U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-26998
ALCOHOL SENSORS INTERNATIONAL, LTD.
(Name of small business issuer in its charter)
New York 11-3104480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11 Oval Drive, Islandia, New York 11722
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (516) 342-1515
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section
12(g) of the Exchange Act: Common Stock, par value $.001
Class A Common Stock Purchase Warrants
Class B Common Stock Purchase Warrants
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes No X
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's net revenues for its most recent fiscal year: $287,556
The aggregate market value of the voting stock held by non-affiliates of
the small business issuer was $1,040,096 on October 23, 1998, based on the
closing sale price of the Common Stock on such date of $.125, as reported by
Standard & Poor's Comstock service.
As of October 26, 1998, there were a total of 9,481,778 shares of the
Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I
Introductory Comment - Forward Looking Statements.
Statements contained in this Annual Report on Form 10-KSB that are not
based upon historical fact are "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements included
in this Form 10-KSB involve known and unknown risks, uncertainties and other
factors which could cause actual results, performance (financial or operating)
or achievements expressed or implied by such forward looking statements not to
occur or be realized. Such forward looking statements generally are based upon
the best estimates by Alcohol Sensors International, Ltd. (the "Company") of
future results, performance or achievement, based upon current conditions and
the most recent results of operations. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "believe," "estimate," "anticipate," "continue," or similar terms,
variations of those terms or the negative of those terms.
Potential risks and uncertainties include, among other things, such factors
as the adequacy and reliability of parts and methods used in manufacturing the
Company's Sens-O-Lock devices, adequacy of the Company's dealer and distribution
network, the market acceptance of the Company's current ("second generation")
Sens-O-Lock devices, the extent of the establishment, if any, of insurance
programs providing discounts to customers installing products such as the
Company's Sens-O-Lock devices, the impact of competitive products and pricing,
the Company's ability to raise additional capital, the availability of funding
to purchase raw materials and manufacture finished products, the success of the
Company's research and development efforts in creating additional improvements
to the Sens-O-Lock product line and other products for the Company, the
establishment and extent of enforcement of laws with respect to the operation of
motor vehicles by alcohol impaired drivers, societal views towards individuals
operating motor vehicles while impaired through the consumption of alcohol and
the other factors and information disclosed and discussed in "Item 1.
Description of Business," "Item 6. Management's Discussion and Analysis or Plan
of Operation" and in other sections of this Form 10-KSB. Readers of this Form
10-KSB should carefully consider such risks, uncertainties and other
information, disclosures and discussions which contain cautionary statements
identifying important factors that could cause actual results to differ
materially from those provided in the forward-looking statements.
Item 1. Description of Business.
General
The Company designs, markets and sells electronic motor vehicle
after-market safety products, including a patent-pending line of breath alcohol
ignition interlock devices (each, a "BAIID") under the Sens-O-Lock brand name.
The Company's Sens-O-Lock BAIID equipment is designed to detect, evaluate and
assist in the prevention of an alcohol impaired driver operating a vehicle. The
Company also markets and sells, under the WeatherEye brand name, a line of
modular products designed to automatically engage and adjust the headlights and
taillights of automobiles depending upon weather and sunlight conditions.
After the Company's initial sale of approximately 700 original ("first
generation") Sens-O-Lock units, the Company became aware in late Spring 1996 of
inconsistencies in certain integral components manufactured for the Company and
other manufacturing, design and quality control problems. As a result, in the
second quarter of 1996, the Company discontinued manufacturing the first
generation Sens-O-Lock product, recalled the first generation Sens-O- Lock units
which had been sold, temporarily ceased marketing efforts and wrote down the
Company's inventory by approximately $556,000. From that time through September
1997, the Company devoted substantially all of its resources to the research and
development of new technology for and design of the second generation
Sens-O-Lock product line, development of new relationships with existing and
other component suppliers and manufacturers, improvement of the Company's
component and manufacturing quality control procedures, enhancement of the
Sens-O- Lock operating software and development of the Company's network of
distributors and dealers. The Company completed final parts procurement and
ordered the initial production of second generation Sens-O-Lock units during
September and October 1997.
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In late February 1998, the Company received confirmation from an
independent testing laboratory that the second generation Sens-O-Lock
successfully completed testing under the National Highway Traffic Safety
Administration ("NHTSA") Model Specifications for Breath Alcohol Ignition
Interlock Devices (the "Model Specifications") for the battery of required tests
for the 37-day calibration stability challenge protocol. The Model
Specifications are utilized by the various states in their individual
certification processes for use in legislative and judicial programs for
supervision of persons convicted of alcohol-related motor vehicle infractions,
violations and crimes ("Mandatory Programs"). The various states have differing
certification processes. Some states merely require compliance with the Model
Specifications while other states have much higher standards and/or a complex
certification procedure. Through October 19, 1998, the Sens-O-Lock has been
certified in five states. The Company anticipates seeking additional state
certifications of the second generation Sens-O-Lock on state-by-state basis,
with priority based, among other factors, upon the location of the Company's
distributors and dealers. The Company anticipates publicizing the Model
Specification testing success and applicable state certifications in promoting
the Sens-O-Lock devices for markets other than for Mandatory Programs (the
"Mandatory Market"), such as (a) the voluntary market, which includes parents of
teenage drivers (the "Voluntary Market"), and (b) the commercial market,
comprising truck, bus and taxi fleets (the "Commercial Market"). The Company
believes that, for the U.S. Voluntary Market and Commercial Market, no Model
Specifications testing success or applicable state certification are required,
although the Company further believes that a significant portion of the
Voluntary Market and Commercial Market will not purchase a BAIID without a
minimum of a 37-day calibration success under the Model Specifications and
applicable state certification. However, there can be no assurance given that
the Model Specifications testing success or state certifications will result in
any revenues to the Company or the commercial success of the second generation
Sens-O-Lock product.
The Company continues to evaluate other sensing technologies currently
utilized by competitors within the industry, as well as sensing technologies
under development by others for use in different alcohol sensing applications.
The Company intends to continue to utilize its research and development efforts
to provide the Company with other alternative technical options for different
specified target markets, as well as to improve and enhance the Company's
products.
The Company intends to seek insurance discounts to help drive the Voluntary
Market and Commercial Market, and to assist in the lobbying for stricter federal
and state laws requiring drivers convicted of alcohol-related motor vehicle
infractions, violations or crimes to install BAIID equipment in their vehicles.
The Company is evaluating strategies, marketing plans and programs which the
Company expects will enable the Company to work jointly with insurance companies
to enhance their respective markets. However, there can be no assurance that the
Company and such insurance companies will agree upon a strategy, plan or program
or that any such strategy, plan or program, if adopted, or the Company's
independent lobbying efforts, will result in revenues to the Company or the
commercial success of its products.
Recent Events
The Company had limited sales of Sens-O-Lock units in 1997, primarily in
the United Kingdom and elsewhere in Europe. During the second quarter of 1998,
the Company sold 161 second generation Sens-O-Lock units and an additional 36
units were sold in the third quarter of 1998. There have been minimal revenues
generated by the WeatherEye product line. The Company has been dependent upon
loans and equity investments from the Company's officers, directors and
shareholders and others to fund the Company's operations in absence of any
material sales through the third quarter of 1998. The Company anticipates that
it will require additional loans and/or equity investments in order to continue
operations and until such time as sufficient revenues from sales of Sens-O-Lock
units are generated.
Management believes that the Company currently does not have sufficient
working capital to continue its operations over the long-term and that cash
generated from operations for the next several months will not be sufficient to
meet the Company's currently anticipated liquidity and capital expenditure
requirements in order to successfully market the second generation Sens-O-Lock
product line and/or for the Company to continue operations. The Company has
entered into discussions with a third party with respect to granting world-wide
distribution/licensing rights to the Company's Sens-O-Lock and WeatherEye
product lines, which is anticipated to entail the pre-payment to the Company of
certain royalties. Further, the Company has continued to have discussions with
one of the Company's preferred
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shareholders with respect to additional equity and/or debt financing. There can
be no assurance, however, that the Company will enter into a formal distribution
/licensing arrangement or receive additional financing from such preferred
shareholder or any other party, that royalties from any such distribution
/licensing arrangement and/or financing proceeds, if any, will be on terms
favorable to the Company or that the Company will be successful in attaining
its sales goals, nor that attaining such sales goals will have the desired
effect on the Company's cash resources. The failure to receive sufficient
distribution/licensing royalties and/or other equity or debt financing, as well
as any failure to obtain a sufficient level of sales, may result in the
Company seeking protection under the Federal Bankruptcy Laws and/or
terminating operations. See "Products - Sens-O-Lock" below, "Item 6.
Management's Discussion and Analysis or Plan of Operations" and "Item 12.
Certain Relationships and Related Transactions."
On October 1, 1998, the Company executed a Consent and Undertaking,
pursuant to which the Company admitted to the failure to timely file with the
Securities and Exchange Commission (the "SEC") the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997 and Quarterly Reports on
Form 10-QSB for the quarters ended March 31, 1998 and June 30, 1998, and
Notifications of Late Filing on Form 12b-25 with respect to such Forms 10-QSB,
and consented to the entry of an order (the "Order") by the Federal District
Court for the District of Columbia directing the Company to file with the SEC
such Form 10-KSB by October 30, 1998 and Forms 10-QSB by November 13, 1998. The
failure to file such Form 10-KSB and Forms 10-QSB in accordance with the Order
may result in the Company being held in contempt of court, which could have a
material adverse result on the Company's business and operations. The Company
believes that the filing of this Form 10-KSB satisfies a part of the Order and
is endevoring to file such Forms 10-QSB by November 13, 1998. However, there can
be no assurance that such Forms 10-QSB will be filed with the SEC by November
13, 1998.
Principal Offices
The Company's principal executive offices are located at 11 Oval Drive,
Islandia, New York 11722; telephone number:(516) 342-1515. The Company maintains
a website at "asil.com."
Products
Sens-O-Lock
The Sens-O-Lock is a breath alcohol ignition interlock device intended for
use in motor vehicles to assist in the prevention of a person with a breath
alcohol content ("BrAC") level above a specified level from operating the motor
vehicle. BAIIDs are breath alcohol sensing instruments designed to be mounted in
a vehicle and connected to the ignition key and starting system in a way that
prevents the vehicle from starting unless the driver first provides an
acceptable breath sample. These devices contain an instrument to measure the
BrAC level of a deep lung breath sample. If the measured BrAC level is at or
above a set level, the vehicle's starting system is locked and the vehicle will
not start.
The driver of a Sens-O-Lock equipped vehicle is required to provide breath
samples before and during the operation of the vehicle. This is accomplished by
requiring an initial breath test (an "IBT") in order to start the vehicle, and
requiring one or more subsequent breath tests (each, a "Rolling Retest") while
the vehicle is being operated. The Sens-O-Lock analyzes the breath sample to
determine the sample's BrAC level. If the tested BrAC level does not exceed the
device's specified testing level (which is programmed at the time of
manufacture), the driver will be advised of such and, in the case of an IBT, the
starting system is enabled and the vehicle may then be started, or, in the case
of a Rolling Retest, the vehicle may continue to be operated without entering
the alarm mode. Should the driver fail the IBT, indicating the driver's breath
contains a BrAC level above the device's specified testing level, the vehicle's
starting system will remain disabled, thereby immobilizing the vehicle's engine.
If a Rolling Retest is failed, the Sens-O-Lock is programmed to ask the driver
to stop the vehicle. A sufficient amount of time is allowed for the driver to
safely pull the vehicle over to the side of the road and turn the engine off. If
the driver fails to stop the vehicle after a failed Rolling Retest, after
issuing a repeated warning, the Sens-O-Lock will enter the alarm mode, whereby
the vehicle's lights will flash and horn will sound intermittently, the intent
being to bring attention to the vehicle.
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The Sens-O-Lock device consists of three major components which are
installed in the motor vehicle: (a) a sensor head assembly, (b) the central
processing unit ("CPU") and (c) the car control module ("CCM"). In most
vehicles, a small light emitting diode ("LED") display will also be mounted on
the dashboard.
The sensor head assembly has been designed by the Company to easily fit
into a driver's hand and to cause a proper breath sample to flow over a sensor.
This sensor is manufactured by a third-party. When a proper breath sample is
given, the sensor analyzes the breath sample for the sample's BrAC level. The
results of the sensor analysis are then transmitted to the CPU which compares
the analysis against pre-programmed parameters, whether state BAIID regulation,
default or Company-set customized levels, and records the analysis for
downloading, if required. The CPU also would cause the Sens-O-Lock to recycle
for a new IBT or Rolling Retest, if an improper or insufficient breath sample or
no breath sample is given. The CPU also manages the CCM, which mutes the radio,
enables or disables the vehicle's starting system, engages the alarm mode, etc.
The Sens-O-Lock is capable of providing voice messages in five different
languages (American English, British English, French, German and Spanish),
selectable at the time of installation. The messages prompt the driver through
the IBT and Rolling Retest and provide other information. The Company
anticipates initially marketing three Sens-O- Lock models, one for the Mandatory
Market (the "Mandatory Unit"), one for the Voluntary Market (the "Voluntary
Unit") and the third for the Commercial Market (the "Commercial Unit"). The
features of the three models are structured to comply with the demands of the
three markets, with the Mandatory Unit features structured to meet the detailed
requirements of Mandatory Programs (e.g., recording, by date and time, the
actual BrAC level results of each test, all attempts to start the vehicle,
whether there has been a test failure, all Rolling Retests, any emergency
override and whether any attempt at circumvention has occurred, etc.).
Once the IBT has been passed, the driver will be able to start and operate
the vehicle. If the engine stalls or is temporarily shut off, the driver may
restart the engine within a pre-set time period without the need to provide a
new breath sample. However, if the alarm mode is engaged, such as due to the
failure of a Rolling Retest, then no restart will be allowed and the normal IBT
sequence must be followed.
Once the IBT has been passed, the driver will be required to pass at least
one Rolling Retest while driving. The driver will have thirty seconds to provide
the required Rolling Retest breath sample. Depending upon applicable state BAIID
regulations, one or more Rolling Retests at random intervals may be required.
For the Voluntary Unit, a Rolling Retest will occur at a random interval during
the first 30 minutes of driving. The Sens-O-Lock has been designed so that the
number and timing (specific or random) of Rolling Retests may be individualized
to meet the requirements of the various state Mandatory Programs, or the needs
of customers in the Voluntary Market and Commercial Market.
To provide a breath sample, whether for an IBT or Rolling Retest, the
driver would take a deep breath and place his or her lips completely around the
sensor head assembly mouthpiece. The driver would then exhale a steady, forceful
stream of air. As this is being done, the Sens-O-Lock will provide a steady tone
and the LED, if installed, will only display a corresponding steady light. The
tone and LED light indicate that the breath sample is not completed and will
only discontinue when a full breath sample has been accepted.
Should the driver be unable to provide a breath sample within thirty
seconds, or the breath sample is insufficient to test the BrAC level, the driver
will be advised that the sample was invalid and a new test will be conducted. In
the case of a Rolling Retest, a second test will be conducted, but only one
time. If a second invalid sample is provided during either an IBT or a Rolling
Retest, or if no sample is provided, the Sens-O-Lock will advise the driver of
such and, in the case of an IBT, the unit will recycle to permit a new IBT or,
in the case of a Rolling Retest, direct the driver to stop the motor vehicle.
The Sens-O-Lock will allow the driver sufficient time to safely pull over and
turn off the ignition. However, if the driver fails to stop the vehicle, the
Sens-O-Lock will enter the alarm mode until the vehicle is pulled over and the
ignition key turned to the OFF position.
For the Mandatory Unit, the failure of either an IBT or a Rolling Retest
for any reason will be recorded in the data logger contained in the CPU. The
failure of a Rolling Retest may be a violation of the terms of the driver's
judicial supervision requirements and of applicable state BAIID regulations, and
subject the motor vehicle to a starting system
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ignition lockout in accordance with applicable state regulations. In such a
case, the Sens-O-Lock will provide a warning message at each motor vehicle
startup following such a violation, notifying the driver that the Sens-O-Lock
must be returned to an authorized dealer for service. The service, in such a
case, would be the downloading of the data logger and the forwarding of the
downloaded data to the appropriate authorities.
All Commercial Units and Voluntary Units and, if permitted by the
applicable state BAIID regulations, Mandatory Units have an emergency override,
allowing the driver to start the motor vehicle upon inserting the key in the
ignition without successfully completing the IBT. However, within two minutes of
starting the vehicle using the emergency override, the Sens-O-Lock will request
a Rolling Retest. Failing the Rolling Retest or ignoring the request to provide
a breath sample will activate the alarm mode. Use of the emergency override will
be recorded in a Mandatory Unit's data logger and may, if programmed, be
recorded on a Voluntary Unit's or Commercial Unit's data logger. This emergency
override feature is intended to be used only in the event of a life-threatening
emergency, and a driver enrolled in a Mandatory Program may be required to show
documentation, such as a hospital bill, etc., in order to justify its use.
Depending on state law, there are various events that may result in a
starting system lockout of a Mandatory Unit, such as:
Failure to return for data downloading on schedule. The Mandatory
Unit is programmed to provide for normal periodic downloading
of information from the data logger in the CPU. The amount of time
between downloading will depend on applicable state law. The
Mandatory Unit is programmed for a seven-day grace period. Once the
scheduled downloading date has been passed, warning messages will be
heard at each startup of the motor vehicle. If the Sens-O-Lock is not
downloaded at the scheduled date or within the warning period, the
starting system will be locked out and the motor vehicle will not be
capable of being started. It will then be necessary to have a
certified Sens- O-Lock technician make a service visit to the vehicle,
download the data as required by law, and re- enable the vehicle's
starting system. The Company anticipates that there will be an
additional charge for this re-enabling service.
Failure to return for data downloading within five days of a BAIID
regulations violation. Depending on applicable state law, a driver
will have a specified period following a violation of a
Mandatory Program's rules, such as failing or ignoring the request for
a Rolling Retest, to return the motor vehicle to a certified dealer to
have the data logger downloaded. Warning messages will be heard during
this period whenever the vehicle is started. Since this is not a
regularly scheduled download, there may be an additional charge for
this downloading service. If the driver fails to have the data logger
downloaded during this period, the Sens-O-Lock will lock out the
starting system mechanism. It will then be necessary to have a
certified technician make a service call to the vehicle, download the
data as required by law, and re-enable the vehicle's starting system.
The Company anticipates that there will be an additional charge for
this re-enabling service.
When Sens-O-Lock requests a breath sample, audio beeps come from the
hand-held sensor head assembly, but the voice is routed through the vehicle's
audio system speakers. (If the vehicle does not have a radio, or the speakers
are inoperative or not compatible, it will be necessary to install a small
speaker in order to hear the voice commands.) The Sens-O-Lock voice is
self-amplified and does not require the radio to be turned on in order to be
heard. If the audio system is playing, the Sens-O-Lock unit will automatically
mute the radio (reduce the radio volume to zero) so that the voice commands can
be heard and understood. Muting will continue through each operational sequence
until completed. For example, on startup, the radio will be muted when the
request to "PLEASE PROVIDE A SAMPLE" is heard and will continue to be muted
until the IBT is passed and the voice reports that "YOU MAY START THE VEHICLE,"
after which audio output will be restored.
In order to preserve battery power, Sens-O-Lock is equipped with a "sleep
mode" feature that reduces power consumption when the vehicle is not in use.
This is particularly important when the vehicle will be out of service for
extended periods of time. Several minutes after the ignition is shut down, the
Sens-O-Lock will enter the sleep mode. As soon as the key is turned to the ON
position, the Sens-O-Lock will return to full operational mode.
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In most Sens-O-Lock installations, an LED display will be mounted on or
just under the dash. Except when in sleep mode, a green LED will glow at all
times, indicating the system is powered and fully operational. An amber LED
flashes in synchronization with the "beeps" from the sensor head assembly, and
glows steadily corresponding to the steady tone heard when providing a proper
breath sample, providing visual reinforcement to the audio signals and aiding
the hearing impaired. Once a breath test is passed, the amber LED will revert to
green.
The second generation Sens-O-Lock models are as follows:
Sens-O-Lock 1100 Series - The Mandated Unit. The Sens-O-Lock 1100
limits the ability of impaired drivers to start their vehicles.
This model was designed for state mandated use by those individuals
convicted of alcohol-related motor vehicle infractions, violations and
crimes, such as driving while intoxicated ("DWI") and driving under
the influence ("DUI"). Under Mandatory Programs, such offenders are
court-ordered to install a BAIID in their vehicle and have the data
stored in the device downloaded at specified intervals (typically,
every 30 to 60 days). More than half the states have enacted laws
requiring, in certain incidences, mandated installation of a BAIID
following either a DWI or DUI conviction.
Sens-O-Lock 2100 Series - The Voluntary Unit. This mode l is a
Variation of the 1100 Series Mandated Unit and is designed for
individuals who voluntarily desire the equipment's protection. Aside
from the safety and moral considerations, in the future, a Sens-O-Lock
installation may afford car insurance premium discounts and the
Company is evaluating marketing strategies for insurance carriers
currently considering promoting discounts for drivers who install a
BAIID. The main difference between the Voluntary Unit and the Mandated
Unit is that the data logger and its downloading are optional in the
Voluntary Unit and generally can be programmed to provide the
information required by insurance carriers for their respective BAIID
premium discounts, which, the Company anticipates, will be less
detailed than the information required under state Mandatory Programs.
Sens-O-Lock 3100 Series - The Commercial Unit. This model also varies
from the 1100 Series Mandated Unit in order to meet the needs of
the Commercial Market. Like the Voluntary Unit, the data logger
will be programmed to record only that information required by the
Commercial Market customer.
WeatherEye Intelligent Headlight Management System
In August, 1996, the Company entered into an agreement with Weather Eye,
Inc., a corporation that is owned by Joseph M. Lively, Esq., President, Chief
Operating Officer and a director of the Company. Weather Eye, Inc. is the owner,
with others. of proprietary technology, invented by Mr. Lively and others, which
automatically turns on the headlights of automobiles to varying capacities, such
as daytime running lights, and also automatically puts the vehicle's headlights
and taillights on at full capacity when the windshield wipers are turned on. The
Company is marketing this technology under the name of WeatherEye Intelligent
Headlight Management System or, simply, WeatherEye.
Pursuant to the terms of its agreement with Weather Eye, Inc., the Company
was granted, for a term expiring on December 31, 2000, the right to distribute
the WeatherEye to the new and used car dealers in the United States and
throughout the world, and has the right to modularize the original system. The
Company has agreed to pay Weather Eye, Inc. a royalty on each modularized unit
sold ranging from $0.19 to $2.00 depending on the unit sold. In September 1998,
for nominal consideration, WeatherEye, Inc. assigned its ownership in the
WeatherEye technology to the Company. See "Item 12. Certain Relationships and
Related Transactions."
Daytime running lights are believed to be an effective means in reducing
accidents. A number of insurance companies now offer premium discounts to
drivers whose motor vehicles are equipped with daytime running lights. In
addition, many states require the headlights and taillights to be turned on when
the windshield wipers are in use. WeatherEye turns these lights on automatically
when the windshield wipers are turned on and reduces the headlights to daytime
running lights and turns off the taillights automatically when the wipers are
turned off. Additionally, since
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WeatherEye automatically turns off the vehicle's lights when the ignition is
turned off, the motorist will not have to be concerned about discovering a
dead battery as a result of leaving the vehicle's lights on. According to the
American Automobile Association ("AAA"), AAA made 27.5 million service calls
due to dead batteries in 1995.
The WeatherEye Intelligent Headlight Management System not only provides
the safety of daytime running lights in daytime, but automatically adapts the
headlights and taillights to the appropriate setting for any driving condition.
WeatherEye can automatically perform all the following functions:
- in daylight, headlights are on at reduced power whenever the vehicle
is running (in some models);
- at dusk, headlights are raised to full brightness, with dash and
taillights being turned on;
- when wipers are switched on, headlights are raised to full brightness,
dash and taillights are on;
- when wipers are switched off during daylight-operation, headlights and
all other lights automatically adjust to appropriate intensity;
- when the ignition is turned off, all lights go off; and
- at night, valet lights remain on for 45 seconds after vehicle is
turned off (in some models).
In its attempt to expand its market potential and acknowledging that
certain features of the WeatherEye Intelligent Headlight Management System, such
as daytime running lights, are included on certain new car models, the Company
has modularized the various components that comprise the WeatherEye. The
consumer now has the ability to purchase certain or all of the features of the
WeatherEye.
Intellectual Property and Other Proprietary Rights
The Company believes that the Company's success depends significantly upon
its proprietary technology. The Company currently relies on a combination of
patent, copyright and trademark laws, trade secrets, confidentiality procedures
and contractual provisions and other written materials under trade secret,
patent and copyright laws to protect its proprietary technology; however, these
generally afford only limited protection. The Company has registered and applied
for registration for certain service marks and trademarks, and will continue to
evaluate the registration of additional service marks and trademarks as
appropriate. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. In addition,
the laws of some foreign countries do not protect proprietary rights to as great
an extent as do the laws of the United States. Monitoring and identifying
unauthorized use of broadly disseminated products is difficult. The Company
anticipates that it will rely upon software engineering and marketing skills to
gain and, thereafter, protect the Company's market position, in addition to the
copyright and trademark or trade secret protection discussed above. Because the
industry in which the Company competes is characterized by technological change,
the Company believes that factors such as the technological and creative skills
of the Company's personnel, product enhancements, name recognition and reliable
product maintenance may be as important to establishing and maintaining a
technology leadership position as the various legal protections of the Company's
technology.
The Company currently has patent applications pending related to the sensor
head assembly, breath monitoring technology and sensing technology aspects of
the second generation Sens-O-Lock and WeatherEye, Inc. has obtained a patent
with respect to the WeatherEye device, such patent having been assigned to the
Company in September 1998. There can be no assurance that any new patent
applications will be submitted, any pending applications will be approved, any
such patent, if issued, and the WeatherEye patent will not be challenged by
third parties or, if challenged, that any such patent will not be invalidated.
In addition, there can be no assurance that any issued patent will provide the
Company with any competitive advantages or will not be challenged by third
parties, any of which may have a material adverse effect on the Company.
<PAGE>
The name "Sens-O-Lock" is a registered trademark of the Company in the
United States and United Kingdom and the Company's ASI logo and the name
"WeatherEye" are trademarks of the Company in the United States.
The Company is not aware that any of its products materially infringes the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to current
or future products. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company.
In 1993, the Company received correspondence from Intoximeters Inc.
claiming that the Company's name infringes upon the name of a product of such
entity, "Alco-Sensor." The Company believes that the Company's name does not
infringe upon such other entity's product name and that the name Sens-O-Lock
does not and will not cause a confusion in the marketplace between the Company's
product and the product of Intoximeters Inc. However, no assurance can be given
that such entity or others would not be successful in prosecuting a claim that
the Company's name and/or product names infringe upon a copyright or trademark
of such entity or others.
Litigation may be necessary to protect the Company's proprietary
technology. Any such litigation may be time-consuming and costly. There can be
no assurance that the Company's means of protecting its proprietary rights will
be adequate or that the Company's competitors will not independently develop
similar technology, duplicate the Company's products or services or design
around patents or other intellectual property rights of the Company. There can
be no assurance that the patents or other intellectual property rights of others
will not have a material adverse effect on the Company's ability to do business.
Competitors and potential competitors of the Company may resort to
litigation as a means of competition. Such litigation may be costly and expose
the Company to new claims that the Company may not have anticipated. Although
patent and intellectual property disputes in the technology area have often been
settled through licensing, cross-licensing or similar arrangements, costs
associated with such arrangements may be substantial, if such arrangements can
be obtained at all. Any litigation involving the Company, whether as plaintiff
or defendant, regardless of the outcome, including any litigation relating to
claims which have been or may in the future be asserted against the Company, may
result in substantial costs and expenses to the Company and significant
diversion of effort by the Company's technical and management personnel. In
addition, there can be no assurance that litigation, either instituted by or
against the Company, will not be necessary to resolve issues that may arise from
time to time in the future with other competitors. Any such litigation could
have a material adverse effect upon the Company's business, operating results
and financial condition. In the event of an adverse result in any such
litigation, the Company could be required to expend significant resources to
develop non-infringing technology, obtain licenses to the technology which is
the subject of the litigation on terms not advantageous to the Company, pay
damages and/or cease the use of any infringing technology. There can be no
assurance that the Company would be successful in such development, that any
such licenses would be available and/or that the Company would have available
funds sufficient to satisfy any cash awards.
Product Development
The Company believes that it must continue to enhance the Company's
existing products and develop new products in order to maintain the Company's
competitive position. The Company anticipates that its future product research
activities, if any, would include refinement and improvement of current products
and the development of new product options and features. The Company also
anticipates devoting additional efforts to assure the reliability of and support
for the second generation Sens-O-Lock as the product is employed by end users.
The Company anticipates continuing its research and development efforts,
including the hiring of additional qualified engineering, production and
technical personnel and enhancing the Company's research and quality control
facilities. The Company spent approximately $523,000 and $913,000 during 1997
and 1996, respectively, for product development and enhancement activities. The
Company anticipates that any funds for future product development and research
and development will be derived from cash flow generated by sales of and/or
royalties derived from the Company's products. As the Company's sales from
inception through the first quarter of 1998 have been minimal, no assurance can
be given that the Company will continue product development and/or other
research and development projects.
<PAGE>
Production
The Company believes high product quality will be an integral part of the
ultimate success of the Company's products and the Company itself.
The Sens-O-Lock manufacturing process consists of component assembly and
systems integration of electronic and mechanical parts, which are then encased
in a high impact plastic package. Most of the components of the Company's
products are items manufactured by third parties and have various applications,
including those applications performed in the Company's products. Component
availability is subject to various lead times. The Company has also designed and
developed the software necessary for the operation of the Sens-O-Lock units. The
mold for manufacturing the sensor head assembly was designed by third parties in
accordance with the Company's specifications and at the Company's cost. The
Company currently holds all rights to this mold. The Company maintains internal
product controls which consist primarily of prototype production, test
engineering, materials purchasing and quality control of its prototypes and
production units. The Company purchases or organizes the purchase of sensing and
other components for Sens-O-Lock units from third party suppliers, then causes
the materials to be forwarded to the Company's contract manufacturers, currently
Intercontinental s.r.l. ("Intercontinental"), a turn-key contract manufacturer
of electronic components, cable assemblies and injection molds and a provider of
assembly, calibration and electronic products and component testing services
located in Varese, Italy, and Flowtronics, Inc. ("Flowtronics"), a turn-key
manufacturer of electronic assemblies located on Long Island, New York. Some
major components are then assembled by Intercontinental and forwarded to
Flowtronics for final assembly, calibration, testing and packaging. The Company
has also outsourced the shipment of Sens-O-Lock units to its distributors and
dealers. The Company believes that its current manufacturing, assembly,
calibration, testing and shipping arrangements are sufficient to satisfy
anticipated demand for the next twelve months, although the Company may elect,
in the future, to retain other contract manufacturers or to contract with others
to provide certain of the services presently performed by Intercontinental
and/or Flowtronics.
The Company previously had formed a subsidiary, Alcohol Sensors Europe, plc
("ASE"), owned 80% by the Company and 20% by Michael G. Ghazarian, a former
director and officer of the Company, to perform component assembly, systems
integration, quality control and shipping functions, as well as to be a
distributor for the countries comprising the European Common Market. Following
the resignation of Mr. Ghazarian as a director and officer of the Company and
ASE, the Company determined to retain Intercontinental and Flowtronics to
perform such functions (other than as an European distributor). Scarico, s.r.l.
("Scarico Italy") an entity which the Company believes to be affiliated with
Intercontinental, previously performed certain of such functions for ASE. While
the Company believes that Scarico Italy has had prior business transactions with
Mr. Ghazarian and his affiliates, Scarico Italy and Intercontinental have
represented to the Company that Mr. Ghazarian is neither an affiliate, agent,
representative nor employee of Scarico Italy and holds no equity interest in or
offices with either Intercontinental or Scarico Italy. See "Item 12. Certain
Relationships and Related Transactions."
Sales and Marketing
The Company's marketing strategy initially is to concentrate on product
sales to the Voluntary Market and Mandated Market. Thereafter, the Company
expects to attempt to penetrate the Commercial Market. However, the Company may
elect to enter the Commercial Market earlier, as market conditions and demand
dictate. According to the Bureau of Judicial Statistics of the United States
Department of Justice, there were approximately 1,250,000 DWI and DUI
convictions in the United States during 1992, including first time convictions
and repeat offenders. According to a 1996 study by NHTSA, the national re-arrest
rate for DUI and DWI offenders was 31%. Recent published studies have reported
an over 60% reduction in recidivism among multiple offenders required to install
a BAIID in their vehicle. In addition, NHTSA has reported that there were 17,126
alcohol-related fatalities in 1996 (40.9% of the total traffic fatalities for
the year), that approximately 1,400,000 drivers were arrested in 1995 for
driving under the influence of alcohol or narcotics and that 32.0% of all 1996
traffic fatalities involved at least one driver or non-occupant with a BrAC
level of 0.10 or greater with an additional 8.9% involved a driver or
non-occupant who had been drinking but whose BrAC level was below 0.10. NHTSA
also estimates that alcohol was involved in 7% of all crashes in 1996.
Laws in a number of states, including Illinois, Nevada, Texas, Virginia and
West Virginia, require the installation of BAIIDs under specified circumstances
and other states, such as Maryland and Tennessee, are considering
<PAGE>
similar legislation. The intent of such laws is to protect the public from those
previously convicted of DWI/DUI from continuing to drink and drive, to provide
authorities and care providers with information concerning compliance with
treatment and probation requirements, cause behavior modification in the
previously convicted and to provide a method for a convicted individual to
maintain his/her license and, hopefully, remain insured, thereby further
protecting the public.
The Company intends to market and sell the Company's products through an
independent distributor, dealer and representative network, as well as through
direct sales. The Company has not conducted any test marketing programs to date.
The Company is currently negotiating distributor agreements with independent
12-volt automotive after-market distributor firms covering specific territories
throughout the United States, which the Company believes will afford sufficient
sales coverage in the states in which the Company intends to initially market
the Sens-O-Lock. The distributors' responsibilities are anticipated to include
appointment of dealers, including automotive chains, auto stores, repair
stations, auto specialty retail stores and alarm and radio installers, all of
whom would sign dealer agreements, and, thereafter, receive Company training to
sell, service and install the Sens-O-Lock system in customers' motor vehicles.
These agreements generally contain provisions for a one-to-three year term with
annual renewals, are terminable without cause upon 30 days written notice by
either party and are automatically terminable for cause if the distributor
breaches various specific contract conditions. Distributors are expected to
receive net commissions based upon a percentage of gross sales of all product
sales made in the distributor's territory through dealers.
The Company has entered into agreements with dealers in various locations
throughout the United States who were recruited by a territorial distributor or
the Company directly. The Company or territorial distributors are expected to
train all dealers to sell, install and service the Sens-O-Locks.
The Company intends to participate in trade shows, advertise in trade
journals, hold seminars and prepare a variety of instructional aids to introduce
the Company's products and to educate potential users, representatives and
dealers. However, due to limited funds, no assurance can be given as to the
level, if any, of such trade show participation, advertising or preparation of
instructional aids.
The Company provides a renewable one year warranty for parts and labor on
all Mandatory Units. A product warranty on parts and labor for the Voluntary
Units and Commercial Units markets is given for 90 days to one year from
installation by an authorized dealer. Servicing of Sens-O-Locks during and
beyond the warranty period is expected to be provided by the Company's
authorized dealers. There is no assurance that dealers will provide satisfactory
warranty, repair or other services.
The Company believes that the insurance market has strong potential. To
enter this market, the Company has devoted significant effort and expense in
evaluating strategies, marketing plans and programs which the Company
anticipates will enable the Company to work jointly with major insurance
companies to enhance the market for the Sens- O-Lock product.
The Company has worked with major insurance companies, including American
International Insurance Company ("AIIC"), a principal shareholder of the
Company, and the Independent Insurance Company, an United Kingdom Insurance
Company ("Independent"), to create strategies, marketing plans and programs to
enhance the Company's and such insurance companies' respective markets. The
Independent and such other insurance companies are expected to provide surcharge
discounts or abatements to insureds who have previously been convicted of
alcohol- related driving infractions, crimes and violations, provided that such
individuals install and use an approved BAIID device, such as the Sens-O-Lock,
and meet certain other underwriting criteria of the respective insurance
companies. A preliminary program with the Independent did not result in material
sales.
Installation and Service
The Company is in the process of establishing a network of independent
territorial distributors covering much of the United States. As of October 20,
1998, the Company had a total of four territorial distributors covering all or a
portion of the following jurisdictions: Arizona, Maryland, North Carolina
Virginia, Washington and the District of Columbia. The distributors generally
are responsible for the recruitment and appointment of qualified authorized
independent Sens-O-Lock dealers. All appointments within their territories
are required to be in accordance with the
<PAGE>
Company's instructions and specifications. Each appointed dealer is required to
execute an agreement with their respective distributor, which agreements are and
shall continue to be in a form approved by the Company. The dealers are expected
to be equipped to sell, install and service Mandatory Units, as well as
Voluntary Units and Commercial Units. Some dealers will sell all three models,
while others are expected to only sell Voluntary Units and/or Commercial Units.
Each distributor is expected to play a key role and assume major
responsibilities in maintaining communications and providing assistance to
dealers and the state motor vehicle departments or other appropriate authorities
in the distributor's state(s) of operation. The distributor is required to
obtain, review and provide explanation of the respective state laws concerning
BAIID installation and performance criteria, update data bases and keep
authorized dealers abreast of current information.
It is anticipated that distributors will be trained by the Company's
technical personnel and then have the responsibility to train all
dealer/installer personnel in the knowledge, application and explanation of the
Sens-O-Lock product line, applicable state laws, and the installation,
downloading and servicing of Sens-O-Locks, all in accordance with the Company's
guidelines and applicable state laws. Distributors are required to conduct
training at their own facilities for installers and other employees of
authorized dealers using a curriculum and materials developed by the Company.
Distributors will be expected to initiate procedures necessary to have a
Mandatory Unit installed in a motor vehicle after receiving notification from
the court or probation department. These procedures will include notifying the
installing dealer and the driver subject to a Mandatory Program, facilitating an
appointment to install the device and train the driver(s) about the proper use
of the Sens-O-Lock, notifying the Company and state authorities upon completion
of installation, and keeping of accurate and permanent data records and serial
numbers for each Sens-O-Lock installed within the distributor's territory.
Distributors are required to collect information downloaded from the
Sens-O-Lock data loggers by authorized dealers from motor vehicles within the
distributor's territory and transmit such data to the appropriate state
authorities. Such data is deemed confidential and is furnished only to
designated state and local authorities and/or the Company's headquarters. The
data is encrypted and only the Company and, in certain cases, state and local
authorities, shall have translation software developed by the Company.
Each distributor will be expected to maintain an inventory of spare parts,
instruction and installation manuals and other applicable components required to
support the dealers and anticipated installations within the distributor's
territory. The Company will provide instruction and installation manuals to
distributors along with specialized training equipment and proprietary
information to assist the distributor in the performance of the distributor's
duties. Distributors are also required to train dealers in their respective
territories at the distributor's sole cost.
All authorized dealer locations are selected by the distributor and
certified by the Company. It is anticipated that the Company will require that
each authorized dealer be financially sound and responsible with a successful
history of automotive aftermarket installations. The Sens-O-Lock is required to
be installed only by Company-trained and -certified installers who have
completed a comprehensive course as part of their dealer agreement. The
installation process, by Company-trained and -certified installers, takes
approximately one hour.
Authorized dealer facilities are required to be furnished with the
necessary equipment to ensure proper installation and the installation area is
to be secured to prevent unauthorized persons from observing or accessing
secured items, such as tamper seals and installation instructions. Prior to
installation, the motor vehicle is screened for mechanical and electrical
conditions that may interfere with device's functioning. The installation site
maintains all records of their Sens-O-Lock customers, copies of which are sent
to the distributor.
The Company provides support to the states and the dealer/representatives
through the distributors in the following manner:
- Operating a communication system via a long distance telephone
carrier with a modern telephone switch network to communicate
by electronic mail with the installation centers, the probation
departments and others interested in the Sens-O-Lock BAIID program;
- Providing educational information and documents to the courts,
installers, probationers and their families and the public in general,
to create awareness that a BAIID may help prevent DWI and DUI
instances;
- Providing probation departments with a decoding program for
downloading encrypted information;
and
- Maintaining national toll free numbers twenty-four hours a day, seven
days a week.
Insurance
The Company maintains liability insurance with coverage limits of
$1,000,000 for each occurrence and $2,000,000 in the aggregate. Although the
Company does not anticipate any liability claims, there is no assurance that
claims will not arise in the future, or that any damages or costs associated
with these claims will not exceed the available insurance coverage limits. The
Company intends to increase the coverage under its liability policy, as
appropriate.
