional shares of Common Stock for less than the exercise
price of the Warrants or the current market price of the Company's securities.
Warrants may be redeemed in whole or in part, at the option of the
Company, upon 30 days' notice, at a redemption price equal to $.01 per
Warrant if the closing price of the Company's Common Stock on NASDAQ is at
least $_____ per share for 20 consecutive trading days, ending not earlier
than five days before the Warrants are called for redemption.
Holders of Warrants may exercise their Warrants for the purchase of
shares of Common Stock only if a current prospectus relating to such shares
is then in effect and only if such shares are qualified for sale, or deemed
to be exempt from qualification, under applicable state
54
<PAGE>
securities laws. The Company is required to use its best efforts to maintain
a current Prospectus relating to such shares of Common Stock at all times
when the market price of the Common Stock exceeds the exercise price of the
Warrants until the expiration date of the Warrants, although there can be no
assurance that the Company will be able to do so.
The shares of Common Stock issuable on exercise of the Warrants will be,
when issued in accordance with the Warrants, fully paid and non-assessable.
The holders of the Warrants have no rights as stockholders until they
exercise their Warrants.
For the life of the Warrants, the holders thereof are given the
opportunity to profit from a rise in the market for the Company's Common
Stock, with a resulting dilution in the interest of all other stockholders.
So long as the Warrants are outstanding, the terms on which the Company could
obtain additional capital may be adversely affected. The holders of the
Warrants might be expected to exercise them at a time when the Company would,
in all likelihood, be able to obtain any needed capital by a new offering of
securities on terms more favorable than those provided by the Warrants.
BRIDGE WARRANTS
In December 1996, the Company completed the borrowing of an aggregate of
$1,040,000 from a group of lenders (the "Bridge Loans") evidenced by promissory
notes bearing interest at 2% over the prime interest rate and due the earlier of
December 1997 or the closing date of the Offering. As additional consideration
for the Bridge Loans, the Company issued one Bridge Warrant for each $4.00
loaned to the Company or a total of 260,000 Bridge Warrants. Each Bridge
Warrant entitles the holder to purchase one share of Common Stock at $_____ per
share for a period of two years from the date hereof. The remaining terms and
conditions of the Bridge Warrants are identical to the terms and conditions
of the Warrants. The Bridge Warrants and shares underlying the Bridge
Warrants are being registered by this Prospectus. See "Selling Stockholders."
OTHER WARRANTS
The Company has issued to Intag common stock purchase warrants to
purchase 200,000 shares at $2.50 per share at any time until June 13, 1999
and common stock purchase warrants to purchase 121,766 shares at $2.50 per
share at any time until October 4, 2001. The Company has issued to Ramtron
common stock purchase warrants to purchase 251,452 shares at $2.50 per share
at any time until October 4, 2001.
CONVERTIBLE LOAN AND INTEREST
The Company owes Intag $400,000 for funds borrowed in order to pay
Ramtron in connection with an amendment to the Technology License. The loan
is to be repaid upon the Company receiving $400,000 in sublicense revenues
from Intag. However, the Company believes it will not receive the sublicense
revenue from Intag and thus will not be required to repay the loan. The
Company recorded the $400,000 as a reduction in the Technology License as of
December 31, 1995. The loan is convertible into the Company's Common Stock at
$2.50 per share at any time, but in any event, no later than June 30, 1997.
Accrued interest on loans previously converted of $55,452 and $93,380 is also
convertible into Common Stock at $2.50 and $1.50 per share, respectively.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock,
no par value (the "Preferred Stock"). The Preferred Stock may, without
action by the stockholders of the Company, be issued by the Board of
Directors from time to time in one or more series for such consideration and
with such relative rights, privileges and preferences as the Board may
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<PAGE>
determine. Accordingly, the Board has the power to fix the dividend rate and
to establish the provisions, if any, relating to voting rights, redemption
rate, sinking fund, liquidation preferences and conversion rights for any
series of Preferred Stock issued in the future.
It is not possible to state the actual effect of any other authorization
of Preferred Stock upon the rights of holders of Common Stock until the Board
determines the specific rights of the holders of any other series of
Preferred Stock. The Board's authority to issue Preferred Stock also
provides a convenient vehicle in connection with possible acquisitions and
other corporate purposes, but could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock. Accordingly, the issuance of Preferred Stock may be used as an
"anti-takeover" device without further action on the part of the stockholders
of the Company, and may adversely affect the holders of the Common Stock.
The Company has not issued any Preferred Stock and has no current intention
to do so.
COMMON STOCK ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 13,032,532 shares of
Common Stock outstanding, (excluding shares issuable upon issuance of the
Warrants, the Overallotment Option or the Representative's Unit Warrant), of
which 1,500,000 shares are being registered in the Offering and will be
freely tradeable without restriction under the 1933 Act (unless purchased by
"affiliates" of the Company as this term is defined under the 1933 Act), and
the remaining 11,532,532 shares have not been registered under the 1933 Act
and are therefore "restricted securities" under Rule 144 of the 1933 Act.
("Rule 144")
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has satisfied a two-year holding period, subject to certain
requirements concerning the availability of public information, and the
manner and notice of sale, may sell within any three-month period, a number
of shares which does not exceed the greater of one percent of the then
outstanding common shares (approximately 130,325 shares immediately after the
Offering assuming no exercise of the Warrants, the Overallotment Option or
the Representative's Unit Warrant) or the average weekly trading volume
during the four calendar weeks prior to such sale. Rule 144 also permits,
under certain circumstances, the sale of shares by a person without any
quantity limitation, so long as such person is not an affiliate of the
Company, has not been an affiliate for three months prior to the sale and has
beneficially owned the shares for at least three years. An aggregate of
10,032,532 shares are currently available for resale under Rule 144, of which
1,000,000 shares will become eligible for resale in February 1997 and the
remaining 500,000 shares will be eligible for resale in August 1997, all
subject to the lock-up agreements described below. The Company is unable to
predict the effect that any sales, under Rule 144 or otherwise, may have on
the then prevailing market price of the Common Stock.
The Company's officers, directors and 5% or greater stockholders have
agreed not to sell or otherwise dispose of any of their shares of Common
Stock for a period of 12 months from the date of this Prospectus and to sell
no more than 50% of their shares of Common Stock for the next 12-month period
without the prior written consent of the Representative. No prediction
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<PAGE>
can be made as to the effect, if any, that sales of Common Stock or the
availability of such shares for sale will have on the market price of the
Common Stock. Nevertheless, the possibility that substantial amounts of
Common Stock may be sold in the public market with the Representative's
consent soon after completion of the Offering, may adversely affect
prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
The Company has also registered pursuant to this Prospectus the Warrants,
the Bridge Warrants and the shares issuable upon exercise of the Warrants and
Bridge Warrants. The Company has granted certain demand and piggy-back
registration rights to the Representative with respect to the
Representative's Unit Warrant as well as the Common Stock issuable upon
exercise of the Representative's Unit Warrant. The Company may also register
Common Stock underlying its 1993 Employee Stock Option Plan in the future.
See "Management - 1993 Employee Stock Option Plan," "Selling Stockholders" and
"Underwriting."
TRANSFER AGENT AND WARRANT AGENT
The Company has appointed American Securities Transfer, Inc., 1825
Lawrence Street, Suite 444, Denver, Colorado 80202, as its transfer agent and
warrant agent.
DIVIDENDS
The Company has not paid dividends on its Common Stock since inception
and does not plan to pay dividends in the foreseeable future. Earnings, if
any, will be retained to finance growth.
LIMITATION ON LIABILITY
The Company's Certificate of Incorporation provide that a director shall
not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director. The effect of this
provision in the Certificate of Incorporation is to eliminate the rights of
the Company and its stockholders, through stockholders' derivative suits on
behalf of the Company, to recover monetary damages from a director for breach
of the fiduciary duty of care as a director including breaches resulting from
negligent or grossly negligent behavior. This provision does not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care or to seek monetary damages for (i) violations of the
federal securities laws, (ii) unlawful payment of dividends or (iii) acts or
omission not in good faith or that involve intentional misconduct or a
knowing violation of law.
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UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase on a firm commitment
basis from the Company the number of Units set forth opposite their names.
NUMBER OF
UNDERWRITER UNITS
----------- ---------
Spencer Edwards, Inc....................................
Total................................................. 1,500,000
---------
---------
The Company has been advised by the Representative that the Underwriters
propose to offer the Units purchased by them directly to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at a maximum price of $_____ per Unit. Any changes in the price
of the Units or selling terms after the initial distribution of the Units
offered hereby will not affect the amount of net proceeds to be received by the
Company as set forth on the cover page of this Prospectus. The Underwriters are
obligated to purchase and pay for all of the Units, if any Units are taken.
After the initial public offering of the Units, the offering price and the
selling terms may be changed by the Underwriters.
The Company has granted the Representative an Overallotment Option,
exercisable within 30 days from the date of this Prospectus, to purchase up to
225,000 Units solely to cover overallotments.
The Underwriters will purchase the Units (including Units subject to the
Overallotment Option) from the Company at a price of $_____ per Unit. In
addition, the Company has agreed to pay to the Representative a 3%
nonaccountable expense allowance on the aggregate initial public offering price
of the Units, including Units subject to the Overallotment Option. The
Overallotment Option may only be exercised by the Representative.
The offering price of the Units and the exercise price of the Warrants were
determined by negotiations between the Company and the Representative based upon
such factors as the Company's historical revenues and earnings, the percentage
of the Company's outstanding securities to be offered hereby, the experience of
the Company's management and the prospects for the Company and its competitors
within its industry.
The Company has agreed to issue the Representative's Unit Warrant to the
Representative for a consideration of $100. The Representative's Unit
Warrant is exercisable at any time during the four-year period commencing one
year from the date of this Prospectus to purchase up to 150,000 Units for
$_____ per Unit. The terms of the Warrants comprising a part of the
Representative's Unit Warrant are identical to the terms of the Warrants.
