As filed with the Securities and Exchange Commission on February 3, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AMERICAN CARD TECHNOLOGY, INC.
(Name of Small Business Issuer in its Charter)
Delaware 7379 06-1403123
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1355 Terrell Mill Road
Building 1462, Suite 200
Marietta, Georgia 30067
(770) 951-2284
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business or Intended Principal Place of Business)
Raymond Findley
1355 Terrell Mill Road
Building 1462, Suite 200
Marietta, Georgia 30067
(770) 951-2284
(Name, Address and Telephone Number of Agent for Service)
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Copies to:
Robert J. Mittman, Esq.
James Martin Kaplan, Esq. Robert J. Mittman, Esq.
Zimet, Haines, Friedman & Kaplan Tenzer Greenblatt LLP
460 Park Avenue The Chrysler Building
New York, New York 10022 405 Lexington Avenue
Telephone No.: (212) 486-1700 New York, New York 10174
Facsimile No.: (212) 223-1151 Telephone No.: (212) 885-5000
Facsimile No.: (212) 885-5001
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Approximate Date of Proposed Sale to the Public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of Each Class of Amount To Offering Price Aggregate Amount of
Securities To Be Registered Be Registered Per Unit (1) Offering Price (1) Registration Fee
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Common Stock,
par value $.001 per share................. 1,725,000(2) $5.00 $8,625,000 $2,613.64
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Redeemable Warrants, each to purchase one
share of Common Stock..................... 1,725,000(3) $ .10 $172,500 $52.27
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Common Stock,
par value $.001 per share(4).............. 1,725,000(5) $5.00 $8,625,000 $2,613.64
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Underwriter's Warrants, each to purchase one
share of Common Stock(6).................. 150,000 $.001 $150 (7)
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Underwriter's Warrants, each to purchase one
warrant(6)................................ 150,000 $.0001 $15 (7)
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Common Stock,
par value $.001 per share(8).............. 150,000 $6.75 $1,012,500 $306.82
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Warrants, each to purchase one share of
Common Stock(9)........................... 150,000 $.135 $20,250 $6.14
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Common Stock,
par value $.001 per share(10)............. 150,000 $8.25 $1,237,500 $375.00
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Total Registration Fee.........................................................................................$5,967.51
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(1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as
amended, solely for purposes of calculating the registration fee.
(2) Includes 225,000 shares which the Underwriter has an option to purchase
from the Registrant to cover over-allotments, if any.
(3) Includes 225,000 redeemable warrants which the Underwriter has the option
to purchase from the Registrant to cover over-allotments, if any.
(4) Issuable upon exercise of the redeemable warrants to be sold to the public
hereunder, together with such indeterminate number of shares of Common
Stock as may be issuable by reason of the anti-dilution provisions
contained therein.
(5) Assumes the Underwriter's option to purchase 225,000 additional redeemable
warrants to cover over-allotments, if any, has been exercised.
(6) To be issued by the Company and purchased by the Underwriter upon the
consummation of this offering.
(7) No fee due pursuant to Rule 457(g).
(8) Issuable upon exercise of the Underwriter's Warrants, together with such
indeterminate number of shares of Common Stock as may be issuable by reason
of the anti-dilution provisions contained therein.
(9) Issuable upon exercise of the Underwriter's Warrants.
(10) Issuable upon exercise of the warrants underlying the Underwriter's
Warrants, together with such indeterminate number of shares of Common Stock
as may be issuable by reason of the anti-dilution provisions contained
therein.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
AMERICAN CARD TECHNOLOGY, INC.
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM SB-2
Item in Form SB-2 Caption or Location in Prospectus
----------------- ---------------------------------
1. Front of Registration Statement and Outside
Front Cover Page of Prospectus............................... Facing Page of Registration Statement; Cross Reference
Sheet; Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus................................................ Inside Front and Outside Back Cover Pages of Prospectus
3. Summary Information and Risk Factors............................ Prospectus Summary; Risk Factors
4. Use of Proceeds................................................. Use of Proceeds
5. Determination of Offering Price................................. Outside Front Cover Page; Risk Factors; Underwriting
6. Dilution........................................................ Risk Factors; Dilution
7. Selling Security Holders........................................ *
8. Plan of Distribution............................................ Outside Front and Outside Back Cover Pages of Prospectus;
Inside Front Cover Page of Prospectus; Underwriting
9. Legal Proceedings............................................... *
10. Directors, Executive Officers, Promoters and
Control Persons.............................................. Management
11. Security Ownership of Certain Beneficial
Owners and Management........................................ Principal Stockholders
12. Description of Securities....................................... Description of Securities
13. Interest of Named Experts and Counsel........................... *
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities ................................................. *
15. Organization Within Last Five Years............................. Prospectus Summary; Plan of Operation; Business; Certain
Transactions
16. Description of Business......................................... Prospectus Summary; Business
17. Management's Discussion and Analysis
or Plan of Operations........................................ Plan of Operation
18. Description of Property......................................... Business
19. Certain Relationships and Related
Transactions................................................. Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters.......................................... Outside Front Cover Page of Prospectus; Risk Factors;
Description of Securities; Shares Eligible for Future Sale;
Underwriting
21. Executive Compensation.......................................... Management
22. Financial Statements............................................ Financial Statements
23. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure......................................... *
* Not applicable or answer is negative.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED FEBRUARY 3, 1997
SUBJECT TO COMPLETION
[LOGO] AMERICAN CARD TECHNOLOGY, INC.
1,500,000 Shares of Common Stock and
Redeemable Warrants to Purchase 1,500,000 Shares of Common Stock
The Company is offering hereby 1,500,000 shares of Common
Stock (the "Common Stock") and redeemable warrants to purchase 1,500,000 shares
of Common Stock (the "Warrants"). The shares of Common Stock and Warrants may be
purchased separately and will be separately transferable immediately upon
issuance. Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock at a price of $5.00, subject to adjustment in certain
circumstances, at any time commencing , 1998, or earlier upon the consent
of the Underwriter, through and including , 2002. The Warrants are
redeemable by the Company, upon the consent of the Underwriter, at a price of
$.10 per Warrant, at any time commencing after the Company has reported its
first four fiscal quarters of financial results following the date of this
Prospectus, upon notice of not less than 30 days, provided that the closing bid
quotation of the Common Stock on all 20 trading days ending on the third day
prior to the day on which the Company gives notice has been at least 150%
(currently $7.50, subject to adjustment) of the then effective exercise price of
the Warrants. In the event the Company's results of operations for the first
four fiscal quarters following the date of this Prospectus reflect, on a
cumulative basis during such four quarters, either revenues of under $5,000,000
or pre-tax operating losses (before interest income and expense, financing
costs, taxes and extraordinary items) in excess of $1,000,000, then the exercise
price of the Warrants shall decrease from $5.00 per share to $4.00 per share.
See "Description of Securities."
Prior to this offering, there has been no public market for
the Common Stock or the Warrants and there can be no assurance that any such
market will develop. It is anticipated that the Common Stock and Warrants will
be quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the symbols "ACRD"
and "ACRDW", respectively. The offering prices of the Common Stock and Warrants,
and the exercise price of the Warrants, were determined pursuant to negotiations
between the Company and the Underwriter and do not necessarily relate to the
Company's book value or any other established criteria of value. For a
discussion of the factors considered in determining the offering prices, see
"Underwriting."
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING
ON PAGE 8 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=========================================================================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
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Per Share.................................. $5.00 $.50 $4.50
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Per Warrant................................ $.10 $.01 $.09
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Total(3)................................... $7,650,000 $765,000 $6,885,000
=========================================================================================================================
(1) In addition, the Company has agreed to pay to the Underwriter a 3%
nonaccountable expense allowance, to sell to the Underwriter warrants (the
"Underwriter's Warrants") to purchase 150,000 shares of Common Stock and/or
150,000 Warrants and to retain the Underwriter as a financial consultant.
The Company has also agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, including the Underwriter's nonaccountable
expense allowance in the amount of $229,500 ($263,925, if the Underwriter's
over-allotment option is exercised in full), estimated at $650,000, payable
by the Company.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 225,000 additional
shares of Common Stock and/or 225,000 additional Warrants, on the same terms
as set forth above, solely for the purpose of covering over-allotments, if
any. If the Underwriter's over-allotment option is exercised in full, the
total price to public, underwriting discounts and commissions and proceeds
to company will be $8,797,500, $879,750 and $7,917,750, respectively. See
"Underwriting."
The shares of Common Stock and Warrants are being offered, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify the
offering and to reject any order in whole or in part. It is expected that
delivery of certificates representing the shares of Common Stock and Warrants
will be made against payment therefor at the offices of the Underwriter, 650
Fifth Avenue, New York, New York 10019, on or about , 1997.
Whale Securities Co., L.P.
The date of this Prospectus is , 1997
[Photographs]
AVAILABLE INFORMATION
As of the date of this Prospectus, the Company will become subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy and
information statements and other information with the Securities and Exchange
Commission (the "Commission"). The Company intends to furnish its stockholders
with annual reports containing audited financial statements and such other
periodic reports as the Company deems appropriate or as may be required by law.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON
STOCK AND WARRANTS AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. The statements contained in this
Prospectus which are not historical facts are forward looking statements that
involve risks and uncertainties including, but not limited to, those described
under "Risk Factors." Unless otherwise indicated, all information contained in
this Prospectus, including all share and per share data and information relating
to the number of shares of Common Stock outstanding, (i) gives effect to a
4.06-for-1 stock split effected in January 1996, (ii) gives effect to a
recapitalization effected in December 1996 pursuant to which each outstanding
share of Common Stock, no par value per share, was converted into 2,500 shares
of Common Stock, par value $.001 per share, and (iii) assumes no exercise of the
Underwriter's over-allotment option to purchase 225,000 additional shares of
Common Stock and/or 225,000 additional Warrants. See "Underwriting" and Note 7
of Notes to Financial Statements.
The Company
American Card Technology, Inc. (the "Company"), a development stage
company, was organized to design, develop and market high security, flexible,
multiple application smart card systems. A smart card is a credit card-sized
plastic card containing a microchip that provides the card with memory storage
capabilities in a secure environment and, in advanced versions such as the
Company's, enables the card to perform data processing functions. Smart card
systems are typically used by government agencies or commercial enterprises (the
"system sponsor") to store, access and modify participant or customer (the
"user") information. The Company's proprietary smart card technology and
software enable system sponsors to store data on a user's smart card, and enable
the system sponsor, or a service provider authorized by the system sponsor to
access user information (the "authorized service provider"), to access, read,
input, delete, modify and process such data. The Company designs its smart card
systems to perform functions for various target markets, such as employee
licensing, animal health and registration, frequent patron tracking and various
government applications, depending on the system sponsor's needs. The Company
believes that its smart card systems, which offer the capability to perform
multiple functions on a single card, provide enhanced security and privacy
protection not offered by existing smart cards and position the Company to
capitalize on perceived market opportunities for information systems
incorporating smart card technology.
Smart card technology is currently in wide use in Europe, the Pacific
Rim, Latin America and the Middle East. Worldwide production of smart cards
numbered approximately 482 million units in 1995 and was expected to have
exceeded 729 million units in 1996, according to a microchip manufacturer cited
in Card Technology Today, an industry trade journal. Most smart cards currently
in use are low capacity memory-only phone cards which provide only data storage,
reading and deletion capabilities. More sophisticated smart cards, including the
Company's smart cards, are microprocessor-based and therefore have the ability
not only to store, read and delete data but also to add, modify and process
data. However, the Company believes that most microprocessor-based smart cards
currently in use were designed to perform functions for single purpose
applications only, such as pay television access control, medical or academic
recordkeeping or insurance claim processing. The Company believes that these
smart cards also generally utilize multiple, alternative technologies, such as
microchips, bar codes and magnetic stripes simultaneously, or allow access by
any authorized service provider to all the information included within the card.
Although the use of smart cards is increasing, most cards currently
used in electronic transactions are magnetic stripe cards, such as ordinary
credit cards or automatic teller machine cards. Such cards contain only limited
information such as account numbers and identification information, but cannot
store or update additional information such as current account balances. The
Company believes that its proprietary smart card systems, comprised of smart
cards, read/write devices, other related hardware and system software, offer
certain advantages over magnetic stripe cards and existing smart card systems,
including enhanced security features and multiple function capabilities through
the use of dual card access technology and multiple application layering. The
dual card access technology incorporated in the Company's smart card systems
requires the simultaneous use of both a card issued to a user (a "user card")
and a card issued to an authorized service provider (an "access card") to access
the system. The information on the user's smart card cannot be accessed or
modified unless used in tandem with the
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authorized service provider's card. For example, a health maintenance
organization ("HMO") could sponsor a system whereby each patient (the user)
enrolled in the HMO would receive a smart card with his or her medical records
stored on the card's microprocessor chip. The HMO would issue access cards to
its member physicians (the authorized service providers) and, when a patient
visits any of these HMO-affiliated physicians, the physician would be able to
update the patient's medical record and history. The dual card access technology
provides enhanced security for the information on the user's card by preventing
unauthorized persons from accessing or modifying such data without the proper
access card.
The Company's smart cards are also uniquely designed to include
multiple application layers, with each layer enabling the performance of
numerous functions when activated by the proper access card. The Company's smart
card systems can provide different sponsors or authorized service providers with
access to different application layers on one user's smart card. Therefore, an
HMO could also store, on the same card that contains a user's medical records,
insurance claim records for access only by the HMO's benefits administrators.
Each application layer contains its own security feature and can only be
accessed or altered by the authorized service provider holding the access card
programmed for that layer. By providing a system sponsor with the ability to add
applications over time, as well as allowing multiple system sponsors to utilize
different layers of the same smart card for different purposes, the Company's
smart card systems will enable the cost per smart card to be allocated among
separate system sponsors or different departments within a single system
sponsor. The Company believes that these features position its smart card
systems as secure, cost-effective solutions for electronic transaction and
information processing.
To date, the Company has developed and installed, on a limited basis,
employee identification and licensing smart card systems for the thoroughbred
racing industry. The Company currently provides to the Birmingham Race Course
and the Oregon Racing Commission smart cards capable of controlling on-site
access and maintaining employee state licensing information. In addition, the
Company has completed a pilot program in New Jersey and Pennsylvania for the
issuance of "equine health passport" smart cards for monitoring the identity,
interstate and intrastate movement and medical records of thoroughbred horses.
The Company is scheduled to commence a similar program in New York in May 1997.
Although the completed program successfully tested the equine health passport
smart card system, such pilot program has not resulted in any system sales to
date. There can be no assurance that any of the Company's pilot programs will
result in system purchases by any potential system sponsor.
The Company's objective is to become a leading provider of smart card
systems to government and commercial system sponsors requiring increasingly
complex, secure and cost-effective information processing systems. The Company
intends to market its products through strategic marketing alliances and
licensing or other arrangements with systems integrators, value added resellers
and other smart card vendors. The Company anticipates that, under certain
circumstances, its smart card products will be bundled with the other party's
products and services to create a complete integrated system that can be
marketed to potential system sponsors. The Company will also seek to provide
complete integrated smart card solutions, on a turnkey basis, to system sponsors
by providing all of the hardware and software elements required to implement the
system.
Since inception, the Company has been engaged principally in
organizational activities, including developing a business plan, hiring
personnel and developing and enhancing its smart card technology and software,
and has only recently commenced the limited marketing of its smart card systems.
The Company has generated limited revenues and incurred significant operating
losses. Therefore, the Company has a limited operating history upon which an
evaluation of its prospects can be made. The Company's prospects must be
considered in light of the risks, uncertainties, expenses, delays and
difficulties associated with the establishment of a new business in the evolving
smart card industry, as well as those risks encountered in the shift from
development to commercialization of new products based on innovative
technologies. There can be no assurance that the Company's smart card systems
will ever gain market acceptance, or that the Company will be able to
successfully implement its marketing strategies, generate meaningful revenues or
ever achieve profitable operations.
The Company was incorporated under the laws of the State of Delaware in
June 1994. Unless otherwise indicated, all references to the Company include
Canadian Smart Card Technology Inc., its majority-owned subsidiary incorporated
under the laws of Ontario, Canada (the "Subsidiary"), which was created to
exploit the Company's technology in Canada. The Company's principal executive
offices are located at 1355 Terrell Mill Road, Building 1462, Suite 200,
Marietta, Georgia 30067 and its telephone number is (770) 951-2284.
-4-
Recent Financing
In January 1997, the Company consummated a financing (the "Bridge
Financing") pursuant to which it issued to 23 private investors (including
certain officers and directors of the Company) an aggregate of 25 units (the
"Units"), each Unit consisting of (i) an unsecured 9% non-negotiable promissory
note of the Company in the principal amount of $50,000 due on the earlier of the
consummation of this offering or January 16, 1998 (a "Bridge Note"); (ii) 5,000
shares of Common Stock (the "Bridge Shares"); and (iii) warrants (the "Bridge
Warrants") to purchase 25,000 shares of Common Stock at an exercise price of
$4.00 per share (the "Bridge Warrant Shares"), subject to adjustment in certain
circumstances. The purchase price per Unit was $50,000. The Company received
gross proceeds of $1,250,000 from the sale of such Units. After payment of
$125,000 in placement fees to the Underwriter, which acted as placement agent
for the Company with respect to the Bridge Financing, and other offering
expenses of approximately $105,000, the Company received net proceeds of
approximately $1,020,000 in connection with the Bridge Financing. The Company's
sale of 25 Units resulted in the Company's issuance (in connection with the
Bridge Financing) of a total of $1,250,000 principal amount of Bridge Notes,
125,000 Bridge Shares and Bridge Warrants to purchase 625,000 Bridge Warrant
Shares. The Company intends, upon the consummation of this offering, to use a
portion of the proceeds of this offering to repay the entire principal amount of
and accrued interest on the Bridge Notes. See "Use of Proceeds." Additionally,
in January 1997, Harold Rothstein, a director of the Company, made a $35,000
working capital loan to the Company, at an interest rate of 10% per annum (the
"Interim Loan"), which was repaid upon consummation of the Bridge Financing with
a portion of the proceeds thereof. See "Use of Proceeds," "Plan of Operation"
and "Certain Transactions."
The Offering
Securities offered......................1,500,000 shares of Common Stock and
Warrants to purchase 1,500,000 shares
of Common Stock. See "Description of
Securities."
Common Stock to be outstanding
after the offering(1).................4,125,000 shares.
Warrants
Number to be outstanding
after the offering(2).................1,500,000 Warrants.
- ----------------------
(1) Includes 125,000 Bridge Shares issued in connection with the Bridge
Financing. Does not include (i) 1,500,000 shares of Common Stock
reserved for issuance upon exercise of the Warrants; (ii) an aggregate
of 300,000 shares of Common Stock reserved for issuance upon exercise of
the Underwriter's Warrants and the Warrants included therein; (iii)
625,000 shares of Common Stock reserved for issuance upon exercise of
the Bridge Warrants; (iv) 64,000 shares of Common Stock reserved for
issuance upon exercise of stock options intended to be granted, as of
the date of this Prospectus, under the Company's 1996 Stock Option Plan
(the "Stock Option Plan"); (v) 206,000 shares of Common Stock reserved
for issuance upon exercise of options available for future grant under
the Stock Option Plan; (vi) 7,500 shares of Common Stock reserved for
issuance upon exercise of options to be granted, as of the date of this
Prospectus, under the Company's Nonemployee Directors' Stock Option Plan
(the "Directors' Plan"); (vii) 22,500 shares of Common Stock reserved
for issuance upon exercise of options available for future grant under
the Directors' Plan; (viii) 100,000 shares of Common Stock issuable upon
exercise of an option to purchase 100,000 shares of Common Stock granted
to Shreveport Acquisition Corp. ("Shreveport"), a company which is owned
by Lawrence O. Perl, the Company's Chief Executive Officer, Harold
Rothstein and Raymond Roncari, each a director of the Company (the
"Shreveport Option"); and (ix) an indeterminate number of shares of
Common Stock reserved for issuance in the event the Company fails under
certain circumstances to register, or maintain an effective registration
statement with respect to, securities issued in the Bridge Financing.
See "Management - 1996 Stock Option Plan," "- Nonemployee Directors'
Stock Option Plan," "Certain Transactions," "Description of Securities"
and "Underwriting."
(2) Does not include any warrants referred to in clause (ii) and (iii) of
Note 1 above.
-5-
Exercise terms...........................Exercisable at any time commencing
, 1998 [one year
following the date of this
Prospectus], or earlier upon the
consent of the Underwriter, each to
purchase one share of Common Stock
at a price of $5.00, subject to
adjustment in certain circumstances.
In the event the Company's results
of operations for the first four
fiscal quarters following the date
of this Prospectus reflect, on a
cumulative basis during such four
quarters, either revenues of under
$5,000,000 or pre-tax operating
losses (before interest income and
expense, financing costs, taxes and
extraordinary items) in excess of
$1,000,000, then the exercise price
of the Warrants shall decrease from
$5.00 per share to $4.00 per share.
See "Description of Securities -
Redeemable Warrants."
Expiration date.......................... , 2002 [five years following
the date of this Prospectus].
Redemption...............................Redeemable by the Company, upon the
consent of the Underwriter, at a price
of $.10 per Warrant, at any time
commencing after the Company has
reported its first four fiscal
quarters of financial results
following the date of this
Prospectus, upon notice of not less
than 30 days, provided that the
closing bid quotation of the Common
Stock on all 20 trading days ending
on the third day prior to the day on
which the Company gives notice has
been at least 150% (currently $7.50,
subject to adjustment) of the then
effective exercise price of the
Warrants. See "Description of
Securities - Redeemable Warrants."
Use of Proceeds..........................The Company intends to use the net
proceeds of this offering for repayment
of indebtedness; research and
development; sales and marketing;
repayment of certain outstanding
obligations; and the balance for
working capital and general corporate
purposes. See "Use of Proceeds."