Competition
The industries and markets in which the Company operates are highly
competitive. Some of the Company's competitors may have substantially greater
financial resources, larger research, development and sales staffs and greater
name recognition than the Company, and may introduce new or improved products in
the future. Market participants must compete on many fronts, including
development time, engineering expertise, product quality, performance and
reliability, price, name recognition, customer support and access to
distribution channels. While the Company believes that it will be able to
compete favorably primarily through product quality, technical excellence and
customer service, there is no assurance that the Company will be able to compete
successfully or develop competitive products in the future.
The Company considers Guardian Interlock System, Lifesaver Interlock (and
its distributor, Life Sciences) and AutoSense as the Company's primary
Sens-O-Lock competition, although the Company expects that others have and will
continue to enter the BAIID industry.
Each technology employed by the Company's Sens-O-Lock competitors has
inherent trade-offs (e.g., to gain additional accuracy, a device may require
increased warm up time, which requires the driver to have to wait several
minutes before providing a sample). The challenges found by BAIID providers is
that, unlike evidential breath test equipment in police stations, which operate
in a static environment, constant temperature and supervised testing, BAIIDs
must operate in a vehicle's environment, which is subject to wide temperature
and humidity swings, in an unsupervised testing environment and must protect
against potential attempts at circumvention.
The Company believes that the current Sens-O-Lock product is more user
friendly, both in size, functionability and appearance than competitors' BAIIDs.
The second generation product is small and unobtrusive (the sensor head assembly
fits in the palm of one's hand, is aesthetically styled with finger grips and
utilizes a snap off cap design) and is voice instructed in five currently
available languages, British English, American English, German, Spanish and
French, so that a driver is prompted by voice to avoid confusion while driving
(e.g., a driver doesn't have to take his/her eyes off the road to view
instructing lights on a panel during Rolling Re-tests). The Company incorporates
sophisticated operating software that enables the sensor to be calibrated
against specified set points, assists in installation and user customization,
discourages circumvention attempts and datalogs driver tests.
The Company believes its competitive advantage will be broadened by a
strategic alliance with members of the insurance industry. The Company believes
that most of the Company's competitors are focusing on the Mandatory Market in
the U.S. The Company's strategy is more diverse; and while the Company intends
to participate in
<PAGE>
the Mandatory Market, the Company also intends to market its products for
Voluntary Market and Commercial Market, each driven by automobile insurance
premium incentives.
Governmental Regulation
The Sens-O-Lock has successfully completed NHTSA Model Specifications for
the 37- and 67- day calibration stability challenge protocols. The Company is
now in the process of having the second generation Sens-O-Lock certified in
states in which the Company initially intends to market the device. Through
October 20, 1998, the second generation Sens-O-Lock has been certified in five
states. More than 35 states, including the most populated states of California,
Texas and New York, have either enacted legislation or administrative directives
with respect to BAIIDs. The Company believes that the vast majority of these
states rely upon successful completion of the NHTSA Model Specifications 37-Day
calibration stability challenge protocol in their respective certification
process. The first generation Sens-O-Lock had been certified as meeting the
state standards in twelve states - California, Florida, Georgia, Kansas,
Maryland, Michigan, Minnesota, Nebraska, New York, Oklahoma, Utah and Missouri.
The Company's primary marketing efforts for the second generation Sens-O-Lock
initially are expected to focus on Arizona, California, Illinois, Georgia,
Kansas, Maryland, Michigan, Nevada, New York, North Carolina, Utah, Virginia,
Washington, Wisconsin and the District of Columbia. Certification standards vary
by jurisdiction and are only applicable to the products installed pursuant to
court ordered installations.
Employees
As of December 31, 1997, the Company had approximately ten full-time
employees, of whom two were in product development, two were in marketing, sales
and customer support, two were in production and four were in general and
administrative functions. Of the total, six employees were located in North
America and four internationally. In addition, the Company utilized
approximately two independent contractors in connection with the Company's
product development and marketing activities. As of October 19, 1998, the
Company had four full-time employees, all located in the United States. The
Company has never experienced a work stoppage and believes that it has
satisfactory relations with its employees.
Item 2. Description of Properties.
The Company's principal executive offices are located at 11 Oval Drive,
Islandia, New York 11722. The Company's executive, administrative, sales,
marketing and product development and support staff are primarily located at
this facility. Pursuant to the lease agreement for this facility, the Company
leased approximately 10,000 square feet of office and warehouse space for a five
year rental term terminating on July 14, 2000. The base rent for this facility
was approximately $89,000 in 1997, which base amount is scheduled to increase by
approximately 5% in each remaining year of the lease term. In addition, the
Company pays a proportional amount of the real estate taxes and increases in
operating costs for the building in which the Company's facility is located.
These additional costs were approximately $60,000 for 1997. In June 1998, the
Company came to an agreement with the landlord of this facility pursuant to
which the Company has consolidated its operations at this facility to
approximately 2,500 square feet and the Company's base rent has been reduced to
approximately $30,000 per year.
Item 3. Legal Proceedings.
The Company was named as a defendant in an action commenced in the United
States District Court for the Eastern District of New York in July 1996 under
the caption Henry Dornhuber v. Alcohol Sensors International, Ltd. The plaintiff
sought $9 million in damages plus 100,000 shares of Company's stock, alleging he
performed certain work for the Company as an independent contractor and was
never compensated for the services he performed. This action was settled in July
1997 pursuant to which the Company issued to plaintiff and others an aggregate
of 24,000 shares of Common Stock.
<PAGE>
The Company and certain of its officers were named as defendants in an
action (the "Pace/Polek Lawsuit") commenced in the Supreme Court of the State of
New York, Orange County, in an action captioned Albert Pace and Jan Polek v.
Alcohol Sensors International, Ltd., Alcohol Sensors, Inc., Robert B. Whitney,
John T. Ruocco, Michael A. Sylvester, Leon Pasqua, Steven A. Martello, George
Berger, Berger and Paul and Barry Beyer, pursuant to which plaintiffs claimed an
equity interest in the Company, as well as damages of $18.5 million, based upon
a purported agreement with another entity, Alcohol Sensors, Inc., with which the
claimants, certain former officers of the Company and others were allegedly
affiliated in 1989, and a claim that one of the plaintiffs is the inventor of
technology that is utilized in the Sens-O-Lock. This action was settled in
February 1997, in connection with which certain present and former members of
management surrendered for transfer to the plaintiffs and others an aggregate of
315,000 shares of their Common Stock to provide for the settlement. See "Item
12. Certain Relationships and Related Transactions."
The Company and certain of its officers were named as defendants in an
action commenced in the United States District Court for the Eastern District of
New York in March 1996, under the caption Steven Eplan, individually and on
behalf of Alcohol Sensors International, Ltd., v. Alcohol Sensors International,
Ltd.,Steven A. Martello, Robert B. Whitney, John T. Ruocco and Michael A.
Sylvester, by a shareholder seeking $2 million in damages based upon plaintiff's
allegation that the Company was damaged as a result of the Company's handling of
a prior lawsuit (the "Prior Lawsuit"). The Prior Lawsuit was settled for a total
of $382,675. In connection therewith, certain present and former officers and
directors of the Company contributed 55,672 shares of Common Stock held by such
individuals along with $107,642. The current action was dismissed without
prejudice in August 1997.
In March 1997, the Company was served with a Demand to Arbitrate by a
former employee, Charles Irwin, who sought $75,000 and options to purchase
36,000 shares of Common Stock based upon claims that the Company breached its
employment agreement with this individual. In October 1997, the Company settled
this matter for approximately $77,000.
In Spring 1998, the Company was served with a Demand to Arbitrate by an
individual, Babak Beheshti, based upon an alleged failure by the Company to
comply with the settlement terms relating to a previous arbitration matter. In
the former matter, this individual claimed he had not been compensated for
engineering consulting services rendered to the Company and sought $650,000 and
114,449 shares of Common Stock. The Company had settled the prior arbitration
matter for the issuance of 27,500 shares of Common Stock which were required to
be registered under the Securities Act for resale by this individual. Such
registration has not been effectuated, nor have such 27,500 shares been issued,
and no assurance can be given that a registration statement with respect to said
27,500 shares will ever be made effective under the Securities Act.
The Company and certain of its former officers were named as defendants in
an action commenced in July 1997 in the New York State Supreme Court, New York
County, in an action entitled Jack Gracian v. Alcohol Sensors International,
Ltd, Robert B. Whitney and John Ruocco. Plaintiff alleges that, in July 1989, he
entered into an agreement with the individual defendants and a company named
"International Beverage Machine" pursuant to which plaintiff claims to have made
certain payments which the individual defendants promised would be used to
purchase stock in "Alcohol Sensors, Inc." which, in turn, plaintiff claims to be
the predecessor to the Company. Plaintiff alleges damages of $13,500,000. The
Company believes that the complaint fails to state a claim against the Company
and that plaintiff has not been damaged by the Company, and, accordingly,
intends to vigorously defend itself in this action. The ultimate outcome of this
action is unknown at this time.
The Company and certain of its former officers were named as defendants in
an action commenced in September 1997 in the New York State Supreme Court,
County of Nassau, captioned Guisepina Aucello v. Robert Whitney, John Ruocco and
Alcohol Sensors International, Ltd. Plaintiff alleges that, in February 1990,
Plaintiff entered into an exclusive "Distributor Agreement" with "Alcohol
Sensors, Inc." wherein Plaintiff was granted a regional license to market,
distribute and install an "automotive alcohol sensor" device to which "AS Inc."
owned the patent rights. Plaintiff alleges damages of $1,000,000. The Company
believes that it has no affiliation with "Alcohol Sensors, Inc.," or "AS Inc.,"
that the Company has no obligations under the "Distributor Agreement" referred
to in the complaint and that plaintiff has not been damaged in any amount by the
Company and, accordingly, intends to vigorously defend itself in the action.
This action is currently in the discovery stage. The ultimate outcome of this
action is unknown at this time.
<PAGE>
In February 1998, an action was commenced in the High Court of Justice,
Queens Bench Division, in Oxford, United Kingdom, under the caption Scarico (UK)
Limited v. Alcohol Sensors Europe plc. Scarico (UK) Limited is an entity which
the Company believes is (a) not presently affiliated with Scarico Italy and (b)
owned by Michael G. Ghazarian. Mr. Ghazarian is a former director and officer of
the Company. Alcohol Sensors Europe plc. ("ASE") is an English corporation
which, at the time of commencement of this action, was 80% owned by the Company
and 20% owned by Mr. Ghazarian. In the complaint, Scarico (UK) Limited claimed
that 68,321.93 (approximately $111,550, as of August 11, 1998) and $10,445 were
due on invoices for services rendered to ASE between 1992 and 1997. ASE denied
that any amounts were due Scarico (UK) Limited and believes that certain of the
claimed services were actually performed by third parties, including Scarico
Italy, and that ASE and the Company had paid such third parties directly. On
August 11, 1998, the Company and ASE entered into a settlement arrangement with
Scarico (UK) Limited, Digital Vehicle Security Systems ("Digital") and Mr.
Ghazarian pursuant to which Scarico (UK) Limited, Digital and Mr. Ghazarian
released and assigned to the Company all intellectual property, contract and
other rights they may have in the technology and know-how related to the
Sens-O-Lock and all claims to Sens-O-Lock units, parts and raw materials in
their possession, as well as Mr. Ghazarian's 20% interest in ASE and Mr.
Ghazarian surrendered an option to purchase 22,500 shares of Common Stock
exercisable at $2.00 per share and expiring in June 2001; and the Company (a)
paid Scarico (UK) Limited, Digital and Mr. Ghazarian an aggregate of
approximately $90,000, (b) confirmed an option granted to Mr. Ghazarian in 1996
to purchase 100,000 shares of Common Stock exercisable at $3.00 per share and
expiring in September 2001 and (c) deleted a provision requiring that Mr.
Ghazarian be an employee of the Company in order to exercise an option to
purchase 200,000 shares of Common Stock exercisable at $2.00 per share and
expiring in September 2002. The parties also exchanged general releases in
connection with this settlement arrangement. See "Item 12. Certain Relationships
and Related Transactions."
In 1993, the Company received correspondence from Intoximeters Inc.
claiming that the Company's name infringes upon the name of a product of such
entity, "Alco-Sensor." The Company believes that the Company's name does not
infringe upon such other entity's product name and that the name Sens-O-Lock
does not and will not cause a confusion in the marketplace between the Company's
product and the product of Intoximeters Inc. However, no assurance can be given
that such entity or others would be successful on a claim that the Company's
name and/or product names infringe upon a copyright or trademark of such entity
or others.
Item 4. Submission of Matters to a Vote of Security Holders.
On February 5, 1998, a Special Meeting of the Shareholders of the Company
was held at which the Company's shareholders approved the elimination of the
restriction on the number of shares of Common Stock issuable upon exercise of
the Company's Series B Convertible Preferred Stock (the "Series B Preferred
Stock") by the vote of 4,699,057 votes for, 278,346 votes against and 47,558
votes abstaining.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market Information
The Common Stock was traded on The Nasdaq SmallCap Market ("Nasdaq") under
the symbol "ASIL" from August 9, 1996 through March 3, 1998. From November 9,
1995 and through August 9, 1996, the Company's "Units" traded on the Nasdaq
SmallCap Market under the symbol "ASILU." Each Unit consisted of two shares of
Common Stock, one Class A Common Stock Purchase Warrant (the "Class A
Warrants"), and one-half of a Class B Common Stock Purchase Warrant (the "Class
B Warrants"). Pursuant to the decision of a Nasdaq Listing Qualifications Panel,
the Common Stock, Class A Warrants and Class B Warrants were delisted from
trading on Nasdaq, effective the close of business on March 3, 1998. The cited
cause of the delisting was the Panel's opinion that the Company was then
currently not in compliance with the minimum net tangible assets continuing
maintenance requirements of Nasdaq. The Common Stock, Class A Warrants and Class
B Warrants have, since March 3, 1998, traded on the electronic bulletin board
(the "OTC Bulletin Board") maintained by the National Association of Securities
Dealers, Inc., under the symbols "ASIL," "ASILW" and "ASILZ," respectively. The
following table sets forth the range of high and low closing bid prices for the
Units and shares of Common Stock for the periods indicated, as derived from
reports furnished by Nasdaq (with respect to information through March 3, 1998)
and the National Quotation Bureau, LLC (with respect to information on and after
March 4, 1998). The information reflects inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
UNITS - High Bid Low Bid
-------- --------
Fiscal 1996
<S> <C> <C>
First Quarter. . . . . . . . . . . . . . $18-1/4 $ 12
Second Quarter . . . . . . . . . . . . . 20 11-3/4
Third Quarter (through August 8, 1996) . 15-3/4 8
COMMON STOCK -
Fiscal 1996
Third Quarter (from August 9, 1996). . . 4-7/8 2-13/16
Fourth Quarter . . . . . . . . . . . . . 4-5/16 2-5/8
Fiscal 1997
First Quarter. . . . . . . . . . . . . . 7-1/4 3-3/8
Second Quarter . . . . . . . . . . . . . 5-3/8 2-5/16
Third Quarter. . . . . . . . . . . . . . 2-5/16 5-3/8
Fourth Quarter . . . . . . . . . . . . . 4-7/16 1
Fiscal 1998
First Quarter. . . . . . . . . . . . . . 1.375 .4375
Second Quarter . . . . . . . . . . . . . 1.4375 .65625
Third Quarter . . . . . . . . . . . . . .6875 .13
Fourth Quarter (through October 16, 1998) .21 .17
</TABLE>
(b) Holders
On October 16, 1998, there were 320 holders of Common Stock of record. The
Company estimates, based upon surveys conducted by its transfer agent in
connection with the Company's Special Meeting of Shareholders held on February
5, 1998, that it has approximately 3,000 beneficial shareholders.
<PAGE>
(c) Dividends
The Company has never paid cash dividends on its capital stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain any future earnings for reinvestment in its
business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and other
relevant factors.
In addition, under the terms of the Company's Series A Cumulative
Non-Redeemable Convertible Preferred Stock, par value $.001 per share (the
"Series A Preferred Stock"), for so long as any shares of Series A Preferred
Stock shall be outstanding, the Company shall not declare, pay or set apart for
payment on any Company security junior in rank to the Series A Preferred Stock,
including the Common Stock (the "Junior Stock"), any dividends whatsoever,
whether in cash, property or otherwise (other than dividends payable in shares
of the class or series upon which such dividends are declared or paid, or
payable in shares of Common Stock with respect to any Junior Stock other than
Common Stock, together with cash in lieu of fractional shares), nor shall the
Company make any distribution on any Junior Stock, nor shall any Junior Stock be
purchased, redeemed or otherwise acquired by the Company or any of its
subsidiaries, nor shall any monies be paid or made available for a sinking fund
for the purchase or redemption of any Junior Stock, in each case unless (i) all
dividends to which the holders of shares of Series A Preferred Stock shall have
been entitled for all previous periods shall have been paid in full and (ii) all
such dividends for the immediately preceding two dividend periods shall have
been paid exclusively in cash.
(d) Recent Sales of Unregistered Securities
The information set forth below is a list of all sales by the Company of
the Company's equity securities occurring since January 1, 1997 that were not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and were not otherwise disclosed in the Company's Quarterly Reports on Forms
10-QSB for a quarter ended in 1997:
1. During 1997, the Company issued 40,750 shares of Common Stock upon
exercise of warrants issued to securityholders in connection with the Company's
private placements conducted in 1994 and 1995. The Company received gross
proceeds of $53,625 from such warrant exercises. These stock issuances were
transactions by the Company not involving any public offering which were exempt
from the registration requirements under the Securities Act pursuant to Section
4(2) thereof.
2. In October 1997, the Company issued 24,000 shares of Common Stock,
valued at $78,000, in settlement of litigation commenced against the Company.
This stock issuance was a transaction by the Company not involving any public
offering which was exempt from the registration requirements under the
Securities Act pursuant to Section 4(2) thereof.
3. In October 1997, the Company issued 500 shares of Common Stock upon
exercise of an option issued as partial consideration for services rendered in
1996. The Company received gross proceeds of $750 from such option exercise.
This stock issuance was a transaction by the Company not involving any public
offering which was exempt from the registration requirements under the
Securities Act pursuant to Section 4(2) thereof.
4. In September 1997, the Company issued 1,000 shares of Common Stock,
valued at $1,250, for consulting services rendered. This stock issuance was a
transaction by the Company not involving any public offering which was exempt
from the registration requirements under the Securities Act pursuant to Section
4(2) thereof.
5. As of February 1998, the Company issued 457,493 shares of Common Stock
to Milbright Estates, Ltd. ("Milbright") upon Milbright's conversion of 26
shares of Series B 8% Convertible Preferred Stock, par value $.001 per share
(the "Series B Preferred Stock"). This stock issuance was a transaction not
including any public offering which was exempt from the registration
requirements under the Securities Act pursuant to Section 4(2) thereof.
<PAGE>
6. In August 1998, the Company issued an aggregate of 230,861 shares of
Common Stock to AIIC as payment in full of $344,375 of dividends due on the
833,333 shares of Series A Preferred Stock registered in the name of AIIC. This
stock issuance was a transaction not including any public offering which was
exempt from the registration requirements under the Securities Act pursuant to
Section 4(2) thereof.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion should be read in conjunction with the historical
financial statements, including the notes thereto, of the Company included
elsewhere herein.
General
The Company designs, markets and sells electronic motor vehicle,
after-market safety products, including a patent-pending line of BAIIDs, breath
alcohol ignition interlock devices, under the Sens-O-Lock brand name. The
Company's Sens-O-Lock BAIID equipment is designed to detect, evaluate and assist
in the prevention of an alcohol impaired driver operating a vehicle. The Company
also markets and sells, under the WeatherEye brand name, a line of modular
products designed to automatically engage and adjust the headlights and
taillights of automobiles depending upon weather and sunlight conditions.
After the Company's initial sale of approximately 700 first generation
Sens-O-Lock units, the Company became aware in late Spring 1996 of
inconsistencies in certain integral components manufactured for the Company and
other manufacturing, design and quality control problems. As a result, in the
second quarter of 1996, the Company discontinued manufacturing the first
generation Sens-O-Lock product, recalled the first generation Sens-O-Lock units
which had been sold, temporarily ceased marketing efforts and wrote down the
Company's inventory by approximately $556,000. From that time through September
1997, the Company devoted substantially all of its resources to the research and
development of new technology for and design of the second generation
Sens-O-Lock product line, development of new relationships with existing and
other component suppliers and manufacturers, improvement of the Company's
component and manufacturing quality control procedures, enhancement of the
Sens-O-Lock operating software and development of the Company's network of
distributors and dealers. The Company completed final parts procurement and
ordered the initial production of second generation Sens-O-Lock units during
September and October 1997.
In late February 1998, the Company received confirmation from an
independent testing laboratory that the second generation Sens-O-Lock
successfully completed testing under the National Highway Traffic Safety
Administration ("NHTSA") Model Specifications for Breath Alcohol Ignition
Interlock Devices (the "Model Specifications") for the battery of required tests
for the 37- and 67-day calibration stability challenge protocols. The Model
Specifications are utilized by the various states in their individual
certification processes for use in legislative and judicial programs for
supervision of persons convicted of alcohol-related motor vehicle infractions,
violations and crimes ("Mandatory Programs"). The various states have differing
certification processes. Some states merely require compliance with the Model
Specifications while other states have much higher standards and/or a complex
certification procedure. Through October 20, 1998, the Sens-O-Lock has been
certified in five states. The Company anticipates seeking additional state
certifications of the second generation Sens-O-Lock on state-by-state basis,
with priority based, among other factors, upon the location of the Company's
distributors and dealers. The Company anticipates publicizing the Model
Specification testing success and applicable state certifications in promoting
the Sens-O-Lock devices for markets other than for Mandatory Programs (the
"Mandatory Market"), such as (a) the voluntary market, which includes parents of
teenage drivers (the "Voluntary Market"), and (b) the commercial market,
comprising truck, bus and taxi fleets (the "Commercial Market"). The Company
believes that, for the U.S. Voluntary Market and Commercial Market, no Model
Specifications testing success or applicable state certification are required,
although, the Company further believes that a significant portion of the
Voluntary Market and Commercial Market will not purchase a BAIID without a
minimum of a 37-day calibration success under the Model Specifications and
applicable state certification. However, there can be no assurance given that
the Model Specifications testing success or state certifications will result in
any revenues to the Company or the commercial success of the second generation
Sens-O-Lock product.
<PAGE>
The Company had limited sales of Sens-O-Lock units in 1997, primarily in
the United Kingdom and elsewhere in Europe. During the second quarter of 1998,
the Company sold 161 second generation Sens-O-Lock units and an additional 36
units were sold in the third quarter of 1998. There have been minimal revenues
generated by the WeatherEye product line. The Company was dependent upon loans
and equity investments from the Company's officers, directors and shareholders
and others to fund the Company's operations in absence of any material sales
through the third quarter of 1998. The Company anticipates that it will require
additional loans and/or equity investments in order to continue operations and
until such time as sufficient revenues from sales of Sens-O-Lock units are
generated. In addition, the Company has held discussions with a third party with
respect to the granting of world-wide distribution/licensing rights to the
Company's Sens-O-Lock and WeatherEye product lines, which grant would require
the pre-payment to the Company of certain royalties. There can be no assurance
that the Company will obtain any additional loans and/or equity investments
and/or enter into any such distribution/license arrangement, that any loans,
equity investments and/or distribution/licensing arrangements will be on terms
favorable to the Company, or that sufficient revenues, if any, will be generated
through sales of Sens-O-Lock units. See "Item 12. Certain Relationships and
Related Transactions."
The Company continues to evaluate other sensing technologies currently
utilized by competitors within the industry, as well as sensing technologies
under development by others for use in different alcohol sensing applications.
The Company intends to continue to utilize its research and development efforts
to provide the Company with other alternative technical options for different
specified target markets, as well as to improve and enhance the Company's
products.
The Company intends to seek insurance discounts to help drive the Voluntary
Market and Commercial Market, and to assist in the lobbying for stricter federal
and state laws requiring drivers convicted of alcohol-related motor vehicle
infractions, violations or crimes to install BAIID equipment in their vehicles.
The Company is evaluating strategies, marketing plans and programs which the
Company expects will enable the Company to work jointly with insurance companies
to enhance their respective markets. However, there can be no assurance that the
Company and such insurance companies will agree upon a strategy, plan or program
or that any such strategy, plan or program, if adopted, or the Company's
independent lobbying efforts, will result in revenues to the Company or the
commercial success of its products.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The Company's net sales for the year ended December 31, 1997 (the "1997
Fiscal Year") were approximately $35,000, compared to $41,000 for the year ended
December 31, 1996 (the "1996 Fiscal Year"), a decrease of $5,000 or 13.0%,
primarily the result of decreased sales of the Company's WeatherEye product,
which more than offset sales of the second generation Sens-O-Lock.
Total cost of sales for the 1997 Fiscal Year was approximately $71,000,
compared to $40,000 for the 1996 Fiscal Year, an increase of $32,000 or 78.8%,
primarily the result of higher costs of initial production of the second
generation Sens-O-Lock units in the 1997 Fiscal Year. As a percentage of the
Company's net sales, costs of sales increased to 202.5% for the 1997 Fiscal Year
from 98.5% for the 1996 Fiscal Year.
Research and development ("R&D") expense for the 1997 Fiscal Year was
approximately $523,000, compared to $913,000 for the 1996 Fiscal Year, a
decrease of $390,000 or 42.7%, primarily as a result of the finalization of the
second generation Sens-O-Lock product for market having lower costs than the
initial development of the product line. As a percentage of the Company's net
sales, the Company's R&D expense decreased to 1482.1% for the 1997 Fiscal Year
from 2250.7% for the 1996 Fiscal Year.
Selling, general and administrative ("SG&A") expense for the 1997 Fiscal
Year was approximately $2,987,000, compared to $3,102,000 for the 1996 Fiscal
Year, a decrease of $114,000 or 3.7%, primarily the result of reduced staff
<PAGE>
in the 1997 Fiscal Year as the Company focused principally on research and
development and reduced active marketing of the Sens-O-Lock line. As a
percentage of the Company's net sales, the Company's SG&A expense decreased to
8460.7% for the 1997 Fiscal Year from 7642.0% for the 1996 Fiscal Year.
Litigation settlement expense for the 1997 Fiscal Year was approximately
$158,000, compared to $1,591,000 for the 1996 Fiscal Year, a decrease of
$1,433,000 or 90.1%, primarily the result of the accrual of settlement costs in
the 1996 Fiscal Year related to the settlement of the Pace/Polek Lawsuit and the
Prior Lawsuit and other litigation. As a percentage of the Company's net sales,
the Company's litigation settlement expense decreased to 447.7% for the 1997
Fiscal Year from 3921.3% for the 1996 Fiscal Year.
The Company incurred a cost of goods sold - inventory write-off expense of
$556,026 in the 1996 Fiscal Year related to the recall of the original
Sens-O-Lock in the first half of 1996. There was no similar expense in the 1997
Fiscal Year.
Interest income for the 1997 Fiscal Year was approximately $81,000,
compared to $83,000 for the 1996 Fiscal Year, a decrease of $2,000 or 1.8%,
primarily as a result of higher average loan balance in the 1996 Fiscal Year.
Interest expense for the 1997 Fiscal Year was approximately $47,000,
compared to $42,000 for the 1996 Fiscal Year, an increase of $5,000 or 12.9%,
primarily as a result of higher average loan balances in the 1996 Fiscal Year.
As a result of all of the above, the Company's net loss for the 1997 Fiscal
Year was $3,670,968, compared to $6,121,143 for the 1996 Fiscal Year, a decrease
of $2,450,175 or 40.0%.
Liquidity and Capital Resources
At December 31, 1997, the Company had working capital of approximately
$890,000, a decrease of $728,000 from working capital of $1,618,000 at December
31, 1996. This decrease is primarily due to the net loss for the 1997 Fiscal
Year of $3,670,968, offset in part by the net proceeds from the sale of Series B
Preferred Stock discussed below.
At December 31, 1997, the Company had cash and cash equivalents of
approximately $1,883,000, a net decrease in cash and cash equivalents of
$1,159,000 from $3,042,000 at December 31, 1996. Cash used in operating
activities for the 1997 Fiscal Year was $3,784,000, a decrease of $157,000 as
compared to the 1996 Fiscal Year. The major factors contributing to this
decrease include the loss from operations, reduced litigation settlement costs,
accounts payable and pre-paid expenses and increases to inventory in
anticipation of sales of the second generation Sens-O-Lock. Cash used in
investing activities for the 1997 Fiscal Year was $20,000, a decrease of
$2,936,000 from cash provided by investing activities in the 1996 Fiscal Year of
$2,915,000, primarily due to sales of marketable securities (offset, in part, by
purchases) and a decrease in restricted cash in the 1996 Fiscal Year, the funds
for such purchases and the restricted cash having been derived from the
Company's initial public offering in 1995. Cash used in financing activities for
the 1997 Fiscal Year was $2,645,000, a decrease of $898,000 from cash used in
financing activities in the 1996 Fiscal Year of $3,543,000, primarily due to
proceeds received in 1996 from the exercise of warrants sold in private
placements conducted in 1993 through 1995 and the sale of notes payable.
On September 26, 1997, the Company sold a total of 300 shares of Series B
Preferred Stock at a price of $10,000 per share to Milbright Estates, Ltd. The
net proceeds from the sale of the Series B Preferred Stock was approximately
$2,675,000. The rights, preferences and privileges of the Series B Preferred
Stock are set forth in amendments to the Company's Certificate of Incorporation
(the "Series B Provisions") filed with the New York Secretary of State. The
Series B Preferred Stock has a liquidation preference of $10,000 per share and
bears cumulative dividends at a rate of eight percent (8%) per share per annum.
Such dividends are payable only immediately prior to the conversion of the
Series B Preferred Stock into Common Stock. The Series B Preferred Stock is
currently convertible, in whole or part, at the option of the holder, into
shares of Common Stock at any time. Each share of Series B Preferred Stock is
convertible into that number of shares of Common Stock as is determined by
dividing (i) the sum of (a) $10,000 plus (b) the amount of all accrued but
unpaid or accumulated dividends on the share of Series B Preferred Stock being
so converted by (ii) the Conversion Price in effect at the time of conversion.
The "Conversion Price" of the Series B Preferred Stock is equal to the lower of
(x) $4.03125 or (y) 82.5% of the average closing bid price of the
<PAGE>
Common Stock over the ten consecutive trading days immediately preceding the
date of the conversion notice delivered to the Company. If not sooner converted,
all outstanding shares of Series B Preferred Stock are subject to automatic
conversion on the earlier of (i) September 26, 1999 or (ii) immediately prior to
the consummation of the acquisition of the Company pursuant to a merger or
consolidation or the sale of substantially all of the assets of the Company.
Except in connection with such automatic conversion, in no event will a holder
of Series B Preferred Stock be entitled to convert any shares of Series B
Preferred Stock if such conversion would cause the sum of (i) the number of
shares of Common Stock beneficially owned by the holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of the Series B Preferred
Stock) and (ii) the number of shares Common Stock issuable upon the conversion
of such shares of the Series B Preferred Stock, to result in beneficial
ownership by the holder and its affiliates of more than 4.99% of the outstanding
shares of Common Stock. As of February 9, 1998, Milbright converted 26 shares of
Series B Preferred Stock into 457,493 shares of Common Stock. Based on the
average of the closing bid prices of the Common Stock for the ten consecutive
trading days preceding October 19, 1998, the currently outstanding 274 shares of
Series B Preferred Stock would, if convertible, be convertible into an aggregate
of 18,123,433 shares of Common Stock (without giving effect to accrued
dividends).
Pursuant to a letter agreement, dated August 14, 1998, between the Company
and AIIC, AIIC, as the holder of the 833,333 outstanding shares of Series A
Preferred Stock, agreed to accept (a) 230,861 shares of Common Stock as payment
in full for all accrued and unpaid dividends on said 833,333 shares of Series A
Preferred Stock for the prior dividend payment dates of June 30, 1997, December
31, 1997 and June 30, 1998 (i.e., $344,375) and (b) agreed to accept shares of
Common Stock in lieu of payment of dividends on said 833,333 shares of Series A
Preferred Stock due on the dividend payment dates of December 31, 1998, June 30,
1999 and December 31, 1999, such shares of Common Stock to be valued at
approximately $1.487 per share (subject to adjustment).
In June 1998, Milbright, the holder of all outstanding shares of Series B
Preferred Stock loaned (the "June 1998 Loan") the Company $100,000, bearing
interest at 11.5% per annum and maturing on July 31, 1998. In August 1998,
Milbright loaned the Company (the "August 1998 Loan") an additional $40,000,
bearing interest at 11.5% per annum and maturing on August 31, 1998. In
September 1998, Milbright loaned the Company an additional $25,000, bearing
interest at 11.5% per annum and maturing on October 31, 1998. Repayment of the
June 1998 Loan and August 1998 Loan are past due, although Milbright has not
made any attempt to require such repayment.
In October 1998, a third party loaned the Company $30,000 with interest at
11.5% per annum and due on November 30, 1998.
In October 1998, the Company received two $20,000 loans from the party
negotiating a distribution agreement with the Company. These loans bear interest
at 8.5% and are due on March 31, 1999 and April 6, 1999.
Management believes that the Company currently does not have sufficient
working capital to continue its operations over the long-term and that cash
generated from operations for the next several months will not be sufficient to
meet the Company's currently anticipated liquidity and capital expenditure
requirements in order to successfully market the second generation Sens-O-Lock
product line and/or for the Company to continue operations. The Company has
entered into discussions with a third party with respect to granting world-wide
distribution/licensing rights to the Company's Sens-O-Lock and WeatherEye
product lines, which is anticipated to entail the pre-payment to the Company of
certain royalties. Further, the Company has continued to have discussions with
Milbright with respect to additional equity and/or debt financing. There can be
no assurance, however, that the Company will enter into a formal
distribution/licensing arrangement or receive additional financing from
Milbright or any other party, that royalties from any such
distribution/licensing arrangement and/or financing proceeds, if any, will be on
terms favorable to the Company or that the Company will be successful in
attaining its sales goals, nor that attaining such sales goals will have the
desired effect on the Company's cash resources. The failure to receive
sufficient distribution/licensing royalties and/or other equity or debt
financing, as well as any failure to obtain a sufficient level of sales, may
result in the Company seeking protection under the Federal Bankruptcy Laws
and/or terminating operations.
<PAGE>
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish twenty-first century dates
from twentieth century dates. As a result, in less than two years, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. The Company is in the process of
implementing a review of issues related to the Company's Year 2000 compliance.
This review is intended to determine the affect of the turn of the century on
the operability of the Company's products, management information systems
("MIS"), non-MIS systems the Company utilizes to conducts its business and other
internal and external processes which may impact the Company's operations. In
connection with this evaluation, the Company also anticipates reviewing the
Company's vendors, distributors and suppliers for Year 2000 compliance and to
effect changes where necessary.
The Company anticipates that this review process will be conducted in three
phases: the first phase is anticipated to encompass a review of all of the
Company's products, internal and external systems/processes and vendors and
suppliers for Year 2000 compliance; the second phase is expected to correct all
items identified as non- compliant and essential to the operations of the
Company; and the third phase is contemplated to be a second review to ensure
Year 2000 compliance and interoperability of all systems/processes.
The Company anticipates conducting its review with its current resources,
but cannot assure that it has sufficient resources to complete the review
process in a timely manner. The Company has not determined at this time, what
total costs it will incur to conduct the review process and to implement any
necessary corrections. Although the Company believes that the software utilized
in the second generation Sens-O-Lock and the Company's MIS software are Year
2000 compliant and is working to ensure that the Company's products and internal
systems are Year 2000 compliant, there can be no assurance that such compliance
is or will be achieved. The failure to be Year 2000 compliant could have a
material adverse effect on the Company's business, operating results and
financial condition.
Inflation
The rate of inflation has had little impact on the Company's operations or
financial position during the 1997 Fiscal Year and inflation is not expected to
have a significant impact on the Company's operations or financial position
during the year ending December 31, 1998.
The Company pays a number of its suppliers, including Intercontinental and
Scarico Italy, in US dollars. Therefore, fluctuations in the value of the
Italian lira against the US dollar will not have an impact on the gross profit
for sales of the Company's products.
Item 7. Financial Statements.
Set forth below is a list of the financial statements of the Company
included in this Annual Report on Form 10-KSB.
<TABLE>
<CAPTION>
Item Page*
- ---- -----
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . .F-1
Consolidated Balance Sheet as at December 31, 1997 . . . . . . . . . . . . .F-2
Consolidated Statements of Operations, for the years ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . .F-3
Consolidated Statements of Changes in Shareholders Equity
for the years ended December 31, 1997 and 1996 . . . . . . . . . . . . . .F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . .F-5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .F-6
<FN>
- ----------
* Page F-1 follows page 38 to this Annual Report on Form 10-KSB.
</FN>
</TABLE>
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Officers and Directors
The current executive officers and directors of the Company are as follows:
Positions and Director
Name Age Offices with the Company Since
- ---- --- ------------------------ --------
Joseph M. Lively 43 President, Chief Operating Officer
and Director 1996
J. Ernest Hansen 59 Director 1996
Steven A. Martello 42 Director 1992
Michael A. Sylvester 60 Director 1992
Michael Rosenbaum 60 Director 1998
Daniel H. Pisani 40 Director 1997
The following is a brief summary of the business experience and background
of the current directors of the Company, based upon information provided to the
Company by such persons:
Joseph M. Lively presently serves as the President (since July 1998), Chief
Operating Officer (since April 1997) and a director (since December 1996) of the
Company. Mr. Lively also served as Vice-President (April 1997 to July 1998) of
the Company. From December 1987 to July 1998, Mr. Lively was engaged in the
private practice of law. He is admitted to practice in New York and the federal
courts for the Southern and Eastern Districts of New York. Mr. Lively received a
BS from Long Island University in 1979 and a JD from St. John's University in
1987. Mr. Lively is the owner of WeatherEye, Inc., the licensor of the Company's
WeatherEye product. (See "Item 12. Certain Relationships and Related
Transactions.")
J. Ernest Hansen presently serves as a director (since December 1996) of
the Company. Mr. Hansen is President of American International Insurance Company
(since November 1991), American International Insurance Company of California,
Inc. (since August 1994), Minnesota Insurance Company (since May 1994), AIG
Marketing, Inc. (since November 1991), and New Hampshire Insurance Services,
Inc. (since March 1993), and has over twenty-five years of experience within the
property and casualty insurance industry.
Steven A. Martello presently serves as a director (since July 1992) of the
Company. Mr. Martello previously served as the President (April 1997 through May
1998), Chief Executive Officer (July 1997 through May 1998), Chief Financial
Officer (February through May 1998) and Chief Operating Officer (February 1992
to April 1997) of the Company. Mr. Martello was Vice President of Worldlink
Information Systems, Inc. (January 1994 to November 1995), Vice President of
Global Management and Technology Company, an international trading and training
company (1990 to 1994), and Benefits Manager at General Mills, Inc. (Izod
Division) (from February 1981 to April 1986). From 1986 to 1990, Mr. Martello
was an officer of a family-owned company in the vehicle repair and refurbishing
business. Concurrently with other employment, from 1984 to 1990, Mr. Martello
worked with Presidential Advance Operations of the White House. Mr. Martello
also served as a director of the Industry Advisory Board to the American
Association of Motor Vehicle Administrators (from 1994 to 1995), assisting in
liaison with Department of Motor Vehicle Commissioners and Industry.
<PAGE>
Daniel H. Pisani presently serves as a director (since November 1998) of
the Company. From November 1997 to January 1998, Mr. Pisani served as the Chief
Financial Officer of the Company. He has served (since February 1998 and from
November 1995 through October 1997) as Chief Financial Officer of Swid Powell
Design Inc., developers and marketers of tableware products. From August 1994
through August 1995, Mr. Pisani served as Chief Financial Officer of the Party
Experience Inc., a retailer of party and paper goods, and, from January 1988 to
August 1994, he was Chief Financial Officer of Kennedy Electrical Supply Corp.
Michael Rosenbaum presently serves as a director (since January 1998) of
the Company. He served as Executive Vice President and a director of Brooke
Group, Ltd. from 1984 to 1992. He presently is a private investor. Mr. Rosenbaum
was appointed to the Company's Board of Directors upon the exercise of the right
of William Scott & Company, L.L.C., the underwriter of the Company's initial
public offering in November 1995, to nominate one individual to the Company's
Board.
Michael A. Sylvester presently serves as a director (since February 1992)
of the Company. He served as Chief Financial Officer and Treasurer of the
Company from February 1992 to October 1997. Mr. Sylvester has been Chief
Executive Officer, President (since 1983) and a principal stockholder of M&S
Chevrolet, Inc. and Secretary/Treasurer (since 1984) of Morningstar Ford, Inc.,
automotive dealerships, and is senior partner (since 1983) of Perry Realty Co.,
a real estate holding company.