The Representative's Unit 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 of law. During
58
<PAGE>
the term of the Representative's Unit 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 Unit Warrant is outstanding. At
any time at which the Representative's Unit Warrant is likely to be
exercised, the Company would probably be able to obtain additional equity
capital on more favorable terms. Any profit realized on the sale of the
Representative's Unit Warrant or the underlying securities may be deemed
additional underwriting compensation. The Company has registered the Units
underlying the Representative's Unit Warrant under the 1933 Act. If the
Company files a registration statement under the provisions of the 1933 Act
at any time for a period of four years commencing one year from the date of
this Prospectus, the holders of the Representative's Unit Warrant or
underlying Units 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 Units at the request of the holders. Additionally, the
Company has agreed, for a period of four years commencing one year from the
date of this Prospectus, on demand of the holders of a majority of the
Representative's Unit Warrant or the Units issued thereunder, to register the
Units underlying the Representative's Unit Warrant one time at the Company's
expense. The registration of securities pursuant to the Representative's
Unit Warrant may result in substantial expense to the Company at a time when
it may not be able to afford such expense and may impede future financing.
The Company may find that the terms on which it could obtain additional
capital may be adversely affected while the Representative's Unit Warrant is
outstanding. The number of Units issuable under the Representative's Unit
Warrant and the exercise price are subject to adjustment under certain events
to prevent dilution.
The Company's officers, directors and 5% or greater stockholders have
agreed, pursuant to a lock-up agreement with the Representative, not to sell
or otherwise dispose of any of their shares of Common Stock for a period of
12 months from the date of this Prospectus and to sell no more than 50% of
their shares of Common Stock during the following 12-month period without the
prior written consent of the Representative. There are no plans, proposals,
arrangements or understandings by or with the Representative to waive or
shorten any lock-up agreements with the Company's officers, directors or 5%
or greater stockholders.
The Company has agreed with the Representative that, for a period of 24
months from the date of closing of the Offering, the Company will allow an
observer designated by the Representative and acceptable to the Company to
attend all meetings of the Board of Directors. The observer will have no voting
rights, will be reimbursed for out-of-pocket expense incurred in attending
meetings and will be indemnified against any claims arising out of participation
at the meetings, including claims based on liabilities arising under the
securities laws.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement, copies of which are on file at the
offices of the Representative, the Company and the Commission. See "Available
Information."
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the 1933 Act, or to contribute to
payments that any Underwriter may be required to make in respect thereof.
59
<PAGE>
LEGAL MATTERS
The validity of the Common Stock and Warrants comprising the Units offered
hereby will be passed upon for the Company by the Law Office of Gary A. Agron,
Englewood, Colorado. Certain legal matters in connection with the Offering will
be passed upon for the Representative by Michael J. Tauger, Esq., Englewood,
Colorado. Mr. Agron and Mr. Tauger maintain separate law practices although
they share office space and from time to time may represent the same client on a
particular matter or may refer clients to each other.
EXPERTS
The financial statements of the Company for the years ended December 31,
1995 and 1994, appearing in this Prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said report. Reference is
made to said report which includes an explanatory paragraph that discusses
substantial doubt about the Company's ability to continue as a going concern.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the 1933 Act with
respect to the Units offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Units,
reference is hereby made to the Registration Statement and such exhibits and
schedules filed as a part thereof, 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
Northwestern 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
prescribed fees.
The Company will be subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will file reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information may
be inspected at the public reference facilities of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material
can be obtained at prescribed rates from the Commission at such address. Such
reports, proxy statements and other information can also be inspected at the
Commission's regional offices at the addresses indicated above.
60
<PAGE>
RACOM SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1994 and 1995, and
September 30, 1996 (Unaudited) F-3
Statements of Operations for the Years Ended December 31, 1994
and 1995, and for the Nine Months Ended September 30, 1995
and 1996 (Unaudited) F-5
Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1994 and 1995, and for the Nine Months Ended
September 30, 1996 (Unaudited) F-6
Statements of Cash Flows for the Years Ended December 31, 1994
and 1995, and for the Nine Months Ended September 30, 1995
and 1996 (Unaudited) F-7
Notes to Financial Statements F-9
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Racom Systems, Inc.:
We have audited the accompanying balance sheets of RACOM SYSTEMS, INC. (a
Delaware corporation) as of December 31, 1994 and 1995, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Racom Systems, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has generated significant operating losses and
operating cash flow deficits since inception which raise substantial doubt about
the ability of the Company to continue as a going concern. Management's plans
in regard to these matters are described in Note 2. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amounts and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
ARTHUR ANDERSEN LLP
Denver, Colorado,
September 25, 1996.
F-2
<PAGE>
Page 1 of 2
RACOM SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
December 31,
------------------------ September 30,
ASSETS 1994 1995 1996
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 228,675 $ 512,435 $ 27,652
Accounts receivable-
Trade 41,160 158,191 110,895
Related parties (Note 7) 40,351 28,090 23,054
Inventory (Note 3) 76,963 221,694 383,519
Deposit with related party (Notes 6 and 7) 400,000 - -
Notes and interest receivable-related party 237,116 - -
Prepaid expenses and other 4,375 - -
---------- ---------- ----------
Total current assets 1,028,640 920,410 545,120
---------- ---------- ----------
PROPERTY AND EQUIPMENT, at cost (Note 3):
Machinery and equipment 272,161 327,337 350,172
Furniture and fixtures 54,617 56,704 56,801
Leasehold improvements 3,328 3,328 3,328
---------- ---------- ----------
330,106 387,369 410,301
Less- Accumulated depreciation (69,260) (157,475) (235,395)
---------- ---------- ----------
260,846 229,894 174,906
---------- ---------- ----------
INVESTMENT IN JOINT VENTURE (Note 4) 159,403 - -
---------- ---------- ----------
OTHER ASSETS (Notes 2, 3, 6 and 12):
Technology license from related party, net of
accumulated amortization of $352,940, $517,646
and $645,487 (unaudited) in 1994, 1995 and 1996,
respectively 1,647,060 1,882,354 1,754,513
Organization costs, net of accumulated
amortization of $15,435, $19,727 and $23,586
(unaudited) in 1994, 1995 and 1996, respectively 10,295 6,003 2,144
---------- ---------- ----------
1,657,355 1,888,357 1,756,657
---------- ---------- ----------
$3,106,244 $3,038,661 $2,476,683
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
Page 2 of 2
RACOM SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
December 31,
LIABILITIES AND ------------------------------- September 30,
STOCKHOLDERS EQUITY (DEFICIT) 1994 1995 1996
----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 183,024 $ 398,200 $ 664,515
Accounts payable - related parties (Note 7) 10,531 392,167 520,102
Current portion of deferred license revenue - related
party (Notes 3, 4 and 12) - - 93,397
Deferred import license revenue 28,850 - -
Notes and interest payable - related
parties (Note 7) 1,701,502 707,975 1,093,133
Deposit from related party (Note 7) 1,000,000 - -
Capital lease obligation - 2,218 1,576
----------- ----------- ------------
Total current liabilities 2,923,907 1,500,560 2,372,723
----------- ----------- ------------
DEFERRED LICENSE REVENUE--RELATED PARTY
(Notes 3, 4 and 12) - - 326,889
COMMITMENTS AND CONTINGENCIES
(Notes 7, 8, 10 and 11)
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 5 and 6):
Common stock, $.01 par value, 20,000,000
shares authorized, 8,970,000, 11,532,532
and 11,532,532 (unaudited) shares issued
and outstanding, respectively 89,700 115,325 115,325
Additional paid-in capital 6,064,418 10,272,591 10,272,591
Accumulated deficit (5,971,781) (8,849,815) (10,610,845)
----------- ----------- ------------
Total stockholders' equity (deficit) 182,337 1,538,101 (222,929)
----------- ----------- ------------
$ 3,106,244 $ 3,038,661 $ 2,476,683
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-4
<PAGE>
RACOM SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
Years Ended Nine Months Ended
December 31, September 30,
------------------------------- -------------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 91,931 $ 425,327 $ 278,561 $ 222,145
Product sales - related parties 148,415 103,738 44,605 84,065
Import license revenues - related party 69,240 28,850 28,850 -
Custom product development projects 45,000 90,000 90,000 600,000
License revenues - related parties
(Notes 4, 6 and 12) - 500,000 250,000 513,682
----------- ----------- ----------- -----------
354,586 1,147,915 692,016 1,419,892
COST OF REVENUES 177,217 646,469 329,783 842,687
----------- ----------- ----------- -----------
GROSS MARGIN 177,369 501,446 362,233 577,205
----------- ----------- ----------- -----------
EXPENSES:
Research and development 867,237 1,049,162 723,659 405,341
General and administrative 1,244,016 1,253,252 1,061,527 654,075
Sales and marketing 492,053 708,566 518,944 649,438
Equity in loss of joint venture (Notes 3 and 4) 133,862 159,403 159,403 466,984
Amortization expense 122,790 168,998 138,762 131,700
----------- ----------- ----------- -----------
2,859,958 3,339,381 2,602,295 2,307,538
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (2,682,589) (2,837,935) (2,240,062) (1,730,333)
OTHER INCOME (EXPENSE):
Interest expense - related parties (108,864) (143,645) (130,438) (42,154)
Interest income 64,599 2,899 1,044 7,092
Write-off of notes receivable - related party (753,317) - - -
Gain on sale of subsidiary (Note 6) - 170,647 170,647 -
Other - (70,000) (24,300) 4,365
----------- ----------- ----------- -----------