Risk Factors.............................The securities offered hereby are
speculative and involve a high degree
of risk and immediate substantial
dilution and should not be purchased
by investors who cannot afford the loss
of their entire investment. See "Risk
Factors" and "Dilution."
Proposed Nasdaq symbols..................Common Stock - "ACRD".
Warrants - "ACRDW".
-6-
Summary Financial Information
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements of the Company,
including the notes thereto, appearing elsewhere in this Prospectus.
Statement of Operations Data:
Period
from June 21,
1994 (inception)
Period from June 21, Year Ended Nine Months to
1994 (inception) to December 31, Ended September 30, September 30,
December 31, 1994 1995 1995 1996 1996
------------------ ----- ---- ---- -----
Revenues........................... $ -- $73,472 $66,262 $19,989 $93,461
Cost of sales...................... -- 68,621 57,881 11,250 79,871
Write-off of license fee........... -- 148,000 -- 20,000 168,000
Other expenses..................... 434,545 878,461 660,197 918,872 2,231,878
Net loss(1)........................ (434,545) (1,021,610) (651,816) (930,133) (2,386,288)
Net loss per share................. (.16) (.37) (.24) (.34)
Weighted average number of shares
outstanding........................ 2,750,000 2,750,000 2,750,000 2,750,000
Balance Sheet Data:
December 31, 1995 September 30, 1996 (unaudited)
----------------- ---------------------------------------------------------
Actual Pro Forma(2) As Adjusted(2)(3)
------------- ------------- -----------------
Working capital (deficit)............. $(1,246,660) $(1,864,837) $(294,837) $4,690,163
Total assets.......................... 313,923 358,297 1,838,297 5,753,297
Total liabilities..................... 1,269,328 1,913,585 2,581,085 753,585
Total stockholders' equity (deficit).. (955,405) (1,555,288) (742,788) 4,999,712(4)
(1) During the periods presented through June 18, 1996, the Company elected to
be treated as an S corporation for federal income tax purposes and,
accordingly, no provision for income taxes during such periods is reflected
in the Company's financial statements. The Company terminated its status as
an S corporation effective June 18, 1996. See Notes to Financial
Statements.
(2) Gives effect to (i) the consummation of the Bridge Financing in January
1997 and the application of the net proceeds therefrom; (ii) the
conversion, upon the consummation of the Bridge Financing, by The 1994 Perl
Trust Indenture, a trust for the benefit of the family of Lawrence Perl,
the Chief Executive Officer of the Company, Raymond Findley, the President
and Chief Operating Officer of the Company, Raymond Roncari, a director of
the Company, and Harold Rothstein (either individually or through The
Rothstein Family Trust, a trust for the benefit of the family of Mr.
Rothstein), a director of the Company, of loans in the aggregate principal
amount of $550,000 (the "Stockholder Loans") into an aggregate of 110,000
shares of Common Stock of the Company (the "Debt Conversion"); and (iii)
the incurrence by the Company of $230,000 principal amount of bank
indebtedness subsequent to September 30, 1996 (collectively, the "Pro Forma
Adjustments").
(3) Gives effect to the sale of the 1,500,000 shares of Common Stock and
1,500,000 Warrants being offered hereby and the anticipated application of
the estimated net proceeds therefrom, including repayment of the Bridge
Notes. See "Use of Proceeds."
(4) Gives effect to a non-recurring charge of $262,500 representing the
unamortized loan discount and $230,000 of unamortized deferred financing
costs associated with the Bridge Financing which will be recorded when the
Bridge Notes are repaid with a portion of the proceeds of this offering.
See Note 9 of Notes to Financial Statements.
-7-
RISK FACTORS
The securities being offered hereby are speculative and involve a high
degree of risk, including, but not limited to, those risk factors set forth
below, and should not be purchased by anyone who cannot afford a loss of his
entire investment. Prospective investors, prior to making an investment in the
Company, should carefully consider the following risk factors inherent in and
affecting the business of the Company and this offering.
The discussion in this Prospectus contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Risk
Factors," "Plan of Operation" and "Business" as well as those discussed
elsewhere in this Prospectus.
1. Development Stage Company; Limited Operating History. The Company
was organized in June 1994 and is in the development stage. Since inception, the
Company has been engaged principally in organizational activities, including
developing a business plan, hiring personnel and developing and enhancing its
proprietary smart card technology and software, and it has only recently
commenced the limited marketing of its smart card systems. Therefore, the
Company has a limited operating history upon which an evaluation of its
prospects can be made. The Company's prospects must be considered in light of
the risks, uncertainties, expenses, delays and difficulties associated with the
establishment of a new business in the evolving smart card industry, as well as
those risks encountered in the shift from development to commercialization of
new products based on innovative technologies.
See "Plan of Operation."
2. Limited Revenues; Significant and Continuing Losses; Accumulated
Deficit; Explanatory Paragraph in Independent Auditors' Report. The Company has
generated limited revenues to date and does not expect to generate meaningful
revenues in the near future until such time, if ever, as its smart card systems
are successfully commercialized. The Company has incurred significant losses in
each period since its inception resulting in an accumulated deficit at September
30, 1996 of $2,386,288 and losses are continuing through the date of this
Prospectus. Inasmuch as the Company will continue to have a high level of
operating expenses and will be required to make significant up-front
expenditures in connection with both the development of its business and the
commercialization of its smart card systems (including, without limitation,
salaries of executive, technical, marketing and other personnel), the Company
anticipates that it will continue to incur significant and increasing losses for
the foreseeable future until such time, if ever, as the Company is able to
generate sufficient revenues to finance its operations. The Company will also
incur non-recurring charges relating to the Bridge Financing of approximately
$492,500 upon the consummation of this offering. The Company's independent
certified public accountants have included an explanatory paragraph in their
report stating that the Company's dependence on outside financing, lack of
existing commitments from lenders to provide necessary financing, lack of
sufficient working capital and losses since inception raise substantial doubt
about the Company's ability to continue as a going concern. There can be no
assurance that the Company's smart card systems will gain market acceptance, or
that the Company will be able to successfully implement its business strategy,
generate meaningful revenues or achieve profitable operations. See "Plan of
Operation" and Financial Statements.
3. Uncertainty of Proposed Plan of Operation. The success of the
Company's proposed plan of operation will be largely dependent upon market
acceptance of smart cards generally, as well as on the Company's ability to
successfully market its smart card systems by persuading potential system
sponsors of the perceived benefits of its dual card access and multiple
application layering concepts (including the benefits to be derived from
allocating total card program costs among individual application layers within a
card) and to develop and commercialize further applications of its proprietary
technology. In addition, the Company's proposed plan of operation and prospects
will be dependent upon, among other things, the Company's ability to enter into
strategic marketing and licensing or other arrangements on a timely basis and on
favorable terms; establish satisfactory arrangements with sales representatives
and marketing consultants; hire and retain skilled management as well as
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financial, technical, marketing and other personnel; successfully manage growth
(including monitoring operations, controlling costs and maintaining effective
quality, inventory and service controls); and obtain adequate financing when and
as needed. The Company has limited experience in developing new products based
on innovative technology and there is limited information available concerning
the performance of the Company's technologies or market acceptance of the
Company's products. There can be no assurance that the Company will be able to
successfully implement its plan or that unanticipated expenses or problems or
technical difficulties will not occur which would result in material delays in
its implementation. Moreover, there can be no assurance that the Company will
have sufficient capacity to satisfy any increased demand for its smart card
products and technologies resulting from the Company's implementation of its
plan of operation. See "Plan of Operation" and "Business."
4. New Concept; Uncertainty of Market Acceptance. The smart card
industry in the United States is an emerging business characterized by an
increasing and substantial number of new market entrants that have introduced or
are developing an array of new products and services relating to electronic
transactions and information processing. Each of these entrants is or may be
seeking to position its products and services as the preferred method of
effectuating highly individualized, easy-to-use electronic transaction and
information processing. The success of the smart card industry depends, in large
part, on the ability of market participants to convince governmental
authorities, commercial enterprises and other potential system sponsors to adopt
a smart card system in lieu of existing or alternative systems such as magnetic
stripe card and paper-based systems, thereby changing the way certain
transaction and information processing tasks are accomplished. In addition, due
to the large capital and infrastructure investment made by debit and credit card
issuers and significantly lower costs associated with the use of magnetic stripe
cards, many potential system sponsors may be reluctant to convert to smart card
technology in the near future. Accordingly, there can be no assurance that there
will be significant market opportunities for smart card systems in the United
States or that the acceptance of smart card based systems in other countries
will be sustained. The Company's dual card access and multiple application
layering technologies are new concepts. As such, demand for and market
acceptance of the Company's smart card systems are subject to a high level of
uncertainty. The Company has limited marketing experience and limited financial,
personnel and other resources to undertake extensive marketing activities.
Potential system sponsors of the Company's smart card systems, as well as the
Company's potential strategic partners, must be persuaded that the costs of
adopting and implementing smart card systems, in general, and, in particular, of
adopting and implementing the Company's smart card systems, which incorporate
dual card access technology and multiple application layering, are justified by
the benefits to be derived therefrom. Achieving market acceptance for the
Company's products and services will require significant efforts and
expenditures by the Company to create awareness, demand and interest by
potential system sponsors, strategic partners and others regarding the perceived
benefits of the Company's technologies, including the possible allocation of
costs among different system sponsors and/or departments of one or more system
sponsors. There can be no assurance that the Company's smart card technology
will prove to be economically viable for a sufficient number of sponsors, that
substantial markets will develop, in the United States or elsewhere, for the
Company's smart card systems or that the Company will be able to meet its
current marketing objectives, succeed in positioning its cards and services as a
preferred method of delivering electronic transaction and information processing
or achieve significant market acceptance of its products. See "Business -
Marketing and Sales."
5. Significant Capital Requirements; Working Capital Deficit;
Dependence on Proceeds of this Offering. The Company's capital requirements have
been and will continue to be significant. At September 30, 1996, the Company had
a working capital deficit of $1,864,837 due to, among other things, costs
associated with the development, commercialization and market testing of the
Company's smart card systems, including the development of the Company's initial
pilot programs. The Company has been dependent on the sales of its securities to
private investors (including the Bridge Financing), as well as on capital
contributions and loans from affiliates and certain financial institutions
guaranteed by certain stockholders of the Company. During the period from
inception through the date of this Prospectus, the Company has raised capital in
the aggregate amount of $3,740,000 through such means. The Company is dependent
on and intends to use the proceeds of this offering to continue the
implementation of its proposed plan of operation. The Company anticipates, based
on currently proposed business plans and assumptions relating to its operations
(including assumptions regarding the Company's
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ability to meet its current marketing objectives and the timing and costs
associated therewith), that the net proceeds of this offering, together with
projected cash flow from operations, will be sufficient to fund the Company's
operations and capital requirements for at least twelve months following the
consummation of this offering. In the event that the Company's plans change, its
assumptions change or prove to be inaccurate or if the proceeds of this offering
prove to be insufficient to fund operations (due to unanticipated expenses,
technical difficulties, problems or otherwise), the Company would be required to
seek additional financing sooner than currently anticipated. There can be no
assurance that the proceeds of this offering will be sufficient to permit the
Company to successfully further develop and commercialize the Company's smart
card technology or that any assumptions relating to the Company's operations
will prove to be accurate. In addition, any implementation of the Company's
business plans subsequent to the twelve month period following this offering may
require proceeds greater than the proceeds of this offering or otherwise
currently available to the Company. The Company has no current arrangements with
respect to, or sources of, additional financing and there can be no assurance
that any such financing will be available to the Company on commercially
reasonable terms, or at all. It is not anticipated that any of the officers,
directors or stockholders of the Company will provide any portion of the
Company's future financing requirements. Any inability to obtain additional
financing when needed will have a material adverse effect on the Company,
including requiring the Company to curtail its activities and possibly causing
the Company to cease its operations. To the extent that the Company finances its
operations through the issuance of additional equity securities, any such
issuance may involve substantial dilution to the Company's then-existing
stockholders. Additionally, to the extent that the Company incurs indebtedness
or issues debt securities, the Company will be subject to all of the risks
associated with incurring substantial indebtedness, including the risks that
interest rates may fluctuate and cash flow may be insufficient to pay principal
and interest on any such indebtedness. See "Use of Proceeds," "Plan of
Operation" and "Certain Transactions."
6. Dependence on Contract with US3, Inc. The Company has entered into a
requirements contract with US3, Inc. ("US3"), a leading manufacturer of smart
cards, pursuant to which the Company has agreed to purchase, and US3 has agreed
to supply, all of the Company's requirements for smart cards at or below certain
specified prices and smart card hardware at prices to be agreed upon from time
to time, subject to certain exceptions. The Company is substantially dependent
on the ability of US3 to provide adequate inventories of quality cards and
microprocessor chips manufactured to the Company's specifications on a timely
basis and on favorable terms. There can be no assurance that US3 will have
sufficient production capacity to satisfy the Company's inventory or scheduling
requirements during any period of sustained demand, or that the Company will not
be subject to the risk of price fluctuations and periodic delays. Although the
Company believes that its relationship with US3 is satisfactory and that
numerous alternative sources for its cards are currently available, the loss of
the services of such manufacturer or substantial price increases proposed by
such manufacturer, in the absence of readily available alternative sources of
supply, could have a material adverse effect on the Company. Failure or delay by
US3 in supplying cards to the Company on favorable terms could also adversely
affect the Company's operating margins and the Company's ability to obtain and
deliver products and services on a timely and competitive basis. Additionally,
the Company will be dependent on US3 or on other third parties for the supply
and manufacture of substantially all of its hardware products, including smart
card read/write devices and printers. Although the Company believes that these
hardware products are available from several manufacturers and distributors,
there can be no assurance that the Company will be able to obtain such products
at competitive prices when needed from time to time. See "Business -
Manufacturing."
7. Limited Marketing Capabilities and Experience; Dependence on
Third-Party Marketing Arrangements. The Company has limited marketing
capabilities, experience and resources. To date, the Company has conducted only
limited marketing activities and has relied primarily on the efforts of its
executive officers in connection with such activities. Although the Company
expects to continue to market smart card systems directly through the Company's
management and employees, including its recently appointed Director of Marketing
and Sales, the Company intends to establish strategic marketing alliances and
licensing or other arrangements with systems integrators, value-added resellers
and other smart card vendors and may also retain the services of sales
representatives and marketing and other consultants. The Company's success will
depend in part on its ability to
-10-
enter into agreements with such third parties, and on the ability and efforts of
such third parties to successfully market the Company's smart card systems.
Moreover, marketing arrangements with third parties may require financial or
other commitments by the Company. There can be no assurance that the Company
will be able, for financial or other reasons, to enter into third-party
marketing arrangements on commercially acceptable terms, or at all. The failure
of the Company to complete its third-party marketing strategy or the failure of
any such party to develop and sustain a market for the Company's smart cards
could have a material adverse effect on the Company. Although the Company views
third-party marketing arrangements as a major factor in the commercialization of
its smart card systems, there can be no assurance that any strategic partners,
licensees or others would view an arrangement with the Company as significant to
their businesses. See "Business - Marketing and Sales."
8. Competition; Technological Obsolescence. The market for the
Company's smart card systems is characterized by intense competition. The market
is currently dominated by cards utilizing magnetic stripes, and is expected to
be dominated by magnetic stripe cards for the foreseeable future due to the
lower costs of production of such cards and the substantial capital and
infrastructure investments made by debit and credit card issuers in such cards.
The Company also competes with numerous well-established companies, including
Gemplus, Bull CP8 (a unit of Groupe Bull), Schlumberger Industries International
and Solaic, which design, manufacture and/or market smart card systems. Although
the Company believes that its dual card access and multiple application layering
technologies will allow the Company to compete on the basis of enhanced
security, flexibility, scalability, cost-effectiveness and quality, the
Company's smart card systems incorporate new concepts and may be unsuccessful
even if they are superior to those of its competitors. In addition, certain
companies may be developing technologies or products of which the Company is
unaware which may be functionally similar or superior to those developed by the
Company. Most of the Company's competitors and potential competitors possess
substantially greater financial, marketing, personnel and other resources than
the Company and have established reputations relating to the design,
development, manufacture, marketing and service of smart card systems. As the
market for smart card systems grows, new competitors are likely to emerge.
Additional competition could adversely affect the Company's operations. There
can be no assurance that the Company will be able to compete successfully, that
competitors will not develop technologies or products that render the Company's
systems obsolete or less marketable or that the Company will be able to
successfully enhance its products or develop new products when necessary. See
"Business - Competition."
9. Technological Factors. The Company's research and development
efforts are subject to all of the risks inherent in the development of new
products and technology (including unanticipated delays, expenses and
difficulties). There can be no assurance that the Company's products will
satisfactorily perform the functions for which they are designed, that they will
meet applicable price or performance objectives or that unanticipated technical
or other problems will not occur which would result in increased costs or
material delays in the development thereof. Furthermore, software products as
complex as those developed by the Company and incorporated into its smart card
products may contain errors or failures when installed, updated or enhanced.
There can be no assurance that, despite testing by the Company and by current
and potential end users, errors will not be found in new products after the
delivery by the Company, resulting in loss of or delay in market acceptance. See
"Business - Technology Overview" and "- Products."
10. Proprietary Rights. The Company's success will depend on its
ability to obtain patents, protect trade secrets and operate without infringing
on the proprietary rights of others. The Company has applied for a United States
patent with respect to its dual card access technology and methods. The Company
contemplates filing patent applications in selected foreign jurisdictions where
such filings would, in the Company's opinion, provide it with a competitive
advantage. Although the Company believes its patent application contains
patentable claims, there can be no assurance that any patent will be issued.
Moreover, the patent laws of other countries may differ from those of the United
States as to the patentability of the Company's products or technology and the
degree of protection afforded by foreign patents may be different from that in
the United States. The failure by the Company to obtain any patents could have a
material adverse effect on the Company's ability to successfully commercialize
-11-
its smart card systems. Even if the Company is able to obtain a patent, there
can be no assurance that any such patent will afford the Company commercially
significant protection for its technology. Other companies may independently
develop equivalent or superior technologies or products and may obtain patent or
similar rights with respect to them. The Company is not aware of any
infringement by its technology on the proprietary rights of others and has not
received any notice of claimed infringement. However, the Company has not
conducted any investigation as to possible infringement and there can be no
assurance that third parties will not assert infringement claims against the
Company in connection with its products, that any such assertion of infringement
will not result in litigation, or that the Company would prevail in such
litigation. Moreover, in the event that the Company's technology or proposed
products were deemed to infringe upon the rights of others, the Company would be
required to obtain licenses to utilize such technology. There can be no
assurance that the Company would be able to obtain such licenses in a timely
manner on acceptable terms and conditions, and the failure to do so could have a
material adverse effect on the Company. If the Company were unable to obtain
such licenses, it could encounter significant delays in product market
introductions while it attempted to design around the infringed upon patents or
rights, or could find the development, manufacture or sale of products requiring
such license to be foreclosed. In addition, patent disputes are common in the
smart card and computer industries and there can be no assurance that the
Company will have the financial resources to enforce or defend a patent
infringement or proprietary rights action. The Company has also applied for a
copyright registration of the software used in connection with its dual card
access technology. In addition, the Company has applied for federal trademark
registration of its SMART-ID mark and design. The Company's use of its software,
name and mark may be subject to challenge by others, which, if successful, could
have a material adverse effect on the Company.
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect the concepts, ideas and documentation
relating to its proprietary technology. However, such methods may not afford the
Company complete protection and there can be no assurance that others will not
independently obtain access to the Company's trade secrets and know-how or
independently develop products or technologies similar to those of the Company.
Furthermore, although the Company has and expects to have confidentiality and
non-competition agreements with its employees and appropriate suppliers and
manufacturers, there can be no assurance that such arrangements will adequately
protect the Company's trade secrets. See "Business - Intellectual Property."
11. Lengthy Sales Cycle; Possible Fluctuations in Operating Results.
The Company's sales cycle is expected to commence at the time a prospective
system sponsor demonstrates an interest in purchasing a smart card system from
the Company or issues a request for a proposal or information or takes similar
action and ends upon the installation of a smart card system for the system
sponsor. The sales cycle will vary by system sponsor and could extend for
periods of up to twelve months or more, depending upon, among other things, the
time required by the system sponsor to complete a pilot test of the Company's
smart card system, make a determination regarding an acquisition thereof and
negotiate payment terms with the Company. The Company's operating results could
vary from period to period as a result of this fluctuation in the length of the
Company's sales cycle and as a result of fluctuations in the purchasing patterns
of potential system sponsors, technological factors, variations in marketing
strategies for different target markets and non-recurring smart card system
sales. See "Plan of Operation - Possible Fluctuations in Operating Results."
12. Risks of Foreign Sales. Although the Company believes that foreign
sales may represent a significant portion of its future revenues, there can be
no assurance that the Company will be able to penetrate foreign markets for
smart cards or that such markets will prove to be viable for sales of the
Company's smart card systems. To the extent that the Company is able to
successfully expand its operations into foreign markets, the Company may become
increasingly subject to risks inherent in foreign sales, including shipping
delays, increased credit risks, trade restrictions (including restrictions on
the export of critical technology), export duties and tariffs, fluctuations in
foreign currencies and international political, regulatory and economic
developments, all of which could have an adverse effect on the Company's results
of operations. The Company does not intend to engage in foreign currency hedging
transactions.
-12-
13. Possible Dependence on Government Contracts. As part of its
strategy, the Company intends to market its smart card systems to government
agencies in the United States, Canada and abroad. If successful, the Company
will become subject to the special risks involving government contracts,
including delays in funding, lengthy review processes for awarding contracts,
non-renewal, delay, termination at the convenience of the government, reduction
or modification of contracts in the event of changes in the government's
policies or as a result of budgetary constraints and increased or unexpected
costs resulting in losses, any or all of which could have a material adverse
effect on the Company.