Pursuant to the Company's Certificate of Incorporation, as amended to date,
and a Shareholders Agreement, dated as of December 20, 1996 (the "Shareholders'
Agreement"), among the Company, American International Insurance Company
("AIIC"), Messrs. Martello, Lively and Sylvester and others, for so long as at
least 250,000 shares of Series A Preferred Stock are outstanding, the holders of
the outstanding Series A Preferred Stock, voting separately as a class, have the
special and exclusive right to elect one director to the Board of Directors. In
accordance with such right, AIIC, as the holder of all of the outstanding shares
of Series A Preferred Stock, has elected J. Ernest Hansen as a director of the
Company.
Currently, Messrs. Hansen, Pisani and Sylvester, each of whom is not an
officer or employee of the Company, serve as the members of the Audit Committee
and Compensation Committee of the Board of Directors. The Audit Committee
recommends engagement of the Company's independent certified public accountants,
and is primarily responsible for reviewing and approving the scope of the audit
and other services performed by the Company's independent certified public
accountants and for reviewing and evaluating the Company's accounting principles
and practices, systems of internal controls, quality of financial reporting and
accounting and financial staff, as well as any reports or recommendations issued
by the independent accountants. The Compensation Committee generally reviews and
approves of the Company's executive compensation and currently administers the
Company's 1998 Stock Incentive Plan (the "1998 Plan").
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5, and amendments thereto,
furnished to the Company, together with written representations received by the
Company from applicable parties that no Annual Statement of Beneficial Ownership
of Securities on Form 5 was required to be filed by such parties for 1997 and
prior years, all parties subject to the reporting requirements of Section 16(a)
of the Exchange Act filed all such required reports, except that Joseph M.
Lively and Michael Ghazarian each failed to timely file their Initial Statements
of Beneficial Ownership of Securities on Form 3 and Joseph M. Lively failed to
file a Form 5 with respect to two option grants by the Company, Steven A.
Martello failed to file a Change in Beneficial Ownership Statement on Form 4
with respect to a transfer of 39,112 shares of Common Stock and a Form 5 with
respect to two option grants by the Company, Michael A. Sylvester failed to file
two Forms 4 with respect to a transfer of 79,822 shares of Common Stock and a
contribution to capital of 13,918 shares of Common Stock and a Form 5 with
respect to an option grant by the Company, Michael G. Ghazarian failed to file a
Form 5 with respect to two option grants by the Company, Robert Whitney failed
to file two Forms 4 with respect to a transfer of 79,822 shares of Common Stock
and a contribution to capital of 13,918 shares of Common Stock and John Ruocco
failed to file two Forms 4 with respect to a transfer of 79,822 shares of Common
Stock and a contribution to capital of 13,918 shares of Common Stock.
Item 10. Executive Compensation.
The following table sets forth, for the three years ended December 31,
1997, the cash and other compensation paid to all individuals serving as the
Company's Chief Executive Officer (or acting in a similar capacity) during 1997
and the one other individual serving as an executive officer of the Company on
December 31, 1997 whose total salary and bonus, for services rendered to the
Company during 1997, was $100,000 or more (each of such three individuals being
a "Named Executive Officer").
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
Securities All
Other Annual Underlying Other
Name and Principal Position Year Salary Bonus Compensation(1) Options Compensation
- --------------------------- ---- ------ ----- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Whitney, 1997 $60,412 $-0- $-0- -0- $-0-
Chairman of Board, 1996 99,944 -0- -0- -0- -0-
Chief Executive Officer 1995 45,386 -0- -0- -0- -0-
and President (2)
Steven A. Martello, 1997 $ 71,226 $-0- $-0- 12,500(4) -0-
Chief Executive Officer 1996 99,944 -0- -0- 100,000 -0-
and President(3) 1995 -0- -0- -0- -0-
Michael G. Ghazarian, 1997 $124,938 -0- -0- 222,500(6) -0-(7)
Director of Production 1996 -0- -0- -0- 100,000 -0-(7)
and Manufacturing and 1995
Managing Director of
ASE (5)
<FN>
- ----------
(1) The value of all perquisites provided did not exceed the lesser of
$50,000 or 10% of the officer's salary and bonus.
(2) On April 17, and July 2, 1997, Mr. Whitney resigned as President and Chief
Executive Officer and a director, respectively, of the Company for medical
reasons.
(3) On April 17, 1997, Mr. Martello was appointed President of the Company and
on July 24, 1997, Mr. Martello was named Chief Executive Officer of the
Company. Mr. Martello resigned as President, Chief Executive Officer
and Chief Financial Officer of the Company, effective May 31, 1998.
(4) Represents options granted in exchange for the cancellation of deferred
salary of $25,000 due Mr. Martello.
(5) Effective January 29, 1998, Mr. Ghazarian resigned all positions with the
Company and ASE.
(6) Includes an option to purchase 22,500 shares of Common Stock granted
in exchange for the cancellation of deferred salary of $45,362 due Mr.
Ghazarian. Pursuant to the Settlement Agreement, dated August 11, 1998,
between the Company and Mr. Ghazarian, this option was canceled.
(7) Does not include approximately $305,000 and $135,000 paid for services
rendered and goods supplied in 1997 and 1996, respectively, to entities the
Company believes are controlled or otherwise affiliated with Mr. Ghazarian.
(See "Item 12. Certain Relationships and Related Party Transactions.")
</FN>
</TABLE>
Stock Option Grants in 1997
The following table sets forth the (a) number of shares underlying options
granted to each Named Executive Officer during 1997, (b) percentage the grant
represents of the total number of options granted to all Company employees
during the 1997, (c) per share exercise price of each option and (d) expiration
date of each option.
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percentage of Total
Underlying Options Options Granted to Exercise Expiration
Name Granted During 1997 Employees in 1997 Price Date
- ---- ------------------- ------------------- -------- ----------
<S> <C> <C> <C> <C>
Robert B. Whitney. . . . . 0 -- -- --
Steven A. Martello . . . . 12,500(1) 4.1% $2.00 6/9/02
Michael G. Ghazarian . . . 22,500(1)(2) 7.4 $2.00 6/9/02
Michael G. Ghazarian . . . 200,000(3) 65.5 $2.00 9/22/02
<FN>
- -----------------------------
(1) Represents options to purchase shares of Common Stock issued in exchange
for accrued salary.
(2) Pursuant to the Ghazarian Settlement Agreement, these options were
canceled.
(3) In accordance with the Ghazarian Settlement Agreement, the Company reissued
this option deleting a provision restricting the right to exercise the
option following Mr. Ghazarian's termination of employment with the
Company.
</FN>
</TABLE>
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
Set forth in the table below is information, with respect to each of the
Named Executive Officers, as to the (a) number of shares acquired during 1997
upon each exercise of options granted to such individuals, (b) aggregate value
realized upon each such exercise (i.e., the difference between the market value
of the shares at exercise and their exercise price), (c) total number of
unexercised options held on December 31, 1997, separately identified between
those exercisable and those not exercisable, and (d) aggregate value of
in-the-money, unexercised options held on December 31, 1997, separately
identified between those exercisable and those not exercisable.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options* In-the-Money Options at
at December 31, 1997 December 31, 1997
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Robert B. Whitney . . . -0- -0- -0- -0- -0- -0-
Steven A. Martello. . . -0- -0- 112,500 -0- -0- -0-
Michael G. Ghazarian. . -0- -0- 300,000 -0- -0- -0-
</TABLE>
Employment Agreements
The Company currently has in effect an employment agreement (the "Lively
Employment Agreement") with Joseph M. Lively. The Lively Employment Agreement,
which became effective as of September 1, 1998, provides for Mr. Lively to serve
as President and Chief Operating Officer of the Company for a term expiring in
September 1, 2001, with an annual base salary of $150,000 (increasing to
$182,500, as of January 1, 1999), subject to cost-of-living adjustments in each
year of the employment term, and bonuses of (a) $50,000, should the Company
report consolidated net income after taxes, excluding extraordinary items, in
1998, and (b) 4% of the Company's consolidated net income after taxes, excluding
extraordinary items, in each of 1999 and 2000. Pursuant to the Lively Employment
Agreement, the Company granted options to Mr. Lively to purchase an aggregate of
400,000 shares of Common Stock exercisable at $.225 per share, and has agreed to
grant to Mr. Lively options to purchase 50,000 shares of Common Stock on each of
September 1, 1999 and 2000 with an exercise price equal to the closing price of
the Common Stock on the date of grant. The Lively Employment Agreement also
provides for health and life insurance, a car allowance and other benefits and
contains restrictions on Mr. Lively engaging in competition with the Company for
the term thereof and for up to one year thereafter and provisions protecting the
Company's proprietary rights and information. The Lively Employment Agreement
also provides for the repricing of certain options to purchase an aggregate of
129,500 and 45,000 shares of Common Stock to $.225 and $.05 per share,
respectively, from prices ranging from $1.06 to $3.00 per share. On the
effective date of the Lively Employment Agreement, the per share closing sale
price of the Common Stock was $.225.
<PAGE>
During 1996 and through June 30, 1997, Mr. Lively agreed to the deferral of
a portion of his salary. As of June 10, 1997, the amount of such deferred salary
and unpaid legal fees due Mr. Lively for services rendered prior to his
employment by the Company was $90,000. On June 30, 1997, Mr. Lively agreed to
the cancellation of such deferred salary in exchange for options to purchase
45,000 shares of Common Stock (subject to shareholder approval of the 1998 Stock
Plan) at an exercise price of $2.00 per share. On June 30, 1997, the closing
sale price of a share of Common Stock, as reported on The Nasdaq SmallCap
Market, was $2.5625.
1998 Stock Incentive Plan
On July 24, 1998, the Board of Directors of the Company adopted the 1998
Plan, subject to shareholder approval.
Plan Summary
The 1998 Plan authorizes the granting of awards to officers and employees
of the Company, as well as to third parties providing services to the Company,
e.g., independent contractors, consultants and advisors to the Company. Awards
can be stock options (each, an "Option"), stock appreciation rights (each, an
"SAR"), performance share awards (each, a "PSA") and/or restricted stock awards
(each, an "RSA"). The 1998 Plan is administered by a committee (the "Committee")
appointed by the Board of Directors and consisting of two or more members, each
of whom must be a non-employee Director, or, in the absence of a committee, the
Board of Directors as a whole. The Committee determines the number of shares to
be covered by an award, the term and exercise price, if any, of the award and
other terms and provisions of awards. The Compensation Committee of the Board of
Directors of the Company has been designated to serve as the Committee and,
thereby, administer the 1998 Plan. Members of the Board of Directors are
eligible to receive awards under the 1998 Stock Plan. In addition, non-employee
directors presently receive the non-discretionary stock option awards described
below.
The number and kind of shares available under the 1998 Plan are subject to
adjustment in certain events. Shares relating to Options or SARs which are not
exercised, shares relating to RSAs which do not vest and shares relating to PSAs
which are not issued will again be available for issuance under the 1998 Plan.
Awards relating to up to 3,000,000 shares of Common Stock may be granted under
the 1998 Plan and the Company has reserved 3,000,000 shares of Common Stock for
issuance thereunder.
An Option granted under the 1998 Plan may be an incentive stock option
("ISO") or a nonqualified Option. ISOs may only be granted to employees of the
Company. The exercise price for Options is to be determined by the Committee
but, in the case of an ISO, is not to be less than the fair market value of the
Common Stock on the date the Option is granted (110% of fair market value, in
the case of an ISO granted to any person who owns more than 10% of the voting
power of the Company) and, in the case of a nonqualified Option, is not to be
less than 85% of the fair market value of the Common Stock on the date the
Option is granted. In general, the exercise price is payable in any combination
of cash, or, if authorized by the Committee, shares of Common Stock already
owned by the participant for at least six months or a promissory note secured by
the Common Stock issuable upon exercise. In addition, the award agreement may
provide for "cashless" exercise and payment. The aggregate fair market value
(determined on the date of grant) of the shares of Common Stock for which ISOs
may be granted to any participant under the 1998 Stock Plan and any other plan
by the Company or its affiliates which are exercisable for the first time by
such participant during any calendar year may not exceed $100,000.
Options granted under the 1998 Plan become exercisable in three equal
annual tranches commencing one year from the date of grant, unless the Committee
determines otherwise. An ISO granted to a holder (a "10% Shareholder") of more
than 10% of the voting power of the Company must expire no later than five years
from the date of grant. ISOs granted to persons other than a 10% Shareholder and
all non-qualified Options must expire no later than ten years from the date of
the grant.
A director who is not also an employee of the Company will, upon
appointment, election or re-election to the Board of Directors, automatically be
granted a nonqualified option to purchase 25,000 shares, exercisable in three
<PAGE>
equal annual tranches commencing one year from the date of grant, at an exercise
price equal to the fair market value of Common Stock on the date of grant.
Options become immediately exercisable in full in the event of a disposition of
all or substantially all of the assets or capital stock of the Company by means
of a sale, merger, consolidation, reorganization, liquidation or otherwise,
unless the Committee arranges for the optionee to receive new Options covering
shares of the corporation purchasing or acquiring the assets or stock of the
Company in substitution of the Options granted under the 1998 Stock Plan (which
Options shall thereupon terminate). The Committee in any event may, on such
terms and conditions as it deems appropriate, accelerate the exercisability of
Options granted under the 1998 Plan.
The Options granted under the 1998 Plan are not transferable other than by
will or the laws of descent and distribution. Options which have become
exercisable by the date of termination of employment or of service must be
exercised within certain specified periods of time from the date of termination;
the period of time to depend on the reason for termination. Such Options
generally lapse three months after termination of employment other than by
reason of retirement, total disability or death, in which case they generally
terminate one year thereafter. If a participant is discharged for cause, all of
the participant's Options will terminate immediately. Options which have not yet
become exercisable on the date the participant terminates employment or service
on the Company's Board of Directors for a reason other than retirement, death or
total disability shall terminate on that date.
An SAR is the right to receive payment based on the appreciation in the
fair market value of Common Stock from the date of grant to the date of
exercise. At the Committee's sole discretion, the Committee may grant an SAR
concurrently with the grant of an Option. Such SAR is only exercisable at such
time, and to the extent that the related Option is exercisable. Upon exercise of
an SAR, the holder receives for each share with respect to which the SAR is
exercised an amount equal to the difference between the exercise price under the
related Option and the fair market value of a share of Common Stock on the date
of exercise of the SAR. Such amount will be applied against the exercise price
due in connection with the exercise of the related Option.
Each SAR granted concurrently with an Option will have the same termination
provisions and exercisability periods as the related Option. In its discretion,
the Committee may also grant SARs independently of any Option, subject to such
conditions consistent with the terms of the Plan as the Committee may provide in
the award agreement. Upon the exercise of an SAR granted independently of any
Option, the holder receives for each share with respect to which the SAR is
exercised an amount in cash based on the percentage specified in the award
agreement of the excess, if any, of fair market value of a share of Common Stock
on the date of exercise over such fair market value on the date the SAR was
granted. The Committee, in the Committee's sole discretion, can authorize the
payment of such amount in cash, shares of Common Stock or a combination thereof.
The termination provisions and exercisability periods of an SAR granted
independently of any Option will be determined by the Committee.
An RSA is an award of a fixed number of shares of Common Stock subject to
transfer restrictions. The Committee specifies the purchase price, if any, the
recipient must pay for such shares. Shares included in an RSA may not be sold,
assigned, transferred, pledged or otherwise disposed of or encumbered until they
have vested. The recipient is entitled to dividend and voting rights pertaining
to such RSA shares even though they have not vested, so long as such shares have
not been forfeited. Upon the date a participant is no longer employed by the
Company for any reason, shares subject to the participant's RSAs which have not
become vested by that date or shares subject to a participant's PSAs which have
not been issued shall be forfeited in accordance with the terms of the related
award agreements.
A PSA is an award of a fixed number of shares of Common Stock, the issuance
of which is contingent upon the attainment of such performance objectives, and
the payment of such consideration, if any, as is specified by the Committee.
The 1998 Stock Plan permits a participant to satisfy the participant's tax
withholding with shares of Common Stock instead of cash, if the Committee
agrees.
The exercisability of all of the outstanding awards may be accelerated,
subject to the discretion of the Committee, upon the occurrence of an "Event"
that, as defined in the 1998 Stock Plan, includes approval by the shareholders
of the dissolution on liquidation of the Company, certain mergers,
consolidations, sale of substantially all of the Company's business and/or
assets and a "change in control." The 1998 Stock Plan defines a change in
control
<PAGE>
to have occurred (i) if a "person," as defined in Section 13(d) and 14(d)
under the Exchange Act, acquires 20% or more of the voting power of the then
outstanding securities of the Company or (ii) if, during any two consecutive
year periods, there is a change of a majority of the members of the Board of
Directors, unless the election or nomination of the new directors is approved by
at least three-fourths of the members still in office from the beginning of the
two year period.
The 1998 Stock Plan provides for anti-dilution adjustments in the event of
a reorganization, merger, combination, recapitalization, reclassification, stock
dividend, stock split or reverse stock split. Upon the dissolution or
liquidation of the Company, or upon a reorganization, merger or consolidation of
the Company as a result of which the Company is not the surviving entity, the
Plan will terminate, and any outstanding awards will terminate and be forfeited,
subject to the Committee's ability to provide for (i) certain payments to
participants in cash or Common Stock in lieu of such outstanding awards, (ii)
the assumption by the successor corporation of either the Plan or the awards
outstanding under the Plan and (iii) continuation of the Plan.
The Board of Directors may, at any time, terminate or suspend the 1998
Plan. The 1998 Plan currently provides that the Board of Directors or the
Committee may amend the 1998 Plan at any time without the approval of the
holders of a majority of the shares of Common Stock except in certain situations
enumerated in the 1998 Plan and then only to the extent such approval is
required by Rule 16b-3 under the Exchange Act or Sections 162(m) or 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
Federal Income Tax Consequences
ISOs granted under the 1998 Plan are intended to qualify as incentive stock
options in accordance with the provisions of Section 422 of the Code. All other
Options granted under the 1998 Plan are non-qualified Options and not entitled
to special tax treatment under Section 422 of the Code. Generally, the grant of
an ISO will not result in taxable income to the recipient at the time of the
grant, and the Company will not be entitled to an income tax deduction at such
time. The grant of nonqualified options will not result in taxable income to the
recipient at the time of the grant to the extent that it is granted at 100% of
the fair market value of Common Stock at such time. So long as such Option does
not result in taxable income to the recipient at the time of the grant, the
Company will not be entitled to an income tax deduction.
Upon the exercise of an ISO granted under the 1998 Plan, the recipient will
not be treated as receiving any taxable income, and the Company will not be
entitled to an income tax deduction. Upon the exercise of a nonqualified option,
an employee who is not a director or officer of the Company will be treated as
receiving compensation, taxable as ordinary income, in an amount equal to the
excess of the fair market value of the underlying shares of the Common Stock at
the time of exercise, over the exercise price. The date of recognition and
determination of the ordinary compensation income attributable to shares
received upon exercise of an Option by an officer of the Company, while he or
she is subject to Section 16(b) of the Exchange Act, is generally delayed until
six months after such exercise, unless that person elects to be taxed as of the
date of exercise. The Company will receive an income tax deduction for the
amount treated as compensation income to the recipient at the time and in the
amount that the recipient recognizes such income.
Upon subsequent disposition of the shares subject to the Option, any
differences between the tax basis of the shares and the amount realized on the
disposition is generally treated as long-term or short-term capital gain or
loss, depending on the holding period of the shares of Common Stock; provided,
that if the shares subject to an ISO are disposed of prior to the expiration of
two years from the date of grant and one year from the date of exercise, the
gain realized on the disposition will be treated as ordinary compensation income
to the optionee.
Upon any grant of restricted stock or other award under the 1998 Plan,
taxable income generally will be recognized by the recipient thereof to the
extent that there is no substantial risk of forfeiture thereof. The satisfaction
of any of the restrictions thereon generally will result in the recipient
thereof being deemed to have received taxable income to the extent of the value
of such award with respect to which such restrictions have been satisfied.
<PAGE>
Options Granted Under the 1998 Stock Plan to Date
The Company has granted options to purchase an aggregate 325,000 shares of
Common Stock under the 1998 Stock Plan, subject to shareholder approval thereof.
Indemnification
Section 722 of the New York Business Corporation Law provides that
indemnification of directors, officers, employees and other agents of a
corporation, and persons who serve at its request as directors, officers,
employees or other agents of another organization, may be provided by such
corporation if such person acted in good faith, for a purpose such person
reasonably believes to be in the best interest of such corporation and, in
criminal proceedings, in addition, had no reasonable cause to believe such
person's conduct was unlawful.
The Company also maintains a directors' and officers' liability insurance
policy in a coverage amount of $2,000,000.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the beneficial ownership of shares of voting
stock of the Company, as of October 23, 1998, of (a) each person known by the
Company to beneficially own 5% or more of the shares of outstanding Common
Stock, based on filings with the SEC and certain other information, (b) each of
the Company's executive officers and directors and (c) all of the Company's
executive officers and directors as a group.
<TABLE>
<CAPTION>
Amount and Percentage Amount and Percentage
Nature of Ownership of Nature of Series Ownership
Common Stock Common Stock A Preferred Stock of Series A
Name and Address of Beneficially and Voting Beneficially Preferred
Beneficial Owner(1) Owned(2) Power(3)(4) Owned(2) Stock(3)
- ------------------- ------------ ------------ ----------------- -----------
<S> <C> <C> <C> <C>
American International
Insurance Company . . . . 1,700,436(5) 15.5 833,333 100.0
American International
Group, Inc. . . . . . . . 1,700,436(6) 15.5 833,333(7) 100.0
J. Ernest Hansen. . . . . . 1,700,436(8) 15.5 833,333(9) 100.0
Michael A. Sylvester. . . . 601,260(10) 6.3 -- 0
Robert B. Whitney (11). . . 566,260 6.0 -- 0
John T. Ruocco (12) . . . . 566,260 6.0 -- 0
Milbright Estates, Ltd. . . 473,140(13) 5.0 -- 0
Steven A. Martello. . . . . 420,047(14) 4.3 -- 0
Joseph M. Lively. . . . . . 214,350(15) 2.2 -- 0
Michael Rosenbaum . . . . . 77,112(16) 0.8 -- 0
Daniel H. Pisani. . . . . . 0(17) 0.0 -- 0
All officer and directors
as a group (6 persons). . . 3,013,205(18) 26.6 833,333 100.0
* Less than 0.1%
<FN>
(1) Unless otherwise indicated, the address for each beneficial owner listed in
the table is Alcohol Sensors International, Ltd., 11 Oval Drive, Islandia,
New York 11722.
(2) Unless otherwise indicated, the Company believes that all persons named
in the security ownership table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them. A person
is deemed to be the beneficial owner of securities which may be acquired by
such person within 60 days from the date on which beneficial ownership is
to be determined upon the exercise of options, warrants or convertible
securities.
(3) Each beneficial owner's percentage ownership and voting power is
determined by assuming that stock options and warrants and convertible
securities that are held by such person (but not those held by any other
person)
<PAGE>
and which are exercisable or convertible within such 60 day period, have
been exercised or converted, as the case may be.
(4) As of October 23, 1998, each share of Series A Preferred Stock is entitled
to cast .6982915 votes on all matters subject to a vote of shareholders
and, subject to applicable law, votes together with the holders of Common
Stock.
(5) Includes (a) the 581,909 shares of Common Stock issuable upon
conversion in full of the 833,333 shares of Series A Preferred Stock held
of record by American International Insurance Company ("AIIC"), a wholly
owned subsidiary of American International Group, Inc. ("AIG"), which
shares of Series A Preferred Stock are convertible within the next 60 days
and (b) the 887,666 shares of Common Stock issuable upon exercise of
warrants held of record by AIIC, which warrants are exercisable within the
next 60 days. However, if Milbright were to convert in full the remaining
274 shares of Series B Preferred Stock as of October 19, 1998, the Series A
Preferred Stock would be convertible into 1,519,941 shares of Common Stock
and the warrants held by AIIC would entitle AIIC to purchase 2,285,415
shares of Common Stock. See Note (13) below and "Item 12. Certain
Relationships and Related Transactions."
(6) Represents the 1,700,436 shares of Common Stock beneficially owned by
AIIC, a wholly owned subsidiary of AIG, as of the Record Date. See
note (5) above.
(7) Represents the 833,333 shares of Series A Preferred Stock owned of record
by AIIC, a wholly owned subsidiary of AIG.
(8) Includes the 1,700,436 shares of Common Stock beneficially owned by AIIC,
of which Mr. Hansen is President and a director. Mr. Hansen disclaims
beneficial ownership to any of the 1,700,436 shares of Common Stock
beneficially owned by AIIC. Does not include 25,000 shares of Common Stock
issuable upon exercise of an option granted to Mr. Hansen which was
granted subject to (and not exercisable prior to) shareholder approval
of the 1998 Plan. The Company anticipates that the shareholders of the
Company will be asked to approve the 1998 Plan at the next Annual Meeting
of Shareholders anticipated to be held more than 60 days from the date
hereof. See note (5) above.
(9) Includes the 833,333 shares of Series A Preferred Stock owned of record by
AIIC, of which Mr. Hansen is President and a director. Mr. Hansen disclaims
beneficial ownership to any of the 833,333 shares of Series A Preferred
Stock held of record by AIIC.
(10) Includes 35,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Sylvester, which option is exercisable within the next 60
days. Does not include 25,000 shares of Common Stock issuable upon
exercise of an option granted to Mr. Sylvester which was granted subject
to (and not exercisable prior to) shareholder approval of the 1998 Plan.
The Company anticipates that the shareholders of the Company will be
asked to approve the 1998 Plan at the next Annual Meeting of Shareholders
anticipated to be held more than 60 days from the date hereof.
(11) The address for Mr. Whitney is 42 Parkside Avenue, Miller Place, New York
11764.
(12) The address for Mr. Ruocco is 26 Moriches Avenue, Mastic, New York 11950.
(13) Under the Securities Purchase Agreement, dated September 24, 1997,
by and between the Company and Milbright, Milbright is prohibited
(the "Milbright Prohibition") from converting shares of Series B Preferred
Stock that would result inMilbright and its affiliates being deemed the
beneficial owner of more than 4.99% of the outstanding Common Stock.
The 473,140 shares of Common Stocklisted in the above table as beneficially
owned by Milbright reflects the 457,493 shares of Common Stock that
Milbright acquired upon conversion of 26 shares of Series B Preferred
Stock and an additional 15,647 shares of Common Stock issuable upon
conversion of Series B Preferred Stock held by Milbright without
violating the Milbright Prohibition. Without giving effect to the
Milbright Prohibition, Milbright would be deemed to be the beneficial owner
of 18,580,926 shares, or 67.3%, of the Common Stock.
(14) Represents (a) 15,659 shares of Common Stock owned by a minor child of Mr.
Martello (of which Mr. Martello disclaims beneficial ownership), (b)
291,888 shares of Common Stock owned by a family limited liability
partnership of which Mr. Martello is the general partner and presently
holds a 99% interest therein (and of which Mr. Martello disclaims
beneficial ownership to all other partnership interests therein) and (c)
112,500 shares of Common Stock issuable upon exercise of options granted to
Mr. Martello, which option is exercisable within the next 60 days. Does not
include 25,000 shares of Common Stock issuable upon exercise of an option
granted to Mr. Martello which was granted subject to (and no exercisable
prior to) shareholder approval of the 1998 Plan. The shareholders of the
Company will be asked to approve the 1998 Plan at the next Annual Meeting
of Shareholders anticipated to be held more than 60 days from the date
hereof.
<PAGE>
(15) Represents (a) 37,350 shares of Common Stock owned by the spouse of Mr.
Lively (of which Mr . Lively disclaims beneficial ownership), (b) 2,500
shares of Common Stock held in a Simplified Employee Pension Plan ("SEPP")
for the benefit of Mr. Lively and (c) 174,500 shares of Common Stock
issuable upon exercise of options granted to Mr. Lively, which options
are exercisable within the next 60 days. Does not include 200,000 shares
of Common Stock issuable upon exercise of an option granted to Mr. Lively
which were granted subject to (and no portion is exercisable prior to)
shareholder approval of the 1998 Plan. The Company anticipates that the
shareholders of the Company will be asked to approve the 1998 Plan at the
next Annual Meeting of Shareholders anticipated to be held more than 60
days from the date hereof.
(16) Includes (a) 60,600 shares of Common Stock issuable upon exercise of
warrants held by Mr. Rosenbaum, which warrants are exercisable within
the next 60 days, (b) 14,090 shares of Common Stock held by Mr. Rosenbaum's
spouse (of which Mr. Rosenbaum disclaims beneficial ownership) and (c) 22
shares of Common Stock issuable upon exercise of warrants held by Mr.
Rosenbaum's spouse, which warrants are exercisable within the next 60 days.
Does not include 25,000 shares of Common Stock issuable upon exercise
of an option granted to Mr. Rosenbaum which was granted subject to (and
no exercisable prior to) shareholder approval of the 1998 Plan. The Company
anticipates that the shareholders of the Company will be asked to approve
the 1998 Plan at the next Annual Meeting of Shareholders anticipated
to be held more than 60 days from the date hereof.
(17) Does not include 25,000 shares of Common Stock issuable upon exercise
of an option granted to Mr. Pisani which was granted subject to (and no
exercisable prior to) shareholder approval of the 1998 Plan. The Company
anticipates that the shareholders of the Company will be asked to approve
the 1998 Plan at the next Annual Meeting of Shareholders anticipated to be
held more than 60 days from the date hereof.
(18) Includes (a) an aggregate 1,469,575 shares of Common Stock issuable upon
upon conversion of the Series A Preferred Stock and the exercise of the
AIIC Warrant held by AIIC, (b) the 382,622 shares of Common Stock issuable
upon exercise of options and warrants held by Messrs. Lively, Martello,
Rosenbaum and Sylvester and Mr. Rosenbaum's spouse, which options and
warrants are exercisable within the next 60 days, and (c) the 361,487
shares of Common Stock owned by Mr. Martello's child and family liability
partnership, Mr. Lively's spouse and SEPP and Mr. Rosenbaum's spouse, as
discussed in notes (12) through (15) above. Does not include the 325,000
shares of Common Stock issuable upon exerciseof the options, as discussed
in notes (12) through (16) above which were granted subject to (and no
portions are exercisable prior to) shareholder approval of the 1998 Plan.
The Company anticipates that the shareholders of the Company will be asked
to approve the 1998 Plan at the 1998 Annual Meeting of Shareholders
anticipated to be held more than 60 days from the date hereof.
</FN>
</TABLE>
Item 12. Certain Relationships and Related Transactions.
Certain current and former officers of the Company were named as parties to
some of the litigation which have been settled or which are currently pending.
See "Item 3. Legal Proceedings."
The Company believes that Michael Ghazarian is the Managing Director of
Digital. In October 1993, Digital was granted exclusive distribution rights to
the Company's products for all of Europe. Mr. Ghazarian also was a 20% owner of
ASE, a subsidiary of the Company, which had been assigned by Digital such
exclusive European distribution rights, and had been granted exclusive European
and non-exclusive world-wide manufacturing rights to the Company's Sens-O-Lock
devices. The Company also believes that Mr. Ghazarian is a director/owner of
Scarico (UK) Limited (not affiliated with Scarico Italy), which had provided
certain sub-manufacturing and assembly services to the Company and ASE. In July
1996, Mr. Ghazarian was made a consultant to the Company; in September 1996, Mr.
Ghazarian was appointed Managing Director of ASE; and, in September 1996, Mr.
Ghazarian was elected a director of the Company. In 1996, the Company incurred
charges of approximately $174,000 for molds, tooling and operating expenses from
Digital and Scarico (UK) Limited. In July 1996, the Company entered into a
consulting agreement with Mr. Ghazarian. The consulting agreement was for a
duration of six months at a fee $100 per month, plus pre-approved expenses.
Under this consulting agreement, Mr. Ghazarian assumed responsibility for
building molds and tooling for the Sens-O-Lock product line and completing the
Company's proprietary air tube design for the Sens-O-Lock devices. In
consideration of Mr. Ghazarian's representation of the successful completion of
the tasks under the consulting agreement, the Company awarded him an option (the
"Consulting Agreement Option") to purchase 100,000 shares of Common Stock
<PAGE>
at an exercise price of $3.00 per share. Following the expiration of such
consulting agreement, the Company retained Mr. Ghazarian as an employee at the
rate of $100,000 per year. Through June 10, 1997, Mr. Ghazarian agreed to the
deferral of a portion of his salary. As of June 30, 1997, the amount of such
deferred salary was $45,000. On June 30, 1997, Mr. Ghazarian agreed to the
cancellation of such deferred salary in exchange for an option (the "Ghazarian
Deferred Compensation Option") to purchase 22,500 shares of Common Stock at an
exercise price of $2.00 per share. On June 30, 1997, the closing sale price of a
share of Common Stock, as reported on The Nasdaq SmallCap Market, was $2.5625.
Pursuant to its arrangement with Mr. Ghazarian, Digital and Scarico UK, Ltd., in
1997, the Company paid Mr. Ghazarian, Digital and Scarico UK, Ltd. an aggregate
of $428,618. Mr. Ghazarian resigned as an officer, director and employee of the
Company and ASE effective January 29, 1998. In February 1998, Scarico (UK)
Limited commenced litigation in the United Kingdom against the Company claiming
that Scarico UK Limited was owed additional funds by ASE, which the Company
disputed. In August 1998, the Company and ASE and Scarico (UK) Limited, Digital
and Mr. Ghazarian (collectively, the "Ghazarian Entities"), settled this
litigation, pursuant to which (a) the Company paid the Ghazarian Entities an
aggregate of approximately $90,000, (b) Mr. Ghazarian made certain
representations as to the Sens-O-Lock equipment and parts inventory in the
possession of the Ghazarian Entities, (c) the Ghazarian Entities turned over to
the Company such Sens-O-Lock equipment and parts, (d) the Ghazarian Deferred
Compensation Option was canceled, (e) the Company confirmed the Consulting
Agreement Option, (f) Mr. Ghazarian assigned his 20% equity interest in ASE to
the Company, (g) the Company deleted a provision requiring that Mr. Ghazarian be
an employee of the Company in order to exercise an option to purchase 200,000
shares of Common Stock exercisable at $2.00 per share and expiring in September
2002 and (h) the parties exchanged general releases. See "Item 3. Legal
Proceedings."
Joseph M. Lively, President, Chief Operating Officer and a director of the
Company, is one of the inventors of the product that eventually became the
Company's WeatherEye product line. Mr. Lively is the sole shareholder of Weather
Eye, Inc., which holds, with one other individual, the patent rights to this
product. Weather Eye, Inc. and the Company entered into an agreement in August
1996, as amended, pursuant to which the Company is obligated to pay a royalty of
between $0.19 and $2.00 per unit. The Company did not pay Weather Eye, Inc. any
royalties in 1996 and 1997. In September 1998, the patent and technology rights
held by WeatherEye, Inc. with respect to the WeatherEye product was assigned to
the Company for nominal consideration. See "Item 1. Description of Business --
Products and "Intellectual Property and Other Proprietary Rights."
During 1996 and through June 30, 1997, Mr. Lively agreed to the deferral of
a portion of his salary. As of June 10, 1997, the amount of such deferred salary
and unpaid legal fees due Mr. Lively for services rendered prior to his
employment by the Company was $90,000. On June 30, 1997, Mr. Lively agreed to
the cancellation of such deferred salary in exchange for options to purchase
45,000 shares of Common Stock (subject to shareholder approval of the 1998 Stock
Plan) at an exercise price of $2.00 per share. The closing sale price of a share
of Common Stock, as reported on The Nasdaq SmallCap Market, on such date was
$2.5625.
On September 26, 1997, the Company sold a total of 300 shares of Series B
Preferred Stock at a price of $10,000 per share to Milbright Estates, Ltd. The
net proceeds from the sale of the Series B Preferred Stock was approximately
$2,675,000. The rights, preferences and privileges of the Series B Preferred
Stock are set forth in amendments to the Company's Certificate of Incorporation
(the "Series B Provisions") filed with the New York Secretary of State. The
Series B Preferred Stock has a liquidation preference of $10,000 per share and
bears cumulative dividends at a rate of 8% per share per annum. Such dividends
are payable only immediately prior to the conversion of the Series B Preferred
Stock into Common Stock. The Series B Preferred Stock is currently convertible,
in whole or part, at the option of the holder, into shares of Common Stock at
any time. Each share of Series B Preferred Stock is convertible into that number
of shares of Common Stock as is determined by dividing (i) the sum of (a)
$10,000 plus (b) the amount of all accrued but unpaid or accumulated dividends
on the share of Series B Preferred Stock being so converted by (ii) the
Conversion Price in effect at the time of conversion. The "Conversion Price" of
the Series B Preferred Stock is equal to the lower of (x) $4.03125 or (y) 82.5%
of the average closing bid price of the Common Stock over the ten consecutive
trading days immediately preceding the date of the conversion notice delivered
to the Company. If not sooner converted, all outstanding shares of Series B
Preferred Stock are subject to automatic conversion on the earlier of (i)
September 26, 1999 or (ii) immediately prior to the consummation of the
acquisition of the Company pursuant to a merger or consolidation or the sale of
substantially all of the assets of the Company. Except in connection with such
automatic conversion, in no event will a holder of Series B Preferred Stock be
entitled to convert any shares
<PAGE>
of Series B Preferred Stock if such conversion would cause the sum of (i)
the number of shares of Common Stock beneficially owned by the holder and its
affiliates (other than shares of Common Stock which may be deemed beneficially
owned through the ownership of the unconverted portion of the Series B Preferred
Stock) and (ii) the number of shares Common Stock issuable upon the conversion
of such shares of the Series B Preferred Stock, to result in beneficial
ownership by the holder and its affiliates of more than 4.99% of the outstanding
shares of Common Stock. Effective as of February 9, 1998, Milbright converted 26
shares of Series B Preferred Stock into 457,493 shares of Common Stock. Based on
the average of the closing bid prices of the Common Stock for the ten
consecutive trading days preceding October 19, 1998, the 274 shares of Series B
Preferred Stock would convert into an aggregate of 18,123,433 shares of Common
Stock (without giving effect to accrued dividends).
Pursuant to a letter agreement, dated August 14, 1998, between the Company
and AIIC, AIIC, as the holder of the 833,333 outstanding shares of Series A
Preferred Stock, (a) agreed to accept an aggregate of 230,861 shares of Common
Stock as payment in full for all accrued and unpaid dividends on said 833,333
shares of Series A Preferred Stock for the prior dividend payment dates of June
30, 1997, December 31, 1997 and June 30, 1998 (i.e., $344,375) and (b) agreed to
accept shares of Common Stock in lieu of payment of dividends on said 833,333
shares of Series A Preferred Stock due on the dividend payment dates of December
31, 1998, June 30, 1999 and December 31, 1999, such shares of Common Stock to be
valued at approximately $1.487 per share (subject to adjustment).
In June 1998, Milbright Estates Ltd. ("Milbright"), the holder of all of
the outstanding shares of Series B Preferred Stock loaned (the "June 1998 Loan")
the Company $100,000, bearing interest at 11.5% per annum and maturing on July
31, 1998. In August 1998, Milbright loaned the Company (the "August 1998 Loan")
an additional $40,000, bearing interest at 11.5% per annum and maturing on
August 31, 1998. In September 1998, Milbright loaned the Company an additional
$25,000, bearing interest at 11.5% per annum and maturing on October 31, 1998.
Neither the June 1998 loan nor the August 1998 loan have been repaid, although
Milbright has not taken any action to require such repayment.
Set forth below are the names of the individuals, their affiliations with
the Company and the number of shares transferred in February 1997 pursuant to a
stipulation of Settlement, Settlement Agreement and mutual release, dated
February 27, 1997, between Albert Pace and Jan Polek and the Company (see "Item
3. Legal Proceedings"), such individuals and others:
<TABLE>
<CAPTION>
Number
of Shares
Name Affiliation Transferred
- ---- ----------- -----------
<S> <C> <C>
Steven A. Martello. . Former President and Chief Executive
Officer and current director . . . . . . . 39,112
John T. Ruocco. . . . Former Senior Vice President and
director and current 5% shareholder. . . . 79,822
Michael A. Sylvester Former Executive Vice President of Sales,
Treasurer and Chief Financial Officer and
current director and 5% shareholder. . . . 79,822
Robert B. Whitney . . Former President, Chief Executive Officer
and director and current 5% shareholder. . 79,822
</TABLE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Set forth below are all exhibits to this Annual Report on Form 10-KSB:
3.1 Composite of Certificate of Incorporation of the Company, as amended to
date. [(Incorporated by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K (Date of Report: September 26, 1997) (Commission File
Number: 0-26998), filed with the Commission on October 7, 1997.)]
3.2 By-laws of the Company, as amended to date. (Incorporated by reference to
Exhibit 3(c) to the Company's Registration Statement on Form SB-2
(Registration Number: 33-96752), filed with the Commission on September 8,
1995.)