NET LOSS $(3,480,171) $(2,878,034) $(2,223,109) $(1,761,030)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER COMMON AND
COMMON EQUIVALENT SHARE $ (.42) $ (.27) $ (.21) $ (.15)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING (Note 3) 8,254,344 10,853,633 10,578,801 11,844,793
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-5
<PAGE>
RACOM SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
Common Stock
-----------------------------------------------------------------
Class A Class B Class C
-------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993 2,000,000 $ 20,000 2,000,000 $ 20,000 2,000,000 $ 20,000
Issuance of common stock for amended Technology License
and Supply Agreements (Note 2) - - - - - -
Cancellation of Classes A, B and C common stock and
issuance of common stock (Note 5) (2,000,000) (20,000) (2,000,000) (20,000) (2,000,000) (20,000)
Issuance of common stock for cash, net of issuance costs of
$270,882 (Note 5) - - - - - -
Net loss - - - - - -
---------- -------- ---------- -------- ---------- --------
BALANCES, December 31, 1994 - - - - - -
Issuance of common stock for amended Technology License
and Supply Agreements (Note 6) - - - - - -
Shareholder contributions (Note 6) - - - - - -
Conversion of shareholder debt of $933,798, $700,000 and $400,000
to common stock at $1.50 per share, $2.50 per share and $2.50
per share, respectively (Notes 5 and 6) - - - - - -
Sale of common stock for cash (Note 6) - - - - - -
Net loss - - - - - -
---------- -------- ---------- -------- ---------- --------
BALANCES, December 31, 1995 - - - - - -
Net loss (unaudited) - - - - - -
---------- -------- ---------- -------- ---------- --------
BALANCES, September 30, 1996 (unaudited) - $ - - $ - - $ -
---------- -------- ---------- -------- ---------- --------
---------- -------- ---------- -------- ---------- --------
Common Stock
-------------------- Additional Accumulated
Shares Amount Paid-In Capital Deficit Total
---------- ------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993 - $ - $ 3,940,000 $(2,491,610) $ 1,508,390
Issuance of common stock for amended Technology License
and Supply Agreements (Note 2) 2,000,000 20,000 (20,000) - -
Cancellation of Classes A, B and C common stock and
issuance of common stock (Note 5) 6,000,000 60,000 - - -
Issuance of common stock for cash, net of issuance costs of
$270,882 (Note 5) 970,000 9,700 2,144,418 - 2,154,118
Net loss - - - (3,480,171) (3,480,171)
---------- ------- ----------- ----------- -----------
BALANCES, December 31, 1994 8,970,000 89,700 6,064,418 (5,971,781) 182,337
Issuance of common stock for amended Technology License
and Supply Agreements (Note 6) 1,000,000 10,000 (10,000) - -
Shareholder contributions (Note 6) - - 700,000 - 700,000
Conversion of shareholder debt of $933,798, $700,000 and $400,000
to common stock at $1.50 per share, $2.50 per share and $2.50
per share, respectively (Notes 5 and 6) 1,062,532 10,625 2,023,173 - 2,033,798
Sale of common stock for cash (Note 6) 500,000 5,000 1,495,000 - 1,500,000
Net loss - - - (2,878,034) (2,878,034)
---------- ------- ----------- ----------- -----------
BALANCES, December 31, 1995 11,532,532 115,325 10,272,591 (8,849,815) 1,538,101
Net loss (unaudited) - - - (1,761,030) (1,761,030)
---------- ------- ----------- ----------- -----------
BALANCES, September 30, 1996 (unaudited) 11,532,532 $115,325 $10,272,591 $(10,610,845) $ (222,929)
---------- ------- ----------- ----------- -----------
---------- ------- ----------- ----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
Page 1 of 2
RACOM SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Years Ended Nine Months Ended
December 31, September 30,
------------------------------- -------------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(3,480,171) $(2,878,034) $(2,223,109) $(1,761,030)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 176,706 266,234 207,689 209,789
Return of deposit to INTAG - (100,000) (100,000) -
Equity in loss of joint venture 133,862 159,403 159,403 466,984
Write-off of notes receivable -
related party 753,317 - - -
Loss (gain) on disposal of fixed assets 3,196 (700) (700) 926
Decrease (increase) in-
Accounts receivable - trade (8,066) (117,031) (84,850) 47,296
Accounts receivable - related parties (33,783) 12,261 31,114 5,036
Inventory (40,140) (144,731) (146,895) (161,825)
Prepaid expenses and other 65,448 4,375 (18,330) -
Increase (decrease) in-
Accounts payable and accrued
liabilities 92,336 215,176 145,751 266,315
Accounts payable - related parties (3,819) 381,636 172,838 127,935
Deferred license revenue - related
party - - - 420,286
Deferred import license revenue (69,240) (28,850) (28,850) -
Interest payable - related parties - 140,271 127,668 40,158
----------- ----------- ----------- -----------
Net cash used in
operating activities (2,410,354) (2,089,990) (1,758,271) (338,130)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment (236,225) (63,440) (59,795) (24,624)
Proceeds on sale of fixed assets 525 914 914 597
Deposit with related party (400,000) - - -
Acquisition of technology license from
related party - (400,000) (400,000) -
Payments from INTAG offset against cost of
technology license (Note 6) - 200,000 200,000 -
Investment in joint venture (153,000) - - (466,984)
Loan to related party (2,850,000) - - -
Repayments of loan from related party 1,859,567 237,116 237,116 -
----------- ----------- ----------- -----------
Net cash used in
investing activities (1,779,133) (25,410) (21,765) (491,011)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes to financial statements
F-7
<PAGE>
are an integral part of these statements.
F-8
<PAGE>
Page 2 of 2
RACOM SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Years Ended Nine Months Ended
December 31, September 30,
------------------------------ -------------------------------
1994 1995 1995 1996
---------- ---------- ----------- --------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common stock $2,425,000 $1,500,000 $ 900,000 $ -
Payment of stock issuance costs (270,882) - - -
Proceeds from notes payable - related
parties 1,503,971 1,113,000 1,113,000 345,000
Payments on notes payable - related parties (300,000) (213,000) (213,000) -
Deposit from related party 1,000,000 - - -
Payments on capital lease obligation - (840) (738) (642)
---------- ---------- ----------- --------
Net cash provided by
financing activities 4,358,089 2,399,160 1,799,262 344,358
---------- ---------- ----------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 168,602 283,760 19,226 (484,783)
CASH AND CASH EQUIVALENTS,
beginning of period 60,073 228,675 228,675 512,435
---------- ---------- ----------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 228,675 $ 512,435 $ 247,901 $ 27,652
---------- ---------- ----------- --------
---------- ---------- ----------- --------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
No cash was paid for interest or income taxes during 1994, 1995, or the
nine months ended September 30, 1996 (unaudited).
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1994, the Company combined all classes of outstanding stock into a
single voting class of common stock on a one-for-one basis (Note 5).
During 1995, the Company purchased equipment under a capital lease totaling
$3,058.
During 1995, notes payable to INTAG of $933,798 and $700,000 were converted
to common stock at $1.50 per share and $2.50 per share, respectively.
In addition, net liabilities of $400,000 were also exchanged for
common stock at $2.50 per share in satisfaction of a deposit from
INTAG of $1,000,000, less Company deposits held by INTAG of $500,000
and a receivable from INTAG of $100,000 relating to the sale of ISI.
A $600,000 payment (together with an unrelated $100,000 deposit)
relating to the Technology License and Supply Agreements was made by
INTAG to Ramtron on the Company's behalf and was treated as a capital
transaction (Note 6).
The accompanying notes to financial statements
F-9
<PAGE>
are an integral part of these statements.
F-10
<PAGE>
RACOM SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(including notes applicable to unaudited periods)
(1) ORGANIZATION AND BUSINESS
Racom Systems, Inc. (the "Company") is a developer and marketer of contactless
smart cards and radio frequency identification ("RFID") contactless smart card
systems. The Company was initially formed as a joint venture between INTAG
International Limited ("INTAG"), AWA Limited ("AWA") and Ramtron International
Corporation ("Ramtron"). In June 1993, INTAG acquired AWA's 2,000,000 shares of
common stock. The Company was incorporated in the State of Delaware on June 3,
1991 and commenced operations in February 1992. Sales of the Company's initial
two products utilizing ferroelectric random access memory ("FRAM") commenced in
1993. The Company's latest product, currently under development, is scheduled
for market introduction in 1997. Prior to 1995, the Company was in the
development stage.
(2) GOING CONCERN AND ASSET REALIZATION
As reflected in the accompanying financial statements, the Company has generated
substantial operating losses since inception and has yet to generate sufficient
revenues to fund its operations. To date, the Company has completed a series of
smaller-scale projects; however, the Company has not yet completed a significant
number of substantial sales transactions covering the application of its
products and, as a result, an uncertainty exists as to whether the Company will
be able to successfully market and sell its products to third parties at
sufficient prices and volumes to fund its operations. During 1995, the Company
experienced significant cash flow deficits and liquidity shortages and funded
its operations primarily through the sale of non-exclusive sublicenses to its
technology, through the proceeds from the sale of its common stock and through
related party borrowings.
During 1996, the Company anticipates that increased operating revenues will be
achieved through a combination of product sales, development contracts and the
sale of non-exclusive licenses. In addition, the Company also anticipates
increased operating expenses and research and development expenditures which are
required for the Company to further develop and market its third generation
products and achieve successful operations. However, there is no assurance the
Company will be successful in developing and marketing its products.
To date, the Company has funded its operations primarily through the issuance of
shares of its common stock and related party borrowings. The related party
borrowings are due on demand. The Company does not currently have the financial
resources to repay any of its debt, if demanded. Management of the Company
intends to fund its 1996 operations through a combination of product sales and
technology sublicensing, additional related and non-related party borrowings
F-11
<PAGE>
and offerings of its common stock. There is no assurance that sales of
common stock or additional borrowings will occur or that additional proceeds
will be received from such offerings. Further, there is no assurance that
the Company's two principal stockholders will continue to fund the cash needs
of the Company.