The Company will also be required to obtain any potential government
contracts through the competitive bidding process. There can be no assurance
that the Company will be successful in having its bids accepted or, if accepted,
that awarded contracts will generate sufficient revenues to result in profitable
operations. The competitive bidding process is typically lengthy and often
results in the expenditure of financial and other resources in connection with
bids that are not accepted. Additionally, inherent in the competitive bidding
process is the risk that actual performance costs may exceed projected costs
upon which a submitted bid or contract price is based. To the extent that actual
costs exceed projected costs, the Company would incur losses, which would
adversely affect the Company's operating margins and results of operations.
Moreover, in most instances, the Company would be required to post bid and/or
performance bonds in connection with contracts with government agencies. Any
inability by the Company to obtain bonding coverage in sufficient amounts could
have a material adverse effect on the Company. See "Business - Government
Regulation and Industry Standards."
14. Broad Discretion in Application of Proceeds; Allocation of Proceeds
to Pay Certain Obligations, including Indebtedness to Principal Stockholders;
Benefit to Related Parties. Approximately $2,179,000 (35.0%) of the estimated
net proceeds of this offering has been allocated to working capital and general
corporate purposes. Accordingly, the Company's management will have broad
discretion as to the application of such proceeds. In addition, the Company
intends to use approximately $2,315,000 (37.1%) of the estimated net proceeds of
this offering to repay indebtedness (including all the Bridge Notes and $510,000
aggregate principal amount of Stockholder Loans) and satisfy pre-existing
obligations and, therefore, such funds will be unavailable to fund future
growth. Included in the indebtedness to be repaid are the Bridge Notes payable
to Lawrence O. Perl, the Company's Chief Executive Officer, Harold Rothstein and
Raymond Roncari, each a director of the Company, in the principal amounts of
$25,000, $75,000 and $75,000, respectively, and approximately $31,000 payable to
Lawrence Owen Associates, a corporation wholly-owned by Mr. Perl, for use of
office space and related services. In addition, Mr. Rothstein has personally
guaranteed and/or pledged personal assets to secure the Company's indebtedness
to Fleet Bank, The Chase Manhattan Bank and First Southern Bank, and Mr. Roncari
has personally guaranteed all of the Company's indebtedness to The First
National Bank of Suffield; repayment of such indebtedness will, in effect,
release such guarantees or pledges. The Company will also use a portion of the
proceeds of the offering allocated to working capital to pay compensation
(including accrued compensation) of its executive officers (anticipated to be
approximately $435,000 during the twelve months following this offering). See
"Use of Proceeds," "Plan of Operation," "Management" and "Certain Transactions."
15. Dependence on Management and Key Personnel. The success of the
Company will be largely dependent on the personal efforts of Lawrence O. Perl,
its Chief Executive Officer, Raymond Findley, Jr., its President and Chief
Operating Officer, Robert H. Dixon, its Vice President of Technical Operations,
Peter J. Quadagno, its recently appointed Director of Marketing and Sales, and
other key personnel. Although the Company has entered into an employment
agreement with each of Messrs. Perl, Findley, Dixon and Quadagno, the loss of
services of any of Mr. Perl, Mr. Findley, Mr. Dixon or Mr. Quadagno would have a
material adverse effect on the Company's business and prospects. The Company has
obtained "key man" insurance on the life of each of Messrs. Perl and Findley in
the amount of $2,000,000 each. In order to successfully implement and manage its
proposed expansion, the Company will be dependent upon, among other things, its
ability to attract and retain qualified managerial, technical and marketing
personnel with experience in business activities such as those contemplated by
the Company. Competition for qualified personnel is intense and there can be no
assurance that
-13-
the Company will be able to hire or retain additional personnel. Any inability
to attract and retain qualified personnel would have a material adverse effect
on the Company. See "Management."
16. Control by Management. Upon the consummation of this offering, the
Company's directors and executive officers (or trusts created by or for such
individuals or their families) will beneficially own, in the aggregate,
approximately 55.8% of the outstanding shares of Common Stock (assuming no
exercise of the Warrants or other options). Accordingly, such persons, acting
together, will be in a position to elect the directors, adopt amendments to the
Company's Certificate of Incorporation and By-Laws, approve mergers and other
significant corporate transactions, including a sale of substantially all of the
Company's assets, and otherwise control the Company's affairs. Purchasers of the
shares of Common Stock offered hereby will be minority stockholders, and,
although entitled to vote on matters submitted for a vote of the stockholders,
will not control the outcome of such a vote. See "Management" and "Principal
Stockholders."
17. Possible Adverse Effects of Authorization of Preferred Stock. The
Company's Certificate of Incorporation, as amended (the "Certificate"),
authorizes the Company's Board of Directors to issue up to 1,000,000 shares of a
class of preferred stock, par value $.001 per share (the "Preferred Stock"). The
Certificate authorizes the Board to establish and issue, out of the authorized
but unissued shares of Preferred Stock, "blank check" preferred stock in one or
more series. One or more of such series may be issued at any time or times upon
authorization of the Board. Without further approval of the stockholders, the
Board is authorized to fix the dividend rights and terms, conversion rights,
voting rights, redemption rights and terms, liquidation preferences, and any
other rights, preferences, privileges and restrictions applicable to each new
series of the Preferred Stock. The issuance of new series of Preferred Stock
could, among other results, adversely affect the voting power of the holders of
Common Stock and, under certain circumstances, could make it more difficult for
a third party to gain control of the Company, prevent or substantially delay
such a change of control, discourage bids for the Common Stock at a premium, or
otherwise adversely affect the market price of the Common Stock. Preferred Stock
could, for example, be issued quickly by the Board with terms that are expressly
designed to prevent or substantially delay a change of control of the Company
that could otherwise benefit stockholders or to make removal of management more
difficult. Although the Company has no current plans to issue any Preferred
Stock, there can be no assurance that the Board will not decide to do so in the
future. See "Description of Securities."
18. Immediate and Substantial Dilution. Investors in this offering
will incur immediate and substantial dilution of $3.83 per share (77%) between
the adjusted net tangible book value per share after this offering and the
initial public offering price of $5.00 per share. See "Dilution."
19. Absence of Public Market, Determination of Offering Prices;
Possible Volatility of Market Price of Common Stock and Warrants. Prior to this
offering, there has been no public trading market for the Common Stock or
Warrants. Consequently, the initial public offering price of the Common Stock
and Warrants and the exercise price of the Warrants have been determined by
negotiations between the Company and the Underwriter and are not necessarily
related to the Company's asset value, net worth or other criteria of value.
There can be no assurance that a regular trading market for either the Common
Stock or the Warrants will develop after this offering or that, if developed, it
will be sustained. The market price for the Company's securities following this
offering may be highly volatile, as has been the case with the securities of
other small capitalization companies. Factors such as the Company's financial
results, announcements of developments related to the Company's business and the
introduction of products and product enhancements by the Company or its
competitors may have a significant impact on the market price of the Company's
securities. Additionally, in recent years, the stock market in general, and the
market for securities of small capitalization stocks in particular, have
experienced wide price fluctuations which have often been unrelated to operating
performance of such companies. See "Underwriting."
20. No Dividends. The Company has never paid any cash or other
dividends on its Common Stock. Payment of dividends on the Common Stock is
within the discretion of the Board of Directors of the Company and will depend
upon the Company's earnings, capital requirements and financial condition, and
on any other relevant
-14-
factors. For the foreseeable future, the Board of Directors intends to retain
future earnings, if any, to finance its business operations and does not
anticipate paying any cash dividends with respect to the Common Stock. In
addition, the payment of cash dividends may be limited or prohibited by the
terms of any future loan agreements or any Preferred Stock that may be issued by
the Company. See "Dividend Policy," "Plan of Operation - Liquidity and Capital
Resources" and "Description of Securities - Preferred Stock."
21. Limitations on Liability of Directors and Officers. The Certificate
includes provisions to eliminate, to the full extent permitted by the Delaware
General Corporation Law (the "DGCL") as in effect from time to time, the
personal liability of directors of the Company for monetary damages under
certain circumstances. The Certificate and the Company's By-Laws (the "By-Laws")
also include provisions to the effect that (subject to certain exceptions) the
Company shall, to the maximum extent permitted from time to time under the law
of the State of Delaware, indemnify, and upon request shall advance expenses to,
any director or officer to the extent that such indemnification and advancement
of expenses is permitted under such law, as it may from time to time be in
effect. As a result of such provisions, stockholders may be unable to recover
damages against the directors and officers of the Company for actions taken by
them which constitute negligence, gross negligence or a violation of their
fiduciary duties. In anticipation of this offering, the Board has authorized and
directed the Company to enter into indemnification agreements with each director
of the Company, pursuant to which the Company would, in general, (i) agree to
indemnify and hold harmless each director to the full extent permitted or
authorized by the DGCL as in effect from time to time and (ii) specify the
various terms and conditions relating to the advancement of expenses in
connection with indemnifiable claims. Each of the provisions described above may
reduce the likelihood of stockholders instituting derivative litigation against
directors and may discourage or deter stockholders from suing directors,
officers, employees and agents of the Company for (among other things) breaches
of their duty of care, even though such an action, if successful, might
otherwise benefit the Company and its stockholders. See "Management - Limitation
of Liability and Indemnification."
22. Adoption of Certain Charter and By-Law Provisions Having
Anti-Takeover Effects. The Certificate and By-Laws contain various provisions
which, under certain circumstances, could make it more difficult for a third
party to gain control of the Company (e.g., by means of a tender offer), prevent
or substantially delay such a change of control, discourage bids for the Common
Stock at a premium, or otherwise adversely affect the market price of the Common
Stock. The Certificate provides (among other things) that the Board will be
classified into three classes of directors, with each class serving a staggered
three-year term. This provision, together with the provision authorizing the
Board to issue one or more series of Preferred Stock, could make it more
difficult for stockholders to effect certain corporate actions that might
facilitate a proposed acquisition of the Company and could have the effect of
delaying or preventing a change of control of the Company. See "Description of
Securities - Antitakeover Provisions."
23. Outstanding Options. As of the date of this Prospectus, the Company
had outstanding options to purchase an aggregate of 171,500 shares of Common
Stock at an exercise price of $5.00 per share. Exercise of any of the foregoing
options will have a dilutive effect on the Company's stockholders. Furthermore,
the terms upon which the Company may be able to obtain additional equity
financing may be adversely affected, since the holders of the options can be
expected to exercise them, if at all, at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to the
Company than those provided in the options. See "Certain Transactions" and
"Management - 1996 Stock Option Plan." and "- Nonemployee Directors' Stock
Option Plan."
24. Shares Eligible for Future Sale; Registration Rights. Upon the
consummation of this offering, the Company will have 4,125,000 shares of Common
Stock outstanding, of which the 1,500,000 shares of Common Stock offered hereby
will be freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). All of the remaining
2,625,000 shares of Common Stock outstanding are "restricted securities," as
that term is defined under Rule 144 promulgated under the Securities Act, and in
the future may only be sold pursuant to an effective registration statement
under the Securities Act, in compliance with
-15-
the exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act. The 2,625,000 restricted shares of Common Stock will become
eligible for sale under Rule 144, subject to certain volume limitations
prescribed by Rule 144 and to the contractual restrictions described below, at
various times commencing 90 days from the date of this Prospectus. The Company
has granted certain demand and "piggyback" registration rights to the holders of
125,000 shares of Common Stock and 625,000 shares of Common Stock underlying the
Bridge Warrants issued in connection with the Bridge Financing. No prediction
can be made as to the effect, if any, that sales of shares of Common Stock or
even the availability of such shares for sale will have on the market prices
prevailing from time to time. All of the Company's officers, directors and
stockholders have agreed not to sell or otherwise dispose of (other than in a
private transfer) any of their shares of Common Stock for a period of 12 months
from the date of this Prospectus without the prior written consent of the
Underwriter (other than in the case of the Bridge Shares and Bridge Warrant
Shares, which cannot be transferred during such period even with the consent of
the Underwriter). However, the possibility that substantial amounts of Common
Stock may be sold in the public market may adversely affect prevailing market
prices for the Common Stock and the Warrants and could impair the Company's
ability to raise capital through the sale of its equity securities. See "Certain
Transactions," "Description of Securities," "Shares Eligible for Future Sale"
and "Underwriting."
25. Possible Inability to Exercise Warrants. The Company intends to
qualify the sale of the Common Stock and the Warrants in a limited number of
states. Although certain exemptions in the securities laws of certain states
might permit Warrants to be transferred to purchasers in states other than those
in which the Warrants were initially qualified, the Company will be prevented
from issuing Common Stock in such other states upon the exercise of the Warrants
unless an exemption from qualification is available or unless the issuance of
Common Stock upon exercise of the Warrants is qualified. The Company may decide
not to seek or may not be able to obtain, qualification of the issuance of such
Common Stock in all of the states in which the ultimate purchasers of the
Warrants reside. In such a case, the Warrants will expire and have no value if
such Warrants cannot be sold. Accordingly, the market for the Warrants may be
limited because of these restrictions. Further, a current prospectus covering
the Common Stock issuable upon exercise of the Warrants must be in effect before
the Company may accept Warrant exercises. There can be no assurance the Company
will be able to have a prospectus in effect when this Prospectus is no longer
current, notwithstanding the Company's commitment to use its best efforts to do
so. See "Description of Securities - Redeemable Warrants."
26. Potential Adverse Effect of Redemption of Warrants. The Warrants
may be redeemed by the Company, upon the consent of the Underwriter, at a price
of $.10 per Warrant, at any time commencing after the Company has reported its
first four fiscal quarters of financial results following the date of this
Prospectus, upon notice of not less than 30 days, provided that the closing bid
quotation of the Common Stock on all 20 trading days ending on the third day
prior to the day on which the Company gives notice has been at least 150%
(currently $7.50, subject to adjustment) of the then effective exercise price of
the Warrants. Redemption of the Warrants could force the holders to exercise the
Warrants and pay the exercise price at a time when it may be disadvantageous for
the holders to do so, to sell the Warrants at the then-current market price when
they might otherwise wish to hold the Warrants, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. See "Description of Securities - Redeemable
Warrants."
27. Possible Delisting of Securities from Nasdaq System; Disclosure
Relating to Low-Priced Stocks. It is currently anticipated that the Company's
Common Stock and Warrants will be quoted on the Nasdaq Small-Cap Market
("Nasdaq") upon the completion of this offering. In order to continue to be
listed on Nasdaq, however, the Company must maintain $2,000,000 in total assets,
a $200,000 market value of the public float and $1,000,000 in total capital and
surplus. In addition, continued inclusion requires two market makers and a
minimum bid price of $1.00 per share; provided, however, that if the Company
falls below such minimum bid price, it will remain eligible for continued
inclusion in Nasdaq if the market value of the public float is at least
$1,000,000 and the Company has $2,000,000 in capital and surplus. Nasdaq has
recently proposed new maintenance criteria which, if implemented, would
eliminate the exception to the $1.00 per share minimum bid price and require,
among other things, $2,000,000 in net tangible assets, $1,000,000 market value
of the public float and adherence to certain
-16-
corporate governance provisions. The failure to meet these maintenance criteria
in the future may result in the delisting of the Company's securities from
Nasdaq, and trading, if any, in the Company's securities would thereafter be
conducted in the non-Nasdaq over-the-counter market. As a result of such
delisting, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's securities. In
addition, if the Common Stock were to become delisted from trading on Nasdaq and
the trading price of the Common Stock was less than $5.00 per share, trading in
the Common Stock would also be subject to the requirements of certain rules
promulgated under the Exchange Act, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Common Stock and Warrants,
which could severely limit the market liquidity of the Common Stock and Warrants
and the ability of purchasers in this offering to sell the Common Stock and
Warrants in the secondary market.
-17-
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock and Warrants offered hereby are estimated to be approximately $6,235,000
($7,233,325 if the Underwriter's over-allotment option is exercised in full).
The Company expects to use the net proceeds (assuming no exercise of the
Underwriter's over-allotment option) approximately as follows:
Approximate
Approximate Percentage of
Application of Proceeds Dollar Amount Net Proceeds
- ----------------------- ------------- --------------
Repayment of indebtedness(1).............................................. $2,090,000 33.5%
Sales and marketing(2).................................................... 1,021,000 16.4
Research and development(3)............................................... 720,000 11.5
Repayment of certain outstanding obligations(4)........................... 225,000 3.6
Working capital and general corporate purposes(5)......................... 2,179,000 35.0
----------- ----
$6,235,000 100.0%
========== ======
(1) Represents the repayment of (i) the Bridge Notes in the aggregate
principal amount of $1,250,000, plus accrued interest thereon, at a rate
of 9% per annum, of approximately $30,000; (ii) Stockholders Loans in the
aggregate principal amount of $510,000 (interest on which, at a rate of
10% per annum, shall be paid out of cash flow from operations commencing
one year after the consummation of this offering); and (iii) indebtedness
of the Company to its banks in the aggregate principal amount of $300,000,
plus accrued interest thereon, at rates ranging from 8.25% to 8.75% per
annum. The net proceeds from the Bridge Financing were, and are, being
used in connection with the Company's operations, including to fund the
Company's research and development efforts, to fund its sales and
marketing activities, to repay certain outstanding obligations, and for
working capital and general corporate purposes, including pre-offering
expenses in connection with this offering and the repayment, upon the
consummation of the Bridge Financing, of the Interim Loan in the principal
amount of $35,000, plus accrued interest thereon, at a rate of 10% per
annum. Included in the Bridge Notes being repaid is a total of $175,000
(plus related interest) payable to Lawrence O. Perl, the Company's Chief
Executive Officer, Harold Rothstein and Raymond Roncari, each a director
of the Company, in the principal amounts of $25,000, $75,000 and $75,000,
respectively. See "Plan of Operation" and "Certain Transactions."
(2) Consists of salaries of marketing personnel, fees paid to marketing
consultants and anticipated costs and expenses associated with sales
presentations, preparation of marketing materials and attendance at
industry trade shows. See "Business - Marketing and Sales."
(3) Represents a portion of anticipated costs associated with further
enhancement of the Company's proprietary technology as well as development
of system applications and pilot programs for potential system sponsors.
See "Business - Research and Development."
(4) Consists of payment of certain past due obligations of the Company to
attorneys, consultants and an affiliate of Mr. Perl.
(5) Includes amounts for the payment of compensation (including accrued
compensation) to executive officers (which is anticipated to be
approximately $435,000 during the twelve months following this offering),
as well as relocation expenses, rent, professional fees, other operating
expenses, accounts payable and accrued expenses. See "Management."
-18-
If the Underwriter exercises its over-allotment option in full, the
Company will realize additional net proceeds of approximately $998,325. If the
1,500,000 Warrants offered hereby are exercised, the Company will realize
proceeds relating thereto of approximately $7,500,000 (or $6,000,000 if the
exercise price of the Warrants is decreased to $4.00 per share in accordance
with their terms), before any solicitation fees which may be paid in connection
therewith. Such additional proceeds are expected to be added to the Company's
working capital. See "Underwriting."
The allocation of the net proceeds from this offering set forth above
represents the Company's best estimates based upon its currently proposed plans
and assumptions relating to its operations and certain assumptions regarding
general economic conditions. If any of these factors change, the Company may
find it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portions thereof for other purposes. The
Company anticipates, based on currently proposed business plans and assumptions
relating to its operations (including assumptions regarding the Company's
ability to meet its current marketing objectives and the timing and costs
associated therewith), that the net proceeds of this offering, together with
projected cash flow from operations, will be sufficient to fund the Company's
operations and capital requirements for at least twelve months following the
consummation of this offering. In the event that the Company's plans change, its
assumptions change or prove to be inaccurate or if the proceeds of this offering
prove to be insufficient to fund operations (due to unanticipated expenses,
technical difficulties, problems or otherwise), the Company would be required to
seek additional financing sooner than currently anticipated. There can be no
assurance that the proceeds of this offering will be sufficient to permit the
Company to successfully further develop and commercialize the Company's smart
card technology or that any assumptions relating to the Company's operations
will prove to be accurate. In addition, any implementation of the Company's
business plans subsequent to the twelve month period following this offering may
require proceeds greater than the proceeds of this offering or otherwise
currently available to the Company. The Company has no current arrangements with
respect to, or sources of, additional financing and there can be no assurance
that any such financing will be available to the Company on commercially
reasonable terms, or at all. It is not anticipated that any of the officers,
directors or stockholders of the Company will provide any portion of the
Company's future financing requirements. Any inability to obtain additional
financing when needed will have a material adverse effect on the Company,
including requiring the Company to curtail its activities and possibly causing
the Company to cease its operations.
Proceeds not immediately required for the purposes described above will
be invested principally in short-term certificates of deposit, short-term
securities, United States government obligations, money market instruments
and/or other interest-bearing investments.
DIVIDEND POLICY
The Company has never paid any cash or other dividends on its Common
Stock. Payment of dividends on the Common Stock is within the discretion of the
Board of Directors of the Company and will depend upon the Company's earnings,
capital requirements and financial condition, and on any other relevant factors.
For the foreseeable future, the Board of Directors intends to retain future
earnings, if any, to finance its business operations and does not anticipate
paying any cash dividends with respect to the Common Stock. In addition, the
payment of cash dividends may be limited or prohibited by the terms of any
future loan agreements or any Preferred Stock that may be issued by the Company.
See "Plan of Operation - Liquidity and Capital Resources" and "Description of
Securities - Preferred Stock."
-19-
DILUTION
The difference between the initial public offering price per share of
Common Stock and the adjusted net tangible book value per share of Common Stock
after this offering constitutes the dilution to investors in this offering. Net
tangible book value per share on any given date is determined by dividing the
net tangible book value (total tangible assets less total liabilities) of the
Company on such date by the number of shares of Common Stock outstanding on such
date.