<PAGE>
4.1 Specimen Common Stock Certificate. (Incorporated by reference to Exhibit
4(a) to Amendment No.2 to the Company's Registration Statement on Form SB-2
(Registration Number: 33-96752), filed with the Commission on October 30,
1995.)
4.2 Specimen Redeemable Common Stock Warrant Certificate. (Incorporated by
reference to Exhibit 4(b) to the Company's Registration Statement on Form
SB-2 (Registration Number: 33-96752), filed with the Commission on
September 5, 1995.)
4.3 Underwriter's Unit Purchase Option (Form). (Incorporated by reference to
Exhibit 4(c) to Amendment No. 2 to the Company's Registration Statement
on Form SB-2 (Registration Number: 33-96752), filed with the Commission
on October 30, 1995.)
10.1 Company's 1998 Incentive Stock Plan.
10.2 Employment Agreement, dated December 31, 1995, between the Company and
Steven A. Martello. (Incorporated by reference to Exhibit 10.5 to Amendment
No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File
Number: 0-26998), filed with the Commission on April 28, 1997.)
10.3 Employment Agreement, dated December 31, 1995, between the Company and
Michael A. Sylvester. (Incorporated by reference to Exhibit 10.6 to
Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission
File Number: 0-26998), filed with the Commission on April 28, 1997.)
10.4 Employment Agreement, dated as of September 1, 1998, between the Company
and Joseph M. Lively (without exhibits).
10.5 Joint Venture Agreement, dated August 8, 1996, between the Company and
Weather Eye, Inc., as amended on December 31, 1996. (Incorporated by
reference to Exhibit 10.9 to Amendment No. 1 to the Company's Annual
Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the
Commission on April 28, 1997.)
10.6 Lease, dated August 8, 1995, between the Company and IR Realty Inc.
(Incorporated by reference to Exhibit 10(f) to the Company's Registration
Statement on Form SB-2 (Registration Number: 33-96752), filed with the
Commission on September 5, 1995.)
10.7 Warrant Agreement, dated 1995, between the Company and Continental Stock
Transfer & Trust Company (Form). (Incorporated by reference to Exhibit
10(a) to Amendment No. 2 to the Company's Registration Statement on Form
SB-2 (Registration Number: 33-96752), filed with the Commission on October
30, 1995.)
10.8 Merger and Acquisition Agreement, dated 1995, between the Company and
William Scott & Company, LLC (Form). (Incorporated by reference to Exhibit
10(c) to the Company's Registration Statement on Form SB-2
(Registration Number: 33-96752), filed with the Commission on September 5,
1995.)
10.9 Financial Consulting Agreement, dated 1995, between the Company and William
Scott & Company, LLC (Form). (Incorporated by reference to Exhibit
10(b) to Amendment No. 2 to the Company's Registration Statement on Form
SB-2 (Registration Number: 33-96752), filed with the Commission on
September 5, 1995.)
10.10 Stipulation of Settlement, Settlement Agreement and Mutual General
Release, dated February 27, 1997, between Albert Pace and Jan Polek and the
Company, John T. Ruocco, Michael A. Sylvester, Robert B. Whitney, Steven A.
Martello and Leon Pasqua.
10.11 Securities Purchase Agreement, dated September 24, 1997, by and between
the Company and Milbright Estates, Ltd. (minus attachments and exhibits
thereto). (Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K (Date of Report: September 26, 1997) (Commission
File No.: 0- 26998), filed with the Commission on October 7, 1997.)
10.12 Registration Rights Agreement, dated September 24, 1997, by and between
the Company and Milbright Estates, Ltd. (Incorporated by reference to
Exhibit 10.2 to the Company's current report on Form 8-K (Date of Report:
September 26, 1997) (Commission File No. 0-26998), filed with the
Commission on October 7, 1997.)
10.13 Consulting Agreement, dated as of July 1, 1996, between the Company
and Digital Vehicle Security System, Inc. and Michael Ghazarian.
(Incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the
Company's Annual Report on Form 10-KSB/A (Commission File Number:
0-26998), filed with the Commission on April 28, 1997.)
10.14 Assignment, dated as of October 30, 1996, between Digital Vehicle
Security Systems Limited and Alcohol Sensors Europe, Plc, Michael
Ghazarian and the Company. (Incorporated by reference to Exhibit 10.4
to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A
(Commission File Number: 0-26998), filed with the Commission on April
28, 1997.)
<PAGE>
10.15 Exclusive Distributor Agreement, dated October 21, 1993, between the
Company and Digital Vehicle Security Systems. (Incorporated by reference
to Exhibit 10.1 to Amendment No. 1 to the Company's Annual Report on Form
10-KSB/A (Commission File Number: 0-26998), filed with the Commission on
April 28, 1997.)
10.16 Contract Affirmation between Digital Vehicle Security Systems, Inc. and
the Company. (Incorporated by reference to Exhibit 10.2 to Amendment No. 1
to the Company's Annual Report on Form 10-KSB/A (Commission File Number:
0-26998), filed with the Commission on April 28, 1997.)
10.17 Convertible Stock and Warrant Purchase Agreement, dated December 20, 1996,
between the Company and American International Insurance Company.
Incorporated on reference to Exhibit 1 to the Company's Current Report
on Form 8-K (Date of Report: December 20, 1996) (Commission File Number:
0-26998), filed with the Commission on January 3, 1997.)
10.18 Registration Rights Agreement, dated December 20, 1996, between the
Company and American International Insurance Company. (Incorporated on
reference to Exhibit 2 to the Company's Current Report on Form 8-K (Date
of Report: December 20, 1996) (Commission File Number: 0-26998), filed
with the Commission on January 3, 1997.)
10.19 Shareholders Agreement, dated as of December 20, 1996, among American
International Insurance Company, Robert B. Whitney, John T. Ruocco,
Michael A. Sylvester, Joseph M. Lively, Steven A. Martello and the Company.
Incorporated on reference to Exhibit 3 to the Company's Current Report on
Form 8-K (Date of Report: December 20, 1996) (Commission File Number:
0-26998), filed with the Commission on January 3, 1997.)
10.20 Consent and Amendment Agreement, dated as of April 9, 1997, among Robert
B. Whitney, John T. Ruocco, Michael A. Sylvester, Joseph M. Lively,
American International Insurance Company, the Company, Albert Pace,
Jan Polek, Lipman Family Partners Ltd., Gerald N. Jacobowitz, David O.
Gubits, John H. Thomas, Gerald A. Lennon, Peter R. Eriksen, Linda F.
Madoff, Howard Protter, Donald G. Nichol, Larry Wolinsky, Robert E.
Dinardo, Mark A. Krohn, J. Benjamin Gailey, Fabricant & Lipman,
Jacobowitz & Gubits and Ariel Enterprises (without exhibits).
10.21 Order containing the Release and Settlement Agreement, dated August 13,
1998, among the Company, Alcohol Sensors Europe plc, Michael Ghazarian,
Digital Vehicle Security Systems Ltd. and Scarico (UK) Ltd.
10.22 Warrant, dated December 20, 1996, registered in the name of American
International Insurance Company. (Incorporated on reference to Exhibit
4 to the Company's Current Report on Form 8-K (Date of Report: December
20, 1996) (Commission File Number: 0-26998), filed with the Commission on
January 3, 1997.)
10.23 Promissory Note, dated June 12, 1998, of the Company, in the principal
amount of $100,000 payable to Milbright Estates Ltd.
10.24 Letter Agreement, dated August 14, 1998, between the Company and American
International Insurance Company.
10.25 Promissory Note, dated August 13, 1998, of the Company, in the principal
amount of $25,000 payable to Milbright Estates Ltd.
10.26 Patent Assignment, dated September 21, 1998, from Joseph M. Lively and
WeatherEye, Inc. to the Company.
10.27 Promissory Note, dated September 4, 1998, of the Company, in the
principal amount of $40,000 payable to Milbright Estates Ltd.
11 Computation of Loss Per Share.
21 Subsidiaries of the Company.
24 Powers of Attorney (set forth on the signature page of this Annual Report
on Form 10-KSB).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On October 7, 1997, the Company filed a Current Report on Form 8-K
(Date of Report: September 26, 1997) with the Commission reporting, as an Item 5
disclosure, the Company's sale of 300 shares of Series B Preferred Stock for
gross proceeds of $3,000,000. There were no financial statements included in
such Form 8-K.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: October 26, 1998 ALCOHOL SENSORS INTERNATIONAL, LTD.
By: /s/ Joseph M. Lively
Joseph M. Lively, President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-KSB has been signed on October 26, 1998
by the following persons in the capacities indicated. Each person whose
signature appears below constitutes and appoints Joseph M. Lively, with full
power of substitution, his true and lawful attorney-in-fact and agent to do any
and all acts and things in his name and on his behalf in his capacities
indicated below which said attorney-in-fact and agent may deem necessary or
advisable to enable Alcohol Sensors International, Ltd. to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Annual Report on Form 10-KSB, including specifically, but not limited to, power
and authority to sign for him in his name in the capacities stated below, any
and all amendments thereto, granting unto said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in such connection, as fully to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or said attorney-in-fact and agent's substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
President, Chief Operating Officer and
Director
/s/Joseph M. Lively (Principal Executive and Financial Officer)
Joseph M. Lively
/s/ J. Ernest Hansen Director
J. Ernest Hansen
Director
Steven A. Martello
/s/ Daniel H. Pisani Director
Daniel H. Pisani
/s/ Michael Rosenbaum Director
Michael Rosenbaum
/s/ Michael Sylvester Director
Michael Sylvester
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Alcohol Sensors International, Ltd.
Islandia, New York
We have audited the accompanying consolidated balance sheet of Alcohol Sensors
International, Ltd. and subsidiary as of December 31, 1997 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the years ended December 31, 1997 and 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of Alcohol
Sensors International, Ltd. and subsidiary as at December 31, 1997 and the
consolidated results of their operations and their consolidated cash flows for
the years ended December 31, 1997 and 1996, 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 A, the Company
expects substantial losses and has depleted its working capital and is past due
on various obligations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note A. The consolidated financial
statements do not include any adjustments that might result from the outcome
of these uncertainties.
As described more fully in Note M[1], the Company is a defendant in litigation,
the ultimate outcome of which cannot be presently determined.
/s/ Richard A. Eisner & Company, LLP
New York, New York
August 11, 1998
With respect to the fifth paragraph in Note A and Note I[2]
September 28, 1998
With respect to Note N
October 15, 1998
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents (includes restricted
cash of $500,000) (Notes B[1] and F) $ 1,882,994
Inventory (Note D) 693,561
Prepaid expenses 55,103
Other current assets 37,636
------------
Total current assets 2,669,294
Fixed assets - at cost (less accumulated depreciation
of $174,069) (Notes B[6] and C) 232,170
Other assets 14,166
------------
$ 2,915,630
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 428,087
Accrued expenses 208,242
Accrued officers salaries 83,662
Due to related party (Note I[1]) 118,315
Loans payable and accrued interest to
shareholders (Note E) 145,716
Note payable (Note F) 500,000
Dividends payable 295,208
------------
Total current liabilities 1,779,230
------------
Accrued litigation settlement cost (Note M) 82,977
------------
Commitments, contingencies and other matters
(Notes J and M)
Shareholders' equity (Notes A and G):
Preferred stock:
Series A, 9% cumulative:
833,333 shares authorized, 833,333 shares issued
and outstanding (liquidation value $2,731,875) 2,500,000
Series B, 8% cumulative:
600 shares authorized, 300 shares issued and
outstanding(liquidation value $3,063,333) 2,658,750
Common stock - $.001 par value; 25,000,000 shares
authorized, 8,849,096 issued 8,849
Additional paid-in capital 13,508,950
Accumulated deficit (17,391,177)
Accumulated foreign currency translation adjustment (9,261)
------------
1,276,111
Less treasury stock, at cost, 55,672 shares of common stock (222,688)
------------
Total shareholders' equity 1,053,423
____________
$ 2,915,630
============
<FN>
See independent auditors' report and notes to financial statements.
</FN>
</TABLE>
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Net sales $ 35,308 $ 40,586
Cost of goods sold 71,483 39,971
------------ ------------
Gross profit (loss) (36,175) 615
------------ ------------
Research and development 523,298 913,456
Selling, general and administrative 2,987,296 3,101,571
Litigation settlement expense (Note M) 158,085 1,591,496
Cost of goods sold - inventory write-off 556,026
------------ ------------
3,668,679 6,162,549
------------ ------------
Loss from operations (3,704,854) (6,161,934)
Interest income 81,027 82,538
Interest expense (47,141) (41,747)
------------ ------------
Net loss $(3,670,968) $(6,121,143)
============ ============
Net loss per common share - basic and
diluted (Note A[8]) $ (.45) $ (.73)
============ ============
Weighted average number of shares
outstanding - basic and diluted 8,756,316 8,430,960
============ ============
<FN>
See independent auditors' report and notes to financial statements.
</FN>
</TABLE>
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
(Notes A and G)
<TABLE>
<CAPTION>
Series A Series B Common Stock Treasury Stock
Preferred Stock Preferred Stock ($.001 Par Value) At Cost
----------------- ------------------ ------------------- -------------------
Number Number Number Number
of of of of
Shares Shares Shares Shares
Issued Amount Issued Amount Issued Amount Issued Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1996 8,116,870 $ 8,117
Issuance of preferred stock and
warrants 833,333 $2,500,000
Issuance of compensatory stock
options for services
Issuance of stock for services 3,844 4
Issuance of common stock for
litigation settlement 300,000 300
Exercise of warrants 355,976 356
Contribution of common stock and
cash by certain officers and
shareholders 55,672 $(222,688)
Net loss
Unrealized loss on marketable
securities
Accumulated foreign currency
translation adjustment
-------- --------- --------- ----- ------ ---------
Balance - December 31, 1996 833,333 2,500,000 8,776,690 8,777 55,672 (222,688)
Issuance of preferred stock and
warrants (net of expenses of
$315,000) 300 $2,610,000
Contribution of common stock by
certain officers and shareholders
Issuance of compensatory stock
options for services
Issuance of common stock for
litigation settlement 315,000 315
Shareholders' contribution of
common stock (315,000) (315)
Exercise of warrants and options 41,250 41
Options issued to officers and others
in lieu of payment of liabilities
Issuance of common stock for
litigation settlement 24,000 24
Issuance of common stock
for services 7,156 7
Net loss
Dividends
Imputed dividend on Series B
preferred stock for beneficial
conversion feature
Accretion on Series B preferred
stock 48,750
Accumulated foreign currency
translation adjustment
-------- ---------- --- ---------- --------- ------- ------ ----------
Balance - December 31, 1997 833,333 $2,500,000 300 $2,658,750 8,849,096 $ 8,849 55,672 $(222,688)
======= ========== === ========== ========= ======= ====== =========
<FN>
See independent auditors' report and notes to financial statements.
</FN>
</TABLE>
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
(Notes A and G)
<TABLE>
<CAPTION>
Unrealized Accumulated
Gain (Loss) Foreign
Additional on Currency
Paid-in Accumulated Marketable Translation
Capital Deficit Securities Adjustment Total
------------ ----------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1996 $ 9,398,354 $ (6,778,857) $ 83 $ 2,627,697
Issuance of preferred stock and
warrants 2,500,000
Issuance of compensatory stock
options for services 250,000 250,000
Issuance of stock for services 15,996 16,000
Issuance of common stock for
litigation settlement 989,700 990,000
Exercise of warrants 435,283 435,639
Contribution of common stock and
cash by certain officers and
shareholders 330,150 107,462
Net loss (6,121,143) (6,121,143)
Unrealized loss on marketable
securities (83) (83)
Accumulated foreign currency
translation adjustment $ (5,633) (5,633)
-------- ------------ ---- ---------- ---------
Balance - December 31, 1996 11,419,483 (12,900,000) -0- (5,633) 799,939
Issuance of preferred stock and
warrants (net of expenses of
$315,000) 75,000 2,685,000
Contribution of common stock by
certain officers and shareholders 1,143,844 1,143,844
Issuance of compensatory stock
options for services 15,000 15,000
Issuance of common stock for
litigation settlement 1,143,529 1,143,844
Shareholders' contribution of
common stock (1,143,529) (1,143,844)
Exercise of warrants and options 54,334 54,375
Options issued to officers and others
in lieu of payment of liabilities 235,000 235,000
Issuance of common stock for
litigation settlement 77,976 78,000
Issuance of common stock
for services 12,063 12,070
Net loss (3,670,968) (3,670,968)
Dividends (295,209) (295,209)
Imputed dividend on Series B
preferred stock for beneficial
conversion feature 525,000 (525,000)
Accretion on Series B preferred
stock (48,750)
Accumulated foreign currency
translation adjustment (3,628) (3,628)
------------ ------------- ------ ---------- -------------
Balance - December 31, 1997 $ 13,508,950 $(17,391,177) $ -0- $ (9,261) $ 1,053,423
============ ============= ====== ========== =============
<FN>
See independent auditors' report and notes to financial statements.
</FN>
</TABLE>
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss $(3,670,968) $(6,121,143)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 82,148 82,147
Fixed assets written off 73,494
Common stock issued for services 12,070 16,000
Common stock issued for litigation
settlement 78,000 990,000
Warrants issued for services 250,000
Options issued for services 15,000
Other (3,628) (5,633)
Changes in:
Accounts receivable 16,392 (16,392)
Inventory (406,099) (144,572)
Prepaid expenses and other assets 54,474 51,404
Accounts payable (275,868) 473,346
Accrued expenses and interest to
shareholders 184,499 150,755
Accrued officers salaries 83,662
Due to related party (35,198) 153,513
Accrued litigation settlement cost 18,008 218,813
Deposits (10,000) (39,036)
------------ ------------
Net cash used in operating activities (3,784,014) (3,940,798)
------------ ------------
Cash flows from investing activities:
Acquisition of fixed assets (20,194) (82,101)
Purchases of marketable securities (2,324,101)
Sales of marketable securities 4,304,402
Decrease in restricted cash 1,017,317
------------ ------------
Net cash (used in) provided by
investing activities (20,194) 2,915,517
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of preferred stock
and warrants 2,685,000 2,500,000
Proceeds from exercise of warrants and
options 54,375 435,639
Payment of loans and accrued interest to
officers/shareholders (94,224)
Contribution of capital by certain
shareholders 107,462
Proceeds from notes payable 1,000,000
Payments of notes payable (500,000)
------------ ------------
Net cash provided by financing
activities 2,645,151 3,543,101
------------ ------------
Net (decrease) increase in cash and cash
equivalents (1,159,057) 2,517,820
Cash and equivalents - beginning of year 3,042,051 524,231
------------ ------------
Cash and cash equivalents - end of year $ 1,882,994 $ 3,042,051
============ ============
Supplemental disclosure of cash flow information:
Interest paid during the year $ 57,601 $ 37,594
</TABLE>
Supplemental schedules of noncash financing activities:
In February 1997, certain officers and members of management contributed
315,000 shares of common stock to the Company to settle litigation that had been
accrued for as of December 31, 1997 in the amount of $1,143,844.
In June 1997, certain officers and others received options to purchase 117,500
shares of the Company's common stock in cancellation of $235,000 of liabilities
due to them.
As of December 31, 1997, the Company had accrued $295,209 in accrued
dividends on the Company's Series A, 9% cumulative preferred stock and
Series B, 8% cumulative preferred stock.
As of December 31, 1997, the Company recorded $525,000 as an imputed dividend
on its Series B, 8% cumulative preferred stock for a beneficial conversion
feature.
As of December 31, 1997, the accompanying financial statements reflect an
adjustment on the Series B preferred stock in the amount of $48,750 for the
accretion towards the liquidation value.
During 1996, certain officers/shareholders contributed 55,672 shares of common
stock to the Company valued at $222,688 and are held in treasury.
See independent auditors' report and notes to financial statements.
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
Note A - The Company and Basis of Presentation
Alcohol Sensors International, Ltd. (the "Company") was formed for the
development and commercial exploitation of a breath alcohol ignition interlock
device ("SENS-O-LOCK"). In October 1996, the Company incorporated a subsidiary
in the United Kingdom ("UK"), Alcohol Sensors Europe, PLC ("ASE"), of which it
owned, as of December 31, 1997, 80% of the outstanding common stock (see Note
M). The consolidated financial statements include the accounts of the Company
and ASE. Significant intercompany balances and transactions have been eliminated
in consolidation.
During the first quarter of 1996 when the Company commenced shipping
SENS-O-LOCK, the Company determined that it was no longer a development stage
company. During the second quarter of 1996, the Company caused the returns of
its product due to manufacturing, design and quality control difficulties. As a
result, the Company suspended manufacturing and resumed its research and
development on a new design and other technology. Research and development on
the new design and other technology was completed in 1997 and there was limited
manufacturing. The product is available in the voluntary market and commercial
market. There is no assurance that the product will be successful or that the
Company will be able to market its product.
The Company's inventory as of December 31, 1997 consists of components and
finished SENS-O-LOCK products and there is an uncertainty whether the Company
can realize the value of its inventory because the Company needs to raise
additional capital to complete the manufacturing and assembly of its product and
to market it. There is no assurance that the product will have any commercial
success.
Although the Company had working capital as of December 31, 1997, the
Company has utilized substantially all of its working capital in operations,
since December 31, 1997. The Company is past due on its obligations to its
vendors and other creditors and is past due on payments required for loans
obtained after December 31, 1997. The Company has also suspended its operations
in the UK. The Company has taken steps to reduce its operating costs and
postpone cash outflow. However, the Company anticipates that losses will
continue at least until significant shipment of its product and maybe
thereafter. The Company has received subsequent loans (see Note N) and is
seeking additional financing from one of its preferred shareholders.
In addition, on September 28, 1998, in connection with negotiating a
distribution agreement, the Company signed a nonbinding preliminary term sheet
and expects advance royalties from the distribution agreement. The Company
received a loan of $40,000 in connection therewith and is continuing to
negotiate a definitive agreement. There can be no assurance that such agreement
will be consummated on terms acceptable to the Company, if at all. If the
Company is unable to obtain additional financing or consummate a distribution
agreement, it may seek protection under Federal Bankruptcy Law. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Note B - Summary of Significant Accounting Policies
[1] Cash equivalents:
The Company considers all highly liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents.
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
Note B - Summary of Significant Accounting Policies (continued)
[2] Marketable securities:
Securities classified as available-for-sale are carried at market value with
unrealized gains or losses reported as a separate component of shareholders'
equity. Securities classified as held-to-maturity are carried at amortized cost.
[3] Inventory:
Inventory is stated at the lower of cost (first-in, first-out basis) or market
(see Note A).
[4] Patent costs:
Patent application costs are charged to expense as incurred.
[5] Research and development:
Research and development costs are charged to expense as incurred.
[6] Depreciation:
Fixed assets are recorded at cost. Depreciation is provided on the straight-line
method over the estimated useful lives from three to five years of the
depreciable assets. Molds and tooling are depreciated on the straight-line basis
over the shorter of three years or the estimated units of production.
Amortization of leasehold improvements is provided over the shorter of the lease
term or the estimated useful life of the asset.
[7] Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Management's estimate of the realization of the carrying amount of the Company's
inventory is particularly sensitive and is dependent on estimates of selling
price which is to be determined prospectively. Actual results could differ from
those estimates.
[8] Loss per share of common stock:
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") in the year ended December 31, 1997 and
has retroactively applied the affects thereof to the year ended December 31,
1996. SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share.
Basic loss per share is computed based upon the weighted average number of
common shares outstanding during each year and dividends accumulated for the
year are added to the net loss for the year. Stock options, warrants and
convertible preferred stock (Note G) did not have an effect on the computation
of diluted earnings per share in 1997 and 1996 since they were anti-dilutive.
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
Note B - Summary of Significant Accounting Policies (continued)
[9] Fair value of financial instruments:
The Company considers its financial instrument obligations, which are carried at
cost, to approximate fair value due to the near term repayment due dates.
[10] Accumulated foreign currency translation adjustment:
Assets and liabilities are translated to United States dollars at year-end
exchange rates. Income and expense items are translated at average rates of
exchange prevailing during the period of operations of ASE. Gains or losses
from translation adjustments are accumulated in a separate component of
shareholders' equity.
Condensed financial information of the Company's UK subsidiary is as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Assets $ 924,531 $ 53,281
Liabilities 1,747,787 195,506
Shareholders' deficiency (823,256) (142,225)
Revenue 381 0
Net loss (78,149) (156,592)
</TABLE>
In 1998, the Company suspended its UK operations and transferred the
remaining assets, consisting primarily of cash and inventory, back to the
United States.
[11] Revenue recognition:
The Company recognizes revenue when a product is shipped.
[12] Advertising and promotion costs:
Advertising and promotion costs are expensed as incurred. These costs
amounted to approximately $263,000 and $337,000 for the years ended
December 31, 1997 and 1996, respectively.
[13] Recently issued accounting pronouncements:
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and displaying comprehensive income
and its components in financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative purposes
is required. The Company is in the process of determining its preferred
format. The adoption of SFAS No. 130 will have no impact on the Company's
consolidated results of operations, financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997.
Financial statement disclosures for prior periods are required to be
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
restated. The Company is in the process of evaluating the disclosure
requirements. The adoption of SFAS No. 131 will have no impact on the
Company's consolidated results of operations, financial position or cash
flows.
Note C - Fixed Assets
<TABLE>
<CAPTION>
Fixed assets as of December 31, 1997 consists of the following:
<S> <C>
Furniture and fixtures $ 153,749
Equipment 126,616
Leasehold improvements 120,974
Molds and tooling 4,900
---------
406,239
Less accumulated depreciation 174,069
---------
$ 232,170
=========
</TABLE>
Note D - Inventory
<TABLE>
<CAPTION>
Inventory consists of the following as of December 31, 1997:
<S> <C>
Components $ 594,842
Finished products 98,719
---------
$ 693,561
=========
</TABLE>
Note E - Loans Payable to Shareholders
Loans payable to shareholders of $63,307 as of December 31, 1997 bear
interest at 10% per annum and are due on demand. Interest accrued on such loans
aggregated $82,409 as of December 31, 1997. Loans due to shareholders include
amounts for prior services rendered to the Company. Interest expense on these
obligations for the years ended December 31, 1997 and 1996 was $12,060 and
$12,091, respectively.
Note F - Note Payable
The Company has a credit facility of $500,000 with a bank and the note was due
in May 1998. The loan bears interest at 5.25% and is collateralized by the
Company's $500,000 certificate of deposit. In June 1998, the Company used the
funds from the certificate of deposit to pay off the note to the bank.
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
Note G - Shareholders' Equity
[1] The Company issued common stock in connection with services rendered and
settlement of litigation as follows:
<TABLE>
<CAPTION>
Number Fair Value of
of Shares Issued Accrued
Year Ended Shares for General and Litigation
December 31, Issued Administration Settlement Total
<S> <C> <C> <C> <C>
1996 303,844 $ 16,000 $ 990,000 $ 1,006,000
1997 7,156 $ 12,070 $ 12,070
</TABLE>
The Company valued such shares at fair value which was determined by the
market price of the Company's common stock with a 30% discount taken for
the accrued litigation settlement.
[2] In September 1996, the Company issued 213,500 options to purchase the
Company's stock as compensation for consulting and legal services. The
options are exercisable at $3.00 and expire in September 2001. The Company
recorded an expense of $250,000 in connection with the issuance of these
options.
[3] In connection with a litigation settlement (see Note M[2]) in October
1996, certain officers and shareholders contributed approximately $108,000
in cash and 55,672 shares of common stock to the Company. The shares are
held in treasury as of December 31, 1997.
[4] In December 1996, the Company was authorized to issue 3,000,000 shares
of Series A nonredeemable, cumulative preferred stock. In December 1996,
the Company issued 833,333 shares of nonredeemable, 9% Cumulative Series A
preferred stock and warrants, expiring in December 1998, to purchase
833,333 shares of common stock at an exercise price of $5.50 per share
(subject to adjustment) for an aggregate of $2,500,000. The Series A
preferred stock is convertible into 613,457 shares ($4.46 per share) of
common stock as of December 31, 1997 and contain anti-dilution provisions.
Dividends accrue on the Series A nonredeemable, cumulative preferred stock
at 9% per annum (compounded semi-annually on any accrued and unpaid
dividends). The Company accrued dividends of $231,875 as of December 31,
1997. In August 1998, the holder of the outstanding Series A non-
redeemable, 9% cumulative preferred stock agreed to accept shares of common
stock in lieu of cash for all dividends due through December 1999.
[5] In February 1997, certain officers and members of management
contributed 315,000 shares of common stock to the Company to settle
litigation that had been accrued for as of December 31, 1997 in the amount
of $1,143,844.
[6] On September 26, 1997, the Company sold a total of 300 shares of Series B
preferred stock at a price of $10,000 per share and, in connection there-
with, warrants to purchase 150,000 shares (which includes warrants to
purchase 100,000 shares of the Company's common stock issued to third
parties as a finder fee) of the Company's common stock at $4.27 per share
(subject to adjustment) expiring on September 24, 2002. The net proceeds
from the sale of the Series B preferred stock was $2,685,000 including
$340,000 for the value of the warrants. The Series B preferred stock has
a liquidation preference of $10,000 per share and bears cumulative
dividends at a rate of eight percent (8%) per share per annum. Such
dividends are payable only immediately prior to the conversion of the
Series B preferred stock into common stock. The Series B preferred stock
is convertible, in whole or part, at the option of the holder, into shares
of common stock at any time. Each share of Series B preferred stock is
convertible into that number of shares of common stock as is determined
by dividing (i) the sum of (a) $10,000 plus (b) the amount of all accrued
but unpaid or accumulated dividends on the share of Series B preferred
stock being so converted by (ii) the Conversion Price in effect at the
time of conversion. The "Conversion Price" of the Series B preferred stock
is equal to the lower of (x) $4.03125 or (y) 82.5% of the average closing
bid price of the common stock over the ten consecutive trading days
immediately preceding the date of the conversion notice delivered to the
Company. If not sooner converted, all outstanding shares of Series B
preferred stock are subject to automatic conversion on the earlier of (i)
September 26, 1999 or (ii) immediately prior to the consummation of the
acquisition of the Company pursuant to a merger or consolidation or the
sale of substantially all of the assets of the Company. Except in
connection with such automatic conversion, in no event will a holder of
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
Series B preferred stock be entitled to convert any shares of Series B
preferred stock if such conversion would cause the sum of (i) the number of
shares of common stock and (ii) the number of shares of common stock
issuable upon the conversion of such shares of the Series B preferred
stock, to result in ownership by the holder of more than 4.99% of the
outstanding shares of common stock. In February 1999, the holder of the
Series B preferred stock converted 26 shares into 457,493 shares of common
stock. As of December 31, 1997, the 300 shares of Series B preferred stock,
if converted, would convert into 2,985,227 shares of common stock.
The Company accrued dividends of $63,333 as of December 31, 1997.
[7] The Company has the following warrants outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Exercise
Description Shares Price Expiration Date
<S> <C> <C> <C>
Warrants issued in connection with debt 96,000(a) $ 1.50 June 30, 2000
Warrants issued in connection with debt 443,100(a) 1.50 July 31, 1999
Warrants issued in connection with debt 290,000(a) 1.50 May 31, 2000
Warrants issued in connection with debt 70,676(a) 1.50 May 1, 1999
Compensatory warrants 150,000(b) 1.00 December 2000
Class A warrants 1,150,000(c) 3.75 November 2000
Class B warrants 575,000(c) 5.00 November 9, 2000
Warrants issued with Series A preferred stock 833,333(d) 5.50 December 19, 1998
Warrants issued with Series B preferred stock 150,000(e) 4.27 September 24, 2002
<FN>
(a) Issued in connection with the Company's private placements of debt.
(b) Issued to consultants for services rendered in 1995 and valued by the
Company at $238,800.
(c) Issued in connection with the Company's initial public offering in
November and December 1995.
(d) Issued in connection with the sale of the Series A nonredeemable, 9%
cumulative preferred stock in December 1996.
(e) Issued in connection with the sale of the Series B nonredeemable, 8%
cumulative preferred stock in September 1997.
</FN>
</TABLE>
[8] The Company granted to the underwriter of the Company's initial public
offering an option to purchase 100,000 units at $10.00 per unit expiring
on November 9, 1999 for $100. Each unit consists of two shares of common
stock, one Class A warrant and Class B warrant. The terms of the warrants
are described in Note G[7].
Note H - Stock Options
[1] 1998 Stock Incentive Plan:
In July 1998, the Board of Directors approved the 1998 Stock Incentive Plan
("1998 Plan"), subject to shareholders approval, to issue up to 3,000,000
options to directors, officers, employees and consultants to purchase the
Company's common stock. The 1998 Plan provides for options, options that
have stock appreciation rights, performance share awards or restricted
stock awards. The compensation committee determines the option, the term
and exercise price, if any, of the award and other terms and provisions of
awards. An option under the 1998 Plan may be an incentive ("ISO") or
nonqualified option. The exercise price for ISO is not to be less than 100%
of the fair market value at the date of grant and the exercise price for
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
nonqualified options is not to be less than 85% of the fair market value at
the date of grant. The aggregate fair market value of the common stock for
which ISOs may be granted may not exceed $100,000 during any calendar year.
Options granted under the 1998 Plan become exercisable in three equal
tranches commencing one year for the date of grant, unless the compensation
committee determines otherwise. An ISO granted to a 10% or more voting
shareholder must expire no later than five years from the date of grant and
for less than a 10% stockholder and all nonqualified options, the option
expire no later than 10 years from the date of grant.
A director who is not an employee of the Company will, upon appointment,
election or re-election of the Board of Directors, automatically be granted
a nonqualified option to purchase 25,000 shares, exercisable in three equal
tranches commencing one year from the date of grant at an exercise price
equal to the fair market value.
The Company has granted options to purchase 525,000 shares under the 1998
Plan subject to shareholder approval.
[2] Other options:
The Company granted an aggregate of 460,647 options under a 1995 Incentive
Stock Option Plan. This 1995 Plan was never approved by the shareholders of
the Company. On July 24, 1998, the Company ratified such options outside
the 1998 Plan.
During 1997, the Company granted to a former officer, options to purchase
the Company's common stock at $2.00 expiring in September 2002. Pursuant to
a settlement agreement with such former officer, the Company deleted the
provision that the option expires when he is no longer an employee. The
fair value of the option at the settlement date was approximately $8,000
(see Note M[2]).
[3] A summary of the status of the Company's stock options as of December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- -----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 504,250 $ 1.89 180,000 $ 1.89
Granted 336,397 2.08 324,250 3.00
Cancelled (150,000) (2.00)
--------- ------- ------- ------
Outstanding at end of year 690,647 2.48 504,250 2.60
--------- ------- ------- ------
Options exercisable at end of year 690,647 2.48 504,250 2.60
========= =======
</TABLE>
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
The following table summarizes information about stock options outstanding
as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range of Number of Contract Average Average
Exercise Options Life Exercise Number Exercise
Price Outstanding (in Years) Price Exercisable Price
--------- ------------ ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.00 25,000 2.9 $ 1.00 25,000 $ 1.00
$ 2.00 - 3.40 663,649 4.1 2.78 663,649 2.52
$ 6.12 - 6.40 999 4.8 6.22 999 6.22
$10.12 -10.40 999 4.8 10.22 999 10.22
------- -------
690,647 3.6 2.68 690,647 2.48
======= =======
</TABLE>
The Company applies APB No. 25 "Accounting for Stock Issued to Employees",
and related interpretations in accounting for its options. Accordingly, no
compensation cost has been recognized for its stock option grants to
employees and directors. Had compensation cost for the Company's stock
option grants been determined based on the fair value at the grant dates
for awards consistent with the method of SFAS No. 123 "Accounting for
Stock-Based Compensation", the Company's net loss and loss per share would
have been as indicated below. The effects of applying SFAS No. 123 in this
pro forma disclosure are not necessarily indicative of future amounts.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C> <C>
Net loss As reported $ (3,670,968) $ (6,121,143)
Pro forma (4,186,301) (6,246,974)
Net loss per share As reported (.45) (.73)
Pro forma (.48) (.74)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996: dividend yield of zero
percent (0%) in 1997 and 1996; expected volatility of seventy percent (70%)
in 1997 and 1996, respectively, risk-free interest rates of 5.85% - 6.43%
in 1997 and 6.50% in 1996 and expected life of 5 years in 1997 and 1996.
The weighted-average fair value of options granted in 1997 and 1996 are
estimated at $1.42 and $1.17, respectively.
Note I - Related Party Transaction
[1] In October 1993, the Company entered into an exclusive distribution
agreement with Digital Vehicle Security Systems Limited ("Digital") to sell
SENS-O-LOCK's purchased from the Company in certain European territories.
This contract was assigned to ASE by Digital in October 1996.
In 1997 and 1996, the Company was charged approximately $200,000, in each
year, for molds, tooling, and operating expenses from Digital and Scarico
UK, Ltd., electronic consumer goods manufacturers, whose managing director
was a 20% owner in ASE and a member of the Company's Board of Directors.
See Note M [2]
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
[2] In August 1996, the Company entered into a royalty agreement with a
company which is owned by the Company's current President and a member of
the Board of Directors. The Company was granted an exclusive right
to distribute WeatherEye Intelligent Headlight Management Systems
("WeatherEye") in the United States as well as the nonexclusive right to
distribute in other worldwide markets. The Company is obligated to pay
a royalty of between $.19 and $2.00 per unit sold. The Company had
insignificant revenues from WeatherEye and no royalty expense was provided
for the year ended December 31, 1997.
In September 1998, for nominal consideration, Weather Eye, Inc. assigned
the WeatherEye technology to the Company.
Note J - Commitments, Contingencies and Other Matters
[1] In 1995, the Company entered into a Marketing Agreement with Texas
Interlock Corporation ("TIC") whereby the Company granted TIC the right to
develop, market, sell and distribute its SENS-O-LOCK device in the state of
Texas. TIC agreed to use its best efforts to assist in the certification
process of the SENS-O-LOCK device in Texas and to prepare a strategy to
obtain legislative support for statutes creating a mandated market for the
Company's product. The Company agreed to compensate TIC at the rate of $100
for each SENS-O-LOCK device leased from the Company during the term of the
agreement. No revenues were recorded in connection with such agreement.
[2] Employment contracts:
The Company has employment contracts with two officers for aggregate annual
salaries of $200,000 which expires through December 31, 1998. The
agreements provide for annual bonuses at the discretion of the Board of
Directors. Such officers resigned in 1998.
Effective September 1, 1998, the Company entered into an employment
agreement with its President and Chief Operating Officer expiring on
September 1, 2001 with annual base salary of $150,000 ($182,500, as of
January 1, 1999), subject to cost-of-living adjustments in each year and
bonuses of $50,000 based upon financial results defined in the contract.
The agreement provides that the Company grant options to its President to
purchase an aggregate of 400,000 shares of the Company's common stock
exercisable at $.225 per share; and to grant options to purchase 50,000
shares of the Company's common stock on each of September 1, 1999 and 2000
with an exercise price equal to the closing price of the Company's common
stock on the date of grant. Additionally, the agreement provides for
certain options to be repriced to purchase an aggregate of 129,500 and
45,000 shares of the Company's stock to $.225 and $.05 per share from
prices ranging from $1.06 to $3.00 per share.
The Company has an employment contract with an engineer for an annual
salary of approximately $75,000 which expires in September 1998 and is
automatically renewed. The Company is obligated to pay a royalty of $1.00
per unit sold for certain technology as determined in the contract.
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
[3] Purchase commitments:
The Company has $250,000 of purchase inventory commitments as of December
31, 1997.
[4] Leases:
The Company has an operating lease for office space. The following is the
future annual rental payments:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1998 $ 131,000
1999 136,000
2000 62,000
---------
$ 329,000
---------
</TABLE>
Rent expense was approximately $136,000 and $100,000 for 1997 and 1996,
respectively.
[5] Securities and Exchange Commission inquiry:
In November 1996, the Company received a letter of inquiry from the
Securities and Exchange Commission, Division of Enforcement (the "SEC")
requesting that the Company voluntarily provide certain information. In
December 1996, the Company responded to the SEC and has not received any
further comments or a response.
[6] Forms 10-KSB and 10-QSB filings:
The Company is late with the filing of its required reports with the
Securities and Exchange Commission on Forms 10-KSB and 10-QSB. There
could be adverse consequences as a result of the Company's late filings.
[7] NASDAQ delisting:
On March 3, 1998, the Company was delisted from NASDAQ.
[8] Year 2000 issue (unaudited):
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish twenty-first
century dates from twentieth century dates. As a result, in less than two
years, computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. The Company is in
the process of implementing a review of issues related to the Company's
Year 2000 compliance. This review is intended to determine the affect of
the turn of the century on the operability of the Company's products,
management information systems ("MIS"), non-MIS systems the Company
utilizes to conduct its business and other internal and external processes
which may impact the Company's operations. In connection with this
evaluation, the Company also anticipates reviewing the Company's vendors
and suppliers for Year 2000 compliance and to effect changes where
necessary.