These factors, among others, raise substantial doubt about the ability of the
Company to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
ASSET REALIZATION
The Company's primary asset is a technology license related to the design and
manufacture of its products. The Company originally purchased the technology
from Ramtron pursuant to a technology license agreement (the "Technology
License"), for $2,000,000 in cash and 2,000,000 shares of the Company's class B
common stock (Note 5). The Company also entered into a supply agreement in
conjunction with the Technology License (collectively, the "Technology License
and Supply Agreements"), which requires the purchase of minimal annual
quantities of ferroelectric RFID semiconductor chips (Note 8). See Note 6 for
amendments to Technology License and Supply Agreements. The Technology License
is protected by patents owned by Ramtron and is further protected by the
Company's own patents. As part of the Technology License, the Company acquired
the rights to any and all improvements in the underlying technology through
2005.
The Technology License was recorded at the original cash acquisition cost of
$2,000,000. In connection with a Memorandum of Understanding ("MOU") signed in
May 1995, the Company acquired certain additional rights with respect to the
technology. The net $400,000 cost of obtaining the additional rights was
capitalized in 1995 (Note 6). The net book value of the Technology License
acquired was $1,647,060, $1,882,354 and $1,754,513 (unaudited), as of
December 31, 1994 and 1995, and September 30, 1996, respectively. Although the
Company is currently marketing products utilizing the technology covered by this
Technology License and believes the underlying technology, which is protected
by a series of patents, has certain long-term proprietary value, given the
Company's current financial position, the ultimate recovery of the carrying
amount is uncertain. No provision for any loss that may result should the
carrying amount of the license not be recovered has been made in the
accompanying financial statements.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial statements of the Company as of September 30, 1995 and 1996, and
for the nine month periods then ended, presented herein, have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments (consisting of only normal recurring accruals) which, in the opinion
of management, are necessary to present fairly the financial position, results
of operations and cash flows of the Company as of September 30, 1995 and 1996,
and for the nine months then ended.
F-12
<PAGE>
PRINCIPLES OF CONSOLIDATION
The December 31, 1994 financial statements are consolidated and include the
accounts of the Company and its wholly-owned subsidiary, Intag Systems, Inc.
("ISI"). All significant intercompany accounts and transactions were eliminated
in consolidation. During 1995, the Company sold its investment in the
subsidiary (Note 6).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in highly liquid investments with
original maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost or market using the first-in, first-out
("FIFO") method of accounting. Inventories at December 31, 1994 and 1995 and
September 30, 1996 (unaudited) consisted of the following:
December 31, September 30,
1994 1995 1996
----------------------- -------------
(Unaudited)
Raw materials $37,271 $129,222 $ 77,456
Work in process 39,692 67,232 152,282
Finished goods - 25,240 153,781
--------- ---------- ----------
$76,963 $221,694 $383,519
--------- ---------- ----------
--------- ---------- ----------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciation is provided using the
straight-line method over the estimated useful lives of three to five years for
the respective assets. Maintenance and repairs are expensed as incurred and
improvements are capitalized.
INVESTMENT IN FOREIGN JOINT VENTURE
The functional currency for the Company's investment in the joint venture (Note
4) is the applicable local currency of the joint venture. The investment in the
joint venture is translated at the exchange rate in effect at year end and any
equity in earnings of the joint venture is translated at the average exchange
rate during the year. Exchange rate fluctuations on translating foreign
currency into U.S. dollars result in unrealized gains or losses referred to as
translation adjustments. Exchange rate differences for the years ended
December 31, 1994 and 1995 and for the nine months ended September 30, 1996
(unaudited) were not material.
F-13
<PAGE>
INTANGIBLE ASSETS
Intangible assets are recorded at cost and are amortized using the straight-line
method over the following estimated useful lives:
Estimated
Useful Lives
(In Years)
------------
Technology license 10-17
Organization costs 5
The amortization lives assigned to the Technology License are based on the
remaining lives of the patents protecting the licensed technology. The Company
reviews its amortization lives on a periodic basis.
DEFERRED IMPORT LICENSE REVENUE
In June 1993, the Company entered into an import agreement with Nittetsu Shoji
Co. Ltd. ("NS"). The terms of the import agreement stated that for a period of
two years, in exchange for cash consideration of approximately $138,000, NS had
exclusive import rights to the Company's products in Japan. Revenue relating to
the import agreement was recognized on a straight-line basis during the two-year
exclusivity right under the import agreement. The agreement was not renewed in
June 1995.
DEFERRED LICENSE REVENUE
Deferred license revenue represents the amount of profit deferred on the March
1996 sublicensing of the Company's Technology License to an equity investee
(Notes 4 and 12). The deferred license revenue will be recognized on a
straight-line basis over a term of five years, corresponding with the
amortization period assigned to the sublicense by the equity investee.
REVENUE RECOGNITION
Revenue from product sales to direct customers is recognized upon shipment.
Royalty revenue is recognized upon the Company's fulfillment of its contractual
obligations and determination of a fixed royalty amount, or, in the case of
ongoing unit royalties, upon sales by the licensee of royalty-bearing products,
as estimated by the Company.
Revenue from the sale of licenses of technology which are nonrefundable and for
which no significant future obligations exist, is recognized when the license is
signed. Revenue from the sale of licenses which are refundable or for which
future obligations exist, is recognized when the Company has completed its
obligations under the license. Certain research and development activities are
conducted for third parties and such revenue is recognized as the services are
performed.
Revenue from development contracts where costs are insignificant or cannot be
reasonably estimated are recognized as the contractual events are achieved.
F-14
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred and are
included in operating expenses. Research and development costs amounted to
approximately $867,237, $1,049,162 and $405,341 (unaudited) for the years ended
December 31, 1994 and 1995, and the nine months ended September 30, 1996,
respectively.
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Net loss per common and common equivalent share has been computed based upon the
weighted average number of common shares and common share equivalents
outstanding. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and common stock equivalent shares issued by the
Company at prices below the initial public offering price during the twelve
month period prior to the offering (using the treasury stock method for common
stock equivalents and an assumed offering price of $4.75 per share) have been
included in the calculation as if they were outstanding for all the periods
presented regardless of whether they were antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
short-term trade receivables and payables, notes receivable and notes payable to
related parties. The carrying values of cash and cash equivalents, short-term
trade receivables and payables, and notes receivable approximate fair value.
The fair value of notes payable to related parties is estimated based on current
rates available for similar debt with similar maturities and collateral, and at
December 31, 1994 and 1995, approximates the carrying value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates may affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS 121 requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable and that long-lived assets and certain identifiable intangibles
to be disposed of be reported at the lower of carrying amount or fair value less
cost to sell. SFAS 121 also establishes the procedures for review of
recoverability, and measurement of impairment if necessary, of long-lived assets
and certain identifiable intangibles to be held and used by an entity. The
Company will be required to adopt SFAS 121 for its year ended December 31, 1996.
Management believes
F-15
<PAGE>
that the adoption of SFAS 121 will not have a material effect on the Company's
reported financial position and results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." SFAS 123 establishes financial accounting and reporting
standards for stock-based compensation, including stock-based employee
compensation plans. SFAS 123 defines a fair value-based method of accounting
for an employee stock option or similar equity instrument. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value-based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting in APB Opinion No.
25 must make pro forma disclosures of net income and earnings per share, as if
the fair value-based method of accounting defined in SFAS 123 had been applied.
The Company will be required to adopt SFAS 123 for its year ended December 31,
1996. The Company has elected to make the pro forma disclosure upon adoption as
allowed by SFAS 123.
CONCENTRATION OF CREDIT RISK
The Company has no significant off balance-sheet concentrations of credit risk
such as foreign exchange contracts, options contracts or other foreign hedging
arrangements. The Company maintains the majority of its cash with financial
institutions, in the form of demand deposits.
The Company performs ongoing evaluations of its customers' financial condition
and generally does not require collateral. Its accounts receivable balances are
primarily domestic and are concentrated among institutions within the high-
technology industry.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued its Statement
of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences based on enacted tax
laws of temporary differences between the financial reporting and tax bases of
assets, liabilities and carryforwards. SFAS 109 also requires recognition of
deferred tax assets for the expected future effects of all deductible temporary
differences, loss carryforwards and tax credit carryforwards. Deferred tax
assets are then reduced, if deemed necessary, by a valuation allowance for the
amount of any tax benefits which, more likely than not based on current
circumstances, are not expected to be realized (see Note 10).
RECLASSIFICATIONS
Certain prior year balances in the accompanying financial statements have been
reclassified to conform with the current year presentation.
F-16
<PAGE>
(4) INVESTMENT IN JOINT VENTURE
In July 1993, the Company entered into a joint venture agreement with NS
pursuant to which NS and the Company each received a 50% ownership interest
in Racom Japan, Inc. ("RJ"), a Japanese Corporation. RJ was formed for the
purpose of marketing, distributing and supporting the Company's RFID products
to be sold in Japan. Upon formation, NS and the Company each purchased 300
shares of common stock at a purchase price of 50,000 Japanese Yen ($466.67)
per share, or $140,265. In August 1994, NS and the Company each purchased an
additional 300 shares of common stock at a purchase price of 50,000 Japanese
Yen ($510) per share, or $153,000. RJ has the exclusive right to distribute
the Company's products in Japan for two years commencing August 1995, with
the Company providing marketing and sales support to RJ. In March 1996, the
Company sold a non-exclusive sublicense to its technology to RJ (Note 12).
In connection with the sale of the sublicense, $466,984 (representing the
Company's intercompany profit due to its 50% equity ownership in RJ on the
date of the sublicense) of the profit was deferred. The deferred license
revenue is being recognized over the life of the related technology license
asset purchased by RJ, which is five years. As of September 30, 1996,
$46,698 (unaudited) of the original deferred license revenue (Notes 3 and 12)
of $466,984 (unaudited) has been recognized.