At September 30, 1996, the net tangible book value (deficit) of the
Company was $(1,792,207) or $(.75) per share of Common Stock. After giving
retroactive effect to the Pro Forma Adjustments (see footnote 2 of "Prospectus
Summary - Summary Financial Information"), the pro forma net tangible book value
(deficit) of the Company at September 30, 1996 would have been $(910,085) or
$(.35) per share of Common Stock. After also giving retroactive effect to the
sale of the 1,500,000 shares of Common Stock and 1,500,000 Warrants being
offered hereby and to the receipt and application (including the repayment of
the Bridge Notes, Stockholder Loans and bank indebtedness) of the estimated net
proceeds therefrom (less underwriting discounts and commissions and estimated
expenses of this offering), the adjusted net tangible book value of the Company
at September 30, 1996 would have been approximately $4,832,415, or $1.17 per
share, representing an immediate increase in net tangible book value of $1.52
per share to existing stockholders and an immediate dilution of $3.83 per share
to new investors. The following table illustrates this dilution to new investors
on a per share basis:
Initial public offering price........................................................... $5.00
Net tangible book value (deficit) before Pro Forma Adjustments...................... $(.75)
Increase attributable to Pro Forma Adjustments...................................... .40
-----
Pro forma net tangible book value (deficit) before offering......................... $(.35)
Increase attributable to new investors.............................................. 1.52
-----
Adjusted pro forma net tangible book value after offering............................... 1.17
-----
Dilution to new investors............................................................... $3.83
=====
The following table sets forth as of September 30, 1996 a comparison
between the existing stockholders (giving retroactive effect to the Pro Forma
Adjustments), and the new investors in this offering with respect to the number
of shares of Common Stock acquired from the Company, the percentage ownership of
such shares, the total consideration paid, the percentage of total consideration
paid and the average price per share:
Shares Purchased Total Consideration Average
---------------------------- ---------------------------- Price Per
Number Percent Amount Percent Share
---------------------------- ---------- ---------- ----------
Existing stockholders.............. 2,625,000 63.6% $1,381,000 15.6% $.53
New investors...................... 1,500,000 36.4% 7,500,000 84.4% $5.00
--------- ----- --------- -----
Total..................... 4,125,000 100.0% $8,881,000 100.0%
========= ====== ========== ======
The above table assumes no exercise of the Underwriter's over-allotment
option. If the Underwriter's over-allotment option is exercised in full, the new
investors will have paid $8,625,000 for 1,725,000 shares of Common Stock,
representing approximately 86.2% of the total consideration, for 39.7% of the
total number of shares of Common Stock outstanding. The foregoing table also
assumes no exercise of the 1,500,000 Warrants offered hereby or any outstanding
options. See "Management - 1996 Stock Option Plan," "- Nonemployee Directors'
Stock Option Plan," "Certain Transactions" and "Underwriting."
-20-
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) on
an actual basis, (ii) on a pro forma basis to give effect to the Pro Forma
Adjustments, and (iii) as adjusted to give effect to the sale of the shares of
Common Stock and Warrants offered hereby and the application of the estimated
net proceeds therefrom.
September 30, 1996
--------------------------------------------------
Actual Pro Forma As Adjusted
--------------- --------------- --------------
Notes Payable.............................................. $1,429,955 $1,109,955 $ 300,000
========== ========= =========
Bridge Notes............................................... $ -- $ 987,500(1) $ --
Stockholders' Equity (Deficit)
Preferred Stock, $.001 par value - 1,000,000 shares
authorized; no shares issued and outstanding.......... -- -- --
Common Stock, $.001 par value - 20,000,000 shares
authorized; 2,390,000 shares issued and
outstanding, actual; 2,625,000, pro forma;
4,125,000, as adjusted(2)............................. 2,390 2,625 4,125
Additional paid-in capital............................ 858,610 1,670,875 7,904,375
Stock subscriptions receivable........................ (30,000) (30,000) (30,000)
Accumulated deficit during the
development stage..................................... (2,386,288) (2,386,288) (2,878,788)
----------- ----------- -----------
Total stockholders' equity (deficit).............. (1,555,288) (742,788) 4,999,712
----------- --------- ---------
Total capitalization..................... $(1,555,288) $244,712 $4,999,712
============ ======== ==========
(1) Net of $262,500 loan discount.
(2) Does not include (i) 1,500,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 300,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the Warrants included therein; (iii) 625,000
shares of Common Stock reserved for issuance upon exercise of the Bridge
Warrants; (iv) 64,000 shares of Common Stock reserved for issuance upon
exercise of outstanding stock options intended to be granted, as of the
date of this Prospectus, under the Stock Option Plan; (v) 206,000 shares
of Common Stock reserved for issuance upon exercise of options available
for future grant under the Stock Option Plan; (vi) 7,500 shares of Common
Stock reserved for issuance upon exercise of options to be granted, as of
the date of this Prospectus, under the Directors' Plan; (vii) 22,500
shares of Common Stock reserved for issuance upon exercise of options
available for future grant under the Directors' Plan; (viii) 100,000
shares of Common Stock reserved for issuance upon exercise of the
Shreveport Option; and (ix) an indeterminate number of shares of Common
Stock reserved for issuance in the event the Company fails under certain
circumstances to register, or maintain an effective registration statement
with respect to, securities issued in the Bridge Financing. See
"Management - 1996 Stock Option Plan," "- Nonemployee Directors' Stock
Option Plan," "Certain Transactions," "Description of Securities" and
"Underwriting."
-21-
SELECTED FINANCIAL DATA
The following selected financial data for the period ended December 31,
1994 and the year ended December 31, 1995 and the balance sheet data at December
31, 1995 are derived from, and are qualified by reference to, the Company's
financial statements audited by BDO Seidman, LLP included elsewhere in this
Prospectus. The statement of operations data for the nine-month periods ended
September 30, 1995 and 1996 and the period from inception to September 30, 1996
and the balance sheet data at September 30, 1996 are derived from unaudited
financial statements of the Company included elsewhere in this Prospectus,
which, in the opinion of management, contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the Company's
results of operations for such periods and financial condition at such date. The
results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year or future
periods.
The following data should be read in conjunction with the financial
statements of the Company, including the notes thereto, appearing elsewhere in
the Prospectus.
Statement of Operations Data:
Nine Months Period
Period from June 21, Year Ended Ended September 30, from June 21,
1994 (inception) to December 31, ------------------ 1994 (inception) to
December 31, 1994 1995 1995 1996 September 30, 1996
------------------ ----- ----- ---- ------------------
Revenues........................... $ -- $73,472 $66,262 $19,989 $93,461
Cost of sales...................... -- 68,621 57,881 11,250 79,871
Write-off of license fee........... -- 148,000 -- 20,000 168,000
Other expenses..................... 434,545 878,461 660,197 918,872 2,231,878
Net loss(1)........................ (434,545) (1,021,610) (651,816) (930,133) (2,386,288)
Net loss per share................. (.16) (.37) (.24) (.34)
Weighted average number of shares
outstanding........................ 2,750,000 2,750,000 2,750,000 2,750,000
Balance Sheet Data:
December 31, 1995 September 30, 1996
---------------- ------------------
Working capital deficit............. $(1,246,660) $(1,864,837)
Total assets........................ 313,923 358,297
Total liabilities................... 1,269,328 1,913,585
Total stockholders' deficit......... (955,405) (1,555,288)
(1) During the periods presented through June 18, 1996, the Company elected to
be treated as an S corporation for federal income tax purposes and,
accordingly, no provision for income taxes during such periods is reflected
in the Company's financial statements. The Company terminated its status as
an S corporation effective June 18, 1996. See Notes to Financial
Statements.
-22-
PLAN OF OPERATION
The Company was organized in June 1994 and is in the development stage.
Since inception, the Company has been engaged principally in organizational
activities, including developing a business plan, hiring personnel and
developing and enhancing its proprietary smart card technology and software, and
has only recently commenced the limited marketing of its smart card systems. To
date, the Company has developed and installed, on a limited basis, employee
identification and licensing smart card systems for the thoroughbred racing
industry. The Company currently provides to the Birmingham Race Course and the
Oregon Racing Commission smart cards capable of controlling on-site access and
maintaining employee state licensing information. In addition, the Company has
completed a pilot program in New Jersey and Pennsylvania for the issuance of
"equine health passport" smart cards for monitoring the identity, interstate and
intrastate movement and medical records of thoroughbred horses. The Company is
scheduled to commence a similar program in New York in May 1997. Although the
completed program successfully tested the equine health passport smart card
system, such pilot program has not resulted in any system sales to date. There
can be no assurance that any of the Company's pilot programs will result in
system purchases by any potential system sponsor.
The Company has generated limited revenues to date and does not expect
to generate meaningful revenues in the near future until such time, if ever, as
its smart card systems are successfully commercialized. The Company has incurred
significant losses in each period since its inception, resulting in an
accumulated deficit at September 30, 1996 of $2,386,288, and losses are
continuing through the date of this Prospectus. Inasmuch as the Company will
continue to have a high level of operating expenses and will be required to make
significant up-front expenditures in connection with both the development of its
business and the commercialization of its smart card systems (including, without
limitation, salaries of executive, technical, marketing and other personnel),
the Company anticipates that it will continue to incur significant and
increasing losses for the foreseeable future until such time, if ever, as the
Company is able to generate sufficient revenues to finance its operations. The
Company will also incur non-recurring charges relating to the Bridge Financing
of approximately $492,500 upon consummation of this offering. The Company's
independent certified public accountants have included an explanatory paragraph
in their report stating that the Company's dependence on outside financing, lack
of existing commitments from lenders to provide necessary financing, lack of
sufficient working capital and losses since inception raise substantial doubt
about the Company's ability to continue as a going concern.
The Company's objective is to become a leading provider of smart card
systems to government and commercial system sponsors requiring increasingly
complex, secure and cost-effective information processing systems. The Company
intends to market its products through strategic marketing alliances and
licensing or other arrangements with systems integrators, value added resellers
and other smart card vendors. The Company anticipates that, under certain
circumstances, its smart card products will be bundled with the other party's
products and services to create a complete integrated system that can be
marketed to potential system sponsors. The Company will also seek to provide
complete smart card solutions, on a turnkey basis, to system sponsors by
providing all of the hardware and software elements required to implement the
system.
The success of the Company's proposed plan of operation will be largely
dependent upon market acceptance of smart cards generally, as well as on the
Company's ability to successfully market its smart card systems by persuading
potential system sponsors of the perceived benefits of its dual card access and
multiple application layering concepts (including the benefits to be derived
from allocating total card program costs among individual application layers
within a card) and to develop and commercialize further applications of its
proprietary technology. In addition, the Company's proposed plan of operation
and prospects will be dependent upon, among other things, the Company's ability
to enter into strategic marketing and licensing or other arrangements on a
timely basis and on favorable terms; establish satisfactory arrangements with
sales representatives and marketing consultants; hire and retain skilled
management as well as financial, technical, marketing and other personnel;
successfully manage
-23-
growth (including monitoring operations, controlling costs and maintaining
effective quality, inventory and service controls); and obtain adequate
financing when and as needed. The Company has limited experience in developing
new products based on innovative technology and there is limited information
available concerning the performance of the Company's technologies or market
acceptance of the Company's products. There can be no assurance that the Company
will be able to successfully implement its plan or that unanticipated expenses
or problems or technical difficulties will not occur which would result in
material delays in its implementation. Moreover, there can be no assurance that
the Company will have sufficient capacity to satisfy any increased demand for
its smart card products and technologies resulting from the Company's
implementation of its plan of operation.
For the period from June 21, 1994 to September 30, 1996, the Company
generated $93,461 in revenues primarily from the sale of its thoroughbred racing
industry employee identification and licensing smart cards in Alabama and
Oregon. For the same period, the Company incurred $2,095,526 of general and
administrative expenses, including research and development. Such expenses
consisted of $427,549 for the period ended December 31, 1994, $841,225 for the
year ended December 31, 1995, and $826,752 for the nine months ended September
30, 1996. In addition, for the year ended December 31, 1995, the Company made
capital expenditures of $32,845 for computers and computer-related equipment.
As of January 30, 1997, the Company had eight full-time employees,
consisting of three executive officers and five employees engaged in
engineering, technical support, product development, marketing and sales,
including the Company's recently appointed Director of Marketing and Sales. The
Company also uses the resources of independent programmers and consultants from
time to time on an as needed basis. The Company anticipates that it will hire
additional sales and technical personnel to continue to implement the Company's
marketing and product development efforts and may engage independent sales
representatives and industry-specific marketing consultants to assist the
Company in marketing the Company's smart card systems to potential system
sponsors. The Company also intends to hire a Chief Financial Officer prior to
the consummation of this offering.
Liquidity and Capital Resources
At September 30, 1996, the Company had cash on hand of $33,006, a
working capital deficit of $1,864,837 and a stockholder's deficit of $1,555,288.
The Company's primary capital requirements will be to fund the Company's
continuing smart card system development and enhancement efforts, its sales and
marketing activities and the Company's working capital. The Company has
historically financed its capital requirements through the issuance of equity
and debt securities, contributions to capital and bank borrowings.
Since the inception of the Company, The 1994 Perl Trust Indenture, a
trust for the benefit of the family of Lawrence Perl, the Chief Executive
Officer of the Company (the "Perl Trust"), Raymond Findley, the Chief Operating
Officer of the Company, Raymond Roncari, a director of the Company, and Harold
Rothstein (both individually and through The Rothstein Family Trust, a trust for
the benefit of Mr. Rothstein (the "Rothstein Trust")), a director of the Company
(each of the foregoing being referred to individually as an "Original
Stockholder"), have made loans to the Company in amounts aggregating $15,177,
$15,177, $688,854 and $840,747, respectively (the "Stockholder Loans"). The
Stockholder Loans bear interest at a rate per annum equal to 10% and are payable
on demand. In March 1995, $250,000 of the then-outstanding principal amount of
the Stockholder Loans of each of Messrs. Rothstein and Roncari was
recharacterized as paid-in capital of the Company (the "Capital Contribution").
Pursuant to an agreement among the Original Stockholders, the Capital
Contribution was allocated equally among the Original Stockholders, in
consideration for which Mr. Findley issued to Mr. Roncari and the Perl Trust
issued to the Rothstein Trust a promissory note in the amount of $125,000 (each,
a "Capital Contribution Note"). Upon the consummation of the Bridge Financing,
$12,675 of the Perl Trust's Stockholder Loans, $12,675 of Mr. Findley's
Stockholder Loans, $223,260 of Mr. Roncari's Stockholder Loans and $301,390 of
Mr. Rothstein's Stockholder Loans were converted into 2,535, 2,535, 44,652 and
60,278 shares of Common Stock, respectively. Mr. Findley and the Perl Trust
subsequently transferred 25,000 shares of Common Stock to Mr. Roncari and the
Rothstein Trust, respectively, in satisfaction of the indebtedness represented
by the Capital Contribution Notes. See "Certain Transactions."
-24-
From March through June of 1995, Joseph D. Basch, the President, Chief
Executive Officer and sole director of the Subsidiary, loaned the Company an
aggregate of $300,000. The loans accrued interest at a rate per annum equal to
10% and were payable on demand. In July 1996, the Company and Mr. Basch entered
into an agreement pursuant to which the then-outstanding principal amount of the
loans, together with accrued interest thereon of approximately $30,000, was
converted into an aggregate of 240,000 shares of Common Stock.
In July, September and November 1996, the Company entered into loan
agreements with The First National Bank of Suffield ("First Suffield") pursuant
to which the Company has borrowed an aggregate of $300,000 as of the date of
this Prospectus. Interest accrues on such borrowings at the prime lending rate
established by First Suffield from time to time and is payable monthly. The
aggregate outstanding principal amount owed by the Company to First Suffield,
together with accrued interest thereon, is payable on July 3, 1997. Mr. Roncari
has personally guaranteed all of the Company's indebtedness to First Suffield.
The loan agreements prohibit the Company, except with the prior consent of First
Suffield, from paying dividends on its stock (other than dividends payable in
stock), merging or consolidating with another company or purchasing or retiring
any of its outstanding stock. The loan agreements also provide that it shall
constitute an event of default thereunder if, among other events, either the
Company or Mr. Roncari shall become insolvent or if First Suffield, in good
faith, deems that it has insufficient security with respect to the loans. See
"Certain Transactions."
From July through October 1996, the Company borrowed $150,000 from
Fleet Bank ("Fleet"). Such amount is payable on demand, but in no event later
than June 27, 1997. Interest accrues on such borrowings at the prime lending
rate established by Fleet from time to time and is payable monthly. The
Company's indebtedness to Fleet is personally guaranteed by Mr. Rothstein, and
is secured by personal assets pledged by Mr. Rothstein in the form of a
certificate of deposit in the amount of $150,000. See "Certain Transactions."
In October 1996, the Company borrowed $100,000 from The Chase Manhattan
Bank ("Chase"). Such amount is payable on demand and bears interest at Chase's
prime rate as in effect from time to time. The Company's indebtedness to Chase
(the "Chase Loan") is secured by personal assets pledged by Mr. Rothstein in the
form of a certificate of deposit in the amount of $105,000. See "Certain
Transactions."
Mr. Rothstein has agreed with the Company that, in the event a demand
is made by Fleet with respect to the Fleet Loan and/or a demand is made by Chase
with respect to the Chase Loan prior to the earlier of the date on which this
offering is consummated and July 1, 1997, he shall either (i) secure replacement
financing to pay the amount so demanded or (ii) personally satisfy the amount
demanded, either through surrender of the collateral previously pledged by him
or through other means satisfactory to Fleet and/or Chase, as the case may be.
In the event Mr. Rothstein elects to personally satisfy the demanded amount, the
Company has agreed to reimburse Mr. Rothstein for the full amount of such
payment on the earlier of the date on which this offering is consummated and
July 1, 1997. See "Certain Transactions."
In December 1996, the Company borrowed $50,000 from First Southern
Bank ("FSB"). Such amount is payable on July 9, 1997 and bears interest at a
rate of 8.75%. The Company's indebtedness to FSB is secured by personal assets
pledged by Mr. Rothstein in the form of a certificate of deposit in the amount
of $50,000. See "Certain Transactions."
In January 1997, Mr. Rothstein provided, for working capital purposes,
the Interim Loan in the principal amount of $35,000, which bore interest at the
rate of 10% per annum. The principal amount of the Interim Loan, plus accrued
interest thereon, was repaid upon the consummation of the Bridge Financing.
In January 1997, pursuant to the Bridge Financing, the Company
completed the sale to 23 private investors (including certain officers and
directors of the Company) of 25 Units, each Unit consisting of (i) an unsecured
9% non-negotiable Bridge Note in the principal amount of $50,000 due on the
earlier of the consummation of this offering or January 16, 1998, (ii) 5,000
Bridge Shares, and (iii) 25,000 Bridge Warrants, each Bridge Warrant
representing the right to purchase one share of Common Stock at an exercise
price of $4.00 per share, subject to
-25-
adjustment in certain circumstances. The purchase price per Unit was $50,000.
The Company received gross proceeds of $1,250,000 from the sale of such Units.
After payment of $125,000 in placement fees to the Underwriter, which acted as
placement agent for the Company with respect to the Bridge Financing, and other
offering expenses of approximately $105,000, the Company received net proceeds
of approximately $1,020,000 in connection with the Bridge Financing. The net
proceeds from the Bridge Financing were, and are, being used in connection with
the Company's operations, including to fund the Company's research and
development efforts, to fund its sales and marketing activities, to repay
certain outstanding obligations, and for working capital and general corporate
purposes, including pre-offering expenses in connection with this offering and
the repayment of the Interim Loan as set forth above.
The Company has obtained a commitment from First Suffield to furnish a
$300,000 revolving credit facility to be made available upon the consummation of
this offering. The commitment provides that such facility would have a term of
366 days and that amounts outstanding thereunder would bear interest at the
bank's floating base rate, with interest payable monthly on outstanding
principal balances. The Company would be required to maintain a minimum checking
account daily balance of $350,000 at such bank. Additionally, all existing loans
from First Suffield to the Company must be paid down to $0 at or prior to the
closing of the loan. There can be no assurance that the revolving credit
facility will be furnished to the Company by such financial institution or any
other lender or, if furnished, as to the timing or terms thereof. If such
facility is obtained by the Company, the Company will borrow the entire amount
available thereunder in order to repay a portion of its then outstanding bank
indebtedness and that the balance of such indebtedness will be paid out of the
proceeds of this offering.
The Company's capital requirements have been and will continue to be
significant. The Company has been dependent on the sales of its securities to
private investors (including the Bridge Financing), as well as on capital
contributions and loans from affiliates and certain financial institutions
guaranteed by certain stockholders of the Company. During the period from
inception through the date of this Prospectus, the Company has raised capital in
the aggregate amount of $3,740,000 through such means. The Company is dependent
on and intends to use the proceeds of this offering to continue the
implementation of its proposed plan of operation. The Company anticipates, based
on currently proposed business plans and assumptions relating to its operations
(including assumptions regarding the Company's ability to meet its current
marketing objectives and the timing and costs associated therewith), that the
proceeds of this offering, together with projected cash flow from operations,
will be sufficient to fund the Company's operations and capital requirements for
at least twelve months following the consummation of this offering. In the event
that the Company's plans change, its assumptions change or prove to be
inaccurate or if the proceeds of this offering prove to be insufficient to fund
operations (due to unanticipated expenses, technical difficulties, problems or
otherwise), the Company would be required to seek additional financing sooner
than currently anticipated. There can be no assurance that the proceeds of this
offering will be sufficient to permit the Company to successfully further
develop and commercialize the Company's smart card technology or that any
assumptions relating to the Company's operations will prove to be accurate. In
addition, any implementation of the Company's business plans subsequent to the
twelve month period following this offering may require proceeds greater than
the proceeds of this offering or otherwise currently available to the Company.
The Company has no current arrangements with respect to, or sources of,
additional financing and there can be no assurance that any such financing will
be available to the Company on commercially reasonable terms, or at all. It is
not anticipated that any of the officers, directors or stockholders of the
Company will provide any portion of the Company's future financing requirements.