The Company anticipates that this review process will be conducted in three
phases: the first phase is anticipated to encompass a review of all of the
Company's products, internal and external systems/processes and vendors,
distributors and suppliers for Year 2000 compliance; the second phase is
expected to correct all items identified as non-compliant and essential to
the operations of the Company; and the third phase is contemplated to be a
second review to ensure Year 2000 compliance and interoperability of all
systems/processes.
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
The Company anticipates conducting its review with its current resources,
but cannot assure that it has sufficient resources to complete the review
process in a timely manner. The Company has not determined at this time,
what total costs it will incur to conduct the review process and to
implement any necessary corrections. Although the Company believes that
the software utilized in the second generation Sens-O-Lock and the
Company's MIS software are Year 2000 compliant and is working to ensure
that the Company's products and internal systems are Year 2000 compliant,
there can be no assurance that such compliance is or will be achieved. The
failure to be Year 2000 compliant could have a material adverse effect on
the Company's business, operating results and financial condition.
Note K - Income Taxes
[1] The Company has United States and state net operating loss carryforwards
of approximately $14,000,000 and a research tax credit carryforward of
approximately $140,000. The net operating loss carryforward expires from
2007 to 2012. No tax benefit has been provided for the losses of the
Company's subsidiary located in the United Kingdom. The tax benefits of
these deferred tax assets are fully reserved for since the likelihood of
realization of the benefit cannot be established.
The Tax Reform Act of 1986 contains provisions which limits the net
operating loss carryforwards available for use in any given year should
certain events occur, including significant changes in ownership interests.
As a result of the Company's initial public offering, as well as other
previous ownership changes, the net operating loss carryover will be
subject to these annual limitations until the net operating loss is
utilized or expires.
[2] The tax effects of principal temporary differences and net operating
losses are as follows as of December 31, 1997:
<TABLE>
<CAPTION>
Asset:
<S> <C>
Inventory $ 52,000
Accrued expense and compensatory stock options
and warrants 364,000
Federal and state operating loss carryforwards 5,726,000
Valuation allowance (6,142,000)
------------
Net deferred tax asset $ 0
------------
</TABLE>
The change in the valuation allowance as of December 31, 1997 was
approximately $1,231,000.
[3] The Company's losses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996
---- ----
Net loss:
<S> <C> <C>
United States $(2,992,819) $(5,964,551)
Foreign (678,149) (156,592)
------------ ------------
$(3,670,968) $(6,121,143)
------------ ------------
</TABLE>
[4] The differences between the statutory Federal income tax rate of 34% are as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Statutory rate benefit (34.0)% (34.0)%
Nondeductible expenses .1
Valuation allowance 34.0 33.9
------- -------
Effective tax rate 0% 0%
------- -------
</TABLE>
Note L - Concentration of Credit Risks
[1] Cash and cash equivalents:
The Company places its cash and cash equivalents at various financial
institutions. At times, such amounts might be in excess of the FDIC
insurance limit.
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
[2] Vendors:
The Company uses a limited number of third party vendors to manufacture and
assemble the Company's products.
Note M - Litigation
[1] Pending litigation:
The Company and certain of its former officers were named as defendants in
an action commenced in July 1997 in the New York State Supreme Court, New
York County. Plaintiff alleges that, in July 1989, he entered into an
agreement with the individual defendants and a company named "International
Beverage Machine" pursuant to which plaintiff claims to have made certain
payments which the individual defendants promised would be used to purchase
stock in "Alcohol Sensors, Inc." which, in turn, plaintiff claims to be the
predecessor to the Company. Plaintiff alleges damages of $13,500,000. The
Company believes that the complaint fails to state a claim against the
Company and that plaintiff has not been damaged by the Company, and,
accordingly, intends to vigorously defend itself in this action. The
ultimate outcome of this action is unknown at this time and the Company
has not made any provision in the accompanying financial statements.
The Company and certain of its former officers were named as defendants in
an action commenced in September 1997 in the New York State Supreme Court,
County of Nassau. Plaintiff alleges that, in February 1990, plaintiff
entered into an exclusive "Distributor Agreement" with "Alcohol Sensors,
Inc." wherein plaintiff was granted a regional license to market,
distribute and install an "automotive alcohol sensor" device to which "AS
Inc." owned the patent rights. Plaintiff alleges damages of $1,000,000. The
Company believes that it has no affiliation with "Alcohol Sensors, Inc.,"
or "AS Inc.," that the Company has no obligations under the "Distributor
Agreement" referred to in the complaint and that plaintiff has not been
damaged in any amount by the Company and, accordingly, intends to
vigorously defend itself in the action. This action is currently in the
discovery stage. The ultimate outcome of this action is unknown at this
time and the Company has not made any provision in the accompanying
financial statements.
In 1993, the Company received correspondence from Intoximeters Inc.
claiming that the Company's name infringes upon the name of a product of
such entity, "Alco-Sensor." The Company believes that the Company's name
does not infringe upon such other entity's product name and that the name
SENS-O-LOCK does not and will not cause a confusion in the marketplace
between the Company's product and the product of Intoximeters Inc. However,
no assurance can be given that such entity or others would be successful on
a claim that the Company's name and/or product names infringe upon a
copyright or trademark of such entity or others.
The Company was served with a Demand to Arbitrate and a Statement of Claim
by a former individual who had performed engineering services for the
Company on a consulting basis. Claimant was seeking $650,000 and 114,449
shares of stock in damages. The Company settled this matter in an
Arbitration Conference and has agreed to transfer to Claimant 27,500 shares
of stock in full satisfaction of all claims in this action. This matter
was settled in April 1997 and the Company has accrued $65,000 as of
December 31, 1996. In 1998, the Company was served with a Demand to
Arbitrate by an individual based upon an alleged failure by the Company to
comply with the settlement terms of the aforemention arbitration. At this
time, it is too early to determine the outcome of this action and
therefore, the Company has not made any additional provision in the
accompanying financial statements.
[2] Settled litigation:
The Company was named as a defendant in an action commenced in the United
States District Court for the Eastern District of New York in July 1996.
The plaintiff was seeking $9 million plus 100,000 shares of the Company's
common stock, alleging he performed certain work for the Company as an
independent contractor and was never compensated for the services he
performed. This action was settled in July 1997 pursuant to which the
Company issued an aggregate of 24,000 shares of the Company's common stock.
The Company recorded an expense of $78,000.
The Company was served with a Demand to Arbitrate by a former employee.
Claimant was seeking $75,000 and approximately 36,000 stock options as
damages. In October 1997, the Company settled this matter for approximately
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
$77,000 of which approximately $59,000 was paid during the year ended
December 31, 1997 and the balance of approximately $18,000 was accrued as
of December 31, 1997.
The Company and certain of its officers were named as defendants in an
action commenced in the United States District Court for the Eastern
District of New York in March 1996, by a stockholder seeking $2 million in
alleged damages as a result of the Company's handling of a prior action,
Barry Beyer, et al. v. Alcohol Sensors International, Ltd., et al. This
previous action was settled for a total of $382,675. In connection
therewith, certain members of management donated 55,672 of their private
shares and cash of $107,642 to the Company. This current action was
dismissed without prejudice in August 1997.
The Company and certain of its former officers were named as defendants in
an action commenced in the Supreme Court of the State of New York, Orange
County, by two individuals claiming an equity interest in the Company, as
well as damages of $18.5 million, based upon a purported agreement with
another company, Alcohol Sensors, Inc. with which the claimants, certain
former officers of the Company and others were affiliated in 1989, and a
claim that one of the individuals is the inventor of the technology that
the Company is using. This action was settled in February 1997. Certain
former and current members of management donated 315,000 of their private
shares to provide for the settlement. As of December 31, 1996, the Company
accrued $1,144,000 in connection with this settlement.
In February 1998, an action was commenced in the High Court of Justice,
Queens Bench Division, in Oxford, United Kingdom, under the caption
"Scarico (UK) Limited v. Alcohol Sensors Europe plc." Scarico (UK) Limited
is an entity which the Company believes is (a) not presently affiliated
with any current supplier to the Company and (b) owned by Michael G.
Ghazarian. Mr. Ghazarian is a former director and officer of the Company.
Alcohol Sensors Europe plc. ("ASE") is an English corporation which, at
the time of commencement of this action, was 80% owned by the Company and
20% owned by Mr. Ghazarian. In the complaint, Scarico (UK) Limited claimed
that BP68,321.93 ($113,000, as of December 31, 1997) and $10,445 were due
on invoices for services rendered to ASE between 1992 and 1997. ASE denied
that any amounts were due Scarico (UK) Limited and that certain claimed
services were actually performed by third parties, including a current
supplier to the Company, and that ASE and the Company had paid such third
parties directly. On August 11, 1998, the Company and ASE entered into a
settlement arrangement with Scarico (UK) Limited, Digital Vehicle
Security Systems ("Digital") and Mr. Ghazarian pursuant to which Scarico
(UK) Limited, Digital and Mr. Ghazarian released to the Company all
intellectual property, contract and other rights they may have in the
technology and know-how related to the SENS-O-LOCK and all claims to
Sens-O-Lock units, parts and raw materials in their possession, as well
as the assignment to the Company of Mr. Ghazarian's 20% interest in ASE,
Mr. Ghazarian surrendered an option to purchase 22,500 shares of Common
Stock exercisable at $2.00 per share and expiring in June 2001 and the
Company (a) paid Scarico (UK) Limited, Digital and Mr. Ghazarian an
aggregate of approximately $90,000, (b) confirmed an option granted to
Mr. Ghazarian in 1996 to purchase 100,000 shares of Common Stock
exercisable at $3.00 per share and expiring in September 2001 and (c)
deleted a provision requiring that Mr. Ghazarian be an employee of the
Company in order to exercise an option to purchase 200,000 shares of Common
Stock exercisable at $2.00 per share and expiring in September 2002. The
parties also exchanged general releases in connection with this settlement
arrangement.
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
Note N - Subsequent Events
In June 1998, the holder of the Series B Preferred Stock ("Series B")
loaned (the "June 1998 Loan") the Company $100,000 with interest at 11.5%
per annum and due on July 31, 1998. In August 1998 (the "August 1998
Loan"), the holder of the Series B Preferred Stock loaned the Company an
additional $40,000 with interest at 11.5% per annum and due on August 31,
1998. On September 4 1998, the holder of the Series B Preferred Stock
loaned the Company an additional $25,000 with interest at 11.5% per annum
and due on August 31, 1998. On September 4, 1998, the holder of the Series
B Preferred Stock loaned the Company an additional $25,000 with interest at
11.5% per annum and due on October 31, 1998.
On October 15, 1998, a third party agreed to loan the Company $30,000 with
interest at 11.5% per annum and due on November 30, 1998.
On September 30, 1998 and October 6, 1998, the Company received two $20,000
loans from the party negotiating a distribution agreement with the Company
(Note A). These loans bear interest at 8.5% per annum and are due on March
31, 1999 and April 6, 1999.
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD.
ANNUAL REPORT ON FORM 10-K
Fiscal Year Ended December 31, 1997
EXHIBIT INDEX
Set forth below are all exhibits to this Annual Report on Form 10-KSB:
3.1 Composite of Certificate of Incorporation of the Company, as amended to
date. [(Incorporated by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K (Date of Report: September 26, 1997) (Commission File
Number: 0-26998), filed with the Commission on October 7, 1997.)]
3.2 By-laws of the Company, as amended to date. (Incorporated by reference to
Exhibit 3(c) to the Company's Registration Statement on Form SB-2
(Registration Number: 33-96752), filed with the Commission on September 8,
1995.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to Exhibit
4(a) to Amendment No.2 to the Company's Registration Statement on Form SB-2
(Registration Number: 33-96752), filed with the Commission on October 30,
1995.)
4.2 Specimen Redeemable Common Stock Warrant Certificate. (Incorporated by
reference to Exhibit 4(b) to the Company's Registration Statement on Form
SB-2 (Registration Number: 33-96752), filed with the Commission on
September 5, 1995.)
4.3 Underwriter's Unit Purchase Option (Form). (Incorporated by reference to
Exhibit 4(c) to Amendment No. 2 to the Company's Registration Statement
on Form SB-2 (Registration Number: 33-96752), filed with the Commission
on October 30, 1995.)
10.1 Company's 1998 Incentive Stock Plan.
10.2 Employment Agreement, dated December 31, 1995, between the Company and
Steven A. Martello. (Incorporated by reference to Exhibit 10.5 to Amendment
No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File
Number: 0-26998), filed with the Commission on April 28, 1997.)
10.3 Employment Agreement, dated December 31, 1995, between the Company and
Michael A. Sylvester. (Incorporated by reference to Exhibit 10.6 to
Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission
File Number: 0-26998), filed with the Commission on April 28, 1997.)
10.4 Employment Agreement, dated as of September 1, 1998, between the Company
and Joseph M. Lively (without exhibits).
10.5 Joint Venture Agreement, dated August 8, 1996, between the Company and
Weather Eye, Inc., as amended on December 31, 1996. (Incorporated by
reference to Exhibit 10.9 to Amendment No. 1 to the Company's Annual
Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the
Commission on April 28, 1997.)
10.6 Lease, dated August 8, 1995, between the Company and IR Realty Inc.
(Incorporated by reference to Exhibit 10(f) to the Company's Registration
Statement on Form SB-2 (Registration Number: 33-96752), filed with the
Commission on September 5, 1995.)
10.7 Warrant Agreement, dated 1995, between the Company and Continental Stock
Transfer & Trust Company (Form). (Incorporated by reference to Exhibit
10(a) to Amendment No. 2 to the Company's Registration Statement on Form
SB-2 (Registration Number: 33-96752), filed with the Commission on October
30, 1995.)
10.8 Merger and Acquisition Agreement, dated 1995, between the Company and
William Scott & Company, LLC (Form). (Incorporated by reference to Exhibit
10(c) to the Company's Registration Statement on Form SB-2
(Registration Number: 33-96752), filed with the Commission on September 5,
1995.)
10.9 Financial Consulting Agreement, dated 1995, between the Company and William
Scott & Company, LLC (Form). (Incorporated by reference to Exhibit
10(b) to Amendment No. 2 to the Company's Registration Statement on Form
SB-2 (Registration Number: 33-96752), filed with the Commission on
September 5, 1995.)
10.10 Stipulation of Settlement, Settlement Agreement and Mutual General
Release, dated February 27, 1997, between Albert Pace and Jan Polek and the
Company, John T. Ruocco, Michael A. Sylvester, Robert B. Whitney, Steven A.
Martello and Leon Pasqua.
10.11 Securities Purchase Agreement, dated September 24, 1997, by and between
the Company and Milbright Estates, Ltd. (minus attachments and exhibits
thereto). (Incorporated by reference to Exhibit 10.1 to the Company's
<PAGE>
Current Report on Form 8-K (Date of Report: September 26, 1997) (Commission
File No.: 0- 26998), filed with the Commission on October 7, 1997.)
10.12 Registration Rights Agreement, dated September 24, 1997, by and between
the Company and Milbright Estates, Ltd. (Incorporated by reference to
Exhibit 10.2 to the Company's current report on Form 8-K (Date of Report:
September 26, 1997) (Commission File No. 0-26998), filed with the
Commission on October 7, 1997.)
10.13 Consulting Agreement, dated as of July 1, 1996, between the Company
and Digital Vehicle Security System, Inc. and Michael Ghazarian.
(Incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the
Company's Annual Report on Form 10-KSB/A (Commission File Number:
0-26998), filed with the Commission on April 28, 1997.)
10.14 Assignment, dated as of October 30, 1996, between Digital Vehicle
Security Systems Limited and Alcohol Sensors Europe, Plc, Michael
Ghazarian and the Company. (Incorporated by reference to Exhibit 10.4
to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A
(Commission File Number: 0-26998), filed with the Commission on April
28, 1997.)
10.15 Exclusive Distributor Agreement, dated October 21, 1993, between the
Company and Digital Vehicle Security Systems. (Incorporated by reference
to Exhibit 10.1 to Amendment No. 1 to the Company's Annual Report on Form
10-KSB/A (Commission File Number: 0-26998), filed with the Commission on
April 28, 1997.)
10.16 Contract Affirmation between Digital Vehicle Security Systems, Inc. and
the Company. (Incorporated by reference to Exhibit 10.2 to Amendment No. 1
to the Company's Annual Report on Form 10-KSB/A (Commission File Number:
0-26998), filed with the Commission on April 28, 1997.)
10.17 Convertible Stock and Warrant Purchase Agreement, dated December 20, 1996,
between the Company and American International Insurance Company.
Incorporated on reference to Exhibit 1 to the Company's Current Report
on Form 8-K (Date of Report: December 20, 1996) (Commission File Number:
0-26998), filed with the Commission on January 3, 1997.)
10.18 Registration Rights Agreement, dated December 20, 1996, between the
Company and American International Insurance Company. (Incorporated on
reference to Exhibit 2 to the Company's Current Report on Form 8-K (Date
of Report: December 20, 1996) (Commission File Number: 0-26998), filed
with the Commission on January 3, 1997.)
10.19 Shareholders Agreement, dated as of December 20, 1996, among American
International Insurance Company, Robert B. Whitney, John T. Ruocco,
Michael A. Sylvester, Joseph M. Lively, Steven A. Martello and the Company.
Incorporated on reference to Exhibit 3 to the Company's Current Report on
Form 8-K (Date of Report: December 20, 1996) (Commission File Number:
0-26998), filed with the Commission on January 3, 1997.)
10.20 Consent and Amendment Agreement, dated as of April 9, 1997, among Robert
B. Whitney, John T. Ruocco, Michael A. Sylvester, Joseph M. Lively,
American International Insurance Company, the Company, Albert Pace,
Jan Polek, Lipman Family Partners Ltd., Gerald N. Jacobowitz, David O.
Gubits, John H. Thomas, Gerald A. Lennon, Peter R. Eriksen, Linda F.
Madoff, Howard Protter, Donald G. Nichol, Larry Wolinsky, Robert E.
Dinardo, Mark A. Krohn, J. Benjamin Gailey, Fabricant & Lipman,
Jacobowitz & Gubits and Ariel Enterprises (without exhibits).
10.21 Order containing the Release and Settlement Agreement, dated August 13,
1998, among the Company, Alcohol Sensors Europe plc, Michael Ghazarian,
Digital Vehicle Security Systems Ltd. and Scarico (UK) Ltd.
10.22 Warrant, dated December 20, 1996, registered in the name of American
International Insurance Company. (Incorporated on reference to Exhibit
4 to the Company's Current Report on Form 8-K (Date of Report: December
20, 1996) (Commission File Number: 0-26998), filed with the Commission on
January 3, 1997.)
10.23 Promissory Note, dated June 12, 1998, of the Company, in the principal
amount of $100,000 payable to Milbright Estates Ltd.
10.24 Letter Agreement, dated August 14, 1998, between the Company and American
International Insurance Company.
10.25 Promissory Note, dated August 13, 1998, of the Company, in the principal
amount of $25,000 payable to Milbright Estates Ltd.
10.26 Patent Assignment, dated September 21, 1998, from Joseph M. Lively and
WeatherEye, Inc. to the Company.
10.27 Promissory Note, dated September 4, 1998, of the Company, in the
principal amount of $40,000 payable to Milbright Estates Ltd.
11 Computation of Loss Per Share.
<PAGE>
21 Subsidiaries of the Company.
24 Powers of Attorney (set forth on the signature page of this Annual Report
on Form 10-KSB).
27 Financial Data Schedule.
ALCOHOL SENSORS INTERNATIONAL, INC.
1998 Stock Incentive Plan
I. DEFINITIONS.
1.1 Definitions. As used herein, capitalized terms not otherwise defined
shall have the meanings assigned to them in this Section 1.1.
(a) "Award" shall mean an Option (which may be designated as a
Nonqualified Stock Option or an Incentive Stock Option), Stock Appreciation
Right, Restricted Stock Award or Performance Share Award, in each case granted
under this Plan.
(b) "Award Agreement" shall mean a written agreement setting forth the
terms of an Award.
(c) "Award Date" shall mean the date upon which the Committee took the
action granting an Award or such later date as is prescribed by the Committee.
(d) "Award Period" shall mean the period beginning on an Award Date
and ending on the expiration date of such Award.
(e) "Beneficiary" shall mean the person(s), trust(s) or other
entity(ies) entitled by will or the laws of descent and distribution to receive
the benefits specified under this Plan in the event of a Participant's death.
(f) "Board" shall mean the Board of Directors of the Corporation.
(g) A "Change in Control" shall be deemed to have occurred if (A) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as such term is defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of securities of
the Corporation representing 20% or more of the combined voting power of the
Corporation's then outstanding securities or (B) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board cease for any reason to constitute at least a majority thereof, unless
the election, or the nomination for election by the Corporation's shareholders,
of each new Board member was approved by a vote of at least three-fourths of the
Board members then still in office who were Board members at the beginning of
such period.
(h) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(i) "Commission" shall mean the Securities and Exchange Commission.
(j) "Committee" shall mean either a committee appointed by the Board
to administer the Plan and consisting of two or more members, each of whom is a
Non-Employee Director, or the entire Board. If there are two or more members of
the Board who are "outside directors" within the meaning of Section 162(m) of
the Code and the regulations promulgated thereunder, then the Committee shall
consist only of such members.
(k) "Common Stock" shall mean the Common Stock, par value $.001 per
share of the Corporation.
(l) "Company" shall mean, collectively, the Corporation and its
Subsidiaries.
(m) "Corporation" shall mean Alcohol Sensors International, Ltd., a
New York corporation, and its successors.
<PAGE>
(n) "Eligible Person" shall mean an employee, director or officer of
the Company or any other person or entity who, in the opinion of the Committee,
is rendering valuable services to the Company, including, without limitation, an
independent contractor, outside consultant or advisor to the Company.
(o) "Event" shall mean any of the following:
(i) Approval by the shareholders of the Corporation of the
dissolution or liquidation of the Corporation;
(ii) Approval by the shareholders of the Corporation of an
agreement to merge or consolidate, or otherwise reorganize, with or into
one or more entities which are not Subsidiaries, as a result of which less
than 50% of the outstanding voting securities of the surviving or resulting
entity are, or are to be, owned by former shareholders of the Corporation;
(iii) Approval by the shareholders of the Corporation of the
sale of substantially all of the Corporation's business and/or assets to a
person or entity which is not a Subsidiary; or
(iv) The occurrence of a Change in Control.
(p) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(q) "Fair Market Value" shall mean: (i) if the stock is listed or
admitted to trade on a national securities exchange, the closing price of the
stock on the Composite Tape, as published in The Wall Street Journal, of the
principal national securities exchange on which the stock is so listed or
admitted to trade, on such date, or, if there is no trading of the stock on such
date, then the closing price of the stock as quoted on such Composite Tape on
the next preceding date on which there was trading in such shares; (ii) if the
stock is not listed or admitted to trade on a national securities exchange but
is listed and quoted on The Nasdaq Stock Market ("Nasdaq"), the last sale price
for the stock on such date as reported by Nasdaq, or, if there is no reported
trading of the stock on such date, then the last sale price for the stock on the
next preceding date on which there was trading in the stock; (iii) if the stock
is not listed or admitted to trade on a national securities exchange and is not
listed and quoted on Nasdaq, the mean between the closing bid and asked price
for the stock on such date, as furnished by the National Association of
Securities Dealers, Inc. ("NASD") or similar organization; or (iv) if the stock
is not listed or admitted to trade on a national securities exchange, not listed
and quoted on Nasdaq and if bid and asked prices for the stock are not furnished
by the NASD or a similar organization, the value established in good faith by
the Committee in the Committee's sole discretion.
(r) "Incentive Stock Option" shall mean an Option which is designated
as an Incentive Stock Option, the Award of which contains such provisions as are
necessary to comply with Section 422 of the Code.
(s) "Non-Employee Director" shall mean a Non-Employee Director within
the meaning of the applicable regulatory requirement promulgated under Section
16 of the Exchange Act.
(t) "Nonqualified Stock Option" shall mean an Option which is not an
Incentive Stock Option.
(u) "Option" shall mean an option to purchase Common Stock granted
under this Plan.
(v) "Participant" shall mean an Eligible Person, who has been granted
an Award.
(w) "Performance Share Award" shall mean an Award of shares of Common
Stock, the issuance of such shares being contingent upon attainment of
performance objectives specified by the Committee.
(x) "Personal Representative" shall mean the person or persons who,
upon the disability or incompetence of a Participant, shall have acquired on
behalf of the Participant by legal proceeding or otherwise the power to exercise
the rights and receive the benefits specified in this Plan.
<PAGE>
(y) "Plan" shall mean this Alcohol Sensors International, Ltd. 1998
Stock Incentive Plan.
(z) "Restricted Stock" shall mean those shares of Common Stock issued
pursuant to a Restricted Stock Award which are subject to the restrictions set
forth in the related Award Agreement.
(aa) "Restricted Stock Award" shall mean an award of a fixed number of
shares of Common Stock to the Participant subject, however, to payment of such
consideration, if any, and such forfeiture provisions, as are set forth in the
Award Agreement.
(bb) "Retirement" shall mean termination of employment with the
Company pursuant to the Company's retirement policy, as in effect from time to
time, or otherwise with the consent of the Company.
(cc) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(dd) "Stock Appreciation Right" shall mean a right to receive a number
of shares of Common Stock or an amount of cash, or a combination of shares and
cash, determined as provided in Section 4.3(a).
(ee) "Subsidiary" shall mean any corporation or other entity a
majority or more of whose outstanding voting stock or voting power is
beneficially owned directly or indirectly by the Corporation.
(ff) "Tax-Offset Bonus" shall mean a bonus payable pursuant to a
disqualifying disposition of Common Stock acquired pursuant to the exercise of
an Incentive Stock Option, determined as provided in Section 3.6.
(gg) "Total Disability" shall mean a "permanent and total disability"
within the meaning of Section 22 (e)(3) of the Code.
II. THE PLAN.
2.1 Purpose. The purpose of this Plan is to promote the success of the
Company by providing an additional means to attract and retain directors,
officers, employees, consultants and other persons and entities through added
long-term incentives and for significant efforts to improve the financial
performance of the Company by granting Awards.
2.2 Administration.
(a) This Plan shall be administered by the Committee. Action of the
Committee with respect to the administration of this Plan shall be taken
pursuant to a majority vote or the written consent of a majority of its members.
In the event action by the Committee is taken by written consent, the action
shall be deemed to have been taken at the time specified in the consent or, if
none is specified, at the time of the last signature. The Committee may delegate
administrative functions (other than functions which are required to be
performed by the Committee pursuant to requirements promulgated under Section 16
of the Exchange Act and Section 162(m) of the Code) to individuals who are
officers or employees of the Company.
(b) Subject to the express provisions of this Plan, the Committee
shall have the authority to construe and interpret this Plan and any agreements
defining the rights and obligations of the Company and Participants under this
Plan, to further define the terms used in this Plan, to prescribe, amend and
rescind rules and regulations relating to the administration of this Plan, to
determine the duration and purposes of leaves of absence which may be granted to
Participants without constituting a termination of their employment for purposes
of this Plan and to make all other determinations necessary or advisable for the
administration of this Plan. The determinations of the Committee on the
foregoing matters shall be conclusive and binding upon all persons.
(c) Any action taken by, or inaction of, the Corporation, any
Subsidiary, the Board or the Committee relating to this Plan shall be within the
absolute discretion of that entity or body and shall be conclusive and
<PAGE>
binding upon all persons. No member of the Board or Committee, or officer of
the Corporation or Subsidiary, shall be liable for any such action or inaction
of the entity or body, of another person or, except in circumstances involving
bad faith, of himself or herself. Subject only to compliance with the express
provisions hereof, the Board and Committee may act in their absolute discretion
in matters related to this Plan.
(d) Subject to the requirements of Section 1.1 (j), the Board, at any
time it so desires, may increase or decrease the number of members of the
Committee, may remove from membership on the Committee all or any portion of its
members, and may appoint such person or persons as it desires to fill any
vacancy existing on the Committee, whether caused by removal, resignation or
otherwise.
2.3 Participation. Awards may be granted only to Eligible Persons. An
Eligible Person who has been granted an Award may, if otherwise eligible, be
granted additional Awards if the Committee shall so determine.
2.4 Stock Subject to the Plan. The stock to be offered under this Plan
shall be shares of the Corporation's authorized but unissued Common Stock. The
aggregate amount of the Common Stock that may be issued or transferred pursuant
to Awards granted under this Plan shall not exceed 3,000,000 shares, subject to
adjustment as set forth in Section 7.2; provided that any Stock Appreciation
Rights granted concurrently in accordance with Section 4.1 are not subject to
the foregoing limitation. If an Option and any Stock Appreciation Right shall
lapse or terminate without having been exercised in full, or any Common Stock
subject to a Restricted Stock Award shall not vest or any Common Stock subject
to a Performance Share Award shall not have been transferred, the unpurchased or
nontransferred shares subject thereto shall again be available for purposes of
this Plan; provided, however, that the counting of shares subject to Awards
granted under the Plan against the number of shares available for further Awards
shall in all cases conform to the requirements of Rule 16b-3 under the Exchange
Act; and provided, further, that, with respect to any Option and any Stock
Appreciation Right granted to any Eligible Person who is a "covered employee" as
defined in Section 162(m) of the Code and the regulations promulgated thereunder
that is canceled, the number of shares subject to such Option and Stock
Appreciation Right shall continue to count against the maximum number of shares
which may be the subject of Options and Stock Appreciation Rights granted to
such Eligible Person. For purposes of the preceding sentence, if, after grant,
the exercise price of an Option and/or the base amount of any Stock Appreciation
Right is reduced, such reduction shall be treated as a cancellation of such
Option and/or Stock Appreciation Right and the grant of a new Option and/or
Stock Appreciation Right (if any), and both the cancellation of the Option
and/or Stock Appreciation Right and the new Option and/or Stock Appreciation
Right shall reduce the maximum number of shares for which Options and Stock
Appreciation Rights may be granted to the holder of such Option and/or Stock
Appreciation Right to the extent required by Section 162(m) of the Code and the
regulations promulgated thereunder.
2.5 Grant of Awards. Subject to the express provisions of the Plan, the
Committee shall determine from the class of Eligible Persons those individuals
and entities to whom Awards under the Plan shall be granted, the terms of Awards
(which need not be identical) and the number of shares of Common Stock subject
to each Award; provided, however, that no Eligible Person may be granted Options
and Stock Appreciation Rights relating in the aggregate to more than 250,000
shares of Common Stock (subject to adjustment as provided in Section 7.2) in any
calendar year; and provided, further, that any shares of Common Stock relating
to Stock Appreciation Rights granted concurrently with one or more Options in
accordance with Section 4.1 shall only be counted once for purposes of such
limit. Each Award shall be subject to the terms and conditions set forth in the
Plan and such other terms and conditions established by the Committee as are not
inconsistent with the purpose and provisions of the Plan.
2.6 Exercise of Awards. An Option or Stock Appreciation Right shall be
deemed to be exercised when the Secretary of the Corporation, or such other
person(s) designated by Committee, receives written notice of such exercise from
the Participant, together with payment of the exercise price made in accordance
with Subsection 3.1(b) or 3.2(b), as the case may be, except to the extent
payment may be permitted to be made following delivery of written notice of
exercise in accordance with Subsection 3.1(b) or 3.2(b), as the case may be.
Notwithstanding any other provision of this Plan, the Committee may impose, by
rule and/or in Award Agreements, such conditions upon the exercise of Awards
(including, without limitation, conditions limiting the time of exercise to
specified periods) as may be required to satisfy applicable regulatory
requirements, including, without limitation, Rule 16b-3 (or any successor rule)
promulgated under the Exchange Act or for any other reason in the sole
discretion of the Committee.
<PAGE>
III. OPTIONS.
3.1 Grants.
(a) One or more Options may be granted to any Eligible Person. Except
for Options granted pursuant to Subsection 3.1(b), all Options granted to
members of the Committee must be ratified by a majority of the members of the
Board. Unless specifically designated by the Committee as an Incentive Stock
Option, each Option granted under the Plan shall be a Nonqualified Stock Option.
Notwithstanding any designation as an Incentive Stock Option, an Option (or
portion thereof) not qualifying as an Incentive Stock Option under Section 422
of the Code, shall be deemed a Nonqualified Stock Option.
(b) Notwithstanding any other provision of the Plan, effective on the
date of the approval of the Plan by the shareholders of the Corporation and on
each subsequent date a director who is not also an employee of the Company is
appointed, elected or, commencing in 1999, re-elected to the Board, such
director will automatically be granted a Nonqualified Stock Option to purchase
25,000 shares of Common Stock at an exercise price per share equal to the Fair
Market Value of the Common Stock on the date of grant, such Nonqualified Stock
Options to have a duration of ten years and to become exercisable in equal
tranches of one-third (1/3) of such shares on each of the first three
anniversaries of the date of grant.
The exercise price of any shares purchased pursuant to the exercise of
an Option granted pursuant to this Section 3.2(b) shall be paid in full at the
time of each purchase in one or a combination of the following methods: (i)
cash; (ii) check (subject to collection); or (iii) in the discretion of the
Committee, by (A) delivery to the Company of a promissory note containing such
terms and conditions determined by the Committee, in the Committee's sole
discretion, but at a rate of interest at least equal to the imputed interest
specified under Section 483 or Section 1274, whichever is applicable, of the
Code, and secured by the Common Stock issuable upon exercise of the Option for
which the promissory note is being delivered and otherwise in compliance with
applicable law (including, without limitation, state corporate law and federal
margin requirements), (B) assignment to the Corporation of the net proceeds (to
the extent necessary to pay such exercise price) to be received from a
registered broker upon the sale of the shares or assignment of the net proceeds
(to the extent necessary to pay such exercise price) of a loan from such broker
in such amount or (C) such other consideration and method of payment for the
issuance of stock to the extent permitted under New York law and satisfying the
requirements of Rule 16b-3 promulgated pursuant to the Exchange Act.
Notwithstanding anything to the contrary contained in Section 7.2 or
7.4, each such Option shall be adjusted and shall accelerate, respectively, in
the following events:
(i) If the outstanding shares of Common Stock are increased,
decreased or changed into, or exchanged for, a different number or kind of
shares or securities of the Corporation through a reorganization or merger
in which the Corporation is the surviving entity, or through a combination,
recapitalization, reclassification, stock split, stock dividend, stock
consolidation or otherwise, an appropriate adjustment shall be made in the
number and kind of shares that may be issued pursuant to each such Option;
provided, however, that any such adjustment shall be made without change in
the total payment, if any, applicable to the portion of such Option not
exercised but with a corresponding adjustment in the price for each share;
(ii) Upon the dissolution or liquidation of the Corporation,
or upon a reorganization, merger or consolidation of the Corporation with
one or more corporations as a result of which the Corporation is not the
surviving corporation, any such Option then outstanding shall terminate and
be forfeited; provided, however, that in the event any such Option
terminates as aforesaid in connection with such a dissolution, liquidation,
reorganization, merger or consolidation, the holder of any such Option
shall be entitled to receive from the Corporation cash in an amount equal
to the excess of (A) the Fair Market Value (determined on the basis of the
amount received by shareholders in connection with such transaction) of the
shares of Common Stock subject to the portion of such Option not
theretofore exercised (whether or not such Option is then exercisable
pursuant to its terms or otherwise), over (B) the aggregate exercise price
which would be payable for such shares upon the exercise of such Option;
<PAGE>
(iii) In adjusting such Options to reflect the changes
described in this Section 3.1(b) or in determining that no such adjustment
is necessary, the Committee shall make only such adjustment as shall be
necessary to maintain the proportionate interest of the holder and preserve
the value of the respective Option and may rely upon the advice of
independent counsel and accountants of the Corporation, and the
determination of the Committee shall be conclusive;
(iv) No fractional shares of stock shall be issued under
this Plan on account of any such adjustment; and
(v) Upon the occurrence of an Event, each such Option shall
become immediately exercisable to the full extent theretofore not
exercisable; provided, however, that such acceleration shall comply with
applicable regulatory requirements, including without limitation Rule 16b-3
promulgated by the Commission pursuant to the Exchange Act.
All or any part of any remaining unexercised Options granted pursuant
to this Section 3.1(b) may be exercised (after approval of the Plan by
shareholders of the Corporation, but in no event during the six-month period
commencing on the later of the date of grant or the date of such shareholder
approval, unless such exercise complies with applicable regulatory requirements)
in the event of the holder's cessation of service as a director of the Company
due to the holder's death, during the period beginning on the date of death and
ending twelve months thereafter, but in no event after the expiration of the
term of the Option. Any Option granted pursuant to this Section 3.1(b), to the
extent unexercised, shall terminate immediately upon the holder's ceasing to
serve as a director of the Company due to Total Disability, except that the
holder or the holder's Personal Representative shall have twelve months
following such cessation of service to exercise any unexercised Option that the
holder could have exercised on the day on which such service terminated;
provided that such exercise must be accomplished prior to the expiration of the
term of such Option. Any Option granted pursuant to this Subsection 3.1(b), to
the extent unexercised, shall terminate immediately upon the holder's ceasing to
serve as a director of the Company (for reasons other than Total Disability or
death), except that the holder shall have three months from the date of such
cessation of service to exercise any unexercised Option that he or she could
have exercised on the day on which such service terminated; provided that such
exercise must be accomplished prior to the expiration of the term of such
Option. Notwithstanding the preceding, if the service as a director of any
holder of an Option granted pursuant to this Subsection 3.1(b) shall be
terminated because of the holder's (i) fraud or intentional misrepresentation or
(ii) embezzlement, misappropriation or conversion of assets or opportunities of
the Company, then all such unexercised Options of the holder shall terminate
immediately upon such holder's ceasing to serve as a director.
Subject to the limitations of Section 7.7, the award formula in this
Subsection 3.1(b) may be amended from time to time by the Board with respect to
timing and amount; provided that the provisions of this Subsection 3.1(b) shall
not be amended more than once every six months, other than to comport with
changes in the Code or the Employee Retirement Income Security Act of 1974, as
amended (and to such extent, if any, as it may be applicable to the Plan) or the
rules and regulations thereunder.
3.2 Option Price.
(a) The exercise price per share of the Common Stock covered by each
Option shall be determined by the Committee but, in the case of Incentive Stock
Options, shall not be less than 100% (110% in the case of a Participant who owns
more than 10% of the total combined voting power of all classes of stock of
the Company) of the Fair Market Value of the Common Stock on the date the
Incentive Stock Option is granted and, in the case of Nonqualified Stock
Options, shall not be less than 85% of the Fair Market Value of the Common
Stock on the date the Nonqualified Stock Option is granted.
(b) The exercise price of any shares purchased pursuant to an Option
granted pursuant to the Plan, other than an Option granted under Subsection
3(b), shall be paid in full at the time of each purchase in one or a combination
of the following methods: (i) cash; (ii) check (subject to collection); (iii) in
the discretion of the Committee, surrender to the Company of other shares of
Common Stock owned by the Optionee which (A) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the shares as to
<PAGE>
which the Option shall be exercised and (B) have been owned of record by the
Participant exercising the Option for at least six months; (iv) commencing three
years from the Date of Grant, in the discretion of the Committee, by "cashless
exercise," by means of exercising the Option in full and receiving such number
of shares of Common Stock having a Fair Market Value on the date of such
cashless exercise equal to the difference between (A) the Fair Market Value of
the shares issuable upon exercise of the Option in full on the date of such
cashless exercise and (B) the exercise price of the Option multiplied by the
number of shares issuable upon exercise of the Option in full; or (v) in the
discretion of the Committee, by (A) delivery to the Company of a promissory note
containing such terms and conditions determined by the Committee, in the
Committee's sole discretion, but at a rate of interest at least equal to the
imputed interest specified under Section 483 or Section 1274, whichever is
applicable, of the Code, and secured by the Common Stock issuable upon exercise
of the Option for which the promissory note is being delivered and otherwise in
compliance with applicable law (including, without limitation, state corporate
law and federal margin requirements), (B) assignment to the Corporation of the
net proceeds (to the extent necessary to pay such exercise price) to be received
from a registered broker upon the sale of the shares or assignment of the net
proceeds (to the extent necessary to pay such exercise price) of a loan from
such broker in such amount or (C) such other consideration and method of payment
for the issuance of stock to the extent permitted under New York law and
satisfying the requirements of Rule 16b-3 promulgated pursuant to the Exchange
Act. The Committee, in the Committee's sole discretion, may impose additional
requirements with respect to any of the above-stated methods of payment of the
exercise price of an Option.
3.3 Option Period. Each Option and all rights or obligations thereunder
shall expire on such date as shall be determined by the Committee, but not later
than ten years after the Award Date of an Incentive Stock Option or ten years
and one day after the Award Date of a Nonqualified Stock Option, and shall be
subject to earlier termination as hereinafter provided.