The investment in RJ is accounted for using the equity method and the Company
has recorded its share of RJ's losses in 1994 and 1995 and for the nine months
ended September 30, 1996 ($133,862, $159,403 and $466,984 (unaudited),
respectively) as equity in loss of joint venture in the accompanying financial
statements to the extent of capital invested in RJ by the Company. The losses
recorded for the nine months ended September 30, 1996, include previously
unrecognized losses which had not been recorded as the Company's investment had
been reduced to zero and it had no obligation to fund such losses. However,
upon the 1996 investment of $466,984 (see Note 12), previously unrecognized
losses of $141,953 (unaudited) were recorded. As of September 30, 1996, the
Company's unrecognized share of RJ losses in excess of its investment was
$48,314 (unaudited).
Summary unaudited financial information of RJ as of and for the years ended
December 31, 1994 and 1995, and the nine months ended September 30, 1996 is as
follows:
Years Ended Nine Months Ended
December 31, September 30,
1994 1995 1996
--------- --------- ----------
(Unaudited) (Unaudited)
Revenue $ 168,132 $ 233,179 $ 317,449
--------- --------- ----------
--------- --------- ----------
Gross margin $ 95,662 $ 155,978 $ 111,903
--------- --------- ----------
--------- --------- ----------
Net loss $(267,724) $(602,712) $ (841,851)
--------- --------- ----------
--------- --------- ----------
Total assets $ 353,535 $ 464,121 $1,468,631
--------- --------- ----------
--------- --------- ----------
Total liabilities $ 19,158 $ 741,511 $1,291,860
--------- --------- ----------
--------- --------- ----------
F-17
<PAGE>
(5) STOCKHOLDERS' EQUITY (DEFICIT)
During 1994, the Company amended and restated its Certificate of
Incorporation and Bylaws to combine all classes of outstanding common stock
into a single voting class of common stock. All existing stockholder
certificates were canceled and reissued on a one-for-one basis.
In June 1994, 970,000 shares of the Company's common stock were issued
pursuant to a Private Placement Memorandum ("PPM") at $2.50 per share. The
proceeds received by the Company were $2,154,118, net of issuance costs of
$270,882. The Company reimbursed Ramtron and INTAG $50,000 each for issuance
costs incurred relating to the PPM. Of the total shares issued, 20,000 were
purchased by directors of the Company.
On November 14, 1994, Ramtron sold 200,000 of its shares of Company common
stock to INTAG at $3.00 per share.
In connection with the MOU (Notes 2 and 6), INTAG converted debt due from the
Company of $933,798, $700,000 and $400,000 into common stock at $1.50 per
share, $2.50 per share and $2.50 per share, respectively, resulting in
1,062,532 shares of common stock being issued to INTAG (Note 6).
(6) AMENDMENTS TO THE TECHNOLOGY LICENSE
AND SUPPLY AGREEMENTS
In 1994, Ramtron was issued an additional 2,000,000 shares of common stock in
connection with an amendment to the Technology License and Supply Agreements.
In February 1995, the Company and Ramtron entered into a second amendment to
the Technology License and Supply Agreements. In May 1995, the Company
signed and executed the MOU (Note 2) with INTAG and Ramtron relating to
further amendments to the Technology License and Supply Agreements and the
conversion to equity of certain of INTAG's loans to the Company (Notes 5 and
7). As a result of these amendments, the Company received certain additional
rights and agreed to make certain payments as discussed below.
The Company has the worldwide, non-exclusive, non-transferable right to
design, manufacture, sell, lease and distribute smart card products which
monolithically incorporate FRAM and contactless technologies regardless of
memory size ("Contactless Products"). In addition, the Company has the
rights to any and all improvements in the FRAM technology. The Company,
through 2005, has certain exclusive rights to design, manufacture, sell,
lease and distribute certain Contactless Products which functionally
incorporate a microprocessor. The Company may sublicense its manufacturing
right up to five times with Ramtron's consent. The Company consented to
Ramtron granting to INTAG an exclusive right to use (but not manufacture) the
technology for use in conveyor fed or tunnel reader equipped airline, postal
and courier applications.
Further to the Technology License and Supply Agreements, Ramtron is obligated
to pay to the Company royalties, as defined in the agreement, on any
Contactless Products which Ramtron sells, leases or distributes to third
parties. Ramtron will also be obligated to pay to the Company 50% of any
license fees on Contactless Products. As of September 30, 1996 (unaudited),
the Company had not received any royalties or licensing fees as there were no
sales of Contactless Products by Ramtron through September 30, 1996. The
amendments extend the requirements that the
F-18
<PAGE>
Company purchase from Ramtron minimal quantities of ferroelectric RFID
semiconductor chips (Note 8). For the years ended December 31, 1994 and
1995, and the nine months ended September 30, 1996, the Company made
purchases from Ramtron of approximately $84,000, $281,000 and $250,000
(unaudited), respectively.
As further consideration for the additional rights obtained through the
amendments to the Technology License and Supply Agreements, the Company
issued to Ramtron 1,000,000 shares of Company common stock and caused Ramtron
to be paid cash of $1,000,000. The common shares issued to Ramtron were
assigned no value because the amendments were viewed as a modification of the
original transfer (Note 2) by a principal stockholder of intangible rights
for which Ramtron had no capitalized historical cost basis. INTAG paid
$600,000 of the cash consideration directly to Ramtron, which together with
an unrelated deposit of $100,000 received from INTAG has been reflected as an
addition to the Company's paid-in capital. The remaining $400,000 balance
paid to Ramtron was loaned to the Company by INTAG, carried a 10% interest
rate and was to be repaid only from future sublicense fees earned by INTAG,
totaling $400,000, which would be due the Company from INTAG should INTAG be
successful in further sublicensing the technology. INTAG and the Company
have agreed that the loan is no longer subject to accrued interest and may be
converted, at INTAG's option, into shares of the Company's common stock at a
rate of $2.50 per share, no later than June 1997. INTAG simultaneously paid
the Company $200,000 for a sublicense. The Company believes the loan amount
effectively represents an additional nonrefundable payment for the
sublicense. Consequently, the Company has netted both the loan amount of
$400,000 and the $200,000 sublicense payment against the $1,000,000 cash paid
to Ramtron, resulting in a net increase to the Technology License of $400,000
as of December 31, 1995. Should INTAG convert the loan to common stock of
the Company, the transaction will be assigned no value.
INTAG agreed to convert to equity the principal balances of the $933,798
related party notes payable and $700,000 working capital notes at $1.50 and
$2.50 per share, respectively (Note 7). INTAG purchased ISI from the Company
for $100,000 and assumed ISI's net liabilities of $70,467. The net balance
of all related party deposits between the Company and INTAG (Note 7) combined
with the ISI purchase price, totaled $400,000 and was converted to equity at
$2.50 per share.
The MOU is subject to formal consummation through execution of certain
definitive agreements. Management of the Company believes that the terms of
the definitive agreements will be substantially the same as those described
in the MOU.
In June 1995, the Company entered into a Cooperative Agreement for Licensed
Manufacturing of Ferroelectric RFID Products with Rohm Co., Ltd. ("ROHM") of
Japan. The license gives ROHM a non-exclusive, non-sublicenseable,
non-transferable right and license to use the RFID technology in connection
with the design, development, manufacture and sale of Custom Ferroelectric
RFID Products for use within a defined territory (Japan). In consideration
of this license, ROHM purchased 300,000 shares of the Company's common stock,
at $3.00 per share. ROHM also purchased 200,000 additional shares of the
Company's common stock, for a purchase price of $3.00 per share upon reaching
certain sales milestones. ROHM is also to pay a $1,000,000 license fee to the
Company in four equal installments upon reaching certain sales milestones.
As of December 31, 1995, the Company has received $500,000 in license fees as
it had achieved certain milestones. As of September 30, 1996 (unaudited), no
new milestones had been reached.
F-19
<PAGE>
(7) OTHER RELATED PARTY TRANSACTIONS
During 1994 and 1995, INTAG advanced approximately $445,000 and $1,113,000,
respectively, to the Company under various notes payable agreements, which
bear interest at 10% per annum and are due on demand. Amounts due under the
notes were convertible into common stock of the Company at the fair value of
the Company's common stock at the date the advances were made. In 1995,
$933,798 of advances were converted to equity in connection with the MOU
(Note 6) at a rate of $1.50 per share. Unpaid accrued interest of $93,380 on
the advances, prior to conversion, was not converted to equity in connection
with the MOU (Note 6), and at the discretion of INTAG, is convertible into
common stock at $1.50 per share or is to be repaid to INTAG within 30 days of
notification by INTAG that repayment is required. As of December 31, 1994 and
1995 and September 30, 1996, the related party notes payable to INTAG had total
principal and interest outstanding of $980,872, $652,523, and $946,848
(unaudited) respectively. In 1996, Ramtron advanced $90,000 to the Company
under a note payable agreement which bears interest at prime plus 2% (10.25%
at September 30, 1996) and is due on demand. As of September 30, 1996, the
related party note payable to Ramtron had total principal and interest
outstanding of $90,833 (unaudited).
During 1994, INTAG loaned the Company $1,000,000 under a $1,000,000 working
capital facility agreement. Of the $1,000,000 drawn during 1994, $300,000
had been repaid as of December 31, 1994. Amounts due under the working
capital facility agreement were convertible into common stock of the Company
at the fair value of the Company's common stock at the date the advances were
made. The facility carried interest at 10% per annum and in May 1995, the
$700,000 balance outstanding was converted to common stock in connection with
the MOU (Note 6) at a rate of $2.50 per share. Unpaid accrued interest of
$55,452 on the advances, prior to conversion, was not converted to equity in
connection with the MOU (Note 6) and, at the discretion of INTAG, is convertible
into common stock at $2.50 per share or is to be repaid to INTAG within 30 days
of notification by INTAG that repayment is required. As of December 31, 1994
and 1995, and September 30, 1996, the related party line of credit had total
principal and interest outstanding of $720,630, $55,452 and $55,452 (unaudited),
respectively. As consideration for INTAG advancing the working capital facility
in June 1994, the Company granted INTAG 200,000 warrants for the Company's
common stock at an exercise price of $2.50 per share, which vest immediately and
are exercisable over a five-year term. The Company determined that these
warrants had a nominal value at the date of issuance.