Any inability to obtain additional financing when needed will have a material
adverse effect on the Company, including requiring the Company to curtail its
activities and possibly causing the Company to cease its operations. To the
extent that the Company finances its operations through the issuance of
additional equity securities, any such issuance would result in dilution to the
interests of the Company's then-existing stockholders. Additionally, to the
extent that the Company incurs indebtedness or issues debt securities, the
Company will be subject to all of the risks associated with incurring
substantial indebtedness, including the risks that interest rates may fluctuate
and cash flow may be insufficient to pay principal and interest on any such
indebtedness.
-26-
Possible Fluctuations in Operating Results
The Company's sales cycle is expected to commence at the time a
prospective system sponsor demonstrates an interest in purchasing a smart card
system from the Company or issues a request for a proposal or information or
takes similar action and ends upon the installation of a smart card system for
the system sponsor. The sales cycle will vary by system sponsor and could extend
for periods of up to twelve months or more, depending upon, among other things,
the time required by the system sponsor to complete a pilot test of the
Company's smart card system, make a determination regarding an acquisition
thereof and negotiate payment terms with the Company. The Company's operating
results could vary from period to period as a result of this fluctuation in the
length of the Company's sales cycle and as a result of fluctuations in the
purchasing patterns of potential system sponsors, technological factors,
variations in marketing strategies for different target markets and
non-recurring smart card system sales.
-27-
BUSINESS
General
The Company, a development stage company, was organized to design,
develop and market high security, flexible, multiple application smart card
systems. A smart card is a credit card-sized plastic card containing a microchip
that provides the card with memory storage capabilities in a secure environment
and, in advanced versions such as the Company's, enables the card to perform
data processing functions. Smart card systems are typically used by government
agencies or commercial enterprises (the "system sponsor") to store, access and
modify participant or customer (the "user") information. The Company's
proprietary smart card technology and software enable system sponsors to store
data on a user's smart card, and enable the system sponsor, or a service
provider authorized by the system sponsor (the "authorized service provider"),
to access, read, input, delete, modify and process such data. The Company
designs its smart card systems to perform functions for various target markets,
such as employee licensing, animal health and registration, frequent patron
tracking and various government applications, depending on the system sponsor's
needs. The Company believes that its smart card systems, which offer the
capability to perform multiple functions on a single card, provide enhanced
security and privacy protection not offered by existing smart cards and position
the Company to capitalize on perceived market opportunities for information
systems incorporating smart card technology.
Industry Background
Smart card technology was developed in France in the mid 1970s and is
currently in wide use in Europe, the Pacific Rim, Latin America and the Middle
East. Worldwide production of smart cards numbered approximately 482 million
units in 1995 and was expected to have exceeded 729 million units in 1996,
according to a microchip manufacturer cited in Card Technology Today, an
industry trade journal. Most smart cards currently in use are low capacity
memory-only phone cards which provide only data storage, reading and deletion
capabilities. More sophisticated smart cards, including the Company's smart
cards, are microprocessor-based and therefore have the ability not only to
store, read and delete data but also to add, modify and process data. However,
the Company believes that most microprocessor-based smart cards currently in use
were designed to perform functions for single purpose applications only, such as
pay television access control, medical or academic recordkeeping or insurance
claim processing. The Company believes that these smart cards also generally
utilize multiple, alternative technologies such as microchips, bar codes and
magnetic stripes simultaneously, or allow access by any authorized service
provider to all the information included within the card.
Most cards currently used in electronic transactions are magnetic
stripe cards, such as ordinary credit cards or automatic teller machine cards.
Such cards contain only limited information such as account numbers and
identification information, but cannot store or update additional information
such as current account balances. The Company believes that the market for smart
cards in North America remains relatively unexploited due to the large capital
and infrastructure investments made by debit and credit card issuers and the
significantly lower costs associated with the use of magnetic stripe cards.
However, smart cards have recently been introduced in the United States in a
number of venues. For example, a stored value card program designed to
facilitate purchases from participating vendors was used during the 1996 Summer
Olympics. In addition, the National Football League's Jacksonville Jaguars have
installed a smart card system to be used for the purchase of concession items at
football games. The State of Mississippi has proposed a plan to replace food
stamps with a card based system to improve convenience and efficiency, as well
as to decrease fraud. American Express Travel Services, Inc. has also recently
announced a test program in conjunction with American Airlines' ticketless
travel system in which smart cards will be used to help streamline the check-in
process and enhance customer reward programs.
-28-
The Company believes that smart cards offer certain advantages over
magnetic stripe cards including the ability to store pages of information and
update or otherwise utilize data as circumstances require. In addition, while
the data contained on magnetic stripe cards is difficult to secure, smart cards
can be programmed to prevent manipulation of data stored in the card. A smart
card can also be programmed with a non-alterable memory, prohibiting the writing
of new data on top of old data, and can be programmed to utilize public and
private key encryption algorithms to lower the risk of theft of sensitive data.
Furthermore, unlike magnetic stripe cards, most smart cards are extremely
difficult to alter, duplicate or reproduce. The Company believes that the
limitations of magnetic stripe cards will present significant market
opportunities in North America for smart card systems featuring enhanced
security and multiple application layering as electronic transactions, including
government benefits transfers, licensing and frequent patron tracking, become
more complex.
Technology Overview
The Company's proprietary smart card systems incorporate dual card
access technology and multiple application layering. The Company believes that
these components result in certain advantages over magnetic stripe cards and
existing smart card systems, including enhanced security features and multiple
function capabilities. The Company's dual card access technology (analogous to a
dual key system for access to a safe deposit box) requires the simultaneous use
of both a user card and an access card to activate the system. User cards are
issued by a system sponsor (such as an HMO, welfare agency, state motor vehicle
department or retail store) to users such as patients, benefits recipients,
drivers or customers. Access cards are issued by the system sponsor to
authorized service providers affiliated with the particular system sponsor (such
as HMO participating physicians, welfare administrators, police officers and
cashiers). Each user card issued by the system sponsor has stored within it an
individualized database containing user-specific information, which is stored in
a "common pool." The Company's multiple application layering technology allows
an access card to retrieve from this common pool of information only the data
that the access card in use is programmed to access. The data stored on the user
card is then displayed and processed in accordance with the requirements of the
application layer activated by the particular access card in use. This process
increases the potential number of uses of the user card and enables a single
user card to serve multiple system sponsors as well as multiple authorized
service providers within a single system sponsor.
By virtue of the dual access and multiple application layering features
of the Company's technology, a basic set of data carried on a single smart card
can be processed and configured according to the specific requirements of each
of the application layers of the card. As a result, a vast array of information
and electronic documents and reports can be generated for various categories of
system sponsors and authorized service providers, thereby substantially
increasing the potential number of uses for each card in the system. For
example, one user's smart card provided by the Company could generate a medical
history when activated by an HMO-participating physician's access card, an
insurance claim record when activated by the HMO's benefits administrator's
access card, a welfare benefits record when activated by a welfare
administrator's access card, and a driver's license when activated by a police
officer's access card. By providing a system sponsor with the ability to add
applications over time, as well as allowing multiple system sponsors to utilize
different layers of the same smart card, the Company's smart card systems will
enable the cost per smart card to be allocated among separate system sponsors or
different departments within a single system sponsor. The Company believes that
these features position its smart card systems as secure, cost-effective
solutions for electronic transaction and information processing.
Generally, smart cards can incorporate advanced security features,
ranging in sophistication from a password or personal identification number
system to a fingerprint or facial geometry recognition system, which are not
found in magnetic stripe cards. The Company believes that the multiple
application layering feature of its smart card systems provides enhanced
security and privacy protection. Each application layer is separate, with
"firewall"-type safeguards to prevent unauthorized access to data in another
application layer. Moreover, each layer can be programmed with the level of
security appropriate to the sensitivity of the data contained in such layer. In
addition, the Company's system establishes an "audit trail" which will record
specific information regarding each instance in which data is accessed,
including the time, the date and the identity of the person accessing
information.
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The Company's technology also permits easy adaptation and
customization, allowing the Company to provide a smart card system tailored to
the system sponsor's needs. The Company's technology provides system scalability
by allowing a system sponsor, over time, to increase the number of applications
performed by its smart cards, provide additional services or add other system
sponsors. Furthermore, the Company's technology can support a communication
system in which messages and data updates can be sent between the system sponsor
and the authorized service provider and/or user, including messages that render
a card inoperable if no longer valid.
Products
The Company was organized to design, develop and market high security,
flexible, multiple application smart card systems, which are comprised of the
following products:
Smart Cards. The Company currently uses commercially available
microchips containing three kilobytes of EEPROM (electronically
erasable programmable read-only memory), but may elect to utilize other
microchips in the future. The Company arranges for initial entry of
database information on the user cards and authorized access codes on
the access cards to the system sponsor's specifications.
Read/Write Devices. A read/write device is hardware that
provides the data interface between a smart card and the host computer,
allowing data to be transferred between a database and a smart card.
Information can be uploaded and downloaded at any read/write device
within the system. The Company's smart card systems utilize basic,
relatively inexpensive read/write devices because certain functions
that would otherwise be performed by the read/write devices are
performed by the Company's smart card software. In addition, because
the Company's smart cards conform with applicable industry standards,
the cards are compatible with various types of read/write devices
currently in use.
Printers. The Company utilizes smart card printers for
printing images and other information required to be displayed on the
face of the smart cards.
Customized Application Software. Each smart card system
developed by the Company, in order to perform the various applications
included in that system, requires customized application software to be
written relating to the specific tasks to be accomplished. Typically,
such customized application software includes software which performs
certain basic functions, as well as software which performs the
specific functions required by the particular system. The Company has
developed software which performs the basic functions required to be
performed by all of the Company's smart card systems. By virtue of
having developed such software, the Company is able to create the
customized applications required for a particular system more quickly
than if all of the software necessary to implement the system were
required to be developed for each particular application. The Company's
proprietary software has been developed for use on a workstation
personal computer. The software is compatible with Windows 3.x(TM),
Windows 95(TM) and Windows NT(TM).
The Company intends to provide each system sponsor with a customized
configuration of its products based upon the sponsor's specific needs and
constraints, ranging from subsystems comprised of selected components which may
be integrated with products or systems provided by third parties to complete
"turnkey" systems. The Company plans to deliver system stations to facilitate
initial and ongoing operation of each system installed by the Company. An issue
station will issue personalized smart cards, and will be comprised of one or
more personal computers, video cameras for systems requiring photographs on user
cards, read/write devices, card printers and system software. An update station
will implement necessary changes to the Company's smart cards, such as updating
of information or modification of a service provider's ability to access
particular user information, and will be comprised of a personal computer, one
or more read/write devices and system software. One or more display stations
will permit a user or authorized service provider to view information stored on
a user card, and will be
-30-
comprised of a personal computer, notebook computer and/or hand-held display
device, read/write devices and system software. The Company anticipates that a
system sponsor may, under certain circumstances, seek to utilize, or otherwise
procure, its own system station hardware. In such cases, the Company would
expect to aid the system sponsor in integrating such hardware with the smart
card system products provided by the Company.
Pricing. The prices of the Company's products will depend on the system
sponsor's specifications and requirements relating thereto (including the number
and type of application layers per card) and any applicable volume discounts.
However, the Company anticipates that the suggested end-user price generally
will be approximately $8 to $15 per card, and $50 to $500 for read-write
devices. The price of the Company's customized application software will depend
upon various factors, including the nature and complexity of the smart card
products and required system interfaces. The off-the-shelf products comprising
the balance of the components of the smart card systems offered by the Company
(including printers, personal computers, notebook computers and hand-held
display devices) will be offered at then-prevailing market prices.
Warranty and Service. The Company will offer a limited warranty
covering both parts and labor, pursuant to which the Company or its authorized
service representatives will make repairs and replace parts which become
defective due to normal use. The Company does not anticipate that the cost of
servicing its smart card systems will be material. Furthermore, substantially
all component parts of the Company's smart card systems will be covered by
warranties from the suppliers thereof. However, there can be no assurance that
future warranty expenses will not have an adverse effect on the Company.
Smart Card Product Development
The Company believes that there are numerous potential applications for
its smart card systems, including the following:
o Employee Licensing - Licensing and identification of employees
in certain regulated industries, including photo
identification, time and attendance records, specific database
information required by the employer and access control to
secure areas.
o Animal Health and Registration - Tracking of lineage history,
medical information, identification, breed information,
nutritional information, performance data and history of
interstate and intrastate movement of thoroughbred horses and
various other racing and show animals.
o Government Applications - Issuance of citizen photo
identification and government licenses (such as motor vehicle,
professional and weapons licenses) and maintenance and
processing of government entitlement information (including
Medicare, Medicaid and welfare information).
o Frequent Patron Programs and Tracking - Awarding of points,
miles or other credits for retail purchases and tracking of
customer purchases to facilitate more focused target
marketing.
The Company is the assignee of McKinnie Systems, Inc. ("McKinnie") with
respect to an agreement between McKinnie and the Birmingham Racing Commission
("BRC"), pursuant to which agreement the Company has installed an employee
tracking system at the Birmingham Race Course. The agreement provides for the
Company to deliver smart cards and hardware in connection with the licensing and
monitoring of race track personnel and others. Pursuant to the agreement, the
Company has developed a licensing database containing more than 30 categories of
information for each licensee, including name, address, date and place of birth,
height, weight, employer's name, fines, rulings, suspensions and revocations.
The agreement provides for the Company to offer to BRC 3,000 smart cards at an
initial price of $10 per card and to offer the next 10,000 smart cards at a
price of $5 per card. Any additional smart cards purchased by BRC shall be at
the lowest unit price per card sold to any other commission customer of the
Company for smart cards of comparable capacity. To date, the Company has
-31-
provided BRC with approximately 11,200 cards and two read/write devices. The
term of the agreement is five years, subject to early termination upon 30 days
notice to the Company. The Company may not terminate the license before
expiration of the five-year term of the agreement. See "Certain Transactions."
In April 1995, the Company entered into a Licensing and Exclusive
Marketing Agreement with The Association of Racing Commissioners International,
Inc. ("ARCI"), a non-profit corporation representing certain racing commissions
throughout North America, pursuant to which the Company has granted to ARCI the
exclusive marketing and promotion rights to certain user information, identifier
and other smart card technology and related software and hardware for use by
public agencies which oversee and regulate employees in the pari-mutuel
industry. Pursuant to the agreement, any ARCI member which enters into an
agreement with ARCI to implement an employee licensing and identification system
using the Company's smart card system shall be required to purchase from the
Company all smart cards to be issued by such ARCI member. The Company has the
right to terminate the agreement in the event that fewer than 50,000 cards
(including those purchased pursuant to the agreement with BRC described above)
are purchased by ARCI members in any year. The agreement is for a term of five
years, and may be renewed by ARCI for an additional period of five years
provided that at least 250,000 smart cards have been purchased thereunder during
the initial term. In connection with the agreement, an employee licensing system
has been installed in Oregon and, to date, the Company has sold approximately
8,000 smart cards and four read/write devices.
From June 1 to September 1, 1995, the Company conducted a pilot program
at Atlantic City Raceway and Monmouth Park in New Jersey and Philadelphia Park
in Pennsylvania involving the issuance of equine health passport smart cards
that track the identity, movement and medical records of thoroughbred
racehorses. Under this program, data on approximately 500 thoroughbred
racehorses that would otherwise have been provided in paper documents was
entered into smart cards provided by the Company and each track gatekeeper in
the program utilized a reader terminal that interfaced with the cards to
determine whether particular horses were eligible for entry on racetrack
grounds. The pilot was co-sponsored by The Jockey Club Racing Services, Inc.
During the pilot program, the Company issued approximately 500 equine health
passport smart cards. The Company is currently developing enhancements to the
smart card system utilized in the pilot program in order to address certain
operational issues which arose during the program. An equine health passport
program is scheduled to be implemented by the Company in New York in May 1997.
The Company is seeking to extend the program into other states as well as to
develop a similar program for other animals in the United States. There can be
no assurance that the Company's pilot programs will be successful or that, if
successful, such programs will result in system purchases by any potential
system sponsor.
The Company, either alone or in conjunction with strategic partners, is
currently in discussions and negotiations with certain potential system sponsors
regarding possible future smart card projects. The Company is in negotiations
with a company involved in the gaming industry to develop one or more smart card
applications in the area of player tracking and customer service. In addition,
the Company is working with a strategic partner which has been selected to
develop a smart card-based system for the time and attendance management of
individuals employed by a major U.S. city. The Company, through the Subsidiary,
is also pursuing negotiations with an international systems integrator to form a
joint venture for the purpose of securing a contract to develop a smart card
system for the Province of Ontario. In addition, the Company has recently
commenced discussions with a general contractor for trade shows, expositions and
special events to develop a smart card system that would, among other things,
provide exhibitor, vendor and attendee registration and tracking, facilitate
rentals of booth space and related goods and services by exhibitors and permit
credit and debit purchases by exhibitors and attendees. There can be no
assurance that any such projects will be implemented or, if implemented,
generate meaningful revenues.
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Marketing and Sales
The Company's objective is to become a leading provider of smart card
systems to government and commercial sponsors requiring increasingly complex,
secure and cost-effective information processing systems. Because the Company
believes that there are numerous potential target markets for the Company's
smart card systems, the Company intends to market its products through multiple
channels, including through strategic marketing alliances and licensing or other
arrangements with systems integrators, value added resellers and other smart
card vendors. The Company believes that such arrangements will enable it to have
access to substantial numbers of potential smart card system sponsors, and that
third-party partners can provide knowledge, experience and/or financial
resources appropriate to a specific market opportunity and may enhance the
Company's ability to achieve significant penetration in select markets,
especially in those involving government services. The Company anticipates that,
under certain circumstances, its smart card products will be bundled with the
other party's products and services to create a complete integrated system that
can be marketed to potential system sponsors. The Company will also seek to
provide complete smart card solutions, on a turnkey basis, to system sponsors by
providing all of the hardware and software elements required to implement the
system.
The Company will seek to identify potential sponsors and strategic
partners and attempt to increase the visibility of the Company. The Company
intends to market its smart card systems either directly through the Company's
management and employees or through third parties such as independent sales
representatives and marketing and other consultants. The Company retains
independent sales representatives in the United States and abroad, whose
relationships with the Company are generally governed by a written contract for
a specified term, subject to renewal under certain circumstances, and provides
for a limited exclusive territorial or industry representation, specified fees
or commissions and specified sales targets. The Company may, in the case of
potential system sponsors within certain target industries, sell its systems
through marketing and other consultants with relationships in such industries.
The Company has recently appointed a Director of Marketing and Sales, and may
also retain the services of other personnel, to implement the Company's
marketing efforts.
The Company also plans to market its systems through sales brochures,
direct mailings, advertisements in trade publications and participation in
industry trade shows. The Company intends to utilize a portion of the proceeds
of this offering to expand its marketing and sales activities.
Research and Development
During the period from June 1994 (inception) through December 31, 1994,
the year ended December 31, 1995 and the nine months ended September 30, 1996,
the Company incurred costs related to research and development activities in the
amounts of approximately $99,000, $140,000, and $128,000, respectively. The
Company intends to utilize a portion of the proceeds of this offering for
research and development, including the further enhancement of the Company's
proprietary technology as well as the development of system applications and
pilot programs for potential system sponsors.
Manufacturing
Components for the Company's smart cards, such as microprocessor chips
and plastic cards as well as associated hardware, may be purchased from a number
of qualified electronic parts manufacturers and distributors. The Company has
entered into a requirements contract with US3, Inc. ("US3"), a leading
manufacturer of smart cards, pursuant to which the Company has agreed to
purchase, and US3 has agreed to supply, all of the Company's requirements for
smart cards at or below certain specified prices and smart card hardware at
prices to be agreed upon from time to time; provided, however, that the Company
may purchase smart cards or related hardware from others if US3 is unable to
provide the Company with its requirements at any time or if the Company is able
to obtain smart cards or hardware of higher quality than that of US3 or of
similar quality to that of US3 but at lower prices. The agreement had an initial
term of one year commencing April 1995, was automatically renewed for an
additional one-year period in April 1996 and will continue to be automatically
renewed on an annual basis through April 2000,
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unless written notice of non-renewal is given by the Company to US3 at least 30
days prior to the end of the applicable renewal term.
Competition
The market for the Company's smart card systems is characterized by
intense competition. The market is currently dominated by cards utilizing
magnetic stripes, and is expected to be dominated by magnetic stripe cards for
the foreseeable future due to the lower costs of production of such cards and
the substantial capital and infrastructure investments made by debit and credit
card issuers in such cards. The Company also competes with numerous
well-established companies, including Gemplus, Bull CP8 (a unit of Groupe Bull),
Schlumberger Industries International and Solaic, which design, manufacture
and/or market smart card systems. Although the Company believes that its dual
card access and multiple application layering technologies will allow the
Company to compete on the basis of enhanced security, flexibility, scalability,
cost-effectiveness and quality, the Company's smart card systems incorporate new
concepts and may be unsuccessful even if they are superior to those of its
competitors. In addition, certain companies may be developing technologies or
products of which the Company is unaware which may be functionally similar or
superior to those developed by the Company. Most of the Company's competitors
and potential competitors possess substantially greater financial, marketing,
personnel and other resources than the Company and have established reputations
relating to the design, development, manufacture, marketing and service of smart
card systems. As the market for smart card systems grows, new competitors are
likely to emerge. Additional competition could adversely affect the Company's
operations. Smart card technology also competes with other electronic
transaction and information processing technologies, including magnetic stripe
cards, bar code cards, laser optical cards and radio frequency contactless
cards, as well as traditional methods of transaction and information processing,
whether effected or recorded on paper or otherwise.
Government Regulation and Industry Standards
In the United States, the Company is not currently subject to direct
regulation other than federal and state regulation applicable to businesses
generally. However, changes in the regulatory environment relating to the smart
card industry could have an adverse effect on the Company's business.