3.4 Exercise of Options. Except as otherwise provided in Section 7.4, an
Option may become exercisable, in whole or in part, on the date or dates
specified in the Award Agreement, and thereafter shall remain exercisable until
the expiration or earlier termination of such Option. Unless otherwise
determined by the Committee and reflected in the Award Agreement with respect to
the Option, each Option shall become exercisable in equal tranches of one-third
(1/3) of the shares of Common Stock subject to such Option on each of the first
three anniversaries of the date of grant of such Option. The Committee may, at
any time after grant of the Option and from time to time increase the number of
shares purchasable at any time so long as the total number of shares subject to
the Option is not increased. No Option shall be exercisable except in respect of
whole shares, and fractional share interests shall be disregarded. Not less than
100 shares of Common Stock may be purchased at one time unless the number
purchased is the total number at the time available for purchase under the terms
of the Option.
3.5 Limitations on Grant of Incentive Stock Options.
(a) The aggregate Fair Market Value (determined as of the Award Date)
of the Common Stock for which Incentive Stock Options may first become
exercisable by any Participant during any calendar year under this Plan (other
than as a result of acceleration pursuant to Section 7.2 or 7.4), together with
that of common stock subject to incentive stock options first exercisable by
such Participant under any other plan of the Company, shall not exceed $100,000;
to the extent such limitation is exceeded for any reason, including as a result
of acceleration, such Option(s) shall be treated as Nonqualified Stock
Option(s).
(b) There shall be imposed in the Award Agreement relating to
Incentive Stock Options such terms and conditions as are required in order that
the Option qualify as an "incentive stock option" as that term is defined in
Section 422 of the Code.
(c) No Incentive Stock Option may be granted to any person who, at the
time the Incentive Stock Option is granted, owns securities possessing more than
10% of the total combined voting power of all classes of stock of the
Corporation or any Subsidiary, unless the exercise price of such Option is at
least 110% of the Fair Market Value of the stock subject to the Option and such
Option by its terms is not exercisable after the expiration of five years from
the date such Option is granted.
<PAGE>
(d) No Incentive Stock Option may be granted to any person who is not
an employee of the Company.
3.6 Additional Rights. In its discretion the Committee may, in the Award
Agreement, provide for a Tax-Offset Bonus to any Participant who elects to make
a disqualifying disposition (as defined in Section 422(a)(1) of the Code) of
Common Stock acquired pursuant to the exercise of an Incentive Stock Option. The
Tax-Offset Bonus shall be in the form of a cash payment equal to a percentage of
the difference between the exercise price and the lesser of (a) the Fair Market
Value on the date of exercise of the Common Stock with respect to which the
disqualifying disposition occurs or (b) the amount realized from such
disqualifying disposition. Such percentage shall be set out in the Award
Agreement and shall be designed to offset the impact of additional taxes which
result from the disqualifying disposition. Notwithstanding the preceding
sentence, the Committee may reserve the right to from time to time change the
percentage applicable with respect to the Award Agreement.
IV. STOCK APPRECIATION RIGHTS.
4.1 Grants. In its discretion, the Committee may grant Stock Appreciation
Rights concurrently with the grant of Options. A Stock Appreciation Right shall
extend to all or a portion of the shares covered by the related Option. A Stock
Appreciation Right shall entitle the Participant who holds the related Option,
upon exercise of the Stock Appreciation Right and surrender of the related
Option, or portion thereof, to the extent the Stock Appreciation Right and
related Option each were previously unexercised, to receive payment of an amount
determined pursuant to Section 4.3. Any Stock Appreciation Right granted in
connection with an Incentive Stock Option shall contain such terms as may be
required to comply with the provisions of Section 422 of the Code and the
regulations promulgated thereunder. In its discretion, the Committee may also
grant Stock Appreciation Rights independently of any Option subject to such
conditions as the Committee may, in the Committee's sole discretion, provide.
4.2 Exercise of Stock Appreciation Rights.
(a) A Stock Appreciation Right granted concurrently with an Option
shall be exercisable only at such time or times, and to the extent, that the
related Option shall be exercisable and only when the Fair Market Value of the
stock subject to the related Option exceeds the exercise price of the related
Option.
(b) In the event that a Stock Appreciation Right granted concurrently
with an Option is exercised, the number of shares of Common Stock subject to the
related Option shall be charged against the maximum amount of Common Stock that
may be issued or transferred pursuant to Awards under this Plan. The number of
shares subject to the Stock Appreciation Right and the related Option of the
Participant shall be reduced by such number of shares.
(c) If a Stock Appreciation Right granted concurrently with an Option
extends to less than all the shares covered by the related Option and if a
portion of the related Option is thereafter exercised, the number of shares
subject to the unexercised Stock Appreciation Right shall be reduced only if and
to the extent that the remaining number of shares covered by such related Option
is less than the remaining number of shares subject to such Stock Appreciation
Right. The number of shares subject to unexercised Stock Appreciation Rights may
also be reduced proportionately.
(d) A Stock Appreciation Right granted independently of any Option
shall be exercisable pursuant to the terms of the Award Agreement with respect
to such Stock Appreciation Right.
(e) In order to achieve the Plan's objective of encouraging ownership
of the Common Stock, the Committee may require that Stock Appreciation Rights
can only be exercised if the Participant uses all or a portion of any cash
received upon exercise of the Stock Appreciation Right to concurrently exercise
all or a portion of the Option the Participant holds.
<PAGE>
4.3 Payment.
(a) Upon exercise of a Stock Appreciation Right and surrender of an
exercisable portion of the related Option, the Participant shall be entitled to
receive payment of an amount determined by multiplying (i) the difference
obtained by (A) subtracting the exercise price per share of Common Stock under
the related Option from (B) the Fair Market Value of a share of Common Stock on
the date of exercise of the Stock Appreciation Right, by (ii) the number of
shares with respect to which the Stock Appreciation Right shall have been
exercised.
(b) The Committee, in its sole discretion, may settle the amount
determined under Subsection 4.3(a) solely in cash, solely in shares of Common
Stock (valued at Fair Market Value on the date of exercise of the Stock
Appreciation Right), or partly in such shares and partly in cash, provided that
the Committee shall have determined that such exercise and payment are
consistent with applicable law. In any event, cash shall be paid in lieu of
fractional shares. Absent a determination to the contrary, all Stock
Appreciation Rights shall be settled in cash as soon as practicable after
exercise. Notwithstanding the foregoing, the Committee may, in the Award
Agreement, determine the maximum amount of cash or stock or a combination
thereof which may be delivered upon exercise of a Stock Appreciation Right.
(c) Upon exercise of a Stock Appreciation Right granted independently
of any Option, the Participant shall be entitled to receive payment in cash of
an amount based on a percentage, specified in the Award Agreement, of the
difference obtained by subtracting the Fair Market Value per share of Common
Stock on the Award Date from the Fair Market Value per share of Common Stock on
the date of exercise of the Stock Appreciation Right.
V. RESTRICTED STOCK AWARDS.
5.1 Grants. Subject to Section 2.4, the Committee may, in its discretion,
grant one or more Restricted Stock Awards to any Eligible Person. Each
Restricted Stock Award Agreement shall specify the number of shares of Common
Stock to be issued to the Participant, the date of such issuance, the price, if
any, to be paid for such shares by the Participant and the restrictions imposed
on such shares. Shares of Restricted Stock shall be evidenced by a stock
certificate registered only in the name of the Participant, which stock
certificate shall bear a legend making appropriate reference to the restrictions
imposed and shall be held by the Corporation until the restrictions on such
shares shall have lapsed and those shares shall have thereby vested.
5.2 Restrictions.
(a) Shares of Common Stock included in Restricted Stock Awards may not
be sold, assigned, transferred, pledged or otherwise disposed of or encumbered,
either voluntarily or involuntarily, until such shares have vested.
(b) Participants receiving Restricted Stock shall be entitled to
voting and dividend rights for the shares issued even though they are not
vested; provided that any dividends declared and paid on the shares issued but
not yet vested shall be returned to the Corporation immediately as to any
forfeited Restricted Stock.
(c) In the event that the Participant shall have paid cash in
connection with the Restricted Stock Award, the Award Agreement shall specify
whether and to what extent such cash shall be returned upon a forfeiture (with
or without an earnings factor).
VI. PERFORMANCE SHARE AWARDS.
6.1 Grants. The Committee may, in its discretion, grant Performance Share
Awards to Eligible Persons based upon such factors as the Committee shall
determine. A Performance Share Award Agreement shall specify the number of
shares of Common Stock subject to the Performance Share Award, the price, if
any, to be paid for such shares by the Participant and the conditions upon which
issuance to the Participant shall be based.
<PAGE>
VII. OTHER PROVISIONS.
7.1 Rights of Eligible Persons, Participants and Beneficiaries.
(a) Status as an Eligible Person shall not be construed as a
commitment that any Award will be made under this Plan to an Eligible Person or
to Eligible Persons generally.
(b) Nothing contained in this Plan (or in Award Agreements or in any
other documents related to this Plan or to Awards) shall confer upon any
Eligible Person or Participant any right to continue in the employ of the
Company or constitute any contract or agreement of employment, or interfere in
any way with the right of the Company to reduce such person's compensation or to
terminate the employment of such Eligible Person or Participant, with or without
cause, but nothing contained in this Plan or any document related thereto shall
affect any other contractual right of any Eligible Person or Participant.
(c) Amounts payable pursuant to an Award shall be paid only to the
Participant or, in the event of the Participant's death, to the Participant's
Beneficiary or, in the event of the Participant's Total Disability, to the
Participant's Personal Representative or, if there is none, to the Participant.
Other than by will or the laws of descent and distribution, or pursuant to a
"qualified domestic relations order" as defined by the Code, no benefit payable
under, or interest in, the Plan or in any Award shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge and any such attempted action shall be void and no such benefit or
interest shall be, in any manner, liable for or subject to, debts, contracts,
liabilities, engagements or torts of any Eligible Person, Participant or
Beneficiary. The Committee shall disregard any attempted transfer, assignment or
other alienation prohibited by the preceding sentence and shall pay or deliver
such cash or shares of Common Stock in accordance with the provisions of the
Plan.
(d) No Participant, Beneficiary or other person shall have any right,
title or interest in any fund or in any specific asset (including shares of
Common Stock) of the Company by reason of any Award granted hereunder. Neither
the provisions of the Plan (or of any documents related hereto), nor the
creation or adoption of the Plan, nor any action taken pursuant to the
provisions of the Plan shall create, or be construed to create, a trust of any
kind or a fiduciary relationship between the Company and any Participant,
Beneficiary or other person. To the extent that a Participant, Beneficiary or
other person acquires a right to receive an Award hereunder, such right shall be
no greater than the right of any unsecured general creditor of the Company.
7.2 Adjustments upon Changes in Capitalization.
(a) If the outstanding shares of Common Stock are increased, decreased
or changed into, or exchanged for, a different number or kind of shares or
securities of the Corporation through a reorganization or merger in which the
Corporation is the surviving entity, or through a combination, recapitalization,
reclassification, stock split, stock dividend, stock consolidation or otherwise,
an appropriate adjustment shall be made in the number and kind of shares that
may be issued pursuant to Awards. A corresponding adjustment to the
consideration payable with respect to Awards granted prior to any such change
and to the price, if any, paid in connection with Restricted Stock Awards or
Performance Share Awards shall also be made. Any such adjustment, however, shall
be made without change in the total payment, if any, applicable to the portion
of the Award not exercised but with a corresponding adjustment in the price for
each share. Corresponding adjustments shall be made with respect to Stock
Appreciation Rights based upon the adjustments made to the Options to which they
are related or, in the case of Stock Appreciation Rights granted independently
of any Option, based upon the adjustments made to Common Stock. Corresponding
adjustments may also be made in particular stock grants with respect to
extraordinary cash dividends.
(b) Upon the dissolution or liquidation of the Corporation, or upon a
reorganization, merger or consolidation of the Corporation with one or more
corporations as a result of which the Corporation is not the surviving
corporation, the Plan shall terminate, and any outstanding Awards shall
terminate and be forfeited. Notwithstanding the foregoing, the Committee may
provide in writing in connection with, or in contemplation of, any such
transaction for any or all of the following alternatives (separately or in
combinations): (i) for the assumption by the successor corporation of the Awards
<PAGE>
theretofore granted or the substitution by such corporation for such Awards of
awards covering the stock of the successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kind of
shares and prices; (ii) for the continuance of the Plan by such successor
corporation in which event the Plan and the Awards shall continue in the manner
and under the terms so provided; or (iii) for the payment in cash or shares of
Common Stock in lieu of and in complete satisfaction of such Awards.
(c) In adjusting Awards to reflect the changes described in this
Section 7.2, or in determining that no such adjustment is necessary, the
Committee may rely upon the advice of independent counsel and accountants of the
Corporation, and the determination of the Committee shall be conclusive. No
fractional shares of stock shall be issued under this Plan on account of any
such adjustment.
7.3 Termination of Employment.
(a) Unless otherwise determined by the Committee and reflected in the
Award Agreement with respect to an Option, if the Participant's employment by
the Company terminates for any reason other than Retirement, death or Total
Disability, the Participant shall have, subject to earlier termination pursuant
to or as contemplated by Section 3.3, three months (or up to one year, if so
determined by the Committee in the grant or otherwise) from the date of
termination of employment to exercise any Option to the extent such Option shall
have become exercisable on such date, and any Option (or portion thereof) not
exercisable on such date shall terminate. Notwithstanding the preceding
sentence, in the event the Participant is discharged for cause as determined by
the Committee, in the Committee's sole discretion, all Options granted to such
Participant shall lapse immediately upon such termination of employment.
(b) Unless otherwise determined by the Committee and reflected in the
Award Agreement with respect to an Option, if the Participant's employment by
the Company terminates as a result of Retirement or Total Disability, the
Participant or Participant's Personal Representative, as the case may be, shall
have, subject to earlier termination pursuant to or as contemplated by Section
3.3, twelve months from the date of termination of employment (or three months
from the date of termination of employment as a result of Retirement, with
respect to an Incentive Stock Option) to exercise any Option to the extent such
Option shall have become exercisable by such date, and any Option (or portion
thereof) not exercisable on such date shall terminate.
(c) Unless otherwise determined by the Committee and reflected in the
Award Agreement with respect of an Option, if the Participant's employment by
the Company terminates as a result of death while the Participant is employed by
the Company or during the twelve-month period referred to in Subsection 7.3(b)
above, the Participant's Option shall be exercisable by the Participant's
Beneficiary, subject to earlier termination pursuant to or as contemplated by
Section 3.3, during the twelve-month period or such shorter period as is
provided in the Award Agreement following the Participant's death, to the
extent such Option shall have become exercisable by such date, and any Option
(or portion thereof) not exercisable on such date shall terminate.
(d) Each Stock Appreciation Right granted concurrently with an Option
shall have the same termination provisions and exercisability periods as the
Option to which it relates. The termination provisions and exercisability
periods of any Stock Appreciation Right granted independently of an Option shall
be established in accordance with Subsection 4.2(d). The exercisability period
of a Stock Appreciation Right shall not exceed that provided in Section 3.3 or
in the related Award Agreement, and the Stock Appreciation Right shall expire at
the end of such exercisability period.
(e) In the event of termination of employment with the Company for any
reason, (i) shares of Common Stock subject to the Participant's Restricted Stock
Award shall be forfeited in accordance with the provisions of the related Award
Agreement to the extent such shares have not become vested on such date and (ii)
shares of Common Stock subject to the Participant's Performance Share Award
shall be forfeited in accordance with the provisions of the related Award
Agreement to the extent such shares have not been issued or become issuable on
such date.
(f) In the event of termination of employment with the Company for any
reason, other than discharge for cause, the Committee may, in its discretion,
increase the portion of the Participant's Award available to the Participant, or
<PAGE>
Participant's Beneficiary or Personal Representative, as the case may be, upon
such terms as the Committee, in the Committee's sole discretion, shall
determine.
(g) If an entity ceases to be a Subsidiary, such action shall be
deemed for purposes of this Section 7.3 to be a termination of employment of
each employee of that Subsidiary.
(h) Upon forfeiture of a Restricted Stock Award pursuant to this
Section 7.3, the Participant, or the Participant's Beneficiary or Personal
Representative, as the case may be, shall transfer to the Corporation the
portion of the Restricted Stock Award not vested at the date of termination of
employment, without payment of any consideration by the Company for such
transfer unless the Participant paid an exercise price, in which event,
repayment, if any, of that price shall be governed by the Award Agreement.
Notwithstanding any such transfer to the Corporation, or failure, refusal or
neglect to transfer, by the Participant, or the Participant's Beneficiary or
Personal Representative, as the case may be, such nonvested portion of any
Restricted Stock Award shall be deemed transferred automatically to the
Corporation on the date of termination of employment. The Participant's original
acceptance of the Restricted Stock Award shall constitute the Participant's
appointment of the Corporation and each of the Corporation's authorized
representatives as attorney(s)-in-fact to effect such transfer and to execute
such documents as the Corporation or such representatives deem necessary or
advisable in connection with such transfer.
7.4 Acceleration of Awards. Unless prior to an Event the Committee
determines that, upon the Event's occurrence, there shall be no acceleration of
Awards or determines those Awards which shall be accelerated and the extent to
which they shall be accelerated, upon the occurrence of an Event (a) each Option
and each Stock Appreciation Right shall become immediately exercisable to the
full extent theretofore not exercisable, (b) Restricted Stock shall immediately
vest free of restrictions and (c) the number of shares covered by each
Performance Share Award shall be issued to the Participant. Acceleration of
Awards shall comply with applicable regulatory requirements, including, without
limitation, Rule 16b-3 promulgated under the Exchange Act and Section 422 of the
Code.
7.5 Government Regulations. The Plan, the granting of Awards under the Plan
and the issuance or transfer of shares of Common Stock (and/or the payment of
money) pursuant thereto are subject to all applicable federal and state laws,
rules and regulations and to such approvals by any regulatory or governmental
agency (including, without limitation, interpretive letters of the Commission)
which may, in the opinion of counsel for the Corporation, be necessary or
advisable in connection therewith. Without limiting the generality of the
foregoing, no Awards may be granted under the Plan, and no shares shall be
issued by the Corporation, or cash payments made by the Corporation, pursuant to
or in connection with any such Award, unless and until, in each such case, all
legal requirements applicable to the issuance or payment have, in the opinion of
counsel to the Corporation, been complied with. In connection with any stock
issuance or transfer, the person acquiring the shares shall, if requested by the
Corporation, give assurances satisfactory to counsel to the Corporation in
respect of such matters as the Corporation may deem desirable to assure
compliance with all applicable legal requirements.
7.6 Tax Withholding.
(a) Upon the disposition by a Participant or other person of shares of
Common Stock acquired pursuant to the exercise of an Incentive Stock Option
prior to satisfaction of the holding period requirements of Section 422 of the
Code, or upon the exercise of a Nonqualified Stock Option or a Stock
Appreciation Right, the vesting of a Restricted Stock Award, the payment of a
Performance Share Award, payment pursuant to a Stock Appreciation Right or
payment of a Tax-Offset Bonus, the Company shall have the right to (i) require
such Participant or other person to pay the Company, by cash or certified or
cashier's check payable to the Company, the amount of any taxes which the
Company may be required to withhold with respect to such transactions or (ii)
deduct from amounts payable to such Participant in cash the amount of any taxes
which the Company may be required to withhold with respect to such cash amounts.
The above notwithstanding, in any case where a tax is required to be withheld in
connection with the issuance or transfer of shares of Common Stock under this
Plan, the Participant may elect, pursuant to such rules as the Committee may
establish, to have the Company reduce the number of such shares issued or
transferred by the appropriate number of shares to accomplish such withholding;
provided that the Committee may impose such conditions on the payment of any
withholding obligation as may be required to satisfy applicable regulatory
requirements, including, without limitation, Rule 16b-3 promulgated under the
Exchange Act.
<PAGE>
(b) The Committee may, in its discretion, permit a loan from the
Company to a Participant (other than a member of the Committee) in the amount of
any taxes which the Company may be required to withhold with respect to shares
of Common Stock received pursuant to a transaction described in Subsection
7.6(a). Such a loan will be for a term, at a rate of interest and pursuant to
such other terms and rules as the Committee may establish.
7.7 Amendment, Termination and Suspension.
(a) The Board may, at any time, terminate or, from time to time,
amend, modify or suspend the Plan (or any part hereof). In addition, the
Committee may, from time to time, amend or modify any provision of the Plan and,
with the consent of the Participant, make such modifications of the terms and
conditions of such Participant's Award as the Committee shall deem advisable.
The Committee, with the consent of the Participant, may also amend the terms of
any Option to provide that the exercise price of the shares remaining subject to
the original Award shall be reestablished at a price not less than 100% of the
Fair Market Value of the Common Stock on the effective date of such amendment.
No modification of any other term or provision of any Option which is amended in
accordance with the foregoing shall be required, although the Committee may, in
its discretion, make such further modifications of any such Option as are not
inconsistent with or prohibited by the Plan. No Awards may be granted during any
suspension of the Plan or after the Plan's termination.
(b) If an amendment would (i) materially increase the benefits
accruing to Participants within the meaning of Rule 16b-3(a) promulgated under
the Exchange Act or any successor thereto, (ii) increase the aggregate number of
shares which may be issued under the Plan or to any individual, (iii) modify the
requirements of eligibility for participation in the Plan or (iv) require
shareholder approval in order to qualify Options and Stock Appreciation Rights
as "performance-based compensation," within the meaning of Section 162(m) of the
Code and the regulations promulgated thereunder, the amendment shall be approved
by the Board or the Committee and holders of a majority of the voting securities
of the Company. If the provisions of Rule 16b-3 promulgated under the Exchange
Act or any successor thereto or Section 162(m) of the Code regulations
promulgated thereunder permit the amendment of stock options plans without
compliance with the shareholder approval requirements then set forth therein,
the foregoing restrictions on the ability of the Board and the Committee to
amend the Plan shall terminate to the extent such approval is not required
thereunder (or under any other applicable law or regulation), and the Board and
the Committee shall be empowered to amend the Plan without regard to the
terminated restrictions in appropriate circumstances.
(c) In the case of Awards issued before the effective date of any
amendment, suspension or termination of this Plan, such amendment, suspension or
termination of the Plan shall not, without specific action of the Board or the
Committee and the consent of the Participant, in any way modify, amend, alter or
impair any rights or obligations under any Award previously granted under the
Plan.
7.8 Privileges of Stock Ownership, Nondistributive Intent. A Participant,
and any Participant's Personal Representative, heirs, beneficiaries and
successors, shall not be entitled to the privilege of stock ownership as to any
shares of Common Stock not actually issued to the Participant or such person or
entity. Upon the issuance and transfer of shares to the Participant, unless a
registration statement is in effect under the Securities Act, relating to such
issued and transferred Common Stock and there is available for delivery a
prospectus meeting the requirements of Section 10 of the Securities Act, the
Common Stock may be issued and transferred to the Participant only if the
Participant represents and warrants in writing to the Corporation that the
shares are being acquired for investment and not with a view to the resale or
distribution thereof. No shares shall be issued and transferred unless and until
there shall have been full compliance with any then applicable regulatory
requirements (including those of exchanges upon which the Common Stock may be
listed).
7.9 Effective Date of the Plan. The Plan is conditioned upon its approval
by the securityholders of the Corporation on or before May 24, 1999 by the vote
of the holders of a majority of the securities of the Corporation entitled to
and voting at a meeting of such holders, either in person or by proxy; except
that the Plan is adopted and approved by the Board effective May 24, 1998 to
permit the grant of Awards prior to the approval of the Plan by the
securityholders as aforesaid. Any Awards granted prior to such securityholder
approval shall not vest or become exercisable prior to such approval. In the
event that the Plan is not approved by such securityholders of the Corporation
as aforesaid, the Plan and any Awards granted hereunder shall be void and of no
force or effect.
<PAGE>
7.10 Term of the Plan. Unless previously terminated by the Board, the Plan
shall terminate at the close of business on May 23, 2008, and no Awards shall be
granted under the Plan thereafter, but such termination shall not affect any
Award theretofore granted.
7.11 Governing Law. This Plan and the documents evidencing Awards and all
other related documents shall be governed by, and construed in accordance with,
the laws of the State of New York. If any provision shall be held by a court of
competent jurisdiction to be invalid and unenforceable, the remaining provisions
of the Plan shall continue to be fully effective.
EXECUTIVE EMPLOYMENT AGREEMENT
BETWEEN
ALCOHOL SENSORS INTERNATIONAL, LTD. AND JOSEPH M. LIVELY
This EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is dated as of
September 1, 1998 (the "Effective Date"), between ALCOHOL SENSORS INTERNATIONAL,
LTD., a New York corporation (the "Corporation"), and JOSEPH M. LIVELY (the
"Executive").
WHEREAS, the Corporation desires to employ Executive as the
Corporation's President and Chief Operating Officer, upon the terms and
conditions as hereinafter set forth; and
WHEREAS, Executive desires to accept such employment with the
Corporation upon such terms and conditions.
NOW, THEREFORE, in consideration of the mutual covenants and obligations
set forth herein and other good and valuable consideration, the receipt and
adequacy is hereby acknowledged, the parties hereto agree as follows:
1. Employment and Duties.
(a) The Corporation hereby employs Executive and Executive accepts the
employment with the Corporation in the positions of President and Chief
Operating Officer of the Corporation.
(b) As President and Chief Operating Officer of the Corporation, Executive
shall perform such duties and services, consistent with such positions, as may
be assigned to Executive from time to time by the Board of Directors of the
Corporation (the "Board") or the Board's designee.
(c) Executive covenants and agrees to perform faithfully and to the best of
Executive's abilities such duties and other reasonable executive duties and
responsibilities assigned to Executive from time to time by the Board or the
Board's designee.
(d) The Corporation hereby covenants and agrees that, for the term of this
Agreement, the Board will nominate and use the Board's best efforts to cause the
election of Executive as a member of the Board.
2. Term of Agreement.
(a) Subject to the terms and conditions set forth in this Agreement, the
term of Executive's employment by the Corporation and this Agreement shall
commence on the Effective Date and shall terminate on the third anniversary of
the Effective Date (the "Initial Term").
(b) The term of employment of Executive and this Agreement, as set forth in
Paragraph 2(a) above, shall automatically be extended, without any further
action by the Corporation or Executive, for successive one year periods (each,
an "Option Term" and, collectively with the Initial Term, the "Term of this
Agreement"), on the same terms and conditions as set forth in this Agreement. If
either party shall desire to terminate Executive's employment by the Corporation
or this Agreement, at the end of the Initial Term or any Option Term, such party
shall give written notice of such desire to the other party at least 90 days
prior to the expiration of the Initial Term or such Option Term, as the case may
be. At the expiration of the Initial Term or then existing Option Term, as the
case may be, the Corporation shall have no further obligation to Executive, and
Executive shall have no further obligation to Corporation, except with respect
to (i) Executive's obligations to the Corporation pursuant to Sections 7, 8 and
10, (ii) the Corporation's obligations to Executive pursuant to Section 5 and
(iii) any other obligations the Corporation may have to Executive and/or
<PAGE>
Executive may have to the Corporation under applicable law governing the
relationship of an employer to an employee and/or an employee to an employer
upon and following termination of such relationship.
3. Time to be Devoted to Employment. Executive agrees to devote Executive's full
time, attention, efforts, loyalties and energies to the business and affairs of
the Corporation. Notwithstanding the immediately preceding sentence, Executive
shall be permitted to devote a reasonable amount of time, attention and energies
to reasonable community activities and public affairs, provided such engagement
shall not in any way conflict with the business of any of the Companies (as such
term is defined in Section 4).
4. Restriction on Other Employment; Relationship of Corporation to Parent and
the Companies.
(a) During the term of employment and the term of this Agreement, Executive
agrees that, without the prior approval of the Board, Executive shall not accept
a membership on or otherwise become a member of a board of directors, act as an
officer, employee or consultant or engage in any other business activity,
whether or not such other business is a similar or competing business with the
Corporation or any subsidiary (each, a "Company" and, together with the
Corporation, the "Companies") or parent ("Parent") of the Corporation, whether
presently existing or hereafter created or acquired, that would in any way
conflict with the business of any of the Companies or the time required by
Executive to perform Executive's duties to the Corporation. It is expressly
acknowledged by the Corporation that Executive is a director of Medibasics
Technologies, Inc. and the Corporation agrees to permit Executive to continue in
such capacity, provided that such entity does not enter a business which is
similar or competing with the Companies or Parent or the time which Executive is
required to devote to such entity would conflict with the time required by
Executive to perform Executives' duties to the Companies.
(b) It is expressly understood that the Corporation may require Executive
to devote Executive's efforts and be assigned duties relating to the operations
of any or all of the Companies, without further compensation from the
Corporation or any of the Companies. It is understood and agreed that Executive
will hold the same offices with all of the Companies as Executive shall hold
under this Agreement, unless the Board, in the Board's sole discretion, shall
determine otherwise.
5. Compensation; Reimbursement.
(a) Commencing as of the Effective Date, the Corporation shall pay to
Executive an annual base salary (the "Base Salary") of $150,000 ($182,500, as of
January 1, 1999), payable in equal weekly installments or in the manner and on
the timetable which the Corporation's payroll is customarily handled or at such
intervals as the Corporation and Executive may hereafter agree to from time to
time. Commencing with the first anniversary of the Effective Date and on each
anniversary thereafter during the Term of this Agreement (each, a "Base Salary
Adjustment Date"), the Base Salary shall be subject to a cost of living
adjustment equal to the Base Salary as in effect on such Base Salary Adjustment
Date multiplied by a fraction, the numerator of which shall be the Consumer
Price Index for the New York/New Jersey Metropolitan Area (All Employees) as
published by the Bureau of Labor Statistics of the United States Department of
Labor (the "COLA Index") in effect on such Base Salary Adjustment Date and the
denominator of which shall be the COLA Index in effect on the later of the
Effective Date or the immediately preceding Base Salary Adjustment Date. In any
year in which the COLA Index is not available, the Board shall, in the Board's
reasonable discretion, find and use a similar governmental publication or
similar criteria for the COLA Index to be used for the numerator for the
purposes of this Paragraph 5(a) and shall, retroactively, establish the COLA
Index to be used for the denominator for the purposes of this Paragraph 5(a)
using such similar publication or criteria. Executive's Base Salary may, but is
not required to, be increased from time to time, based upon Executive's
performance and other relevant factors, as the Board may deem appropriate,
without affecting any other provisions of this Agreement. Once so increased in
accordance with the immediately preceding sentence, the Base Salary may not be
thereafter decreased without the prior written consent of Executive.
(b) In addition to receiving the Base Salary provided for in Paragraph
5(a), Employee shall be entitled to receive the following incentive compensation
(the "Incentive Compensation") based upon the annual Discretionary Income (as
hereinafter defined) of the Companies on a consolidated basis:
<PAGE>
(i) Executive shall be entitled to receive Incentive Compensation
in the amount of $50,000 if the Discretionary Income for the 1998 calendar
year shall equal or exceed $1, payable no later than April 30, 1999;
(ii) Executive shall be entitled to receive Incentive
Compensation in the amount equal to 4% of all Discretionary Income for the
1999 calendar year, payable no later than April 30, 2000;
(iii) Executive shall be entitled to receive Incentive
Compensation in the amount equal to 4% of all Discretionary Income for the
2000 calendar year, payable no later than April 30, 2001; and
(iv) Executive shall be entitled to receive Incentive
Compensation in the amount equal to 4% of all Discretionary Income for each
of the 2001 calendar year and each calendar year thereafter, provided that
this Agreement shall be in effect on the last day of such calendar year.
Each such Incentive Compensation amounts to be payable no later than
April 30th of the calendar year following the calendar year in which the
Discretionary Income is applicable. Along with a check in the amount of the
Incentive Compensation, Executive shall receive a schedule, prepared by the
Chief Financial Officer of the Corporation, setting forth the amount of the
Incentive Compensation and a description of the manner in which it was
calculated.
For purposes of this Agreement, "Discretionary Income" shall mean the
annual net consolidated income after taxes of the Companies, determined by the
certified public accounting firm of the Corporation or Parent, if Parent shall
then be in existence, calculated in accordance with generally accepted
accounting principles, minus all Incentive Compensation payments due or owing
pursuant to this Paragraph 5(b) and all extraordinary items. The calculation of
Discretionary Income for purposes of this Paragraph 5(b) shall not include any
transactions between or among the Companies.
(c) In addition to receiving the Base Salary provided for in Paragraph 5(a)
and the Incentive Compensation, if any, provided for in Paragraph 5(b), during
the Term of this Agreement, Employee shall be entitled to receive a car
allowance (the "Car Allowance") of $600 per month, payable in advance,
commencing as of the first day of the first calendar month following the
Effective Date. It is agreed by the parties hereto that the payment of the Car
Allowance is in lieu of any right of Executive to reimbursement of costs related
the use by Executive of Executive's personal motor vehicle, including, but not
limited to, insurance, repair, maintenance, mileage charges and fuel costs, but
does not include parking and toll charges (the "Other Car Expenses") reasonably
incurred on the Corporation's behalf, such Other Car Expenses to be reimbursed
by the Corporation upon submission of a detailed accounting for such Other Car
Expenses by Executive to the Corporation. Commencing with the first anniversary
of the Effective Date and on each anniversary thereafter during the Term of this
Agreement (each, a "Car Allowance Adjustment Date"), the Car Allowance shall be
subject to a cost of living adjustment equal to the Car Allowance as in effect
on such Car Allowance Adjustment Date multiplied by a fraction, the numerator of
which shall be the COLA Index in effect on such Car Allowance Adjustment Date
and the denominator of which shall be the COLA Index in effect on the later of
the Effective Date or the immediately preceding Car Allowance Adjustment Date.
In any year in which the COLA Index is not available, the Board shall, in the
Board's reasonable discretion, find and use a similar governmental publication
or similar criteria for the COLA Index to be used for the numerator for the
purposes of this Paragraph 5(c) and shall, retroactively, establish the COLA
Index to be used for the denominator for the purposes of this Paragraph 5(c)
using such similar publication or criteria. Executive's Car Allowance may, but
is not required to, be increased from time to time, based upon Executive's
performance and other relevant factors, as the Board may deem appropriate,
without affecting any other provisions of this Agreement. Once so increased in
accordance with the immediately preceding sentence, the Car Allowance may not be
thereafter decreased without the prior written consent of Executive.
(d) During the Term of this Agreement, Executive shall be entitled to such
fringe benefits, including, but not limited to, medical, health, disability and
other insurance benefits, as are made available from time to time to other
executive officers of the Corporation or any of the Companies. Whether or not
available to others, Executive and Executive's immediate family shall
specifically be entitled to medical insurance coverage, paid for by the
Corporation, provided that Executive and Executive's immediate family shall
qualify for such coverage. For purposes of this Agreement, the term "Executive's
immediate family" shall mean Executive's spouse and minor children.
(e) The Corporation shall reimburse the Executive, in accordance with the
practice followed from time to time for other officers of the Corporation, for
all reasonable and necessary business and traveling expenses, except as provided
<PAGE>
in Paragraph 5(c) above, and other disbursements incurred by Executive for or on
behalf of the Corporation in the performance of Executive's duties hereunder
upon presentation by the Executive to the Corporation of an appropriate detailed
accounting of such expenses and disbursements.
(f) In addition to receiving the Base Salary provided for in Paragraph 5(a)
and the Incentive Compensation, if any, provided for in Paragraph 5(b), (i) upon
the execution of this Agreement and the surrender by Executive of options to
purchase an aggregate 174,500 shares of the common stock, par value $.001 per
share (the "Common Stock"), of the Corporation, the Corporation shall grant to
Executive options to purchase 25,000, 104,500, 45,000 and 200,000 shares of
Common Stock, evidenced by option agreements, to be delivered to Executive at
such execution and surrender, substantially in the forms annexed to this
Agreement as Exhibits A, B, C and D, respectively, (ii) upon the execution of
this Agreement, the Corporation shall grant to Executive, under the
Corporation's 1998 Stock Incentive Plan, an option to purchase 200,000 shares of
Common Stock, evidenced by an option agreement, to be delivered at such
execution, substantially in the form annexed to this Agreement as Exhibit E, and
(iii) on each anniversary of the Effective Date occurring during the Term of
this Agreement, the Corporation shall grant to Executive, under the
Corporation's 1998 Stock Incentive Plan (or successor plan), options to purchase
50,000 shares of Common Stock, at an exercise price equal to the per share last
sale price of the Common Stock on such anniversary date evidenced by option
agreements, to be delivered on such anniversary date, substantially in the form
annexed to this Agreement as Exhibit F.
(g) Executive shall use Executive's best efforts to obtain and maintain for
the Term of this Agreement "key man" term life insurance on the life of
Executive in the amount of $2,000,000, the first $1,000,000 of which shall be
payable to the Corporation as beneficiary and the second $1,000,000 of which
shall be payable to Executive's designee(s). Executive shall have the right to
change Executive's designee(s), at Executive's sole discretion, subject to the
provisions of the applicable insurance policy. The entire premium expense for
such life insurance shall be paid by the Corporation.
6. Termination of Employment.
(a) Executive's employment by the Corporation and this Agreement shall
terminate in the event of the death of Executive.
(b) The Corporation may terminate this Agreement and Executive's employment
for cause, and, in such an event, the Corporation shall only be obligated to pay
Executive the Base Salary through the date of such termination. Prior to any
termination pursuant to this Paragraph 6(b), the Corporation must give Executive
reasonable written notice and adequate opportunity to respond to the reasons for
such termination or, where applicable, cure. For purposes of this Paragraph
6(b), "cause" shall mean that the Board has made a reasonable determination that
Executive has:
(i) committed a fraud against any of the Companies,
(ii) misappropriated or done material, intentional damage to the
property of any of the Companies,
(iii) been convicted of a felony involving personal dishonesty,
moral turpitude, or willfully violent conduct,
(iv) engaged in gross business misconduct, (v) engaged in gross
malfeasance of Executive's duties, (vi) materially breached any
provision of this Agreement, or
(vii) failed, on account of a medical disability, to
substantially perform Executive's duties of employment for a period of 180
consecutive calendar days and the finding by the Board, in the exercise of
the Board's reasonable discretion, that Executive will not be able to
substantially perform Executive's duties for the shorter of (A) at least a
period of an additional 180 calendar days during the Term of this Agreement
or (B) for the remainder of the Term of this Agreement.
For purposes of a determination by the Board pursuant to this
Paragraph 6(b), Executive agrees to abstain from voting on any motion for
termination for cause by the Board.
<PAGE>
(c) If, for any reason, Executive's employment is terminated under
Paragraph 6(a) or clause (vii) of Paragraph 6(b), any compensation payable under
Paragraphs 5(a) and 5(b) which shall have been earned but not yet paid shall be
paid by the Corporation to Executive or Executive's estate, guardian or
custodian, as the case may be. In the case of Incentive Compensation payable
under Paragraph 5(b), such amounts shall be deemed earned each day during the
year in which Executive is employed pursuant to this Agreement and any payment
of such Incentive Compensation made after termination shall be equal to the
entire Incentive Compensation for the year times a fraction, the numerator of
which is equal to the number of days of the year in which Executive was employed
and the denominator of which is 365.
7. Disclosure of Information.
Executive agrees that Executive will not, at any time during or after the
Term of this Agreement, disclose, reproduce, assign or transfer to any person,
firm, corporation or other business entity, except as required by law, any
non-public information concerning the business, clients, affairs, business
plans, strategies, compounds, formulations, methods, devices, apparatus,
preparations, results from ongoing investigations by others, and present and
future plans of the Corporation, any subsidiary or affiliate thereof or any
company formed or funded by the Corporation ("Confidential Information") for any
reason or purpose whatsoever, without the Corporation's written consent; nor
shall Executive make use of any of such Confidential Information for Executive's
own purpose or for the benefit of any person, firm, corporation or other
business entity, except the Corporation or any subsidiary or affiliate thereof.
8. Restrictive Covenants.
(a) Executive hereby acknowledges and recognizes that during the term of
employment by the Corporation, Executive will be privy to trade secrets and
confidential proprietary information critical to the Corporation's business and
Executive further acknowledges and recognizes that the Corporation would find it
extremely difficult or impossible to replace Executive and accordingly Executive
agrees that, in consideration of the premises contained herein and, the
consideration to be received by the Executive hereunder, Executive will not,
from the date hereof through the end of the Term of this Agreement and for a one
year period thereafter, (i) directly or indirectly engage in, represent in any
way, or be connected with, any business or activity (such business or activity
being hereinafter called a "Competing Business"), in competition with the
Corporation or any Subsidiary in any location throughout the world, at the time
of Executive's termination of employment with the Corporation, whether such
engagement shall be as an officer, director, owner, employee, partner, affiliate
or other participant in any Competing Business, (ii) assist others in engaging
in any Competing Business in the manner described in the foregoing clause (i) of
this Paragraph 8(a) or (iii) induce other employees of any of the Companies to
terminate such employee's employment with any of the Companies, or engage in any
Competing Business. In the event that termination of Executive is without cause
under Paragraph 6(b), then the restrictions specified above shall be applicable
for the period of time Executive continues to receive compensation from the
Corporation pursuant to this Agreement, but in no event for less than six months
from the date of such termination without cause.