On March 23, 1995, the Company and INTAG entered into an assignment and
security agreement whereby all current and future debt owed by the Company to
INTAG is secured by all of the Company's assets and agreements.
F-20
<PAGE>
For the years ended December 31, 1994 and 1995, and for the nine months ended
September 30, 1995 and 1996 (unaudited), the statements of operations include
amounts attributable to related party transactions as follows:
<TABLE>
Years Ended Nine Months Ended
December 31, September 30,
---------------------------- ---------------------------
1994 1995 1995 1996
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
PRODUCT SALES
Sales to INTAG $112,770 $ 33,747 $ 25,697 $ -
-------- -------- -------- --------
-------- -------- -------- --------
Sales to NS $ 21,888 $ 21,593 $ - $ -
-------- -------- -------- --------
-------- -------- -------- --------
Sales to RJ $ 11,957 $ 48,398 $ 18,908 83,365
-------- -------- -------- --------
-------- -------- -------- --------
Sales to Ramtron $ 1,800 $ - $ - $ 700
-------- -------- -------- --------
-------- -------- -------- --------
IMPORT LICENSE REVENUES
NS $ 69,240 $ 28,850 $ 28,850 $ -
-------- -------- -------- --------
-------- -------- -------- --------
LICENSE REVENUES
Rohm $ - $500,000 $250,000 $ -
RJ - - - 513,682
-------- -------- -------- --------
$ - $500,000 $250,000 $513,682
-------- -------- -------- --------
-------- -------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSES
Management fees paid to related
parties $ 12,000 $ 15,575 $ 15,575 $ -
-------- -------- -------- --------
-------- -------- -------- --------
Director travel expenses $ 52,205 $ 46,730 $ 36,332 $ 17,415
-------- -------- -------- --------
-------- -------- -------- --------
Directors fees $ 32,000 $ 12,000 $ 12,000 $ -
-------- -------- -------- --------
-------- -------- -------- --------
OTHER INCOME AND EXPENSE
Interest income on note receivable
from Concord Services, Inc. $ 62,668 $ - $ - $ -
-------- -------- -------- --------
-------- -------- -------- --------
Interest expense on notes
payable to INTAG $108,864 $143,645 $130,438 $ 41,320
-------- -------- -------- --------
-------- -------- -------- --------
Interest expense on notes
payable to Ramtron $ - $ - $ - $ 834
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
F-21
<PAGE>
DEPOSIT FROM RELATED PARTY
In April 1994, the Company and INTAG signed a letter of intent to enter into a
license agreement. As of December 31, 1994, $1,000,000 had been received as a
deposit on the license fee. Under the MOU (Note 6), the $1,000,000 deposit, net
of deposits with INTAG of $500,000 and an INTAG receivable of $100,000 related
to the ISI purchase, were converted into common stock of the Company at a rate
of $2.50 per share and negotiations in connection with the license agreement
ceased.
DEPOSIT WITH RELATED PARTY
In 1993 and 1994, the Company paid deposits of $100,000 and $400,000,
respectively, to INTAG to purchase BagTag and Intertrak technology licenses. In
connection with the execution of the MOU (Note 6), these deposits were offset
against amounts due INTAG as described above.
(8) COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under noncancelable
operating lease agreements. Minimum future annual lease payments under these
leases as of December 31, 1995, are as follows:
1996 $104,509
1997 102,479
1998 79,095
1999 -
2000 -
Thereafter -
--------
$286,083
--------
--------
Total rent expense for noncancelable, cancelable and month-to-month operating
leases for the years ended December 31, 1994 and 1995 was approximately $83,430
and $115,561, respectively.
The Company leases equipment under a 36-month capital lease. The lease
commenced in February 1995 and bears interest at a rate of 15%.
The amended Technology License and Supply Agreements require the Company to
purchase from Ramtron minimal annual quantities of ferroelectric RFID
semiconductor chips. The minimum purchases increase in future years, in
accordance with the Technology License and Supply Agreements. The requirement
continues through 1998. In the event the Company does not purchase the minimum
annual quantities, Ramtron will be released from all sales restrictions under
the Supply Agreement. Ramtron is restricted from selling RFID products to any
other party until December 31, 1998.
F-22
<PAGE>
(9) MAJOR CUSTOMERS
The Company's product sales from non-related party customers in excess of 10% of
non-related party product sales for the years ended December 31, 1994 and 1995,
and the nine months ended September 30, 1996 (unaudited) are as follows:
Years Ended Nine Months
December 31, Ended
-------------- September 30,
1994 1995 1996
---- ---- -------------
(Unaudited)
Customer A 27% 1% 0%
Customer B 10% 15% 6%
Customer C 3% 26% 12%
Customer D 0% 14% 15%
Customer G 0% 0% 11%
Customer H 0% 4% 27%
All of the Company's custom product development project revenue for the years
ended December 31, 1994 and 1995 was from the same customer. Additionally,
custom product development project revenue for the nine months ended
September 30, 1996 (unaudited) was from a single customer and unrelated to the
1994 and 1995 revenue.
The Company's accounts receivable balances from non-related party customers in
excess of 10% of the accounts receivable balance from non-related parties for
the years ended December 31, 1994 and 1995 and the nine months ended
September 30, 1996 (unaudited) are as follows:
Years Ended Nine Months
December 31, Ended
-------------- September 30,
1994 1995 1996
---- ---- -------------
(Unaudited)
Customer A 61% 0% 0%
Customer C 0% 42% 68%
Customer D 0% 19% 0%
Customer E 0% 14% 0%
Customer F 12% 0% 0%
Customer G 0% 0% 13%
F-23
<PAGE>
(10) INCOME TAXES
For income tax return reporting purposes, the Company has approximately
$8,400,000 of net operating loss carryforwards that expire at various dates
through the year 2010. The net operating loss for tax purposes differs from
that for financial reporting purposes due to differences in reporting certain
transactions for income tax and financial reporting purposes. These differences
primarily relate to the Technology License.
The Tax Reform Act of 1986 contains provisions which may limit the net operating
loss carryforwards available to be used in any given year if certain events
occur, including significant changes in ownership interests.
The Company has determined that approximately $3,741,000 and $4,742,000 of
unrecognized tax benefits as of December 31, 1994 and 1995, respectively, did
not satisfy the realization criteria set forth in SFAS No. 109. Accordingly, a
valuation allowance was recorded against the entire net deferred tax asset.
The components of the net deferred income tax asset at December 31, 1994 and
1995 were as follows:
1994 Change 1995
----------- ------------ -----------
Technology license $ 1,212,000 $ 139,000 $ 1,351,000
Net operating loss carryforwards 2,173,000 1,019,000 3,192,000
Research and development
tax credits 70,000 88,000 158,000
Allowance for bad debt 286,000 (286,000) -
Other - 41,000 41,000
Less- Valuation allowance (3,741,000) (1,001,000) (4,742,000)
----------- ------------ -----------
$ - $ - $ -
----------- ------------ -----------
----------- ------------ -----------
(11) EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
In May 1993, the Company adopted the 1993 Employee Stock Plan which authorized
the granting of incentive and nonqualified stock options and restricted stock
(collectively, the "stock options") to acquire up to 1,700,000 shares of the
Company's common stock. The exercise terms for the stock options granted are
determined by the Board of Directors at the time the stock options are granted.
Stock options may be granted at an exercise price not less than the fair market
value on the date of grant with a maximum term of 10 years. The 1993 Employee
Stock Plan also permits the granting of limited stock appreciation rights
("SAR's")which, upon a change in control, as defined, entitle the holders to
exercise SAR's in an amount equal to the number of stock options held and at
terms similar to the terms of the related stock options. As of December 31,
1995 and September 30, 1996, the Company has issued 900,000 and 1,100,000
(unaudited) SAR's, respectively, none of which are exercisable.
F-24
<PAGE>
A summary of stock option activity for the years ended December 31, 1994 and
1995, and for the nine months ended September 30, 1996 (unaudited), is as
follows:
Number of Per Share
Shares Exercise Price
---------- --------------
Balance, December 31, 1993 1,585,000 $1.00-1.50
Granted during 1994 110,000 $1.50-2.50
Exercised during 1994 - $ -
Canceled during 1994 (30,000) $1.00-1.50
---------- ----------
Balance, December 31, 1994 1,665,000 $1.00-2.50
Granted during 1995 550,000 $2.50
Exercised during 1995 - $ -
Canceled during 1995 (703,000) $1.00-2.50
---------- ----------
Balance, December 31, 1995 1,512,000 $1.00-2.50
Granted during 1996 (unaudited) 289,000 $2.50
Exercised during 1996 (unaudited) - $ -
Canceled during 1996 (unaudited) (242,000) $1.50-2.50
---------- ----------
Balance, September 30, 1996 (unaudited) 1,559,000 $1.00-2.50
---------- ----------
---------- ----------
Exercisable at September 30, 1996 (unaudited) 1,065,250 $1.00-2.50
---------- ----------
---------- ----------
DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan (the "Plan") intended to qualify
under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"), in which substantially all full-time employees are participants.
Participants in the Plan may make pretax contributions subject to limitations
imposed by the Code. The Company may make, at the Board of Directors'
discretion, an annual contribution on behalf of each participant. No amounts
have been contributed by the Company under the Plan.