Legislative proposals from federal and state government bodies in the area of
privacy rights could impose additional regulations and obligations upon all
smart card providers. The Company cannot predict the likelihood that any such
legislation will pass, nor the financial impact, if any, that any such
legislation may have. Moreover, the applicability to smart card system sponsors
and service providers of existing laws governing issues such as personal privacy
is uncertain.
The Company believes that its smart card systems are currently in
compliance with the quality assurance standards of ISO-7816, an international
standard promulgated by the International Organization for Standardization, a
worldwide federation of standards bodies from approximately 100 countries. These
standards have been adopted by the European Community and others as their
preferred quality standards. However, as technological advances occur in the
smart card industry, other emerging standards may gain widespread acceptance.
While compliance with applicable and emerging standards is the responsibility of
the Company's suppliers, any failure on the part of the Company's suppliers to
comply with such standards could materially and adversely affect the Company's
sales to various system sponsors and prevent the Company's expansion into
certain markets.
As part of its strategy, the Company intends to market its smart card
systems to government agencies in the United States, Canada and abroad. If
successful, the Company will become subject to the special risks involving
government contracts, including delays in funding, lengthy review processes for
awarding contracts, non-renewal, delay, termination at the convenience of the
government, reduction or modification of contracts in the event of changes in
the government's policies or as a result of budgetary constraints and increased
or unexpected costs resulting in losses.
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The Company will also be required to obtain any potential government
contracts through the competitive bidding process. The competitive bidding
process is typically lengthy and often results in the expenditure of financial
and other resources in connection with bids that are not accepted. Additionally,
inherent in the competitive bidding process is the risk that actual performance
costs may exceed projected costs upon which a submitted bid or contract price is
based. Moreover, in most instances, the Company would be required to post bid
and/or performance bonds in connection with contracts with government agencies.
To the extent that the Company is able to successfully expand its
operations into foreign markets, the Company may become subject to trade
restrictions (including restrictions on the export of critical technology),
export duties and tariffs and international political and regulatory
developments.
Intellectual Property
The Company's success will depend on its ability to obtain patents,
protect trade secrets and operate without infringing on the proprietary rights
of others. The Company has applied for a United States patent with respect to
its dual card access technology. The Company contemplates filing patent
applications in selected foreign jurisdictions where such filings would, in the
Company's opinion, provide it with a competitive advantage. Although the Company
believes its patent application contains patentable claims, there can be no
assurance that any patent will be issued. Moreover, the patent laws of other
countries may differ from those of the United States as to the patentability of
the Company's products or technology and the degree of protection afforded by
foreign patents may be different from that in the United States. The failure by
the Company to obtain any patents could have a material adverse effect on the
Company's ability to successfully commercialize its smart card systems. Even if
the Company is able to obtain a patent, there can be no assurance that any such
patent will afford the Company commercially significant protection for its
technology. Other companies may independently develop equivalent or superior
technologies or products and may obtain patent or similar rights with respect to
them. The Company is not aware of any infringement by its technology on the
proprietary rights of others and has not received any notice of claimed
infringement. However, the Company has not conducted any investigation as to
possible infringement and there can be no assurance that third parties will not
assert infringement claims against the Company in connection with its products,
that any such assertion of infringement will not result in litigation, or that
the Company would prevail in such litigation. Moreover, in the event that the
Company's technology or proposed products were deemed to infringe upon the
rights of others, the Company would be required to obtain licenses to utilize
such technology. There can be no assurance that the Company would be able to
obtain such licenses in a timely manner on acceptable terms and conditions, and
the failure to do so could have a material adverse effect on the Company. If the
Company were unable to obtain such licenses, it could encounter significant
delays in product market introductions while it attempted to design around the
infringed upon patents or rights, or could find the development, manufacture or
sale of products requiring such license to be foreclosed. In addition, patent
disputes are common in the smart card and computer industries and there can be
no assurance that the Company will have the financial resources to enforce or
defend a patent infringement or proprietary rights action. The Company has also
applied for a copyright registration of the software used in connection with its
dual card access technology. In addition, the Company has applied for federal
trademark registration of its SMART-ID mark and design. The Company's use of its
software, name and mark may be subject to challenge by others, which, if
successful, could have a material adverse effect on the Company.
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect the concepts, ideas and documentation
relating to its proprietary technology. However, such methods may not afford the
Company complete protection and there can be no assurance that others will not
independently obtain access to the Company's trade secrets and know-how or
independently develop products or technologies similar to those of the Company.
Furthermore, although the Company has and expects to have confidentiality and
non-competition agreements with its employees and appropriate suppliers and
manufacturers, there can be no assurance that such arrangements will adequately
protect the Company's trade secrets.
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The Company purchases many of the hardware and non-proprietary software
components of its smart card systems through normal electronic and computer
distribution channels. Typically, such components are sold with standardized
license agreements containing non-negotiated terms, conditions and restrictions
established by the manufacturer.
Employees
As of January 30, 1997, the Company had eight full-time employees,
consisting of three executive officers and five employees engaged in
engineering, technical support, product development, marketing and sales,
including its recently appointed Director of Marketing and Sales. The Company
also uses the resources of independent programmers and consultants from time to
time on an as needed basis. The Company anticipates that it will hire additional
sales and technical personnel to continue to implement the Company's marketing
and product development efforts and may engage independent sales representatives
and industry-specific marketing consultants to assist the Company in marketing
the Company's smart card systems to potential system sponsors. The Company also
intends to hire a Chief Financial Officer prior to the consummation of this
offering.
Facilities
The Company leases, pursuant to a sublease, approximately 2,750 square
feet of office space at 1355 Terrell Mill Road, Marietta, Georgia. The sublease
commenced on December 15, 1996 and will continue through January 31, 2000.
Pursuant to the sublease, the Company is required to pay rent of approximately
$2,917 per month, increasing through the term of the sublease to approximately
$3,100 per month. The Company currently leases furniture and fixtures for such
facility at a rate of approximately $378 per month.
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MANAGEMENT
Directors and Executive Officers
The current directors and executive officers of the Company are as
follows:
Name Age Position
----- --- --------
Lawrence O. Perl 54 Chief Executive Officer and Director
Raymond Findley, Jr. 48 President, Chief Operating Officer and Director
Robert H. Dixon 36 Vice President of Technical Operations
Harold Rothstein 74 Director
Raymond Roncari 72 Director
Stephen S. Weisglass 67 Director
Lawrence O. Perl, a co-founder of the Company, has been Chief Executive
Officer and a director of the Company since its inception. From April 1993 to
June 1994, Mr. Perl served as Chief Executive Officer and a director of
McKinnie, a privately-held supplier of computerized management information
systems to the pari-mutuel industry. From September 1984 through March 1993, Mr.
Perl served as a financial consultant for Roncari Industries, Inc., a
privately-held producer of quarry, asphalt and concrete products. In addition,
since August 1977, Mr. Perl has served as President of Lawrence Owen Associates,
Inc., a privately-held hotel and financial consulting firm, and, since 1978, has
been affiliated with other privately-held entities engaged in hotel ownership
and management.
Raymond Findley, Jr., a co-founder of the Company, has been President,
Chief Operating Officer and a director of the Company since its inception. From
June 1990 to May 1994, Mr. Findley served as President and Chief Executive
Officer of Phoenix DataCrypt Systems, Inc., a privately-held designer and
developer of smart card-based technology and business applications. From
September 1988 to April 1990, Mr. Findley was President and Chief Executive
Officer of British Telecom CBP, Inc., a developer and marketer of financial
telecommunications and trading systems.
Robert H. Dixon has been Vice President of Technical Operations of the
Company since July 1994. From September 1987 to July 1994, Mr. Dixon was
employed as software manager of McKinnie and from April 1984 to August 1987 Mr.
Dixon was employed as a sales representative and computer programmer by
Tri-State Lighting, Inc., a privately-held lighting fixture manufacturer.
Harold Rothstein, a co-founder of the Company, has been a director of
the Company since May 1996. In 1967, Mr. Rothstein founded Utility Development
Corporation, a Connecticut-based privately-held general contracting firm which
is primarily engaged in building federally insured multi-family and low-income
housing. Mr. Rothstein has served as the Chief Executive Officer of Utility
Development Corporation since its inception.
Raymond Roncari, a co-founder of the Company, has been a director of
the Company since May 1996. From 1979 to July 1995, Mr. Roncari served as the
President and Chief Executive Officer of Roncari Industries, Inc., and since
July 1995 has served as President and Chief Executive Officer of Tilcon-Roncari,
Inc., a successor-in-interest to Roncari Industries, Inc. Mr. Roncari has also
served as Chairman, President and Chief Executive Officer of Roncari Development
Co., a real estate development company, since 1970 and of Roncari Associates,
Inc., a cargo facilities company, since 1980. In addition, from 1965 to 1985,
Mr. Roncari served as a director and Chairman of the Executive Committee of the
Northern Connecticut National Bank - Windsor Locks.
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Stephen S. Weisglass became a director of the Company in November 1996.
Since August 1996, Mr. Weisglass has served as Executive Managing Director of
Genesis Merchant Group Securities, a San Francisco investment banking firm. From
1979 to July 1990 and from October 1990 to August 1996, Mr. Weisglass was
affiliated with Ladenburg, Thalmann & Co. Inc. ("Ladenburg"), an investment
banking firm, during which time he served in various positions, including
Managing Director, President, Chairman of the Executive Committee and Vice
Chairman of the Board, as well as Chairman of the Board of Equity Research
Associates, an investment research firm which was a subsidiary of Ladenburg.
During August and September of 1990, Mr. Weisglass was Vice Chairman of the
Underwriter.
Key Employee
Peter J. Quadagno, 50, was appointed Director of Marketing and Sales in
January 1997. From January 1996 through January 1997, Mr. Quadagno served as
principal of Quadagno and Associates, Inc., a consulting firm specializing in
the development and implementation of card-based programs. From June 1994 to
January 1996, he served as Manager, Transitional Services of the Smart Card
Enterprise Division ("SCE") of Electronic Payment Services, Inc., a processor of
debit and credit card transactions and the owner of the MAC regional ATM network
("EPS"). SCE was responsible for the development of an electronic, stored value
card purse application for EPS using smart card technology. From June 1989 to
May 1994, Mr. Quadagno was Vice President, Operations of the Metropolitan
Transportation Authority Card Company, which was created to manage the market
introduction, and product management functions for the New York City Transit
Authority's stored value MetroCard product. From 1987 to June 1989, Mr. Quadagno
was Engagement Manager/Marketing Director for Carmody & Company, a management
consulting firm. From 1984 to 1987, he served as Executive Account Manager - ATM
Vertical Business Unit of NCR Corporation's Financial Systems Division. Prior
thereto, Mr. Quadagno was Assistant Vice President - ATM Project/Debit Card
Product Management with Manufacturers Hanover Trust Company.
Executive officers serve at the discretion of the Board. Directors of
the Company hold office until the expiration of the term for which they are
elected and until their respective successors have been elected and qualified,
or until their prior death, resignation or removal. The Board of Directors is
classified into three classes of directors, with each class serving a staggered
three-year term. Messrs. Findley and Weisglass are Class I directors, Mr.
Roncari is a Class II director, and Messrs. Perl and Rothstein are Class III
directors. The terms of the Class I, Class II and Class III directors will
expire at the annual meetings of stockholders to be held in 1997, 1998 and 1999,
respectively. The Company reimburses the directors for reasonable travel
expenses incurred in connection with their activities on behalf of the Company,
but does not pay its directors any fees for Board participation (although it may
do so in the future). Pursuant to the Nonemployee Directors' Stock Option Plan,
nonemployee directors will automatically be granted each year, on the date of
the Company's annual meeting of stockholders, Non-incentive Options (as
hereinafter defined) to purchase 2,500 shares of Common Stock of the Company at
an exercise price equal to the fair market value thereof on the date of grant.
See "- Nonemployee Directors' Stock Option Plan."
Committees of the Board
Audit Committee. Upon the consummation of this offering, the Company
will establish an Audit Committee of the Board of Directors consisting of at
least two directors who are not employees of the Company. It is currently
anticipated that Messrs. Rothstein and Weisglass will comprise the Audit
Committee. Audit Committee members will meet regularly with the Company's
financial management and independent auditors to review the results of their
examination, the scope of audits and their opinions on the adequacy of internal
controls and quality of financial reporting.
Compensation Committee. Upon the consummation of this offering, the
Company will establish a Compensation Committee of the Board of Directors (the
"Compensation Committee") consisting of at least two directors who are not
employees of the Company. It is currently anticipated that Messrs. Rothstein and
Roncari
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will comprise the Compensation Committee. The Committee will make
recommendations to the Board of Directors concerning the salaries of all elected
officers. In addition, the Compensation Committee will administer the Company's
Stock Option Plan and determine the amounts of, and the individuals to whom,
awards shall be made thereunder. See "1996 Stock Option Plan."
Executive Committee. Upon the consummation of this offering, the
Company will establish an Executive Committee of the Board of Directors. It is
currently anticipated that Messrs. Perl and Rothstein will comprise the
Executive Committee. The Executive Committee will have all the powers of the
Board (except those specifically reserved under the DGCL to the full Board of
Directors) in the management and direction of the business of the Company.
The Company has agreed, for a period of five years from the date of
this Prospectus, upon the request of the Underwriter, to nominate and use its
best efforts to elect a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. All of the Company's officers and directors, as
well as the holders of a majority of the Company's outstanding stock, have
agreed to vote their shares of Common Stock in favor of such designee. The
Underwriter has not yet exercised its right to designate such person.
The Company has obtained "key man" insurance on the life of each of
Messrs. Perl and Findley in the amount of $2 million each.
Executive Compensation
The following table sets forth certain information regarding the
compensation in each of the fiscal years since the Company's inception paid to
the person who served as the Company's Chief Executive Officer during the fiscal
year ended December 31, 1996 and to the other officer of the Company who earned
$100,000 or more during such year (collectively, the "Named Officers").
Summary Compensation Table
Long-Term Compensation
-----------------------------------
Annual Compensation(1) Awards Payouts
------------------------------------- ----------------------- -------
Other
Annual Restricted All Other
Compen- Stock LTIP Compen-
Name and Principal sation Award(s) Options/ Payouts sation
Position Year Salary ($) Bonus ($) ($) ($) SARs(#) ($) ($)
- ----------------------- ---- ---------- --------- ------- ----- ------- ----- ----
Lawrence O. Perl 1996 $200,000(1) -- -- -- -- -- --
Chief Executive 1995 192,308 -- -- -- -- -- --
Officer 1994 80,700 -- -- -- -- -- --
Raymond Findley, Jr. 1996 $200,000(1) -- -- -- -- --
President and Chief 1995 192,308 -- -- -- -- -- --
Operating Officer 1994 80,700 -- -- -- -- -- --
- ---------------------
(1) Does not include $50,000 in accrued but unpaid salary payable to each of
Messrs. Perl and Findley upon consummation of this offering.
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Employment Agreements
Messrs. Perl, Findley and Dixon. Effective upon consummation of this
offering, the Company and each of Messrs. Perl, Findley and Dixon will enter
into employment agreements with the Company providing for their continued
employment as, respectively, the Company's Chief Executive Officer, President
and Vice President-Technical Operations. Each such agreement will have a term
of two years. The employment agreements with Messrs. Perl and Findley provide
for each to receive an annual base salary of $125,000 during the first year of
the agreement and $150,000 during the second year of the agreement. The
agreement with Mr. Dixon provides for an annual base salary of $85,000 during
the first year of the agreement and $120,000 during the second year of the
agreement. Messrs. Perl and Findley will each also be entitled to receive an
annual bonus for each year during the agreement equal to 50% of the annual base
salary for such year, subject to the Company's having achieved certain
performance objectives. In addition, Messrs. Perl and Findley will each be
entitled to receive $50,000 in accrued but unpaid salary. Pursuant to their
employment agreements, each of Messrs. Perl, Findley and Dixon will also be
entitled to such benefits, including participation in medical and life insurance
plans, as are customarily provided to senior executives of the Company.
The employment agreements with each of Messrs. Perl, Findley and Dixon
provide that, in the event such employee is terminated due to death or
disability, the employee shall be entitled to receive a lump sum severance
payment equal to six months' annual base salary. In addition, if the employee is
terminated without cause, or the Company elects not to extend the employment
agreement or the employee terminates for good reason, including employee's
resignation within one year following a change of control of the Company, the
employee will be entitled to receive a lump sum payment equal to the greater of
(a) one year's annual base salary or (b) the total annual base salary payable
for the balance of the agreement. Messrs. Perl and Findley will also be entitled
to a bonus for the then current term based on the Company's performance as of
the date of termination projected for the balance of the year and prorated to
the date of termination. The employment agreements will also contain provisions
prohibiting each of Messrs. Perl, Findley and Dixon from competing with the
Company during the term of employment. In addition, such restriction shall be
continued for a period of two years following the termination of any such
employee's employment (i) automatically, in the event such employment is
terminated by the Company during the term of the agreement for cause or is
terminated voluntarily by the employee during the term of the agreement other
than for good reason, and (ii) at the option of the Company, in the event such
employment is terminated by the Company during the term of the agreement other
than for cause, is terminated by the employee during the term of the agreement
for good reason or is terminated due to the expiration of the agreement,
provided that, if the Company so elects to continue such restriction, the
Company shall be required to pay the employee an amount equal to two times the
employee's then current annual base salary, less the amount of severance payable
upon termination, payable in monthly installments over the two-year period.
Mr. Quadagno. Effective upon consummation of this offering, the Company
will enter into an employment agreement with Mr. Quadagno providing for his
employment as the Company's Director of Marketing and Sales. The agreement with
Mr. Quadagno will have a term of three years. The agreement provides for Mr.
Quadagno to receive an annual base salary of $110,000 during the first year of
the agreement and $125,000 during the second year of the agreement, and an
annual base salary during the third year of the agreement in an amount, not less
than $125,000, to be determined by the Executive Committee of the Board of
Directors. Mr. Quadagno will also be entitled to receive a bonus of up to
$40,000 in the first year of the agreement, $75,000 in the second year of the
agreement and an amount to be determined by the Executive Committee of the Board
of Directors in the third year of the agreement, in each case subject to the
Company's having achieved certain performance objectives. The agreement also
provides that the Company shall grant to Mr. Quadagno an Incentive Stock Option
(as hereinafter defined) to purchase 20,000 shares of Common Stock, which option
will vest in equal installments over a three-year period following the date of
grant so long as Mr. Quadagno remains employed by the Company. In the event of
Mr. Quadagno's voluntary termination or termination of his employment by the
Company for cause, he shall have no further right to exercise the option. The
agreement further provides that the Company shall reimburse Mr. Quadagno for
reasonable weekly commuting expenses from Philadelphia to the Company's offices
in Georgia, and
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that he shall be entitled to such benefits, including participation in health
and life insurance plans, as are customarily provided to senior executives of
the Company.
Pursuant to the employment agreement, in the event Mr. Quadagno's
employment is terminated by the Company without cause during the first year of
the agreement, he shall be entitled to receive a lump sum payment equal to one
year of the then current annual base salary. In addition, in the event Mr.
Quadagno's employment is terminated by the Company without cause after the end
of the first year of the agreement or due to his death or disability at any time
during the term of the agreement, he (or his estate) shall be entitled to
receive a lump sum payment equal to six months' annual base salary. The
employment agreement also contains provisions prohibiting Mr. Quadagno from
competing with the Company during the term of his employment and for a period of
two years after the termination thereof.
1996 Stock Option Plan
In order to attract, retain and motivate employees (including
officers), directors, consultants and other persons who perform substantial
services for or on behalf of the Company, the Company has adopted the 1996 Stock
Option Plan (the "Stock Option Plan"). Pursuant to the Stock Option Plan, stock
options covering an aggregate of 270,000 shares of the Company's Common Stock
may be granted to the foregoing persons. Under the Stock Option Plan, "incentive
stock options" ("Incentive Options") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), may be granted to
employees (including officers), and non-incentive stock options ("Non-incentive
Options") may be granted to any such employee and to other persons (including
directors) who perform substantial services for or on behalf of the Company.
Incentive Options and Non-incentive Options are collectively referred to herein
as "Options."
The Stock Option Plan is administered by the Board of Directors or, at
its discretion, by the Compensation Committee. The Board of Directors or the
Compensation Committee will be vested with complete authority to administer and
interpret the Stock Option Plan, to determine the terms upon which Options may
be granted, to prescribe, amend and rescind such interpretations and
determinations and to grant Options. The Board of Directors or the Compensation
Committee will have the power to terminate or amend the Stock Option Plan from
time to time in such respects as it deems advisable, except that no termination
or amendment shall materially adversely affect any outstanding Option without
the consent of the grantee, and the approval of the Company's stockholders will
be required in respect of any amendment which would (i) change the total number
of shares subject to the Stock Option Plan or (ii) change the designation or
class of employees or other persons eligible to receive Incentive Options or
Non-incentive Options.
The price at which shares covered by an Option may be purchased
pursuant thereto shall be no less than the par value of such shares and no less
than the fair market value of such shares on the date of grant (the "Fair Market
Value"); provided, however, that in the case of Incentive Options, if the
optionee directly or indirectly beneficially owns more than 10% of the total
combined voting power of all of the outstanding voting stock of the Company (a
"10% Holder"), the purchase price shall not be less than 110% of the Fair Market
Value on the date of grant. The Fair Market Value will generally be equal to the
last sale price quoted for shares of Common Stock on Nasdaq on the date of
grant. The purchase price of shares issuable upon exercise of an Option may be
paid in cash or by delivery of shares with a value equal to the exercise price
of the Option. The Company may also loan the purchase price to the optionee, or
guarantee third-party loans to the optionee, on terms and conditions acceptable
to the Board of Directors or the Compensation Committee.