(b) Executive understands that the restrictions contained in Paragraph 8(a)
may limit Executive's ability to earn a livelihood in a business similar to the
businesses of any of the Companies, but Executive nevertheless believes that
Executive will receive sufficient consideration hereunder and as an employee of
the Corporation and as otherwise provided hereunder clearly to justify such
restrictions which, in any event (given Executive's education, skills and
ability), Executive does not believe would prevent Executive from earning a
living.
(c) Executive represents and warrants that:
(i) Executive is familiar with the covenants not to compete as
set forth in Paragraph 8(a) of this Agreement;
(ii) Executive has had the opportunity to discuss the provisions
of the covenants as set forth this Section 8 with Executive's personal
attorney and has concluded that such provisions (including, without
<PAGE>
limitation, the right of equitable relief and the length of time provided
for herein) are fair, reasonable and just under the circumstances;
(iii) Executive is fully aware of the obligations, limitations
and liabilities included in the covenants as set forth in Paragraph 8(a) of
this Agreement;
(iv) the scope of activities covered as set forth in Paragraph
8(a) of this Agreement is substantially similar to those activities to be
performed by Executive pursuant to this Agreement;
(v) the duration of covenants as set forth in Paragraph 8(a) of
this Agreement have been agreed upon as a reasonable restriction, giving
consideration to the following factors: (A) Executive and the Corporation
reasonably anticipate that this Agreement, although terminable in
accordance with Section 6 or otherwise, may continue in effect for
sufficient duration to allow Executive to attain superior bargaining
strength and an ability for unfair competition with respect to the
customers of the Companies and (B) the duration of the covenants as set
forth in Paragraph 8(a) of this Agreement is a reasonably necessary period
to allow the Companies to restore the Companies' position of equivalent
bargaining strength and fair competition with respect to such customers;
(vi) the geographical territory covered hereby has been agreed
upon as a reasonable geographical restriction; and
(vii) the Corporation is relying upon the representations,
warranties and covenants of Executive contained in this Section 8 in
entering into this Agreement and, without such representations, warranties
and covenants, the Corporation would not enter into this Agreement.
9. Corporation's Right to Inventions and Work Product.
Executive shall promptly disclose, grant and assign to the Corporation for
the Corporation's sole use and benefit any and all inventions, improvements,
technical information and suggestions relating in any way to the business of any
of the Companies, which Executive may develop or acquire during the term of
employment with the Corporation (whether or not during normal working hours),
together with all patent applications, letters, patents, copyrights and reissues
thereof that may at any time be granted for or upon any such invention,
improvement or technical information.
In connection therewith:
(a) Executive shall without charge, but at the expense of the Corporation,
promptly at all times hereafter execute and deliver to the Corporation and/or
the Companies such applications, assignments, descriptions and other instruments
as may be necessary or proper in the opinion of the Corporation to vest title to
any such inventions, improvements, technical information, patent applications,
patents, copyrights or reissues thereof in the Corporation and/or the Companies
and to enable the Corporation and/or the Companies to obtain and maintain the
entire right and title thereto throughout the world; and
(b) Executive shall render to the Corporation and/or the Companies at the
Corporation's and/or the Companies' expense (including a reasonable payment for
the time involved in case Executive is not then in the Corporation's employ) all
such assistance as the Corporation and/or the Companies may require in the
prosecution of applications for said patents or copyrights or reissues thereof,
in the prosecution or defense of interferences which may be declared involving
any of said applications, patents or copyrights and in any litigation in which
the Corporation and/or the Companies may be involved relating to any such
patents, inventions, improvements or technical information.
10. Enforcement.
It is the desire and intent of the parties hereto that the provisions of
this Agreement shall be enforced to the fullest extent permissible under the
laws and public policies applied in each jurisdiction in which enforcement is
sought. Accordingly, to the extent that a restriction contained in this
Agreement is more restrictive than permitted by the laws of any jurisdiction
where this Agreement may be subject to review and interpretation, the terms of
such restriction, for the purpose only of the operation of such restriction in
such jurisdiction, shall be the maximum restriction allowed by the laws of such
jurisdiction and such restriction shall be deemed to have been revised
accordingly herein.
<PAGE>
11. Representations, Warranties, and Covenants of the Executive.
Executive hereby represents, warrants and covenants to the Corporation that
Executive has the capacity to enter into this Agreement, and the execution,
delivery and performance of this Agreement and compliance with the provisions
hereof by Executive will not conflict with or result in any breach of any of the
terms, conditions, covenants or provisions of, or constitute a default under,
any note, mortgage, agreement, contract or instrument to which Executive is a
party or which Executive may be bound or affected.
12. Remedies; Survival.
(a) Executive acknowledges and understands that the provisions of this
Agreement are of a special and unique nature, the loss of which cannot be
accurately compensated for in damages by an action at law, and that the breach
or threatened breach of the provisions of this Agreement would cause the
Corporation irreparable harm. In the event of a breach or threatened breach by
the Executive of any of the provisions of Sections 7, 8 and 9 hereof, the
Corporation shall be entitled to an injunction restraining Executive from such
breach. Nothing herein contained shall be construed as prohibiting the
Corporation from pursuing any other remedies available for any breach or
threatened breach of this Agreement.
(b) Notwithstanding anything contained in this Agreement to the contrary,
the provisions of Sections 7, 8 and 9 shall survive the expiration or other
termination of this Agreement until, by their terms, such provisions are no
longer operative.
13. Notices.
All requests, demands, notices and other communications required or
otherwise given under this Agreement shall be sufficiently given if (a)
delivered by hand against written receipt therefor, (b) forwarded by overnight
courier or (c) mailed by registered or certified mail, postage prepaid,
addressed as follows:
If to the Corporation, to: Alcohol Sensors International, Ltd.
11 Oval Drive
Islandia, New York 11722
Attention: Corporate Secretary;
with a copy to: Kaufman & Associates, LLC
50 Charles Lindbergh Blvd.
Mitchel Field, NY 11553
Attention: Keith S. Braun, Esq.
If to Executive, to: Joseph M. Lively
10 Willard Avenue
Farmingdale, New York 11735
or, in the case of any of the parties hereto, at such other address as such
party shall have furnished in writing, in accordance with this Section 13, to
the other party hereto. Each such request, demand, notice or other communication
shall be deemed given (a) on the date of delivery by hand, (b) on the first
business day following the date of delivery to an overnight courier or (c) three
business days following mailing by registered or certified mail.
14. Indemnification.
The Corporation agrees to indemnify Executive and hold Executive harmless
against any and all losses, claims, damages, liabilities and costs (and all
actions in respect thereof and any legal or other expenses in giving testimony
or furnishing documents in response to a subpoena or otherwise), including,
without limitation, the costs of investigating, preparing or defending any such
action or claim, whether or not in connection with litigation in which Executive
<PAGE>
is a party, as and when incurred, directly or indirectly caused by, relating to,
based upon or arising out of any work performed by Executive in connection with
this Agreement to the full extent permitted by the New York Business Corporation
Law and by the Certificate of Incorporation and Bylaws of the Corporation, as
may be amended from time to time.
The indemnification provision of this Section 14 shall be in addition to
any liability which the Corporation may otherwise have to Executive.
If any action, proceeding or investigation is commenced as to which
Executive proposes to demand such indemnification, Executive shall notify the
Corporation with reasonable promptness. Executive shall have the right to retain
counsel of Executive's own choice to represent Executive and the Corporation
shall pay all reasonable fees and expenses of such counsel; and such counsel
shall, to the fullest extent consistent with such counsel's professional
responsibilities, cooperate with the Corporation and any counsel designated by
the Corporation. The Corporation shall be liable for any settlement of any claim
against Executive made with the Corporation's written consent, which consent
shall not be unreasonably withheld, to the fullest extent permitted by the New
York Business Corporation Law and the Certificate of Incorporation and Bylaws of
the Corporation, as may be amended from time to time.
15. Prior Agreements/Oral Modification.
This Agreement supersedes all prior agreements and constitutes the entire
Agreement and understanding between parties. This Agreement may not be amended,
modified in any manner or terminated orally; and no amendment, modification,
termination or attempted waiver of any of the provisions hereof shall be binding
unless in writing and signed by the parties against whom the same is sought to
be enforced; provided, however, that Executive's compensation may be increased
at any time by the Corporation without in any way affecting any of the other
terms and conditions of this Agreement which in all other respects shall remain
in full force and effect.
16. Attorney's Fees.
In the event of any litigation between the parties to this Agreement, or
any of them, concerning this Agreement, the prevailing party shall be entitled
to recover the prevailing party's reasonable attorney's fees, including, but not
limited to, the prevailing party's reasonable attorney's fees for services
rendered on appeal, as determined by a court of competent jurisdiction.
17. Binding Agreement; Benefit.
The provisions of this Agreement will be binding upon, and will inure to
the benefit of, the respective heirs, legal representatives and successors of
the parties hereto.
18. Governing Law.
This Agreement will be governed by, and construed and enforced in
accordance with the laws of the State of New York.
19. Arbitration.
(a) Any dispute arising between the parties to this Agreement, including,
but not limited to, those pertaining to the formation, validity, interpretation,
effect or alleged breach of this Agreement ("Arbitrable Dispute") will be
submitted to arbitration in New York, New York, before an experienced employment
arbitrator and selected in accordance with the rules of the American Arbitration
Association labor tribunal. Each party shall pay the fees of their respective
<PAGE>
attorneys, the expenses of their witnesses and any other expenses connected with
presenting their claim. Other costs of the arbitration, including the fees of
the arbitrator, cost of any record or transcript of the arbitration,
administrative fees, and other fees and costs shall be borne equally by the
parties hereto.
(b) Should any party to this Agreement hereafter institute any legal action
or administrative proceedings against another party with respect to any claim
waived by this Agreement or pursue any other Arbitrable Dispute by any method
other than said arbitration, the responding party shall be entitled to recover
from the initiating party all damages, costs, expenses and attorney's fees
incurred as a result of such action.
20. Proper Construction.
(a) The language of all parts of this Agreement shall in all cases be
construed as a whole according to its fair meaning, and not strictly for or
against any of the parties.
(b) As used in this Agreement, the term "or" shall be deemed to include the
term "and/or" and the singular or plural number shall be deemed to include the
other whenever the context so indicates or requires.
21. Waiver of Breach.
The waiver by either party of a breach of any provision of this Agreement
by the other party must be in writing and shall not operate or be construed as a
waiver of any subsequent breach by such other party.
22. Entire Agreement; Amendments.
This Agreement contains the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior agreements or
understandings among the parties with respect thereto. This Agreement may be
amended only by an agreement in writing signed by the parties hereto.
23. Headings.
The Section and Paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
24. Severability.
Any provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
25. Assignment.
This Agreement is personal in its nature and the parties hereto shall not,
without the consent of the other, assign or transfer this Agreement or any
rights or obligations hereunder; provided, however, that the provisions hereof
shall inure to the benefit of, and be binding upon, each successor of the
Corporation whether by merger, consolidation, transfer of all or substantially
all assets, or otherwise.
<PAGE>
26. Counterparts.
This Agreement may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
EXECUTIVE: CORPORATION:
JOSEPH M. LIVELY ALCOHOL SENSORS INTERNATIONAL, LTD.
/s/ Joseph M. Lively By: /s/ Keith S. Braun
Name: Keith S. Braun
Title: Secretary
WITNESS: WITNESS:
/s/ Neil M. Kaufman /s/ Neil M. Kaufman
Name: Name:
STIPULATION OF SETTLEMENT,
SETTLEMENT AGREEMENT
AND MUTUAL GENERAL RELEASE
This Stipulation of Settlement, Settlement Agreement and Mutual General
Release ("Agreement") executed as of the 27th day of February, 1997 by and
between
Albert Pace and Jan Polek (sometimes hereinafter referred to as
"Releasors"), and
Alcohol Sensors International Ltd. ("ASI"), John T. Ruocco ("Ruocco"),
Michael A. Sylvester ("Sylvester"), Robert B. Whitney ("Whitney")
Steven A. Martello ("Martello"), Leon Pasqua, ("Pasqua"), and
(sometimes hereinafter collectively referred to as "Releasees"),
both Releasors and Releasees collectively referred to as the "Parties" and
individually as a "Party".
W I T N E S S E T H:
WHEREAS, Releasors filed a complaint for damages against Alcohol Sensors
International, Ltd., Whitney, Ruocco, Sylvester, Martello and Pasqua currently
pending in the Federal District Court for the Southern District of New York
under Index No. 96 Civ. 5867 (hereinafter the "Action"); and
WHEREAS, all Parties desire that the Action be settled, discontinued and
dismissed, that all matters at issue be settled, and that the Parties release
and fully discharge each other of and from any and all claims, suits, or causes
of action arising from, and all acts, actions, and transactions between the
Parties, or in any way connected with, the facts and circumstances surrounding
the Action on the terms and conditions set forth herein;
NOW, THEREFORE, for and in consideration of the premises, and the mutual
releases set forth herein, and the payment of shares of stock in Alcohol Sensors
International, Ltd. in accordance with the provisions of paragraph "1" hereof,
to be paid by Releasees to Releasors (or their designees) in accordance with the
terms and subject to the conditions hereinafter set forth, the receipt and
sufficiency of which is hereby expressly acknowledged, the Parties hereby agree
as follows:
1.a. Releasees will take all necessary action to issue transfer and deliver
to the Releasors, or their designees, 315,000 fully-paid, non-assessable shares
of the common stock of Alcohol Sensors International, Ltd., a New York
corporation within thirty (30) days of the date this Agreement is fully
executed. Releasors acknowledge that the shares to be issued, transferred and
delivered pursuant to this paragraph "1.a." are subject to contractual "lock-up"
provisions and a shareholder agreement between the Releasees and American
International Insurance Company ("AIIC") respectively. Notwithstanding the terms
of such lock-up provisions, Releasees warrant, represent and agree that with
respect to 50,000 of the shares to be issued transferred and delivered pursuant
to this Stipulation and Settlement Agreement, that the Releasors will take all
necessary and appropriate action to have these shares issued transferred and
delivered to Jacobowitz & Gubitz as attorneys, free of such contractual lock-up
restrictions provided, however, that Jacobowitz and Gubitz shall have signed an
escrow agreement which will restrict the sale of these 50,000 shares to no more
than 12,500 shares in each of the four (4) calendar months commencing April 1,
1997. Releasors and their attorneys agree further that any such sales of these
securities shall be made only through the brokerage facilities of William Scott
& Company, LLC provided, however, that William Scott will have agreed, in
writing, to afford Jacobowitz & Gubitz in respect of any such sales, the same
prices and terms available to the general public.
b. With respect to the remainder of the shares issuable hereunder
(265,000), Releasors agree, for themselves, their heirs, attorneys, assignees,
and designees to be bound by the terms of a certain agreement between AIIC and
the Releasees (the "AIIC Agreement) including, without limitation, provisions
relating to restrictions on sale of the securities to be issued hereunder.
Releasors acknowledge that they have received a copy of the AIIC Agreement and
that no representation has been made as to the content, meaning, or significance
of the terms thereof other than has been stated therein. Releasors further agree
to execute, if required by AIIC, a separate agreement, in form and substance
agreeable to AIIC or its counsel, memorializing the substantive terms of this
paragraph "1.b."
<PAGE>
c. The Releasees warrant and represent that ASI's Employee Stock Option
Plan provides for the issuance of no more than 600,000 shares of ASI's common
stock on exercise of such options, and that 300,000 of these options are
issuable only to outside consultants and outside advisors to the Company.
d. The Releasees warrant and represent that neither ASI nor its Board of
Directors has taken any action prior to the execution of this Agreement, and
further warrant and represent that they will take no action subsequent to the
execution of this Agreement and prior to the issuance and delivery of 315,000
shares pursuant to paragraph "1.a." hereof, and/or any judgment authorized
herein has been satisfied, to effect any stock split or stock dividend of or on
any of the outstanding capital stock of the Company.
e. In order to effectuate the issuance, transfer and delivery of shares
contemplated by paragraph "1.a." hereof, the Releasees warrant and represent
that they will in good faith and without delay take the following actions:
i. Deliver share certificates, stock powers, and letters of
authorization to its Transfer Agent, Continental Stock Transfer, within three
(3) business days of receipt of written instructions from Releasors as to the
identity, social security number, and address of the individuals/entities to
whom shares are to be issued, transferred and delivered;
ii. Secure and deliver to the Transfer Agent such other documentation
as may be required by the Transfer Agent to effect the transfers and deliveries
contemplated hereby including, without limitation, waivers and consents of AIIC,
consents of William Scott & Co., LLC, opinion(s) of counsel, and the consents of
any others whose consents may be necessary to cause the transfers and deliveries
contemplated hereby. Any additional documentation requested or required by the
Transfer Agent will be delivered to the Transfer Agent by overnight courier no
later than the next business day after receipt of same by the Releasees or any
of them.
f. In order to effectuate the issuance of shares contemplated by paragraph
"1.a.", the Releasors agree to execute any and all documentation required by the
Transfer Agent, AIIC, or William Scott & Company, LLC, including, without
limitation, agreements necessary to enforce the terms of paragraph "1.b." and
the AIIC lock-up provisions; agreements necessary to enforce the provisions
restricting sales through William Scott & Company, LLC as set forth in paragraph
"1.a."; any additional documentation reasonably requested and necessary to
effect the transfers contemplated, all of which shall be subject to approval of
counsel to the Releasors.
2. Assuming successful completion of the delivery of shares pursuant to
paragraphs "1.a." and "b.", Albert Pace and Jan Polek hereby FULLY RELEASES,
ACQUITS and FOREVER DISCHARGE ASI, Whitney, Ruocco, Sylvester, Martello, and
Pasqua, their executors, administrators, predecessors and successors in
interest, shareholders, directors, former directors, officers, former officers,
partners, assigns, attorneys, agents, employees, and former employees, parents,
subsidiaries, affiliates, any company affiliated with, controlled by, or having
a contractual relationship with the Releasees, personal representatives, of and
from any and all actions, suits, liens, claims, counterclaims, losses, rights,
demands, debts, costs, accounts, contracts, agreements, promises, options,
liabilities, obligations, damages, controversies, causes of action, loss of
services, expenses and compensation, of any kind or nature whatsoever, known or
unknown, suspected or unsuspected, fixed or contingent, whether in contract or
in tort, at law or in equity, including without limitation, attorneys' fees and
costs (and appellate fees and costs), which Releasors, their executors,
administrators, predecessors and successors in interest, assigns, attorneys,
agents, employees, parent subsidiaries, affiliates, and/or personal
representatives, may have had or claim to have had, or now have or claim to have
or hereafter may have or assert to have on account of, or by reason of, or in
any way growing out of or resulting from the Action, or relating to any of the
facts, theories, causes or action or circumstances forming the basis of the
Action, or in any way connected with the transactions giving rise to the Action,
or otherwise.
3. Assuming successful completion of the delivery of shares pursuant to
paragraphs "1.a." and "b.", ASI, Whitney, Ruocco, Sylvester, Martello, and
Pasqua hereby FULLY RELEASE, ACQUIT and FOREVER DISCHARGE, Releasors and their
executors, administrators, predecessors and successors in interest, assigns,
attorneys, agents, employees, affiliates, any company affiliated with,
controlled by, or having a contractual relationship with the Releasors and/or
personal representatives, of and from any and all actions, suits, liens, claims,
counterclaims, losses, rights, demands, debts, costs, accounts, contracts,
agreements, promises, options, liabilities, obligations, damages, controversies,
<PAGE>
causes of action, loss of services, expenses and compensation, of any kind or
nature whatsoever, known or unknown, suspected or unsuspected, fixed or
contingent, whether in contract or in tort, at law or in equity, including
without limitation, attorneys fees and costs (and appellate fees and costs),
which its executors, administrators, predecessors and successors, in interest,
shareholders, directors, former directors, officers, former officers, partners,
assigns, attorneys, agents, employees, parents, subsidiaries, affiliates, and/or
personal representatives, may have had or claim to have had, on account of, or
by reason of, or in any way growing out of or resulting from the Action, or
relating to any of the facts, theories, causes of action or circumstances
forming the basis of the Action, or in any way connected with the transactions
giving rise to the Action, or otherwise.
4. Each party expressly understands and acknowledges that it is possible
that unknown losses or claims exist, whether or not said claims or causes, or
the predicate acts of such claims or causes have been enumerated in the Action,
or that present losses may have been underestimated in amount or severity, and
each Party represents and warrants that this uncertainty was taken into account
in determining the consideration to be paid for the making of this Agreement,
and that a portion of the consideration has been bargained for between the
Parties with the knowledge of the possibility of such unknown claims and that
said consideration was given in exchange for full accord, satisfaction and
discharge of all such claims including claims and counterclaims that could have
been made in the Action.
5. It is agreed and understood that the consideration for this Agreement is
contractual and not a mere recital. This Agreement is a compromise settlement
agreement and is entered into by the Releasees in order to settle disputed
claims, to avoid the expense of litigation, and to achieve peace. The Releasees
deny that they or any of their agents, representatives, corporate parents,
affiliates, subsidiaries, divisions, officers, directors, shareholders,
employees, attorneys, heirs, survivors, executors, administrators, and/or
assigns have ever had any liability to the Releasors. Nothing in this Agreement
shall be interpreted as an admission of liability by the Releasees.
6. Each Party acknowledges that it is fully and completely informed of the
facts relating to the subject matter of this Agreement and of the rights and
liabilities of each of the Parties; that each Party enters into this Agreement
voluntarily after having given careful and mature consideration to the making of
this Agreement; that each Party has carefully read this instrument; that each
Party has discussed the provisions of this Agreement with an attorney of its
choice and has executed it in reliance upon its own judgment and the advice of
its attorneys; that this Agreement represents the entire agreement between the
Parties; that each Party is legally competent to execute this Agreement; that
each Party fully understands and intends that this Agreement will be a full,
final and complete release of all matters described herein between the Parties.
7. The Releasors and their agents, representatives, survivors, heirs,
successors, assigns, executors, and administrators further covenant that they
will refrain from commencing any action, suit, arbitration, or administrative
proceeding, or prosecuting any pending action, suit, arbitration, or
administrative proceeding, in law or in equity, against the Releasees or their
agents, representatives, corporate parents, affiliates, subsidiaries, divisions,
officers, directors, shareholders, employees, attorneys, heirs, survivors,
executors, administrators, successors, or assigns, concerning any causes of
action, claims, or demands released in this Agreement. The Releasors further
represent and warrant that they will not in the future, aid, assist, or
instigate any person, firm, business entity or corporation to bring any claim,
action, arbitration, or other proceeding against any of the other parties
hereto.
8. This Agreement and its terms are CONFIDENTIAL and neither the Releasors
nor their attorneys, agents, representatives, survivors, heirs, successors,
assigns, executors, or administrators shall disclose this Agreement or any of
its terms to any other person or entity except as otherwise required by law. If
the Releasors or their attorneys, agents, representatives, survivors, heirs,
successors, assigns, executors, or administrators disclose this Agreement or any
of its terms to any other person except as otherwise required by law, then the
Releasors (a) shall be liable for all damages arising from that breach, (b)
shall indemnify the Releasees and their agents and affiliates for and from any
and all liability, loss, cost or expense (including but not limited to
reasonable attorneys' fees) resulting from the breach, and (c) shall forfeit any
moneys and shares that have been, or will be, received pursuant to this
Agreement. The parties hereby stipulate that the above provisions of this
paragraph do not constitute a penalty and waive any right to make such a claim.
If any of the persons or entities bound by this paragraph discloses this
Agreement or any of its terms to any other person as required by law, then the
person or entity making the disclosure shall inform the other person to whom the
<PAGE>
information was disclosed that the Agreement and its terms are confidential and
must not be disclosed by the other person.
9. The Releasors make the following warranties and covenants concerning
their right to settle and release their claims: the Releasors warrant that they
have not voluntarily or involuntarily transferred, conveyed, pledged, assigned,
or made any other disposition of the rights, claims, interests, actions, causes
of action, obligations, or any other matter being released by this Agreement,
and that they have the full power and right to accept the consideration for this
Agreement and to give the releases and agreements set forth herein. The
Releasors represent and warrant that there are no other persons or entities,
including but not limited to former or existing spouses of the Releasors, who
possess any potential claim for damages against the Releasees or their agents,
representatives, corporate parents, affiliates, subsidiaries, divisions,
officers, directors, shareholders, employees, attorneys, heirs, survivors,
executors, administrators, successors, and assigns, arising out of or relating
to the causes of action, claims, or demands released in this Agreement, or who
must sign, approve, or consent to this Agreement in order for the Releasees to
obtain complete releases from the claims as stated above.
10. In connection with this Settlement and Release, the Parties each
acknowledge that additional facts may be discovered later, but that it is the
intention of each Party to fully, finally and forever settle and release all
matters and any related claims, known or unknown, suspected or unsuspected,
which now exist, may exist, or formerly have existed between Parties. The
Parties acknowledge that this Agreement shall and will remain in effect as a
full and complete general release of all matters, notwithstanding the discovery
or existence of any additional or different facts. The Releasors acknowledge
that they assume the risk of any mistake of fact or law with regard to all
aspects of this Agreement and any asserted rights released by this Agreement.
RELEASORS AND RELEASEES ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT, AND
THAT THEY FULLY KNOW, UNDERSTAND AND APPRECIATE ITS CONTENTS AND THAT THEY
EXECUTE THE SAME AND MAKE THE SETTLEMENT PROVIDED FOR HEREIN VOLUNTARILY AND OF
THEIR OWN FREE WILL.
11. This Settlement Agreement shall be governed by, subject to, and
construed in accordance with the internal laws of the State of New York without
regard to its choice of law or conflicts rules or provisions.
12. The Parties acknowledge that this Agreement is the entire agreement
between and among them and that there are no terms, agreements, representations,
warranties, promises, inducements, or understandings, oral or otherwise, except
as expressly stated herein; that this Agreement contains the entire agreement
between the Releasors and the Releasees and that the terms of the Release are
contractual and not mere recitals; and that this Agreement may not be amended or
modified in any respect except by a written instrument duly executed by all the
parties to this Agreement.
13. If any portion or term of this Agreement is held unenforceable by a
court of competent jurisdiction, the remainder of this Agreement shall not be
effected and shall remain fully in force and enforceable.
14. This Agreement may be pleaded as a full and complete defense to any
action, suit, arbitration, or other proceeding that may be instituted,
prosecuted, or attempted with respect to any of the claims released hereby. The
Releasors agree that any such proceeding would cause irreparable injury to the
Releasees and that any court of competent jurisdiction may enter an injunction
restraining prosecution thereof. The Releasors further agree that this Agreement
may be pleaded as necessary for the purpose of enforcing this Agreement in
court.
15. The Parties consent to have any dispute concerning this Agreement heard
in the Federal District Court for the Southern District of New York located in
the County of Westchester, State of New York.
16. This Agreement may be executed in one or more counterparts and by
telecopier and shall be effective as between the parties when so executed
provided that the party executing this stipulation by telecopier agrees to
provide the others with signed counterpart by overnight courier. A set of
counterpart copies which collectively contains the signature and acknowledgment
of all parties shall constitute an original.
<PAGE>
17. The parties through counsel agree to execute stipulations of
discontinuance with prejudice and without costs necessary to effect a dismissal
of the Action.
18. This Stipulation may be, but shall not be required to be submitted to
the court to be "so ordered", but whether or not "so ordered" by the court shall
be deemed to constitute and have the effect of an order in this proceeding as
between the parties, and shall be enforceable as such.
19. The shares to be delivered to the Releasees are to be issued out of the
shares of stock currently held by John T. Ruocco, Michael T. Sylvester, Robert
B. Whitney, Steven A. Martello and Leon Pasqua and others.
20. This Agreement shall be held in escrow and not be delivered and
effective until Releasors have delivered share certificates, stock powers,
letter of authorization, the consents of AIC and the underwriter, opinions of
counsel and such other documentation necessary to deliver to the Escrow Agent
share certificates in good deliverable form necessary to effectuate the
transfer, issuance and delivery contemplated under paragraph "1.a" and "1.b".
IN WITNESS WHEREOF, this Agreement is executed as follows:
/s/ Albert Pace
ALBERT PACE
State of New York )
)ss.:
County of Orange )
Before me personally appeared Albert Pace known to me to be the person
whose name is subscribed to the foregoing instrument and he acknowledged to me
that he executed the same.
Sworn and subscribed before me this 27th day of February, 1997.
/s/ Howard Protter
Notary Public
/s/ Jan Polek
JAN POLEK
State of New Jersey )
)ss.:
County of Morris )
Before me personally appeared Jan Polek known to me to be the person whose
name is subscribed to the foregoing instrument and he acknowledged to me that he
executed the same.
Sworn and subscribed before me this 27th day of February, 1997.
/s/ Mariann G. Werp
Notary Public
<PAGE>
ALCOHOL SENSORS
INTERNATIONAL, LTD.
By /s/ Robert B. Whitney
Robert B. Whitney, its President
State of New York )
)ss.:
County of Nassau )
Before me personally appeared Robert B. Whitney known to me to be the
person whose name is subscribed and acknowledged to me that the same was an act
of Alcohol Sensors International, Ltd., a New York corporation, and that he
executed the same for the purposes and consideration therein expressed as the
act and deed of said corporation, and that he is authorized to execute same by
order of the Board of Directors of said corporation.
Sworn and subscribed before me this 27th day of February, 1997.
/s/ Joseph M. Lively
Notary Public
/s/ John T.Ruocco
JOHN T. RUOCCO
State of New York )
)ss.:
County of Nassau )
Before me personally appeared John T. Ruocco known to me to be the person
whose name is subscribed to the foregoing instrument and he acknowledged to me
that he executed the same.
Sworn and subscribed before me this 27th day of February, 1997.
/s/ Joseph M. Lively
Notary Public
/s/ Michael A. Sylvester
MICHAEL A. SYLVESTER
State of New York )
)ss.:
County of Nassau )
Before me personally appeared Michael A. Sylvester known to me to be the
person whose name is subscribed to the foregoing instrument and he acknowledged
to me that he executed the same.
Sworn and subscribed before me this 27th day of February, 1997.
/s/ Joseph M. Lively
Notary Public
<PAGE>
/s/ Robert B. Whitney
ROBERT B. WHITNEY
State of New York )
)ss.:
County of Nassau )
Before me personally appeared Robert B. Whitney known to me to be the
person whose name is subscribed to the foregoing instrument and he acknowledged
to me that he executed the same.
Sworn and subscribed before me this 27th day of February, 1997.
/s/ Joseph M. Lively
Notary Public
/s/ Steven A. Martello
STEVEN A. MARTELLO
State of New York )
)ss.:
County of Nassau )
Before me personally appeared Steven A. Martello known to me to be the
person whose name is subscribed to the foregoing instrument and he acknowledged
to me that he executed the same.
Sworn and subscribed before me this 27th day of February, 1997.
/s/ Joseph M. Lively
Notary Public
/s/ Leon Pasqua
LEON PASQUA
State of New York )
)ss.:
County of Suffolk )
Before me personally appeared Leon Pasqua known to me to be the person
whose name is subscribed to the foregoing instrument and he acknowledged to me
that he executed the same.
Sworn and subscribed before me this 27th day of February, 1997.
/s/ Joseph M. Lively
Notary Public
CONSENT AND AMENDMENT AGREEMENT
CONSENT AND AMENDMENT AGREEMENT (this "Agreement") dated as of April
9, 1997 among:
I. ROBERT B. WHITNEY ("Whitney"), STEVEN A. MARTELLO ("Martello"),
JOHN T. RUOCCO ("Ruocco"), MICHAEL A. SYLVESTER ("Sylvester") and JOSEPH M.
LIVELY ("Lively"; and each, an "Existing Shareholder" and, collectively,
the "Existing Shareholders");
II. AMERICAN INTERNATIONAL INSURANCE COMPANY, a New York corporation
(the "Investor");
III. ALCOHOL SENSORS INTERNATIONAL, LTD., a New York corporation
(the "Company");
IV. ALBERT PACE ("PACE"), JAN POLEK ("POLEK"), LIPMAN FAMILY PARTNERS
LTD. ("LFP"), GERALD N. JACOBOWITZ, DAVID B. GUBITS, JOHN H. THOMAS, GERALD
A. LENNON, PETER R. ERIKSEN, LINDA F. MADOFF, HOWARD PROTTER, DONALD G.
NICHOL, LARRY WOLINSKY, ROBERT E. DINARDO, MARK A. KROHN and J. BENJAMIN
GAILEY (each, a "Releasor" and, collectively, the "Releasors");
V. FABRICANT & LIPMAN ("F&L") and JACOBOWITZ & GUBITS ("J&G"); and
VI. ARIEL ENTERPRISES, a trust ("Ariel").
RECITALS:
A. The Existing Shareholders, the Investor and the Company are parties
to a Shareholders Agreement dated as of December 20, 1996 (the "Shareholders
Agreement"; capitalized terms used herein and not otherwise defined shall have
the meaning given to such terms in the Shareholders Agreement), a copy of which
is attached hereto as Exhibit A.
B. Pursuant to (i) a Stipulation of Settlement, Settlement Agreement
and Mutual General Release dated as of February 27, 1997 among Pace, Polek, the
Company, Ruocco, Sylvester, Whitney, Martello and Leon Pasqua ("Pasqua"), a copy
of which is attached hereto as Exhibit B (the "Release"), and (ii) an Escrow
Agreement dated as of February 27, 1997 among the Company, Whitney, Ruocco,
Sylvester, Martello, Pasqua, John Walz ("Walz"), Anthony Kearney ("Kearney"),
John Lawlor, Esq., J&G, F&L and the Releasors, a copy of which is attached
hereto as Exhibit C (the "Escrow Agreement"), certain of the Existing
Shareholders, Pasqua, Walz and Kearney have agreed to Transfer to J&G as Escrow
Agent (in such capacity, the "Escrow Agent") for the account of the Releasors,
F&L and J&G an aggregate of 315,000 shares of Common Stock (the "Subject
Shares"), as more particularly described in the Release and the Escrow
Agreement.
<PAGE>
C. Of the Subject Shares 278,578 shares (the "Existing Shareholder
Subject Shares") are to be delivered by Whitney, Ruocco, Sylvester and Martello,
as more particularly described in Section 1 hereof, and the balance of such
Subject Shares are to be delivered by Pasqua, Walz and Kearney.
D. An aggregate of 265,000 shares of the Subject Shares (the
"Releasors' Shares"), are to be released from escrow and Transferred to the
appropriate Releasors upon consummation of the Release, as more particularly
described in the Release, the Escrow Agreement and Section 1 of this Agreement.
E. An aggregate of 50,000 shares of the Subject Shares (the "Escrow
Shares") are to be released from escrow and Transferred to Pace, Polek, F&L and
J&G over a period commencing April 1, 1997 and ending July 31, 1997, as more
particularly described in the Release, Section 5(b) of the Escrow Agreement and
Section 3 of this Agreement.
F. The parties hereto desire to set forth their agreement that,
subject to the terms and conditions hereof (i) the Transfer of the Existing
Shareholder Subject Shares by certain of the Existing Shareholders pursuant to
the Release and the Escrow Agreement, and the Transfer of the Subject Shares by
the Escrow Agent to the Releasors, F&L and J&G, shall be permitted
notwithstanding the provisions of the Shareholders Agreement to the contrary,
(ii) the Releasors shall become parties to and shall be bound by the
Shareholders Agreement with respect to the Releasors' Shares, (iii) Ariel shall
become a party to and shall be bound by the Shareholders Agreement for all
purposes as an Existing Shareholder thereunder and (iv) in connection with the
Transfers of the Subject Shares described herein, certain provisions of the
Shareholders Agreement shall be amended.
NOW, THEREFORE, the parties hereto, intending legally to be bound,
hereby agree as follows:
1. Pursuant to the Release and the Escrow Agreement, the Existing
Shareholders identified below shall be entitled to Transfer the number of
Existing Shareholder Subject Shares specified with respect to such Existing
Shareholder to the Escrow Agent:
<TABLE>
<CAPTION>
Number of
Existing Shareholder
Existing Shareholder Subject Shares
<S> <C>
Ruocco 79,822
Sylvester 79,822
Whitney 79,822
Martello 39,112
</TABLE>
Pursuant to the Release and the Escrow Agreement, the Escrow Agent
shall be entitled upon consummation of the Release to release from escrow and to
Transfer the number of Releasors' Shares specified below to the Releasor
specified:
<PAGE>
<TABLE>
<CAPTION>
Number of
Releasor Releasors' Shares
<S> <C>
Pace 127,000
Polek 31,800
LFP 53,100
Gerald N. Jacobowitz 5,734
David B. Gubits 4,567
John H. Thomas 4,567
Gerald A. Lennon 4,567
Peter R. Eriksen 4,567
Linda F. Madoff 4,567
Howard Protter 4,567
Donald G. Nichol 4,567
Larry Wolinsky 4,567
Robert E. Dinardo 3,610
Mark A. Krohn 3,610
J. Benjamin Gailey 3,610
</TABLE>
2. Effective as of the date of this Agreement, each Releasor (i)
hereby severally agrees to become a party to the Shareholders Agreement and to
be bound by the terms thereof with respect to the Releasors' Shares acquired by
such Releasor pursuant to the Release and the Escrow Agreement (as more
particularly described in Section 1 hereof), (ii) shall be a Shareholder under
the Shareholders Agreement (provided that, notwithstanding any provision of the
Shareholders Agreement to the contrary, no Releasor shall be entitled to any of
the rights of a Shareholder specified in Section 5.1.2, 5.1.3 or 5.1.4 thereof)
and (iii) hereby severally makes the representations and warranties set forth in
Sections 4.2 and 4.3 of the Shareholders Agreement to each other party hereto as
if such representations and warranties were set forth herein in their entirety.
3. The Escrow Agent shall be entitled to release from escrow and to
Transfer the Escrow Shares to Pace, Polek, F&L and J&G at the times and in the
manner provided in the Release and in Section 5(b) of the Escrow Agreement. In
connection with such Transfer of the Escrow
<PAGE>
Shares, each of Pace, Polek, F&L and J&G hereby severally agrees that any
Transfer by such Person of any of the Escrow Shares from April 1 , 1997
through July 31, 1997 shall be made only through the brokerage facilities of
William Scott & Company, LLC (the "Broker"), provided that the Broker shall have
agreed, in writing, to afford such Person the same prices and terms in relation
to such Transfers as are generally made available to the general public.
Subject to the foregoing, the Escrow Shares shall not be subject to the
Shareholders Agreement.
4. Effective as of the date of this Agreement, Ariel agrees to be
bound by the terms of the Shareholders Agreement and to be deemed for all
purposes an Existing Shareholder thereunder.
5. (a) In connection with the Transfers of the Subject Shares
described herein, the definition of Related Transferee in the Shareholders
Agreement is hereby deleted in its entirety and replaced with the following:
""Related Transferee": as to any Existing Shareholder or any
Releasor, a Transferee that (i) has purchased or otherwise acquired shares of
Capital Stock of the Company from such Existing Shareholder or Releasor, as the
case may be, and (ii) is a spouse, parent, sibling, child, stepchild or
grandchild of such Existing Shareholder or Releasor, as the case may be, or a
trust which is for the benefit of such a Person or Persons, or is an Affiliate
of such Existing Shareholder or Releasor, as the case may be."
(b) In connection with the Transfers of the Subject Shares
described herein, Sections 3.1(a) and (b) of the Shareholders Agreement are
hereby deleted in their entirety and replaced with the following paragraphs:
"(a) For the period from (and including) April 9, 1997 through
(and including) December 20, 1998 (the "Restricted Period"), the Existing
Shareholders and the Releasors severally agree with the Company, the
Investor and with each other Shareholder that they will not, directly or
indirectly, Transfer any Capital Stock of the Company (or any interest
therein), now or hereafter at any time owned by them (excluding in the case
of Pace and Polek the Escrow Shares acquired by such Persons, respectively,
pursuant to the Release and the Escrow Agreement (the "Excluded Shares")),
except that, upon written notice to the Company, the Investor and each
other Shareholder, in accordance with applicable law: (i) each Existing
Shareholder (other than Ariel) and each Releasor (other than LFP) may
Transfer any Common Stock pursuant to an Involuntary Transfer (for such
purpose, the reference to "Existing Shareholder" in the definition of
Involuntary Transfer in the Shareholders Agreement shall be deemed a
reference to "Existing Shareholder or a Releasor"); (ii) each Existing
Shareholder (other than Ariel) and each Releasor (other than LFP) may
Transfer any Common Stock for estate planning purposes to such Existing
Shareholder's or Releasor's spouse, parents, siblings, children,
stepchildren or grandchildren or to a trust which is for the benefit of
such Existing Shareholder or Releasor or such Existing Shareholder's or
Releasor's spouse, parents, siblings, children, stepchildren or
grandchildren; (iii) during the period from (and including) April 9, 1997
through (but excluding) April 9, 1998 (the "Initial Period"), Lively and
Ariel, respectively, may Transfer any Common Stock which, when combined
with all other Transfers of Common Stock by
<PAGE>
such Person during the Initial Period, does not exceed 7,000 shares of
Common Stock for Lively and 14,000 shares of Common Stock for Ariel; and
(iv) during the period from (and including) the last day of the initial
Period through (and including) the last day of the Restricted Period (the
"Second Period"), Ruocco, Sylvester, Whitney, Lively and Ariel,
respectively, may Transfer any Common Stock which, when combined with
all other Transfers of Common Stock by such Person during the Second
Period, does not exceed the number of shares of Common Stock specified with
respect to such Person below:
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Which May Be
Transferred in the
Shareholder Second Period
<S> <C>
Ruocco 49,394
Sylvester 49,394
Whitney 49,394
Lively 21,000
Ariel 42,000
</TABLE>
; provided, however, that, in connection with any Transfer permitted
under this Section 3.1(a), prior to such Transfer, such Existing
Shareholder or such Releasor, as the case may be, shall comply with Section
3.1(b) hereof.