(12) SUBSEQUENT EVENTS
DEVELOPMENT AND SUPPLY AGREEMENT
On January 29, 1996, the Company signed an agreement with an unaffiliated third
party to develop a multi-application "smart card" based on the Company's
contactless smart card technology and the third party's bank and electronic
purse operating system. In combination, the two technologies form the basis for
a new product family which will combine contact and contactless operation on a
single, microprocessor smart card. Under the terms of the agreement, the
Company received an
F-25
<PAGE>
initial cash payment of $500,000 and will receive approximately an additional
$1,300,000 based upon the achievement of certain production milestones and
delivery of specified products. As of September 30, 1996 (unaudited), the
Company has recognized $600,000 of revenue as a result of the initial cash
payment of $500,000 and reaching the first milestone.
TECHNOLOGY LICENSE AND SUPPLY AGREEMENT
On March 22, 1996, the Company entered into a technology license and supply
agreement with its affiliate, RJ, for the common purpose of more fully
developing the Japanese market for ferroelectric RFID products. RJ paid
$933,968 to the Company for the non-exclusive right and license to use its
patented ferroelectric RFID technology and all improvements, for the limited
right to design, develop and manufacture ferroelectric RFID products for sale
and use in Japan only. This license specifically excludes the right to use the
ferroelectric RFID technology in conveyor fed, airline, postal and courier
applications (as the rights to this technology were already previously licensed
to INTAG). Under the agreement, RJ is obligated to pay 50% of all sublicense
revenues and royalties, as defined in the agreement, on net sales of
ferroelectric RFID products to the Company. In March 1996, the Company
purchased an additional 1,000 shares of common stock in RJ at a purchase price
of 50,000 Japanese Yen ($466.98) per share, or $466,984. Additionally, in March
1996, NS and third parties purchased additional shares of common stock
decreasing the Company's ownership of RJ to 40%.
RJ PRODUCT DEVELOPMENT CONTRACT (UNAUDITED)
In October 1996, the Company consented to allow RJ to enter into a custom
product development project with a Japanese company, pursuant to the technology
license and supply agreement granted to RJ on March 22, 1996, under which the
Company is entitled to 50% of all sublicense revenue earned by RJ. The
sublicense is for a specified amount, as defined in the contract, a portion of
which is to be paid upon execution of the agreement and the remainder to be paid
upon RJ meeting certain performance criteria. Additionally, certain discounts
will be granted to RJ for purchases of specified products related to the
sublicense. Under the agreement, RJ will be entitled to royalties, as defined
in the contract, over the next five years.
WARRANTS (UNAUDITED)
In October 1996, the Company issued 121,766 and 251,452 warrants to purchase the
Company's common stock at an exercise price of $2.50 per share to INTAG and
Ramtron, respectively. The warrants were approved in consideration of
approximately $933,000 of short-term loans from Ramtron and INTAG and deferred
payment terms on product purchases from Ramtron made to the Company. The
warrants, which vest immediately, are exercisable for a period of five years
after the date of issuance. The Company determined that these warrants had a
nominal value at the date of issuance.
BRIDGE FINANCING (UNAUDITED)
In December 1996, the Company completed a private offering agreement whereby
they issued $1,040,000 of promissory notes (the "Bridge Notes"). The Bridge
Notes bear interest at prime plus 2% per annum, computed as of the date of
issuance (the "Bridge Date"), and thereafter on a quarterly basis commencing
December 31, 1996.
F-26
<PAGE>
The Bridge Notes mature the earlier of one year from the Bridge Date or upon the
closing date of any initial public offering ("IPO") of the Company's securities.
On the Bridge Date, the Company also granted warrants (the "Bridge Warrants")
entitling the holder to purchase shares of the Company's common stock at 125% of
the IPO price per unit, beginning on the effective date of the IPO and
continuing for two years thereafter. The holders of the Bridge Notes received
one warrant for every $4 of Bridge Note principal purchased, resulting in
260,000 Bridge Warrants being issued in connection with the offering of the
Bridge Notes.
F-27
<PAGE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than contained in this
Prospectus in connection with the Offering described herein, and if given or
made, such information or representations must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an offer
to sell, or the solicitation of an offer to buy, the securities offered
hereby to any person in any state or other jurisdiction in which such offer
or solicitation is unlawful. Neither the delivery of this Prospectus nor any
sale hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company since the date hereof.
--------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary .............................. 4
Risk Factors .................................... 8
Dilution ........................................ 15
Capitalization .................................. 17
Use of Proceeds ................................. 18
Selected Financial Data ......................... 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ..................... 20
Business ........................................ 30
Management ...................................... 39
Principal Stockholders .......................... 45
Selling Stockholders ............................ 47
Certain Transactions ............................ 51
Description of Securities ....................... 54
Underwriting .................................... 58
Legal Matters ................................... 60
Experts ......................................... 60
Available Information ........................... 60
Financial Statements ............................ F-1
Until __________, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
1,500,000 Units
RACOM SYSTEMS, INC.
--------------------
PROSPECTUS
--------------------
Spencer Edwards, Inc.
__________, 1997
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI of the Registrant's Restated Certificate of Incorporation
provides as follows:
"LIMITATION OF LIABILITY
A Director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a Director except for liability, (i) for any breach of the Director's
duty of loyalty to the Corporation or its shareholders, (ii) for acts or
omissions not in good faith or which 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 any improper
personal benefit.
Notwithstanding any other provisions herein, personal liability of a
director shall be eliminated to the greatest extent possible as is now, or in
the future, provided for by law."
Article Eight of the Company's Restated Bylaws provides, INTER ALIA, as
follows:
"LIABILITY: INDEMNIFICATION
Section 8.01 EXCULPATION. No director or officer of the Corporation shall be
liable for the acts, defaults or omissions of any other director or officer, or
for any loss sustained by the Corporation, unless the same has resulted from his
own willful misconduct, willful neglect or gross negligence.
Section 8.02 INDEMNIFICATION FOR ACTION, ETC. OTHER THAN BY OR IN THE RIGHT OF
THE CORPORATION. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner which such person reasonably
believed to be in or not opposed to the best interests of the Corporation, and
with respect to any criminal action or proceeding, had no reasonable cause to
believe the conduct which was taken was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that such person did not act in good faith and in a manner which
such person reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with
<PAGE>
respect to any criminal action or proceeding, that such person had reasonable
cause to believe that the conduct which was taken was unlawful.
Section 8.03 INDEMNIFICATION FOR ACTIONS, ETC. BY OR IN THE RIGHT OF THE
CORPORATION. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that such person is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
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
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper."
Insofar as indemnification for liabilities arising under the 1933 Act, as
amended, may be permitted to officers, directors or persons controlling the
Company, the Company has been advised that, in the opinion of the Securities and
Exchange Commission, Washington, D.C. 20549, such indemnification is against
public policy as expressed in such Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
officer, director or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such officer, director or
controlling person in connection with the securities being registered, the
Company 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 such Act and will be governed by the final adjudication of such
issue.
II-2
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)(2)
SEC Registration Fee................................. $ 7,434
NASD Filing Fee...................................... 2,953
Blue Sky Filing Fees................................. 12,000
Blue Sky Legal Fees.................................. 25,000
Printing Expenses.................................... 45,000
Legal Fees and Expenses.............................. 85,000
Accounting Fees...................................... 40,000
Transfer Agent....................................... 3,000
NASDAQ Application Fee............................... 10,000
Miscellaneous Expenses............................... 19,613
--------
TOTAL................................................ $250,000(1)
(1) Does not include the Representative's commission and expenses of
$__________ ($__________ if the Overallotment Option is exercised).
(2) All expenses, except the SEC registration fee and NASD filing fee, are
estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, the Registrant sold the following shares of
its Common Stock which were not registered under the 1933 Act, as amended.
(i) In May and June 1994, the Registrant sold 970,000 shares of its Common
Stock at $2.50 per share to the following persons:
NAME NUMBER OF SHARES
---- ----------------
FAI Overseas Investment PTY, LTD. 200,000
Wahib S. Binzagr 100,000
John A. Duke Trust 100,000
Blairmore PTY, LTD. 80,000
Maxwell Investment Limited 20,000
W.S.P. Constructions PTY, LTD.
Superannuation Fund 20,000
TFK International Nominees (Asia) Limited 10,000
David Stanley Jones Haselton and Delma Jean
Haselton (Joint Tenants) 10,000
Raymond Henry Lennon and Pauline Maria
Lennon (Tenants in Common) 15,000
BUJO PTY, Limited as Trustee for the
Fisher Family Trust 10,000
The W. R. Taylor Family Discretionary Trust 10,000
II-3
<PAGE>
Rosalind-Margaret Reid (Read) nee Fung 12,400
Katunayake Garments Limited 20,000
John D. Adcock 40,000
Equitilink International Management Limited 200,000
Liza Ying 10,000
Capital Credit Company PTY, LTD. 20,000
George Stanley Shaw 20,000
AusAsean Investment PTY, LTD. 12,600
Asia Assets & Developments, Inc. 60,000
(ii) In June 1994, the Registrant issued 200,000 common stock purchase warrants
to Intag exercisable at $2.50 per share until June 13, 1999.
(iii) In February 1995, the Registrant issued 1,000,000 shares of its Common
Stock to Ramtron International Corporation ("Ramtron") in exchange for the
execution of an amendment to the Registrant's Technology License Agreement with
Ramtron.
(iv) In June 1995, the Registrant issued 1,062,532 shares of its Common Stock
to Intag International Limited ("Intag") in exchange for debt owed to Intag in
the aggregate amount of $2,033,798 or $1.91 per share.
(v) In August and December 1995, the Registrant sold 500,000 shares to Rohm
Co., Ltd. for $1,500,000 or $3.00 per share.
(vi) In October 1996, the Registrant issued 121,766 common stock purchase
warrants to Intag and 251,452 common stock purchase warrants to Ramtron
exercisable at $2.50 per share until October 4, 2001 in consideration of loans
and deferred payment terms granted to the Registrant by Intag and Ramtron in the
amounts of $304,414 and $628,630, respectively.