In the event the aggregate fair market value of the shares of Common
Stock (determined at the time the Option is granted) with respect to which
Incentive Options are exercisable for the first time by the optionee during any
calendar year (under all such option plans maintained by the Company) exceeds
$100,000, then only the first $100,000 of such shares so purchased will be
treated as Incentive Options and any excess over $100,000 so purchased shall be
treated as Non-incentive Options. This rule shall be applied by taking Options
into account in the order or sequence in which they were granted.
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The number of shares covered by an Option is subject to adjustment for
stock splits, mergers, consolidations, combinations of shares, reorganizations
and recapitalizations. Options are generally non-transferable except by will or
by the laws of descent and distribution, and in the case of employees, with
certain exceptions, may be exercised only so long as the optionee continues to
be employed by the Company. If the employee dies or becomes disabled, the right
to exercise the Option, to the extent then vested, continues for specified
periods. Options may be exercised within a period not exceeding ten years from
the date of grant, except that the term of any Incentive Options granted to a
10% Holder may not exceed five years from the date of grant. The terms of
Incentive Options are subject to additional restrictions provided by the Stock
Option Plan.
Effective as of the date of this Prospectus, Options to purchase an
aggregate of 64,000 shares of Common Stock will be granted under the Stock
Option Plan, including Options to purchase 20,000 shares to be granted to each
of Peter J. Quadagno and Robert H. Dixon. All of such Options will be
exercisable at the public offering price per share and will vest in equal
installments over a three-year period following the consummation of this
offering.
Nonemployee Directors' Stock Option Plan
In order to attract and retain the services of non-employee members of
the Board of Directors and to provide them with increased motivation and
incentive to exert their best efforts on behalf of the Company by enlarging
their personal stake in the Company, the Company has adopted the Nonemployee
Directors' Stock Option Plan (the "Directors' Plan"). Pursuant to the Directors'
Plan, stock options covering an aggregate of 30,000 shares of the Company's
Common Stock may be granted to such non-employee directors.
Pursuant to the Directors' Plan, each member of the Board of Directors
of the Company who is not an employee of the Company (or a subsidiary) (a
"Non-employee Director") and who is elected or re-elected as a director of the
Company by the stockholders at any annual meeting of stockholders commencing
with the first annual meeting following this offering will receive, as of the
date of each such election or re-election, options to purchase 2,500 shares of
the Company's Common Stock at the fair market value thereof on the date of
grant. In addition, Non-employee Directors will receive options to purchase
2,500 shares of Common Stock upon their initial election or appointment as
director, and all current Non-employee Directors (i.e., Messrs. Rothstein,
Roncari and Weisglass) shall be granted options to purchase 2,500 shares of
Common Stock at an exercise price of $5.00 per share upon the date of this
Prospectus. All options granted under the Directors' Plan are to be
Non-incentive Options.
Limitation of Liability and Indemnification
Section 145 of the DGCL contains provisions entitling the Company's
directors and officers to indemnification from judgments, fines, amounts paid in
settlement, and reasonable expenses (including attorney's fees) as the result of
an action or proceeding in which they may be involved by reason of having been a
director or officer of the Company. In the Certificate, the Company has included
a provision that limits, to the fullest extent now or hereafter permitted by the
DGCL, the personal liability of its directors to the Company or its stockholders
for monetary damages arising from a breach of their fiduciary duties as
directors. Under the DGCL as currently in effect, this provision limits a
director's liability except where such director (i) breaches his duty of loyalty
to the Company or its stockholders, (ii) fails to act in good faith or engages
in intentional misconduct or a knowing violation of law, (iii) authorizes
payment of an unlawful dividend or stock purchase or redemption as provided in
Section 174 of the DGCL, or (iv) obtains an improper personal benefit. This
provision does not prevent the Company or its stockholders from seeking
equitable remedies, such as injunctive relief or rescission. If equitable
remedies are found not be to available to stockholders in any particular case,
stockholders may not have any effective remedy against actions taken by
directors that constitute negligence or gross negligence.
The Certificate and By-Laws also include provisions to the effect that
(subject to certain exceptions) the Company shall, to the maximum extent
permitted from time to time under the law of the State of Delaware, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent that such
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indemnification and advancement of expenses is permitted under such law, as it
may from time to time be in effect. At present, the DGCL provides that, in order
to be entitled to indemnification, an individual must have acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
Company's best interests.
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the date of this
Prospectus and as adjusted to reflect the sale by the Company of 1,500,000
shares of Common Stock offered hereby, based on information obtained from the
persons named below, with respect to the beneficial ownership of shares of
Common Stock by (i) each person who is known by the Company to beneficially own
more than 5% of the outstanding shares of Common Stock, (ii) each director of
the Company and (iii) all of the Company's officers and directors as a group.
Amount and Percentage of Shares
Nature of Beneficially Owned
Name and Address Beneficial ---------------------------------
of Beneficial Owner(1) Ownership(2)(3) Before Offering(3) After Offering
- ---------------------- -------------- ---------------------------------
Lawrence Perl......................... 495,035(4) 18.8% 12.0%
Raymond Findley....................... 480,035 18.3% 11.6%
Harold Rothstein...................... 635,278(5) 23.8% 15.3%
Raymond Roncari(6).................... 619,652 23.3% 14.9%
Stephen S. Weisglass.................. 102,500 3.9% 2.5%
Joseph Basch.......................... 240,000 9.1% 5.8%
All officers and directors as
a group (six persons)............... 2,352,500 86.5% 55.8%
- ---------------
(1) The address for each such person is c/o American Card Technology, Inc.,
1355 Terrell Mill Road, Building 1462, Suite 200, Marietta, Georgia 30067.
(2) Unless otherwise indicated, the Company believes that all persons named in
the 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 that can be acquired by such person within
60 days from the date of this Prospectus upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or convertible
securities that are held by such person (but not those held by any other
person) and which are exercisable within 60 days of the date of this
Prospectus have been exercised. Assumes 2,625,000 shares of Common Stock
outstanding prior to this offering and 4,125,000 shares of Common Stock
outstanding immediately after this offering, before any consideration is
given to outstanding options, warrants or convertible securities.
(3) Gives effect to the grant to each of Messrs. Rothstein, Roncari and
Weisglass as of the date of this Prospectus of options to purchase
2,500 shares of Common Stock pursuant to the Directors' Plan.
(4) Includes 480,035 shares held by the Perl Trust, a family trust of which Mr.
Perl is a beneficiary, and 12,500 shares issuable upon exercise of Bridge
Warrants. Does not include shares issuable upon exercise of an option to
purchase 100,000 shares granted to Shreveport Acquisition Corp.
("Shreveport"), a company which is owned by Messrs. Perl, Roncari and
Rothstein (the "Shreveport Option"), which option is not exercisable within
60 days of the date of this Prospectus.
(5) Includes 587,778 shares held by the Rothstein Trust, a family trust for
the benefit of the family of Harold Rothstein, and 37,500 shares
issuable upon exercise of Bridge Warrants. Does not include shares
issuable upon exercise of the Shreveport Option.
(6) Includes 37,500 shares issuable upon exercise of Bridge Warrants. Does
not include shares issuable upon exercise of the Shreveport Option.
Lawrence Perl, Raymond Findley, Harold Rothstein and Raymond Roncari
may be deemed "promoters" of the Company, as such term is defined under the
federal securities laws.
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CERTAIN TRANSACTIONS
Pursuant to an agreement dated as of January 1, 1993, Shreveport, a
corporation founded by Lawrence Perl, the Chief Executive Officer and a director
of the Company, and Raymond Roncari, a director of the Company, and currently
owned by Mr. Perl, Mr. Roncari and Harold Rothstein, a director of the Company,
acquired all of the outstanding stock of McKinnie, a supplier of computerized
management information systems to the pari-mutuel industry, for a purchase price
of $2 million, which was paid $75,000 in cash and $1,925,000 by delivery of a
one-year promissory note which was guaranteed by Mr. Roncari. Concurrently with
such acquisition, McKinnie entered into an agreement (the "McKinnie License
Agreement") with US3 and Phoenix DataCrypt Systems, Inc. ("Phoenix"), a company
of which Raymond Findley, Jr., the Company's President, Chief Operating Officer
and a director, was co-founder, President and Chief Executive Officer. Pursuant
to the McKinnie License Agreement, Phoenix granted to McKinnie an exclusive
license to use, in connection with McKinnie's management information systems,
the smart card technology and computer software owned or licensed by Phoenix
(including technology then licensed by Phoenix) for use in the pari-mutuel
industry and McKinnie agreed to purchase all of its smart card requirements from
Phoenix, a distributor of US3's smart cards.
In May 1994, Mr. Findley severed his relationship with Phoenix in order
to pursue smart card-related business opportunities with Messrs. Perl, Roncari
and Rothstein. In June 1994, Messrs. Findley, Perl, Roncari and Rothstein formed
the Company to develop and market smart card technology and applications. In
order to pursue their business plan, Messrs. Perl, Roncari and Rothstein elected
to divest themselves of control of McKinnie. In July 1994, Shreveport sold a 51%
equity interest in McKinnie to The Jockey Club Racing Services, Inc. ("The
Jockey Club"). In connection therewith, The Jockey Club agreed to cause McKinnie
to transfer to the Company all of McKinnie's rights to any smart card
technology, including certain software technology and all rights under the
McKinnie License Agreement.
In April 1995, the Company, Phoenix and US3 elected to terminate the
McKinnie License Agreement. In addition, the Company granted to McKinnie a right
of first refusal pursuant to which the Company agreed that, in the event it
proposes to grant any rights to sell, market and/or develop any equine-related
applications of any smart card technology developed by the Company, the Company
shall first offer the proposed grant to McKinnie.
In December 1996, the Company issued to Shreveport an option (the
"Shreveport Option") to purchase 100,000 shares of Common Stock at an exercise
price of $5.00 per share. The Shreveport Option is exercisable at any time
during the ten year period commencing 90 days following the consummation of this
offering. The Shreveport Option provides that upon exercise, in lieu of a cash
payment, the option may be exchanged for a number of shares of Common Stock
equal to (a) the total number of shares issuable upon exercise of such option
for cash, minus (b) a number of shares equal to the quotient of (i) the
aggregate exercise price of the exercised portion of the option, divided by (ii)
the then current market price of a share of Common Stock.
In connection with the formation of the Company in June 1994, each of
the Perl Trust, Mr. Roncari, the Rothstein Trust and Mr. Findley (collectively,
the "Original Stockholders") purchased 507,500 shares of Common Stock for a
purchase price of $250. In January 1995, each of the Original Stockholders sold
to Robert Dixon, the Company's Vice President of Technical Operations, 5,000
shares of Common Stock for a purchase price of $1,250.
Since the inception of the Company, the Perl Trust and Messrs. Findley,
Roncari and Rothstein (either individually or through the Rothstein Trust) have
made the Stockholder Loans to the Company in amounts aggregating $15,177,
$15,177, $688,854 and $840,747, respectively. The Stockholder Loans bear
interest at a rate per annum equal to 10% and are payable on demand. In March
1995, $250,000 of the then-outstanding principal amount of the Stockholder Loans
of each of Messrs. Rothstein and Roncari was recharacterized as paid-in capital
of the Company. Pursuant to an agreement among the Original Stockholders, the
aggregate $500,000 Capital Contribution was allocated equally among the Original
Stockholders, in consideration for which Mr. Findley
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issued to Mr. Roncari and the Perl Trust issued to the Rothstein Trust a Capital
Contribution Note in the amount of $125,000. Pursuant to the Debt Conversion
which occurred upon the consummation of the Bridge Financing in January 1997,
$12,675 of the Perl Trust's Stockholder Loans, $12,675 of Mr. Findley's
Stockholder Loans, $223,260 of Mr. Roncari's Stockholder Loans and $301,390 of
Mr. Rothstein's Stockholder Loans were converted into 2,535, 2,535, 44,652 and
60,278 shares of Common Stock, respectively. Mr. Findley and the Perl Trust
subsequently transferred 25,000 shares of Common Stock to Mr. Roncari and the
Rothstein Trust, respectively, in satisfaction of the indebtedness represented
by the Capital Contribution Notes. The Company intends to use a portion of the
proceeds of this offering to repay up to $510,000 of any Stockholder Loans
outstanding upon consummation of this offering, with any interest on the
Stockholder Loans to be paid out of cash flow from operations commencing one
year thereafter.
Pursuant to an agreement dated as of July 1, 1994, the Company agreed
to pay Lawrence Owen Associates, a corporation wholly owned by Mr. Perl, a
monthly fee of $1,000 in consideration for the use of office space in West
Hartford, Connecticut and for accounting and other general and administrative
services. At December 31, 1995 and September 30, 1996, amounts due to Lawrence
Owen Associates from the Company pursuant to such agreement were $18,000 and
$27,000, respectively. This arrangement terminated following consummation of the
Bridge Financing.
From March through June 1995, Joseph D. Basch, the President, Chief
Executive Officer and sole director of the Subsidiary, loaned the Company an
aggregate of $300,000. The loans accrued interest at a rate per annum equal to
10% and were payable on demand. In July 1996, the Company and Mr. Basch entered
into an agreement pursuant to which the then-outstanding principal amount of the
loans, together with accrued interest thereon of approximately $30,000, was
converted into an aggregate of 240,000 shares of Common Stock.
In January 1996, the Company sold 100,000 shares of Common Stock to
Stephen S. Weisglass at a price of $.25 per share. Mr. Weisglass became a
director of the Company in November 1996.
Mr. Rothstein has personally guaranteed all of the Company's
indebtedness to Fleet and has pledged personal assets in the form of a
certificate of deposit in the amount of $150,000 to secure such indebtedness;
Mr. Roncari has personally guaranteed all of the Company's indebtedness to First
Suffield; and Mr. Rothstein has pledged to Chase a certificate of deposit in the
amount of $105,000 to secure the Company's indebtedness to Chase. In addition,
Mr. Rothstein has agreed with the Company that, in the event a demand is made by
Fleet with respect to the Fleet Loan and/or a demand is made by Chase with
respect to the Chase Loan prior to the earlier of the consummation of this
offering and July 1, 1997, he shall either (i) secure replacement financing to
pay the amount so demanded or (ii) personally satisfy the amount demanded,
either through surrender of the collateral previously pledged by him or through
other means satisfactory to Fleet and/or Chase, as the case may be. In the event
Mr. Rothstein elects to personally satisfy the demanded amount, the Company has
agreed to reimburse Mr. Rothstein for the full amount of such payment on the
earlier of the consummation of this offering and July 1, 1997. The Company
intends to use $300,000 of the proceeds of this offering to repay a portion of
its bank indebtedness. See "Plan of Operation - Liquidity and Capital
Resources."
In January 1997, Mr. Rothstein made the Interim Loan in the principal
amount of $35,000, which was used for working capital purposes. The principal
amount thereof, plus accrued interest thereon, at a rate of 10% per annum, was
paid upon the consummation of the Bridge Financing with a portion of the net
proceeds thereof.
In January 1997, in connection with the Bridge Financing, the Company
borrowed from Messrs. Perl, Rothstein and Roncari $175,000 and issued to them
Bridge Notes in such aggregate principal amount, an aggregate of 17,500 Bridge
Shares and 87,500 Bridge Warrants. The Company intends to use approximately
$179,200 of the proceeds of this offering to repay such Bridge Notes (including
estimated interest accrued thereon through and until such repayment date) upon
the consummation of this offering.
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Although the Company believes that the foregoing transactions were on
terms no less favorable to the Company than would have been available from
unaffiliated third parties in arm's length transactions, there can be no
assurance that this is the case. All future transactions and loans between the
Company and its officers, directors and 5% stockholders will be on terms no less
favorable to the Company than could be obtained from independent third parties.
There can be no assurance, however, that future transactions or arrangements
between the Company and its affiliates will be advantageous, that conflicts of
interest will not arise with respect thereto or that if conflicts do arise, they
will be resolved in favor of the Company.
DESCRIPTION OF SECURITIES
General
Upon completion of this offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, $.001 par value per
share, of which 4,125,000 shares will be outstanding, and 1,000,000 shares of
Preferred Stock, $.001 par value per share, of which no shares will be
outstanding. The following description of the securities of the Company and
certain provisions of the Company's Certificate and By-Laws is a summary and is
qualified in its entirety by the provisions of the Certificate and By-Laws as
currently in effect.
Common Stock
Holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders, including the election of
directors. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. The Certificate does not provide
for cumulative voting for the election of directors. Holders of Common Stock
will be entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor, and will be entitled to receive, pro rata, all assets of the Company
available for distribution to such holders upon liquidation. Holders of Common
Stock have no preemptive, subscription or redemption rights. The rights of the
holders of the Common Stock are subject to any rights that may be fixed for
holders of Preferred Stock, when and if any Preferred Stock is issued. All of
the outstanding shares of Common Stock are fully paid and non-assessable. Upon
issuance, all of the shares of Common Stock offered hereby will be fully paid
and nonassessable.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of Preferred Stock
from time to time in one or more series, which may rank senior to the Common
Stock with respect to payment of dividends and in the event of the liquidation,
dissolution or winding up of the Company. The Board has the power, without
stockholder approval, to issue shares of one or more series of Preferred Stock,
at any time, for such consideration and with such relative rights, privileges,
preferences and other terms as the Board may determine (including, but not
limited to, terms relating to dividend rates, redemption rates, liquidation
preferences and voting, sinking fund and conversion or other rights). The rights
and terms relating to any new series of Preferred Stock could adversely affect
the voting power or other rights of the holders of the Common Stock or could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company.
Redeemable Warrants
Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock, at a price of $5.00, subject to adjustment in certain
circumstances, at any time commencing , 1998, or earlier upon the consent
of the Underwriter, through and including , 2002.
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The Warrants are redeemable by the Company, upon the consent of the
Underwriter, at a price of $.10 per Warrant, at any time commencing after the
Company has reported its first four fiscal quarters of financial results
following the date of this Prospectus, upon notice of not less than 30 days,
provided that the closing bid quotation of the Common Stock on all 20 trading
days ending on the third day prior to the day on which the Company gives notice
has been at least 150% (currently $7.50, subject to adjustment) of the then
effective exercise price of the Warrants. All warrantholders have exercise
rights until the close of business on the date fixed for redemption.
In the event the Company's results of operations for the first four
fiscal quarters following the date of this Prospectus reflect, on a cumulative
basis during such four quarters, either revenues of under $5,000,000 or pre-tax
operating losses (before interest income and expense, financing costs, taxes and
extraordinary items) in excess of $1,000,000, then the exercise price of the
Warrants shall decrease from $5.00 per share to $4.00 per share.
For purposes of the foregoing provisions, the first of the aforesaid
four fiscal quarters shall be the first quarter the majority of which falls
after the date hereof.
The Warrants will be issued in registered form under a Warrant
Agreement between the Company and American Stock Transfer & Trust Company, as
Warrant Agent. Reference is made to said Warrant Agreement for a complete
description of the terms and conditions therein (the description herein
contained being qualified in its entirety by reference thereto).
The exercise price and number of shares of Common Stock or other
securities issuable on exercise of the Warrants are subject to adjustment in
certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.
However, such Warrants are not subject to adjustment for issuances of Common
Stock at a price below the exercise price of the Warrants, including the
issuance of shares of Common Stock pursuant to the Stock Option Plan or the
Directors' Plan.
The Warrants may be exercised upon surrender of the Warrant certificate
on or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the certificate completed and executed as
indicated, accompanied by full payment of the exercise price (by certified check
payable to the Company) to the Warrant Agent for the number of Warrants being
exercised. The warrantholders do not have the rights or privileges of holders of
Common Stock.
No Warrant will be exercisable unless at the time of exercise the
Company has filed a current registration statement with the Commission covering
the shares of Common Stock issuable upon exercise of such Warrant and such
shares have been registered or qualified or deemed to be exempt under the
securities laws of the state of residence of the holder of such Warrant. The
Company will use its best efforts to have all such shares so registered or
qualified on or before the first possible exercise date and to maintain a
current prospectus relating thereto until the expiration of the Warrants,
subject to the terms of the Warrant Agreement. While it is the Company's
intention to do so, there can be no assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the Warrants.
However, if a warrantholder exercises all Warrants then owned of record by him,
the Company will pay to such warrantholder, in lieu of the issuance of any
fractional shares which is otherwise issuable, an amount in cash based on the
market value of the Common Stock on the last trading day prior to the exercise
date.
Bridge Warrants
The Bridge Warrants will be exercisable until January 16, 2002 at a
price of $4.00 per Bridge Warrant Share, subject to adjustment. The Bridge
Warrants provide that, upon exercise, in lieu of a cash payment, the Bridge
Warrants to be exercised may be exchanged for a number of Bridge Warrant Shares
equal to (a) the total
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number of Bridge Warrant Shares issuable upon exercise of such Bridge Warrants
for cash minus (b) a number of Bridge Warrant Shares equal to the quotient of
(i) the aggregate exercise price of the exercised Bridge Warrants, divided by
(ii) the then current market price of a share of the Company's Common Stock.
The Bridge Warrants are redeemable by the Company, upon the consent of
the Underwriter at any time commencing on January 16, 1999, upon notice of not
less than 30 days, at a price of $.10 per Bridge Warrant, provided that the
closing bid quotation of the Common Stock on all 20 trading days ending on the
third day prior to the date on which the Company gives notice has been at least
150% (currently $6.00, subject to adjustment) of the then effective exercise
price of the Bridge Warrants. The Bridge Warrants will be exercisable until the
close of business on the date fixed for redemption.
Registration Rights
In connection with this offering, in addition to the registration
obligations with respect to the shares of Common Stock issuable upon exercise of
the Warrants, the Company has agreed to grant to the Underwriter certain demands
and "piggyback" registration rights in connection with the 300,000 shares of
Common Stock issuable upon exercise of the Underwriter's Warrants and the
Warrants included therein. See "Underwriting".