(b) Any Transfer of Capital Stock of the Company (excluding in
the case of Pace and Polek, the Excluded Shares) by any Existing
Shareholder or any Releasor during the Restricted Period, or at any time
thereafter to a Related Transferee, shall not relieve the transferor of its
obligations hereunder and shall only be valid if the Person to whom such
Capital Stock is Transferred (a "Transferee"), prior to the Transfer,
agrees in writing to be bound by the terms of this Agreement as and to the
same extent that the transferor was bound by this Agreement immediately
prior to such Transfer. Any such Transferee that agrees to be bound by the
terms of this Agreement as provided in this paragraph (b) shall be deemed,
upon execution and delivery of such agreement, to be a Shareholder
hereunder. For purposes of Sections 3.1(a)(iii) and (iv) hereof, references
to a Person shall be deemed to be references to that Person and each
Transferee of that Person on a collective basis. Each such Transferee shall
be entitled to all of the rights under this Agreement to which the
transferor was entitled immediately prior to such Transfer. Any purported
Transfer without obtaining this agreement by the Transferee shall be deemed
void and of no further effect and shall be governed by the provisions of
paragraph (c) below. The provisions of this paragraph (b) shall not apply
in connection with a Public Transfer by an Existing Shareholder or a
Releasor."
<PAGE>
6. Each of the Existing Shareholders, each Releasor, F&L and J&G
hereby severally represents and warrants to, and covenants with, each of the
other parties hereto that the Transfers contemplated hereby and by the Release
and the Escrow Agreement will be made in compliance with all applicable laws,
including securities laws. In addition, each of the Existing Shareholders and
Ariel hereby severally represents and warrants to each of the other parties
hereto with respect to himself or itself only that he or it has not Transferred
and Capital Stock of the Company (or any interest therein) from December 20,
1996 through the date hereof.
7. Schedule I to the Shareholders Agreement is hereby deleted in its
entirety and replaced with Schedule I attached hereto. Each Existing Shareholder
(with respect to himself or itself only) and the Company severally makes the
representations and warranties set forth in Section 4.1(f) of the Shareholders
Agreement as if such representations and warranties were set forth herein in
their entirety (except that references therein to (i) the Effective Date shall
be deemed to be references to the date of this Agreement (after accounting for
the Transfers described herein, including the Transfers permitted pursuant to
Section hereof), and (ii) in the case of the representation and warranty by the
Company, (x) Existing Shareholders shall be deemed to be references to
Shareholders (other than the Investor) and (y) an individual shall be deemed to
be references to a Person). Each Shareholder (other than the Existing
Shareholders and the Investor) severally represents and warrants to the other
parties hereto that, as of the date hereof (after accounting for the Transfers
described herein, including the Transfers permitted pursuant to Section 3
hereof), such Person owns all right, title and interest in and to the number of
shares of Common Stock specified with respect to such Person on Schedule I
attached hereto, free and clear of all liens, claims, charges, security
interests and other encumbrances. The parties to the Shareholders Agreement
hereby acknowledge and agree that the 39,850 shares of Common Stock presently
owned by Lively shall not be subject to the Shareholders Agreement, provided
that, within sixty (60) days from the date hereof, Lively shall Transfer such
shares of Common Stock as follows: (i) 2,500 shares of Common Stock shall be
Transferred to a retirement account in Lively's name and (ii) 37,350 shares of
Common Stock shall be Transferred to Lively's wife, Kathleen Lively.
8. Notwithstanding anything to the contrary contained in the Release
or the Escrow Agreement, the Company and each of the Shareholders (other than
the Investor) severally agree that they will not enter into any amendment of or
agree to waive any of the provisions of the Release relating to the Subject
Shares or of the Escrow Agreement without the prior written consent of the
Investor, and any such amendment or waiver entered into or agreed to without
such consent shall be deemed void for all purposes hereof and the Shareholders
Agreement.
9. All notices, demands and other communications under the
Shareholders Agreement with respect to the following Persons shall be addressed
as specified below:
Releasors: c/o Jacobowitz & Gubits
158 Orange Avenue
Walden, New York 12586
Fax: (914) 778-5173
<PAGE>
with a copy to:
Fabricant & Lipman
One Hurriman Square
Goshen, New York 10924
Ariel: c/o Joseph M. Lively
Alcohol Sensors International Ltd.
11 Oval Drive
Islandia, New York 11722
Fax: (516) 342-1550
or to such other address as any such Person shall designate in writing to the
other parties to the Shareholders Agreement.
10. This Agreement may be executed in any number of counterparts and
by different parties hereto on separate counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an original
and all of which counterparts, taken together, shall constitute but one and the
same Agreement.
11. The rights and obligations of the parties under this Agreement may
not be assigned or otherwise transferred to any other Person, except with the
prior written consent of the other parties hereto. Except as expressly provided
in this Agreement, this Agreement shall not be construed so as to confer any
right or benefit upon any Person other than the parties to this Agreement and
their respective successors, permitted assigns, heirs and personal
representatives. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors, permitted
assigns, heirs and personal representatives. Except as otherwise expressly
amended hereby, the Shareholders Agreement shall remain in full force and
effect.
12. This Agreement shall be deemed to be a contract made under and
shall be governed by and construed in accordance with the internal laws of the
State of New York without reference to the principles of conflict of laws. In
the event of any conflict between this Agreement, on the one hand, and the
Release or the Escrow Agreement, on the other hand, the provisions of this
Agreement shall prevail as between the parties hereto.
13. Each of the parties hereto shall execute and deliver such
documents, instruments and agreements and take such further actions as may be
reasonably required or desirable to carry out the provisions of this Agreement
and the transactions contemplated hereby, and each of the parties hereto shall
cooperate with each other in connection with the foregoing.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement or caused this Agreement to be duly executed by their respective
officers or representatives thereunto duly authorized as of the day and year
first written above.
/s/ Robert B. Whitney
ROBERT B. WHITNEY
/s/ Steven A. Martello
STEVEN A. MARTELLO
/s/ John T. Ruocco
JOHN T. RUOCCO
/s/ Michael A. Sylvester
MICHAEL A. SYLVESTER
/s/ Joseph M. Lively
JOSEPH M. LIVELY
AMERICAN INTERNATIONAL INSURANCE
COMPANY
By: /s/ J. Ernest Hansen
Name: J. Ernest Hansen
Title: President
ALCOHOL SENSORS INTERNATIONAL, LTD.
By: /s/ Robert B. Whitney
Name:
Title:
/s/ Albert Pace
ALBERT PACE
/s/ Jan Polek
JAN POLEK
FABRICANT & LIPMAN
By: /s/ Alan S. Lipman
Name: Alan S. Lipman
Title: Owner
<PAGE>
JACOBOWITZ & GUBITS
By: /s/ Howard Protter
Name: Howard Protter
Title: Partner
LIPMAN FAMILY PARTNERS LTD.
By: /s/ Alan S. Lipman
Name: Alan S. Lipman
Title: General Partner
/s/ Gerald N. Jacobowitz
GERALD N. JACOBOWITZ
/s/ David B. Gubits
DAVID B. GUBITS
/s/ John H. Thomas
JOHN H. THOMAS
/s/ Gerald A. Lennon
GERALD A. LENNON
/s/ Peter R. Eriksen
PETER R. ERIKSEN
/s/ Linda F. Madoff
LINDA F. MADOFF
/s/ Howard Protter
HOWARD PROTTER
/s/ Donald G. Nichol
DONALD G. NICHOL
/s/ Larry Wolinsky
LARRY WOLINSKY
/s/ Robert E. Denardo
ROBERT E. DENARDO
/s/ Mark A. Krohn
MARK A. KROHN
<PAGE>
/s/ J. Benjamin Gailey
J. BENJAMIN GAILEY
ARIEL ENTERPRISES
By: /s/ Joseph M. Lively
Name: JOSEPH M. LIVELY
Title: Trustee
<PAGE>
SCHEDULE I
SHAREHOLDERS' OWNERSHIP
OF COMMON STOCK
<TABLE>
<CAPTION>
Percentage
No. of Shares of Ownership of All
Options of the Company's
No. of Shares Exercisable for Capital Stock
of Common Common Stock (on a Fully
Name of Shareholder Stock Owned Owned Diluted Basis)
<S> <C> <C> <C>
Robert B. Whitney 566,260 3.83%
Steven A. Martello 110,888 0.75%
John T. Ruocco 566,260 3.83%
Michael A. Sylvester 566,260 3.83%
Joseph M. Lively 0 140,000 0.95%
Ariel Enterprises 180,000 100,000 1.89%
Albert Pace 150,600 1.02%
Jan Polek 37,700 0.26%
Fabricant & Lipman 10,000 0.07%
Jacobowitz & Gubits 10,500 0.07%
Lipman Family Partners Ltd. 53,100 0.36%
Gerald N. Jacobowitz 5,734 0.04%
David B. Gubits 4,567 0.03%
John H. Thomas 4,567 0.03%
Gerald A. Lennon 4,567 0.03%
Peter R. Eriksen 4,567 0.03%
Linda F. Madoff 4,567 0.03%
Howard Protter 4,567 0.03%
Donald G. Nichol 4,567 0.03%
Larry Wolinsky 4,567 0.03%
Robert E. Dinardo 3,610 0.02%
Mark A. Krohn 3,610 0.02%
J. Benjamin Gaily 3,610 0.02%
</TABLE>
<PAGE>
EXHIBIT A: SHAREHOLDERS AGREEMENT
EXHIBIT B: RELEASE
EXHIBIT C: ESCROW AGREEMENT
IN THE HIGH COURT OF JUSTICE Case No. 1998 S No. 162
QUEENS BENCH DIVISION
IN THE OXFORD DISTRICT REGISTRY
BETWEEN:-
SCARICO (UK) LIMITED
Plaintiff
AND
ALCOHOL SENSORS EUROPE PLC
Defendant
ORDER
<PAGE>
UPON an Application made by the parties Solicitors
AND UPON the Plaintiff and Defendants agreeing to the terms of compromise set
forth in the Schedule hereto and consenting to this Order
IT IS ORDERED that all further proceedings in this action be stayed save for the
purpose of carrying out this Order and the said terms into effect and for that
purpose the parties are at liberty to apply.
THE SCHEDULE
1.1 In this Schedule where the context so admits the following
expression shall bear the following meanings:
Scarico (UK) Ltd means the Plaintiff
Alcohol Sensors Europe PLC means the Defendant
Mr Ghazarian means Mr. Michael Ghazarian of Unit
1B Saxeway Business Centre,
Chesham, Bucks HPS 2SH
ASI means Alcohol Sensors International,
Ltd of 11 Oval Drive,
Islandia, New York 11722, USA
Share Options means share options to be allocated
and issued by ASI to Mr. Ghazarian
as set out in the Schedule attached
to this Order
Baker Tilley means the auditors of ASE
DVSS means Digital Vehicle Security
Systems Ltd
1.2 Upon receipt of a sealed copy of this Order the parties agree
that-
1.3 The Defendant agrees to make payment on August 11th 1998 in
accordance with and provided that the arrangements herein have been
complied with to the Plaintiff and Mr. Ghazarian (via their
solicitors) in the total sum of US$75,000.00 to be paid in UK Pound
Sterling (to be converted using the exchange rate of Lloyds Bank Plc
as at 11th August 1998) and to be paid by the Defendants solicitors
to the Plaintiffs solicitors by telegraphic transfer.
1.4 In respect of the Sens-O-Lock finished goods held by the
Plaintiff, the Plaintiff Michael Ghazarian and DVSS have not harmed or
damaged and will not interfere with, or harm or damage the finished
goods, which have been sealed by the Defendants appointed
representative, in the Plaintiff, Mr Ghazarian or DVSS possession as
at 24th June 1998, the date of the said inspection, and the Plaintiff,
Mr. Ghazarian and DVSS jointly and severally represent that the
Sens-O-Lock finished goods are still in good working order.
1.5 In respect of the Sens-O-Lock inventory of parts and
WeatherEye inventory of parts and finished goods, the Plaintiff,
Michael Ghazarian and DVSS represent they are as received form the
manufacturer and/or distributor and where the Plaintiff, Mr Ghazarain
or DVSS were the manufacturer or distributor then as received from the
manufacturer or distributor immediately proceeding them, and that no
harm has been caused to any of the finished goods and/or parts with
<PAGE>
intention of causing the said parts to fail and the said finished
goods and parts are still in good working order.
2. Mr Ghazarian represents that he has no knowledge of the fate
or whereabouts of any alleged missing items of equipment, including
the facsimile machine, copier, printer, scanner and computer.
3. The Plaintiff, Mr Ghazarian, DVSS, ASI and ASE agree to
deliver executed General Releases forthwith, in the form of the
Release and Settlement Agreement and Supplemental Release Agreement as
attached to this Order.
4. Mr Ghazarian will transfer all 10,000 shares in ASE originally
issued to him and does represent that he has the legal capacity to
sell or assign them free and clear of all liens and encumbrances and
agrees to execute a Stock Transfer Form and a share certificate in
respect of this shareholding. In consideration of which the Defendant
agrees to pay Mr Ghazarian the sum of BP2,500.00 to be paid by the
Defendants solicitors immediately to Mr Ghazarian's solicitors on
receipt of the Stock Transfer Form and share certificate, each duly
executed, as full and final settlement of any and all claims relating
to Mr. Ghazarian's shareholding in the Defendant.
5. The Plaintiff, Mr Ghazarian and DVSS will release to ASE or
its agent or appointed representative or authorized carrier all ASE's
products as held by any of them, including but not limited to
WeatherEye and Sens-O-Lock finished goods and inventory subject to
clause 1.4 and 1.5 hereof.
6. The Plaintiff and DVSS, agree that payment of US $10,000.00
from the payment referred to in clause 1.3 herein, be in full and
final settlement of any and all causes of action which the Plaintiff
and DVSS may have against ASE or ASI or any of its Directors,
Officers, Employees, Consultants, Agents, Shareholders, past or
present of ASE or ASI, whether in the UK, USA or anywhere in the
world.
7. Mr Ghazarian agrees that payment of US $65,000.00 from the
payment referred to in clause 1.3 herein, be in full and final
settlement of any and all causes of action which Mr Ghazarian may have
against the Defendant, ASI or any of its Directors, Officers,
Employees, Consultants, Agents, Shareholders, past or present of ASE
or ASI, whether in the UK, USA or anywhere in the world.
8. The Defendant, ASI and their Directors agree that the payments
referred to in clauses 6. and 7. herein, will be in full and final
settlement of any and all causes of action which they may have against
the Plaintiff, Mr. Ghazarian, DVSS or any of the Directors, Officers,
Employees, Consultants, Agents, Shareholders, past or present of the
Plaintiff or DVSS whether in the United Kingdom, USA or anywhere in
the world.
9. The Plaintiff, Mr Ghazarian and DVSS will assign all worldwide
intellectual property and patent rights with respect to and including
but not limited to the Sens-O-Lock trade mark to ASI forthwith.
10. ASI will provide an executed Share Option Agreement for the
provision of an additional 200,000 share options in ASI, to Mr
Ghazarian forthwith, in the form provided as attached to this Order.
11. ASI agrees to make payment forthwith to Mr Ghazarian, the sum
of US $5,000.00 (via his solicitor) as payment in lieu of 22,500
shares of common stock in ASI owed to Mr. Ghazarian by ASI for
services rendered and agrees to the cancellation forthwith of 22,500
options to purchase ASI Common Stock relating thereto.
12. Mr Ghazarian agrees to provide reasonable assistance to Baker
Tilley during a period of 10 working days during the period that the
audit of the Defendant is carried out, immediately after the entry of
the Order herein.
<PAGE>
13. The Plaintiff, Mr Ghazarian and DVSS agree to deliver up all
books and records, relating to ASI or the Defendant, in their
possession, custody or control, to ASI's duly appointed
representative. They further represent that they have no knowledge of
books or records of the Defendant or ASI in the possession, custody or
control of any other person or entity.
14. Each party do represent that they have the legal authority to
enter into this Agreement.
15. Mr Ghazarian agrees that he will not compete nor act as a
representative, distributor, agent, employee or become a director,
officer or consultant, partner or 10% equity holder in any company
which shall compete or attempt to compete with ASI or ASE, in the
manufacture or sale of the products of ASI or ASE ie. Breath Alcohol
Ignition Interlock devices and vehicle headlight management systems
without limitation or similar products in the UK or throughout the
world for a period of three years from January 1, 1998.
16. Mr Ghazarian, the Plaintiff, DVSS, ASE, ASI the Directors of
the Plaintiff and DVSS and the Directors of ASI agree that the terms
of this Order should be regarded as confidential between the parties,
save for such disclosure as may be necessary to government agencies or
government regulated bodies of ASI or ASE so as to permit proper and
due disclosure of information necessary to the proper regulation and
records of these companies.
17. All arrangements are to completed hereunder no later that by
the close of business on 13th August 1998.
18. There be liberty for either party to apply for further Order.
19. The Defendant agrees to pay the Plaintiff, Mr Ghazarian and
DVSS (via their solicitors) the total sum of BP3,000.00 forthwith, as
contribution towards the Plaintiff's costs and payment shal be in full
and final settlement of any such claim for costs.
Dated the 11th day of August 1998
Signed /s/ Brethertons Auld & Jardine Signed /s/ Doberman Horsman
BRETHERTONS AULD & JARDINE DOBERMAN HORSMAN
30 High Street College Chambers
Banbury 92/94 Borough Road
Oxon OX16 8ER Middlesborough TS1 2HL
For and on behalf of the For and on behalf of
Plaintiff, DVSS and the Defendant, ASI and the
Mr. Ghazarian Directors of ASI
<PAGE>
RELEASE AND SETTLEMENT AGREEMENT
This Release and Settlement Agreement ("Agreement") is entered as of
13 August, 1998, by and between ALCOHOL SENSORS INTERNATIONAL LTD. and ALCOHOL
SENSORS EUROPE PLC, the Defendant herein, and their Directors, Officers and
Affiliates, and all others, whether a party to the action herein or not and
including those recited in the terms of the Tomlin Order of the Court entered on
the 13th day of August, 1998 and MICHAEL GHAZARIAN, DIGITAL VEHICLE SECURITY
SYSTEMS LTD. and SCARICO (UK) Ltd the Plaintiff herein, and their Directors,
Officers and Affiliates, to include but not limited to, Michael Ghazarian,
Digital Vehicle Security Systems and any others.
RECITALS
1. SCARICO (UK) LTD. is the Plaintiff in an action against Alcohol
Sensors Europe PLC, which action is currently pending before the Court.
2. The parties hereto wish mutually to compromise, resolve and settle
their disputes and claims raised in the Action and generally to effect a
dismissal of the said Action, without the necessity of incurring the extensive
costs of trial, and to do so without making any admission as to the truth, or
lack thereof, of any allegation of any party in the Action and without making
any admission whatsoever of liability on the part of either party hereto or any
other individuals or corporations in whatsoever capacity, and which liability is
expressly denied.
NOW, THEREFORE, in consideration of the mutual promises set forth in this
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Dismissal of Action. Upon receipt by the Defendant's Solicitors of
this Agreement and the Supplemental Release signed by all parties thereto, and
upon receipt by SCARICO (UK) LTD. DVSS and MICHAEL GHAZARIAN'S solicitors of the
payment of US $75,000.00, and other payments, pursuant to the Tomlin Order
herein, the parties shall forthwith cause to be submitted to the Court for
approval and entry, a dismissal of the said Action with costs agreed under the
terms of the Order herein.
2. Releases.
(a) SCARICO (UK) LTD., the Plaintiff herein, together with Michael
Ghazarian, Digital Vehicle Security Systems Ltd and all Directors, Officers,
Agents and Employees of SCARICO (UK) LTD. and/or Digital Vehicle Security
Systems Ltd hereby release forever Alcohol Sensors (Europe) PLC, Alcohol Sensors
International, Ltd., any and all Directors, Officers, Agents, Employees,
Consultants or Shareholders past or present, in whatsoever capacity and
wheresoever performed against all of the foregoing from any and all claims,
demands, actions, causes of action and/or claims for relief of any and all kinds
whatsoever which ever had, now has, may have and/or claim or may claim to have,
whether known or unknown and/or whether ascertainable at this time, except for
any and all obligations of the parties in the performance of their obligations
under the Tomlin Order herein and under this Agreement and Supplemental Release,
and this Release shall be unlimited in time from the beginning of the world to
the date of this Release.
(b) ALCOHOL SENSORS EUROPE PLC, the Defendant herein, together with
Alcohol Sensors International, Ltd. and all Directors, Officers, Agents and
Employees of ALCOHOL SENSORS EUROPE PLC and/or Alcohol Sensors International,
Ltd, hereby release forever Scarico (UK) Ltd, Michael Ghazarian and Digital
Vehicle Security Systems Ltd., any and all Directors, Officers, Agents and
Employees, past or present, in whatsoever capacity and wheresoever performed
against all of the foregoing from any and all claims, demands, actions, causes
of action and/or claims for relief of any and all kinds whatsoever which ever
had, now has, may have and/or claim or may claim to have, whether known or
unknown and/or whether ascertainable at this time, except for any and all
obligations of the parties in the performance of their obligations under the
Tomlin Order herein and under this Agreement and Supplemental Release, and this
<PAGE>
Release shall be unlimited in time from the beginning of the world to the date
of this Release.
3. Survival. The obligations and agreements of the parties hereto in
and/or under this Agreement shall survive the execution of this Agreement.
4. Amendment. This Agreement may be amended, altered or terminated in
whole or in part only by a writing signed by all of the parties hereto.
5. Heirs and Successors. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, representatives, successors and assigns. Other than
expressly provided for in this Agreement, There shall be no third-party
beneficiaries of this Agreement. The parties hereto agree for themselves and for
their respective heirs, executors, administrators, representatives, successors
and assigns, to execute and deliver any and all documents and/or instruments
and/or to do any and all other acts and/or deeds which may be necessary or
convenient to carry out the purpose and intent of this Agreement.
6. Entire Agreement. This Agreement in conjunction with the
Supplemental Release and the Tomlin Order embodies the entire understanding of
the parties hereto with respect to the subject matter set forth herein. There
are no promises, terms, conditions or obligations other than those expressly
contained herein, furthermore, this Agreement shall supersede all previous
communications, representation or agreements, either verbal or written, between
the parties regarding the subject matter set forth herein. Without limiting the
foregoing, no letter, telegram, or other communication passing between the
parties hereto concerning any matter during the negotiation of this Agreement,
shall be deemed to be a part of this Agreement, nor shall it have the effect of
modifying or adding to this Agreement.
7. Notices. Any and all notices and other communications necessary or
desirable to be served hereunder shall be either personally delivered or sent by
telecopy, prepaid same-day or overnight delivery service, proof of delivery
requested, or registered mail, postage prepaid, addressed as follows:
a. If to Michael Ghazarian, or
Digital Vehicle Security Systems Ltd., or
Scarico (UK) Ltd, any Directors, Officers, Employers,
or Agents thereof
Scarico (UK) Ltd
Saxeway Business Centre
Chartridge Lane
Chesham, Bucks
HP5 2SH
With a copy to:
Brethertons, Auld and Jardine
30 High Street
Banbury, Oxon
OX16 8ER
b. If to Alcohol Sensors Europe PLC, Alcohol Sensors International
Ltd., any Directors, Officers, Employees or Agents thereof:
Alcohol Sensors International Ltd.
11 Oval Drive
Islandia, NY 11722 USA
<PAGE>
With a copy to:
Walter and Haverfield, P.L.L.
1300 Terminal Tower
Cleveland, Ohio 44113 USA
Attention: David Silk
With a copy to:
Doberman Horsman
College Chambers
92/94 Borough Road
Middlesborough, UK
or to such address or addresses as any party may designate from time to time in
a written notice served upon the other parties in accordance herewith. Any
notice sent as hereinabove provided shall be deemed delivered upon receipt or
refusal of delivery, except in the case of registered mail which shall be deemed
delivered on the third (3rd) business day next following the postmark date which
it bears.
8. Incorporation of Recitals and Preamble. The preamble and the
Recitals set forth above are hereby incorporated herein as though the same were
fully set forth herein.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties as of the date and at the place first set forth.
/s/ Michael Ghazarian
Michael Ghazarian for an on behalf of SCARICO (UK)
------------------------------------------
Corporate Seal of SCARICO (UK) LTD
/s/ Michael Ghazarian
Michael Ghazarian for an on behalf of Digital Vehicle
Security Systems Ltd.
------------------------------------------
Corporate Seal of Digital Vehicle Security Systems Ltd.
/s/ Michael Ghazarian
Michael Ghazarian
/s/ Joseph Lively
Joseph Lively for and on behalf of Alcohol Sensors
Europe PLC
<PAGE>
------------------------------------------
Corporate Seal of Alcohol Sensors Europe PLC
/s/ Joseph Lively
Joseph Lively for and on behalf of Alcohol Sensors
International Ltd.
------------------------------------------
Corporate Seal of Alcohol Sensors International Ltd.
PROMISSORY NOTE
$100,000 June 12, 1998
FOR VALUE RECEIVED, the undersigned ("Payor") promises to pay to MILBRIGHT
ESTATES LTD. ("Payee") the principal sum of One Hundred Thousand and 00/100
($100,000) Dollars, together with interest at the rate of 11.5% per annum, on
July 31, 1998. Payment of this note shall be made in lawful money of the United
States of America at 319 Fifth Avenue, New York, New York 10016, or at such
address or commercial bank within the United States of America as any holder of
this Note may designate by notice to Payor not less than five (5) days prior to
the date when this Note is due and payable.
This Note may be prepaid.
The occurrence of any one or more of the following events shall constitute
an Event of Default hereunder:
(A) The Payor shall fail to pay when due the principal or interest payable
hereunder.
(B) The undersigned hereby forever waives presentment, demand, protest,
and/or notice of dishonor of the within note and the undersigned, and each of
them, guarantees the payment of the said note at maturity and consents, without
notice, to any and all extensions of time and/or terms of payment made by the
holder of said note. In the event this right is exercised and this note is
collected by suit or attorney, the maker and endorsers hereof agree to pay, in
addition to the amount due, a sum equal to fifteen (15%) percent as collection
and/or legal fees.
(C) The Payor shall admit to its creditors its inability to pay its debts
as they mature, or shall make an assignment for the benefit of its creditors.
(D) Proceedings in bankruptcy, or for reorganization of the Payor, or for
the readjustment of any of its debts, under the Bankruptcy Code, as amended, or
any part thereof, or under any other Laws, whether state or federal, for the
relief of debtors, now or hereafter existing, shall be commenced by the Payor;
or shall be commenced against the Payor and shall not be discharged within
ninety (90) days of their commencement.
(E) A receiver or trustee shall be appointed for the Payor or for any
substantial part of its respective assets, or any proceedings shall be
liquidated for the dissolution or the full or partial liquidation of the Payor
and such receiver or trustee shall not be discharged within ninety (90) days of
his appointment, or such proceedings shall not be discharged within thirty (30)
days of their commencement, or the Payor shall discontinue its business or
materially change the nature of its business.
<PAGE>
(F) The Payor shall suffer final judgments for payment of money aggregating
in excess of $100,000 and shall not discharge the same within a period of thirty
(30) days unless, pending further proceedings, execution has not been commenced
or if commenced has been effectively stayed.
(G) If any payment due hereunder remains unpaid more than fifteen (15) days
after the due date thereof, Payor shall pay to Payee a late charge equal to four
(4%) percent of such overdue payment.
IN WITNESS WHEREOF, this Note has been duly executed and delivered by duly
authorized officers of the Payor.
ALCOHOL SENSORS INTERNATIONAL LTD.
By:/s/ Joseph M. Lively
Its C.O.O.
ATTEST:
/s/ Janet DiBenedetto
ALCOHOL SENSORS INTERNATIONAL, LTD.
11 Oval Drive
Islandia, New York 11722
August 14, 1998
J. Ernest Hansen, President
American International Insurance Company
70 Pine Street
New York, New York 10270
Re: Series A Cumulative Non-Redeemable Convertible Preferred Stock
Dear Mr. Hansen:
This letter will serve to confirm and memorialize the agreement
between American International Insurance Company ("AIIC") and Alcohol Sensors
International, Ltd. (ASI") that, notwithstanding the terms and provisions of the
Certificate of Incorporation of ASI, as amended to date (the "Charter"), that
certain Convertible Preferred Stock and Warrant Purchase Agreement, dated as of
December 20, 1996 (the "Purchase Agreement"), between ASI and AIIC, and that
certain Registration Rights Agreement, dated as of December 20, 1996 (the
"Registration Rights Agreement"), between ASI and AIIC, AIIC, as the registered
and beneficial owner of all of the 833,333 shares (the "Preferred Shares") of
the Series A Cumulative Non-redeemable Convertible Preferred Stock, par value
$.001 per share, of ASI currently authorized and outstanding, has agreed to
accept the following number of shares (the "Shares") of the common stock, par
value $.001 per share (the "Common Stock"), of ASI, in full and complete
satisfaction of all dividend payments due AIIC with respect to the Preferred
Shares for the Dividend Payment Dates (the singular of term as defined in the
Charter) of June 30, 1997, December 31, 1997, June 30, 1998, December 31, 1998,
June 30, 1999 and December 31, 1999:
(a) 79,583 shares of Common Stock with respect to the Dividend
Payment Date of June 30, 1997, determined by multiplying the amount of
dividends due on said Dividend Payment Date (i.e., $119,375), by a
fraction, the numerator of which is $3.00 and the denominator of which is
$4.50;
(b) 75,639 shares of Common Stock with respect to the Dividend
Payment Date of December 31, 1997, determined by multiplying the amount of
dividends due on said Dividend Payment Date (i.e., $112,500), by a
fraction, the numerator of which is $3.00 and the denominator of which is
$4.462;
(c) 75,639 shares of Common Stock with respect to the Dividend
Payment Date of June 30, 1998, determined by multiplying the amount of
dividends due on said Dividend Payment Date (i.e., $112,500), by a
fraction, the numerator of which is $3.00 and the denominator of which is
$4.462;
<PAGE>
(d) such number of shares of Common Stock as shall equal the
amount of dividends due on December 31, 1998, multiplied by a fraction, the
numerator of which shall be $3.00 and the denominator of which shall be the
Conversion Price (as such term is defined in the Charter) as then in
effect, with respect to such Dividend Payment Date;
(e) such number of shares of Common Stock as shall equal the
amount of dividends due on June 30, 1999, multiplied by a fraction, the
numerator of which shall be $3.00 and the denominator of which shall be the
Conversion Price as then in effect, with respect to such Dividend Payment
Date; and
(f) such number of shares of Common Stock as shall equal the
amount of dividends due on December 31, 1999, multiplied by a fraction, the
numerator of which shall be $3.00 and the denominator of which shall be the
Conversion Price as then in effect, with respect to such Dividend Payment
date.
In addition, each and all of the Shares shall be deemed "Registrable
Securities" under, and shall be subject to, the Registration Rights Agreement
for all purposes contained therein.
Except as modified by the matters set forth herein, the terms and
condition of the Charter, Purchase Agreement and Registration Rights Agreement
shall remain in full force and effect.
If the foregoing accurately reflects your understanding of our
agreement with respect to the foregoing matters, kindly acknowledge and agree to
such by executing the duplicate copy of this letter in the space indicated for
such below.
Very truly yours,
Alcohol Sensors International, Ltd.
By: /s/ Joseph M. Lively
Joseph M. Lively, President
Accepted and Agreed to:
American International Insurance Company
By: /s/ J. Ernest Hansen
J. Ernest Hansen, President
PROMISSORY NOTE
$40,000 August 13, 1998
FOR VALUE RECEIVED, the undersigned ("Payor") promises to pay to MILBRIGHT
ESTATES LTD. ("Payee") the principal sum of Forty Thousand and 00/100 ($40,000)
Dollars, together with interest at the rate of 11.5% per annum, on August 31,
1998. Payment of this note shall be made in lawful money of the United States of
America at 319 Fifth Avenue, New York, New York 10016, or at such address or
commercial bank within the United States of America as any holder of this Note
may designate by notice to Payor not less than five (5) days prior to the date
when this Note is due and payable.
This Note may be prepaid.
The occurrence of any one or more of the following events shall constitute
an Event of Default hereunder:
(A) The Payor shall fail to pay when due the principal or interest payable
hereunder.
(B) The undersigned hereby forever waives presentment, demand, protest,
and/or notice of dishonor of the within note and the undersigned, and each of
them, guarantees the payment of the said note at maturity and consents, without
notice, to any and all extensions of time and/or terms of payment made by the
holder of said note. In the event this right is exercised and this note is
collected by suit or attorney, the maker and endorsers hereof agree to pay, in
addition to the amount due, a sum equal to fifteen (15%) percent as collection
and/or legal fees.
(C) The Payor shall admit to its creditors its inability to pay its debts
as they mature, or shall make an assignment for the benefit of its creditors.
(D) Proceedings in bankruptcy, or for reorganization of the Payor, or for
the readjustment of any of its debts, under the Bankruptcy Code, as amended, or
any part thereof, or under any other Laws, whether state or federal, for the
relief of debtors, now or hereafter existing, shall be commenced by the Payor;
or shall be commenced against the Payor and shall not be discharged within
ninety (90) days of their commencement.
(E) A receiver or trustee shall be appointed for the Payor or for any
substantial part of its respective assets, or any proceedings shall be
liquidated for the dissolution or the full or partial liquidation of the Payor
and such receiver or trustee shall not be discharged within ninety (90) days of
his appointment, or such proceedings shall not be discharged within thirty (30)
days of their commencement, or the Payor shall discontinue its business or
materially change the nature of its business.
<PAGE>
(F) The Payor shall suffer final judgments for payment of money aggregating
in excess of $100,000 and shall not discharge the same within a period of thirty
(30) days unless, pending further proceedings, execution has not been commenced
or if commenced has been effectively stayed.
(G) If any payment due hereunder remains unpaid more than fifteen (15) days
after the due date thereof, Payor shall pay to Payee a late charge equal to four
(4%) percent of such overdue payment.
(H) A default in that certain Promissory Note dated June 11, 1998 in the
principal amount of $100,000 made by Payor to Milbright Estates Ltd.
IN WITNESS WHEREOF, this Note has been duly executed and delivered by duly
authorized officers of the Payor.
ALCOHOL SENSORS INTERNATIONAL LTD.
By:/s/ Joseph M. Lively
Its C.O.O.
ATTEST:
/s/ Janet DiBenedetto
PATENT
ASSIGNMENT
For valuable consideration, the receipt of which is acknowledged, Joseph M.
Lively and WeatherEye of 110 Willard Avenue, Farmingdale, New York 11735,
HEREBY assigns, transfers and sets over to Alcohol Sensors International,
Ltd., of 11 Oval Drive, Islandia, New York 11772, all right title and
interest in and to Patent Number 5780973 dated July 14, 1998, any and all
inventions relating to a headlight management system, including but not
limited to all drawings, schematics, plans, prototypes and any and all
patents relating thereto all inventions disclosed therein, and all
counterpart patent applications, patents and rights to the invention
throughout the world, and with the right to sue for past infringement and
collect all damages therefor.
Dated 21st day of September, 1998.
For and on behalf of Joseph M. Lively /s/Joseph M. Lively
For and on behalf of WEATHEREYE, INC. /s/Joseph M. Lively
Name: Joseph M. Lively
PROMISSORY NOTE
$25,000 September 4, 1998
FOR VALUE RECEIVED, the undersigned ("Payor") promises to pay to MILBRIGHT
ESTATES LTD. ("Payee") the principal sum of Twenty-Five Thousand and 00/100
($25,000) Dollars, together with interest at the rate of 11.5% per annum, on
October 31, 1998. Payment of this note shall be made in lawful money of the
United States of America at 319 Fifth Avenue, New York, New York 10016, or at
such address or commercial bank within the United States of America as any
holder of this Note may designate by notice to Payor not less than five (5) days
prior to the date when this Note is due and payable.
This Note may be prepaid.
The occurrence of any one or more of the following events shall constitute
an Event of Default hereunder:
(A) The Payor shall fail to pay when due the principal or interest payable
hereunder.
(B) The undersigned hereby forever waives presentment, demand, protest,
and/or notice of dishonor of the within note and the undersigned, and each of
them, guarantees the payment of the said note at maturity and consents, without
notice, to any and all extensions of time and/or terms of payment made by the
holder of said note. In the event this right is exercised and this note is
collected by suit or attorney, the maker and endorsers hereof agree to pay, in
addition to the amount due, a sum equal to fifteen (15%) percent as collection
and/or legal fees.
(C) The Payor shall admit to its creditors its inability to pay its debts
as they mature, or shall make an assignment for the benefit of its creditors.
(D) Proceedings in bankruptcy, or for reorganization of the Payor, or for
the readjustment of any of its debts, under the Bankruptcy Code, as amended, or
any part thereof, or under any other Laws, whether state or federal, for the
relief of debtors, now or hereafter existing, shall be commenced by the Payor;
or shall be commenced against the Payor and shall not be discharged within
ninety (90) days of their commencement.
(E) A receiver or trustee shall be appointed for the Payor or for any
substantial part of its respective assets, or any proceedings shall be
liquidated for the dissolution or the full or partial liquidation of the Payor
and such receiver or trustee shall not be discharged within ninety (90) days of
his appointment, or such proceedings shall not be discharged within thirty (30)
days of their commencement, or the Payor shall discontinue its business or
materially change the nature of its business.
<PAGE>
(F) The Payor shall suffer final judgments for payment of money aggregating
in excess of $100,000 and shall not discharge the same within a period of thirty
(30) days unless, pending further proceedings, execution has not been commenced
or if commenced has been effectively stayed.
(G) If any payment due hereunder remains unpaid more than fifteen (15) days
after the due date thereof, Payor shall pay to Payee a late charge equal to four
(4%) percent of such overdue payment.
(H) A default in that certain Promissory Note dated June 11, 1998 in the
principal amount of $100,000 made by Payor to Milbright Estates Ltd.
(I) A default in that certain Promissory Note dated August 13, 1998 in the
principal amount of $40,000 made by Payor to Milbright Estates Ltd.
IN WITNESS WHEREOF, this Note has been duly executed and delivered by duly
authorized officers of the Payor.
ALCOHOL SENSORS INTERNATIONAL LTD.
By:/s/ Joseph M. Lively
Its C.O.O.
ATTEST:
/s/ Janet DiBenedetto
Computation of Loss Per Share
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996
---- ----
<S> <C> <C>
Net loss $ (3,670,968) $ (6,121,143)
Cumulative dividend on Series A
and B preferred stock (288,333) (6,875)
------------- --------------
Net loss attributable to common
stockholder $ (3,959,301) $ (6,128,018)
============= ==============
Shares:
Weighted-average number of common
shares outstanding 8,756,316 8,430,960
============= ==============
Loss per common share $ (.45) $ (.73)
============= ==============
</TABLE>
ALCOHOL SENSORS INTERNATIONAL, LTD.
List of Subsidiaries
State or Other Jurisdiction of
Name Incorporation or Organization
Alcohol Sensors Europe plc.. . . . . . . . . . . . . . . . . . . . . . . England
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 1,882,994
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 693,561
<CURRENT-ASSETS> 2,669,294
<PP&E> 406,239
<DEPRECIATION> 174,069
<TOTAL-ASSETS> 2,915,630
<CURRENT-LIABILITIES> 1,779,230
<BONDS> 0
0
5,158,750
<COMMON> 8,849
<OTHER-SE> (4,114,176)
<TOTAL-LIABILITY-AND-EQUITY> 2,915,630
<SALES> 35,308
<TOTAL-REVENUES> 35,308
<CGS> 71,483
<TOTAL-COSTS> 71,483
<OTHER-EXPENSES> 681,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,141
<INCOME-PRETAX> (3,670,968)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,670,968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,670,968)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