(vii) In December 1996, the Registrant issued 260,000 Bridge Warrants to the
following individuals in exchange for an aggregate of $1,040,000 of loans to the
Registrant at the rate of one Bridge Warrant for each $4.00 loaned. Each Bridge
Warrant is exercisable to purchase one share of Common Stock for $__________ per
share at any time for a period of two years from the effective date hereof. See
"Selling Stockholders."
NAME NUMBER OF BRIDGE WARRANTS
---- -------------------------
Michael M. Arnouse 25,000
Three Edward Lane
Syosset, NY 11791
William P. Bennett 12,500
P.O. Box 4240
Boulder, CO 80306
II-4
<PAGE>
NAME NUMBER OF BRIDGE WARRANTS
---- -------------------------
Steven Bloechl 6,250
4540 S. Decatur Street
Englewood, CO 80110
Roland J. Christensen 12,500
192 E. 100N
Fayette, UT 84630
Ellis V. Couch 6,250
2926 Rocky Oak Street
San Antonio, TX 78232
Thomas L. Dutcher 6,250
P.O. Box 897
Montrose, CO 81402-0897
John A. Duke Trust 25,000
9100 Boyd Road
P.O. Box 430
Rogue River, OR 97537
Frederick M. Galloway 6,250
375 Ammons Street
Lakewood, CO 80226
John R. Hannifan 12,500
1366 S.W. Tamarind Way
Boca Raton, FL 33486
Arthur Kassoff 6,250
7600 State Street
E. St. Louis, IL 62203
Kaufmann Survivors Trust 6,250
(c/o Carl J. Kaufmann)
2000 Royal Marco Way #906
Marco Island, FL 34145-1800
II-5
<PAGE>
NAME NUMBER OF BRIDGE WARRANTS
---- -------------------------
Gary A. Mosko 12,500
234 Garfield
Denver, CO 80206
Heribert Obser 12,500
P.O. Box 697
Quogue, NY 11959
Mitchell & Elizabeth Pearlman 6,250
27157 Highlands Lane
Valencia, CA 91354
Robert R. Peterson 6,250
P.O. Box 3460
Estes Park, CO 80517
Max Quimby & Armond Quimby 6,250
Revocable Living Trust
(c/o Max Quimby)
10409 Riverside Drive #302
Toluca Lake, CA 91602
S. G. Construction Company 12,500
(c/o Ronald W. Massner)
2850 Mt. Pleasant St., Suite 102
Burlington, IA 52601
David M. Schneider 12,500
721 Redwood Drive
Lincoln, NE 68510-5219
Shepler & Thomas, Inc. 6,250
Profit Sharing Plan FBO William R. Bell
(c/o William R. Bell)
28650 Cavan Lane
Evergreen, CO 80439
Deloris J. Sherwood 6,250
15111 Bushard Street #84
Westminster, CA 92683
II-6
<PAGE>
NAME NUMBER OF BRIDGE WARRANTS
---- -------------------------
Charles W. Wafer 37,500
P.O. Box 2174
Rancho Santa Fe, CA 92067
David Wank 10,000
5200 White Oak Ave. #35
Encino, CA 91316
Barbara L. Westrick 6,250
11786 Decatur Drive
Denver, CO 80234-2554
(viii) From time to time, the Registrant has issued stock options (currently
aggregating 1,559,000 such stock options) to employees, officers and directors
under its 1993 Employee Stock Option Plan.
With respect to the sales made, the Registrant relied on Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act"), and/or Regulation D,
Rule 506. No advertising or general solicitation was employed in offering
the securities. The securities were offered to a limited number of
individuals all of whom were business associates of the Registrant or its
executive officers and directors and the transfer thereof was appropriately
restricted by the Registrant. All shareholders were foreign persons or were
accredited investors as that term is defined under Regulation D under the
1933 Act and were capable of analyzing the merits and risks of their
investment who acknowledged in writing that they were acquiring the
securities for investment and not with a view toward distribution or resale
and understood the speculative nature of their investment.
ITEM 27. EXHIBITS.
EXHIBIT NO. TITLE
----------- -----
1.01 Form of Underwriting Agreement (1)
1.02 Form of Selling Agreement (1)
1.03 Form of Representative's Warrant (1)
1.04 Form of Warrant Agreement (1)
1.05 Form of Lock-up Agreement
3.01 Restated Certificate of Incorporation of the Registrant (1)
II-7
<PAGE>
3.02 Restated Bylaws of the Registrant (1)
5.01 Opinion of Gary A. Agron, regarding legality of the Common Stock
(includes Consent) (1)
10.01 1993 Employee Stock Option Plan (1)
10.02 Lease Agreement - Greenwood Village Office Facility (1)
10.03 Joint Venture Agreement (Racom Japan) (1)
10.04 Exclusive Distributor Agreement (Racom Japan) (1)
10.05 Technology License Agreement (Racom Japan) (1)
10.06 Exclusive Distributor Agreement (Racom Japan) (1)
10.07 Development and Supply Agreement (Bull CP-8) (1)
10.08 Agreement regarding ferroelectric RFID Products (Rohm) (1)
10.09 Stock Purchase Agreement (Rohm) (1)
10.10 Settlement Agreement (Intag) (1)
10.11 Assignment and Security Agreement (Intag) (1)
10.12 Technology License Agreement (Ramtron) (1)
10.13 Amendment to Technology License Agreement (Ramtron) (1)
10.14 Second Amendment to Technology License Agreement (Ramtron) (1)
23.01 Consent of Arthur Andersen LLP (1)
23.02 Consent of Gary A. Agron (See 5.01, above) (1)
23.03 Consent of Arthur Andersen LLP
- ---------------
(1) Previously filed.
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the
1933 Act may be permitted to directors, officers and controlling persons of
the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification
II-8
<PAGE>
is against public policy as expressed in the 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 of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and
Exchange Commission such supplementary and periodic information, documents
and reports as may be prescribed by any rule or regulation of the Commission
heretofore or hereafter duly adopted pursuant to authority conferred in that
section.
(c) That any post-effective amendment filed will comply with the
applicable forms, rules and regulations of the Commission in effect at the
time such post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
1933 Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(e) That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(f) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
Offering.
(g) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the 1933 Act, as amended, 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 caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Greenwood Village, Colorado, on February 5, 1997.
RACOM SYSTEMS, INC.
By: /s/ RICHARD HORTON
----------------------------
Richard Horton
Chief Executive Officer
Pursuant to the requirements of the 1933 Act, as amended, this Registration
Statement has been signed below by the following persons on the dates indicated.
<TABLE>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CHARLES A. FEAR Chairman of the Board of February 5, 1997
- --------------------------- Directors
Charles A. Fear
/s/ RICHARD HORTON President, Chief Executive February 5, 1997
- --------------------------- Officer, Chief Financial
Richard L. Horton Officer (Principal Accounting
Officer) and Director
/s/ MARK R. DAVISON Director February 5, 1997
- ---------------------------
Mark R. Davison
/s/ L. DAVID SIKES Director February 5, 1997
- ---------------------------
L. David Sikes
/s/ GEORGE J. STATHAKIS Director February 5, 1997
- ---------------------------
George J. Stathakis
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. TITLE
- ----------- -----
1.05 Form of Lock-up Agreement
23.03 Consent of Arthur Andersen LLP
<PAGE>
March __, 1997
Spencer Edwards, Inc.
6120 Greenwood Plaza Blvd.
Englewood, CO 80111
Re: Lock Up Agreement
The undersigned, a beneficial owner of the $.01 par value common stock
("Common Stock") of Racom Systems, Inc. (the "Company"), understands that the
Company has filed with the Securities and Exchange Commission a registration
statement on Form SB-2 (File No. 333-18351) (the "Registration Statement")
for the registration of up to 1,500,000 Units of the Company's securities
("Units") with each Unit consisting of one share of Common Stock and one
redeemable common stock purchase warrant in connection with a public offering
of such Units and underlying securities. The undersigned further understands
that the Company and Spencer Edwards, Inc. (the "Underwriter") have entered
into an underwriting agreement upon the effectiveness of the Registration
Statement (the "Underwriting Agreement"), in connection with such public
offering.
In order to induce the Underwriter to close the transactions contemplated by
such Underwriting Agreement, the undersigned agrees, for the benefit of the
Company and the Underwriter, that he/she will not, without the prior written
consent of the Underwriter, sell, transfer or otherwise dispose of, directly
or indirectly, any of the shares of Common Stock of the Company owned by
him/her as set forth below, during the twelve (12) month period commencing on
March __, 1997 and that he/she will not, without the prior written consent of
the Underwriter, sell, transfer or otherwise dispose of, directly or
indirectly, more than fifty percent (50%) of the shares of Common Stock of
the Company owned by him/her as set forth below, during the twelve (12) month
period commencing March __, 1998. Furthermore, the undersigned will permit
all certificates evidencing his/her shares as aforementioned to be endorsed
with the appropriate restrictive legends, and will consent to the placement
of appropriate stop transfer orders with the transfer agent for the Company;
PROVIDED, that notwithstanding the foregoing, without the consent of the
Underwriter the undersigned may (i) transfer such shares to one or more
immediate family member(s), charitable remainder trusts, or to trusts for the
primary benefit of, or partnerships comprised of, immediate family members
(collectively, "Permitted Transferees") upon the condition that any such
Permitted Transferee agrees to be bound by the foregoing restriction in the
same manner as it applies to the undersigned by delivering to the Underwriter
a Lock Up Agreement in form and substance identical to this Lock Up
Agreement; and/or (ii) dispose of such shares in other private transactions,
as long as any purchaser or donee in such transaction agrees to be bound by
the terms of this Lock Up Agreement.
Very truly yours,
- -----------------------------------
Signature
- -----------------------------------
Name
- -----------------------------------
Number of Shares of Common Stock
Subject to Lock-Up Agreement
<PAGE>
EXHIBIT 23.03
[Letterhead]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of
this registration statement.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Denver, Colorado,
February 5, 1997.