The Company has also agreed to include the Bridge Shares and the Bridge
Warrant Shares in a registration statement (the "Post-IPO Registration
Statement") which the Company will prepare and file and use its best efforts to
have declared effective by the Commission so as to permit the public trading of
the Bridge Shares and Bridge Warrant Shares pursuant thereto commencing 15
months following the date of this Prospectus. Notwithstanding the foregoing, the
holders of the Registrable Securities (as defined below) have agreed not to sell
any of such securities until twelve months following the date of this
Prospectus.
If the Post-IPO Registration Statement is not declared effective by the
Commission within 15 months following the date of this Prospectus, then the
Company shall issue to each holder of the Registrable Securities, on the first
day of each month that the Post-IPO Registration Statement continues not to have
been declared effective by the Commission beginning on the first day of the 16th
month following the date of this Prospectus, such number of additional shares of
Common Stock and additional warrants (identical to the Bridge Warrants) as is
equal to 10% of the number of Bridge Shares and Bridge Warrants, respectively,
held by such holder. The Bridge Shares, Bridge Warrant Shares and such
additional shares and shares underlying such additional warrants are referred to
herein as the "Registrable Securities."
Once the Post-IPO Registration Statement relating to the Registrable
Securities is declared effective, the Company has agreed to use its best efforts
to keep it effective until the earlier of (i) the date that all of the
Registrable Securities have been sold pursuant to the Post-IPO Registration
Statement and (ii) the date that the holders of the Registrable Securities
receive an opinion of counsel that the full amount of such securities may be
freely sold by such holders without registration under the Securities Act (the
"Registration Period"). If the Company fails to keep the Post-IPO Registration
Statement continuously effective during the Registration Period and fails, upon
the request of holders of at least 51% of the unsold Registrable Securities, to
update the Post-IPO Registration Statement or file a new registration statement
covering such unsold securities within 90 days of its receipt of such request,
then the Company shall issue to each holder of the Registrable Securities
remaining unsold, on one occasion only, such number of additional shares of
Common Stock and additional warrants (identical to the warrants included in the
unsold Registrable Securities) as is equal to one-quarter of the number of
shares and warrants, respectively, comprising the unsold Registrable Securities
held by such holder. The Company shall be obligated to cause the Registrable
Securities and such additional shares and warrants (and shares underlying such
additional warrants) to be registered promptly under the Securities Act, subject
to the terms of a registration rights agreement entered into in connection with
the Bridge Financing.
The Company shall bear all fees and expenses incurred in the
preparation and filing of the Post-IPO Registration Statement.
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Antitakeover Provisions of Delaware Law
The Company is a Delaware corporation and thus subject to Section 203
of the DGCL ("Section 203"), which is generally viewed as an anti-takeover
statute. In general, Section 203 prohibits a publicly traded Delaware
corporation from engaging in any "business combination" (as defined) with any
"interested stockholder" (as defined) for a period of three years following the
date that such stockholder became an interested stockholder, unless: (i) prior
to such time, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder; (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of the
stockholders, and not by written consent, by the affirmative vote of at least
662/3% of the outstanding voting stock which is not owned by the interested
stockholder.
In general, Section 203 defines a "business combination" to include:
(i) any merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the corporation; (iii)
(subject to certain exceptions) any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the receipt
by the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an "interested stockholder" as (a) any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation or (b) any entity or person affiliated with or controlling or
controlled by such entity or person.
The existence of Section 203 would be expected to have the effect of
discouraging takeover attempts involving the Company, including attempts that
might result in a premium over the market price of the Common Stock (if it is
then publicly traded).
Transfer Agent and Registrar
The Company's Transfer Agent, Warrant Agent and Registrar is American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
Reports to Stockholders
The Company intends to file, prior to the date of this Prospectus, an
application with the Commission to register the Common Stock and Warrants under
the provisions of Section 12(g) of the Exchange Act. The Company has agreed with
the Underwriter that the Company will use its best efforts to continue to
maintain such registration. Such registration will require the Company to comply
with periodic reporting, proxy solicitation and certain other requirements of
the Exchange Act.
-49-
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 4,125,000
shares of Common Stock outstanding, of which the 1,500,000 shares of Common
Stock offered hereby by the Company will be freely tradeable without restriction
or further registration under the Securities Act, except for any shares
purchased by an affiliate of the Company (in general, a person who has a control
relationship with the Company), which shares will be subject to the resale
limitations of Rule 144 under the Securities Act. All of the remaining 2,625,000
shares of Common Stock are deemed to be "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act, and in the future
may only be sold pursuant to a registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act. The 2,625,000 restricted shares of Common
Stock will become eligible for sale under Rule 144, subject to the volume
limitations prescribed by Rule 144 and to the contractual restrictions described
below, at various times commencing 90 days from the date of this Prospectus.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated), who has owned restricted
shares of Common Stock beneficially for at least two years is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares of the same class or, if
the shares of Common Stock are quoted on Nasdaq, the average weekly trading
volume during the four calendar weeks preceding the sale. A person who has not
been an affiliate of the Company for at least the three months immediately
preceding the sale and who has beneficially owned shares of Common Stock for at
least three years is entitled to sell such shares under Rule 144 without regard
to any of the limitations described above.
All of the Company's officers, directors and stockholders have agreed
not to sell or otherwise dispose of (other than in a private transfer) any of
their shares of Common Stock for a period of 12 months from the date of this
Prospectus without the prior written consent of the Underwriter (other than in
the case of the Bridge Shares and Bridge Warrant Shares, which cannot be
transferred during such period even with the consent of the Underwriter).
The Company has granted the Underwriter demand and "piggyback"
registration rights with respect to the Underwriter's Warrants and the shares of
Common Stock and Warrants underlying the Underwriter's Warrants. The Company has
also granted certain demand and "piggyback" registration rights to the holders
of 125,000 shares of Common Stock and 625,000 shares of Common Stock underlying
the Bridge Warrants issued in connection with the Bridge Financing.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such shares after the 90th day following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period.
Prior to this offering, there has been no market for the shares of
Common Stock or Warrants and no prediction can be made as to the effect, if any,
that market sales of shares of Common Stock or the availability of such
securities for sale will have on the market prices prevailing from time to time.
Nevertheless, the possibility that substantial amounts of shares of Common Stock
may be sold in the public market may adversely affect prevailing market prices
for the Common Stock and the Warrants and could impair the Company's ability to
raise capital through the sale of its equity securities.
-50-
UNDERWRITING
Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to
the terms and conditions contained in the Underwriting Agreement, to purchase
1,500,000 shares of Common Stock and 1,500,000 Warrants from the Company. The
Underwriter is committed to purchase and pay for all of the Common Stock and
Warrants offered hereby if any of such securities are purchased. The shares of
Common Stock and Warrants are being offered by the Underwriter subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to approval of certain legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the
Common Stock and Warrants to the public at the public offering prices set forth
on the cover page of this Prospectus. The Underwriter may allow to certain
dealers who are members of the National Association of Securities Dealers, Inc.
(the "NASD") concessions, not in excess of $ per share of Common Stock and
$ per Warrant, of which not in excess of $ per share of Common Stock
and $ per Warrant may be reallowed to other dealers who are members of the
NASD.
The Company has granted to the Underwriter an option, exercisable for
45 days from the date of this Prospectus, to purchase up to 225,000 additional
shares of Common Stock and/or 225,000 additional Warrants at the respective
public offering prices set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. The Underwriter may exercise this option
in whole or, from time to time, in part, solely for the purpose of covering
overallotments, if any, made in connection with the sale of the shares of Common
Stock and/or Warrants offered hereby.
The Company has agreed to pay to the Underwriter a nonaccountable
expense allowance of 3% of the gross proceeds of this offering, of which $50,000
has been paid as of the date of this Prospectus. The Company has also agreed to
pay all expenses in connection with qualifying the shares of Common Stock and
Warrants offered hereby for sale under the laws of such states as the
Underwriter may designate, including expenses of counsel retained for such
purpose by the Underwriter.
The Company has agreed to sell to the Underwriter and its designees,
for an aggregate of $165, warrants (the "Underwriter's Warrants") to purchase up
to 150,000 shares of Common Stock at an exercise price of $6.75 per share (135%
of the public offering price per share) and/or up to 150,000 Warrants (each to
purchase one share of Common Stock at $8.25 per share) at an exercise price of
$.135 per Warrant (135% of the initial public offering price per Warrant). The
Underwriter's Warrants may not be sold, transferred, assigned or hypothecated
for one year from the date of this Prospectus, except to the officers and
partners of the Underwriter or members of the selling group, and are exercisable
during the four-year period commencing one year from the date of this Prospectus
(the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of
the Underwriter's Warrants are given, at nominal cost, the opportunity to profit
from a rise in the market price of the Common Stock. To the extent that the
Underwriter's Warrants are exercised, dilution to the interests of the Company's
stockholders will occur. Further, the terms upon which the Company will be able
to obtain additional equity capital may be adversely affected since the holders
of the Underwriter's Warrants can be expected to exercise them at a time when
the Company would, in all likelihood, be able to obtain any needed capital on
terms more favorable to the Company than those provided in the Underwriter's
Warrants. Any profit realized by the Underwriter on the sale of the
Underwriter's Warrants, the underlying shares of Common Stock or the underlying
Warrants, or the shares of Common Stock issuable upon any exercise of such
underlying Warrants may be deemed additional underwriting compensation.
Subject to certain limitations and exclusions, the Company has agreed,
at the request of the holders of a majority of the Underwriter's Warrants, at
the Company's expense, to register the Underwriter's Warrants, the shares of
Common Stock and warrants underlying the Underwriter's Warrants, and the shares
of Common Stock issuable upon exercise of the underlying Warrants under the
Securities Act on one occasion during the Warrant
-51-
Exercise Term and to include such Underwriter's Warrants and such underlying
securities in any appropriate registration statement which is filed by the
Company during the seven years following the date of this Prospectus.
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this Prospectus),
to pay to the Underwriter for bona fide services provided a fee of 5% of the
exercise price for each Warrant exercised, provided, however, that the
Underwriter will not be entitled to receive such compensation in Warrant
exercise transactions in which (i) the market price of Common Stock at the time
of exercise is lower than the exercise price of the Warrants; (ii) the Warrants
are held in any discretionary account; (iii) disclosure of compensation
arrangements is not made, in addition to the disclosure provided in this
Prospectus, in documents provided to holders of the Warrants at the time of
exercise; (iv) the holder of the Warrants has not confirmed in writing that the
Underwriter solicited such exercise; or (v) the solicitation of exercise of the
Warrants was in violation of Rule 10b-6 promulgated under the Exchange Act. In
addition to soliciting, either orally or in writing, the exercise of the
Warrants, such bona fide services may also include disseminating information,
either orally or in writing, to the holders of the Warrants about the Company or
the market for the Company's securities, and assisting in the processing of the
exercise of Warrants.
The Underwriter acted as placement agent in connection with the Bridge
Financing and received $125,000 (representing 10% of the purchase price of the
Units) and a non-accountable expense allowance of $25,000.
The Company has agreed, for a period of five years from the date of
this Prospectus, upon the request of the Underwriter, to nominate and use its
best efforts to elect a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. All of the Company's officers and directors, as
well as the holders of a majority of the Company's outstanding stock, have
agreed to vote their shares of Common Stock in favor of such designee. The
Underwriter has not yet exercised its right to designate such a person.
In addition, the Company has agreed to enter into a consulting
agreement to retain the Underwriter as a financial consultant for a period of
two years following the consummation of this offering at an annual fee of
$30,000, the entire $60,000 payable in full, in advance. The consulting
agreement will not require the consultant to devote a specific amount of time to
the performance of its duties thereunder. It is anticipated that these
consulting services will be provided by principals of the Underwriter and/or
members of the Underwriter's corporate finance department who, however, have not
been designated as of the date hereof. In the event that the Underwriter
originates a financing, merger, acquisition, joint venture or other transaction
to which the Company is a party, the Underwriter will be entitled to receive a
finder's fee in consideration for origination of such transaction.
The Company has agreed to indemnify the Underwriter against certain
civil liabilities, including liabilities under the Securities Act.
All of the Company's officers, directors and stockholders have agreed
not to sell or otherwise dispose of (other than in a private transfer) any of
their shares of Common Stock for a period of 12 months from the date of this
Prospectus without the prior written consent of the Underwriter (other than in
the case of the Bridge Shares and Bridge Warrant Shares, which cannot be
transferred during such period even with the consent of the Underwriter).
The Underwriter has informed the Company that it does not expect sales
made to discretionary accounts to exceed 1% of the securities offered hereby.
-52-
Prior to this offering, there has been no public trading market for the
Common Stock or the Warrants. Consequently, the initial public offering prices
of the Common Stock and Warrants and the exercise price of the Warrants have
been determined by negotiations between the Company and the Underwriter. Among
the factors considered in determining the initial public offering prices and the
exercise price of the Warrants were the Company's financial condition and
prospects, management, market prices of similar securities of comparable
publicly-traded companies, certain financial and operating information of
companies engaged in activities similar to those of the Company and the general
condition of the securities markets.
LEGAL MATTERS
The validity of the Common Stock and Warrants offered hereby will be
passed upon for the Company by Zimet, Haines, Friedman & Kaplan, New York, New
York. Certain legal matters in connection with this offering will be passed upon
for the Underwriter by Tenzer Greenblatt LLP, New York, New York.
EXPERTS
The financial statements included in this Prospectus have been audited
by BDO Seidman, LLP, independent certified public accountants, to the extent and
for the periods set forth in their report (which contains an explanatory
paragraph regarding uncertainties about the Company continuing as a going
concern) appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form SB-2, including
amendments thereto, under the Securities Act with respect to the securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules filed
therewith. For further information with respect to the Company and the Common
Stock offered hereby, reference is made such Registration Statement, exhibits
and schedules. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part, each such statement being qualified in all respects by such reference.
The Registration Statement, and the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following regional offices of the Commission:
13th Floor, Seven World Trade Center, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained form the Public Reference Section of the
Commission, Washington, D.C. at prescribed rates. The Commission also maintains
a Web site at http://www.sec.gov that contains reports, proxy and information
statements. Such reports and other information may also be inspected at NASDAQ,
1735 K Street, N.W., Washington, D.C. 20006.
-53-
American Card Technology, Inc.
(a development stage company)
Contents
================================================================================
Report of independent certified public accountants F-2
Financial statements:
Balance sheets F-3
Statements of operations F-4
Statements of stockholders' deficit F-5
Statements of cash flows F-6 - F-7
Summary of significant accounting policies F-8 - F-11
Notes to financial statements F-12 - F-16
F-1
Report of Independent Certified Public Accountants
To the Board of Directors
American Card Technology, Inc.
We have audited the accompanying balance sheet of American Card Technology, Inc.
(a development stage company) as of December 31, 1995, and the related
statements of operations, stockholders' deficit and cash flows for the period
from June 21, 1994 (inception) to December 31, 1994 and the year ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Card Technology, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the period from June 21, 1994 (inception) to December 31, 1994 and the year
ended December 31, 1995 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company's dependence on outside financing, lack of existing
commitments from lenders to provide necessary financing, lack of sufficient
working capital, and losses since inception raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
New York, New York
August 1, 1996, except for Note 6
which is as of December 11, 1996
F-2
American Card Technology, Inc.
(a development stage company)
Balance Sheets
===============================================================================================================================
December 31, September 30,
1995 1996
- --------------------------------------------------------------------------------------------------------------------------------
(unaudited)
Assets
Current:
Cash $ 10,643 $ 33,006
Inventory 1,250 8,092
Prepaid expenses and other current assets 10,775 7,650
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 22,668 48,748
Equipment, net of accumulated depreciation of $11,808 and
$28,562 46,677 47,887
Other assets:
Deferred license fee 148,000 -
Software development costs 94,608 167,297
Deferred financing costs - 69,622
Other 1,970 24,743
- ---------------------------------------------------------------------------------------------------------------------------
$ 313,923 $ 358,297
===========================================================================================================================
Liabilities and Stockholders' Deficit
Current:
Accounts payable $ 76,645 $ 259,380
Accrued interest expense 43,788 103,228
Other accrued expenses 29,871 121,022
Notes payable to banks (Note 2) - 370,000
Notes payable to stockholders and affiliate (Note 3) 971,024 1,059,955
Other payable (Note 4) 148,000 -
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,269,328 1,913,585
- ---------------------------------------------------------------------------------------------------------------------------
Commitment and contingency (Notes 1 and 6)
Stockholders' deficit (Note 7):
Preferred stock, $.001 par value - shares authorized 1,000,000;
none issued - -
Common stock, $.001 par value - shares authorized
20,000,000; issued and outstanding 2,030,000 at
December 31, 1995 and 2,390,000 at September 30, 1996 2,030 2,390
Additional paid-in capital 498,970 858,610
Stock subscriptions receivable (250) (30,000)
Accumulated deficit during the development stage (1,456,155) (2,386,288)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (955,405) (1,555,288)
- ---------------------------------------------------------------------------------------------------------------------------
$ 313,923 $ 358,297
===========================================================================================================================
See accompanying summary of significant accounting policies
and notes to financial statements.
F-3
American Card Technology, Inc.
(a development stage company)
Statements of Operations
====================================================================================================================================
Period from Period from
June 21, 1994 Nine months ended June 21, 1994
(inception) to Year ended September 30, (inception) to
December 31, December 31, ------------------------------- September 30,
1994 1995 1995 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Revenues $ - $ 73,472 $ 66,262 $ 19,989 $ 93,461
Cost of sales - 68,621 57,881 11,250 79,871
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit - 4,851 8,381 8,739 13,590
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
General and administrative 427,549 841,225 636,494 826,752 2,095,526
Write-off of license fee (Note 4) - 148,000 - 20,000 168,000
Interest (Notes 2 and 3) 6,996 37,236 23,703 92,120 136,352
- ------------------------------------------------------------------------------------------------------------------------------------
434,545 1,026,461 660,197 938,872 2,399,878
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (434,545) $(1,021,610) $(651,816) $(930,133) $(2,386,288)
====================================================================================================================================
Pro forma loss per share $ (.16) $ (.37) $ (.24) $ (.34)
====================================================================================================================================
Weighted average shares 2,750,000 2,750,000 2,750,000 2,750,000
====================================================================================================================================
See accompanying summary of significant accounting policies
and notes to financial statements.
F-4
American Card Technology, Inc.
(a development stage company)
Statements of Stockholders' Deficit
====================================================================================================================================
Period from June 21, 1994 (inception) to September 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock Additional Stock
------------------------------- paid-in subscription Accumulated
Shares Amount capital receivable deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares to
founders 2,030,000 $2,030 $ (1,030) $ (250) $ - $ 750
Net loss - - - - (434,545) (434,545)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1994 2,030,000 2,030 (1,030) (250) (434,545) (433,795)
Capital contribution
(conversion of loan) - - 500,000 - - 500,000
Net loss - - - - (1,021,610) (1,021,610)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 2,030,000 2,030 498,970 (250) (1,456,155) (955,405)
Period ended
September 30, 1996
(unaudited) -
Issuance of shares 120,000 120 29,880 (30,000) - -
Issuance of shares for
debt 240,000 240 329,760 - - 330,000
Net loss - - - - (930,133) (930,133)
Receipt of stock
subscriptions - - - 250 - 250
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1996
(unaudited) 2,390,000 $2,390 $858,610 $(30,000) $(2,386,288) $(1,555,288)
====================================================================================================================================
See accompanying summary of significant accounting policies
and notes to financial statements.
F-5
American Card Technology, Inc.
(a development stage company)
Statements of Cash Flows
====================================================================================================================================
Period from Period from
June 21, 1994 Nine months ended June 21, 1994
(inception) to Year ended September 30, (inception) to
December 31, December 31, --------------------------------- September 30,
1994 1995 1995 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (434,545) $(1,021,610) $(651,816) $(930,133) $(2,386,288)
- -----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation - 11,808 8,468 16,754 28,562
Issuance of debt for services
rendered 72,774 - - - 72,774
Changes in assets and liabilities:
(Increase) decrease in assets:
Inventory - (1,250) (554) (6,842) (8,092)
Prepaid expenses and other
current assets (4,769) (6,006) (8,548) 3,125 (7,650)
Other assets - (1,970) (1,970) (22,773) (24,743)
Increase in liabilities:
Accounts and other
payable 26,984 49,661 85,826 182,735 259,380
Accrued expenses 40,481 33,178 14,079 180,591 254,250
- -----------------------------------------------------------------------------------------------------------------------------------
Total
adjustments 135,470 85,421 97,301 353,590 574,481
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in
operating
activities (299,075) (936,189) (554,515) (576,543) (1,811,807)
- -----------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
See accompanying summary of significant accounting policies
and notes to financial statements.
F-6
American Card Technology, Inc.
(a development stage company)
Statements of Cash Flows
====================================================================================================================================
Period from Period from
June 21, 1994 Nine months ended June 21, 1994
(inception) to Year ended September 30, (inception) to
December 31, December 31, --------------------------------- September 30,
1994 1995 1995 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from investing activities:
Capital expenditures $ (25,640) $ (32,845) $ (30,256) $(17,964) $ (76,449)
Software development costs - (94,608) (364,553) (72,689) (167,297)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities (25,640) (127,453) (394,809) (90,653) (243,746)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock 750 - - 250 1,000
Deferred financing costs - - - (69,622) (69,622)
Borrowing on lines of credit - - - 370,000 370,000
Proceeds from the issuance of notes to
stockholders 357,250 1,041,000 939,000 388,931 1,787,181
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 358,000 1,041,000 939,000 689,559 2,088,559
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 33,285 (22,642) (10,324) 22,363 33,006
Cash, beginning of period - 33,285 33,285 10,643 -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 33,285 $ 10,643 $ 22,961 $ 33,006 $ 33,006
====================================================================================================================================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ - $ - $ - $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ - $ - $ - $ - $ -
====================================================================================================================================
Supplemental noncash investing and
financing information:
Loans totaling $500,000 were converted into capital contributions in 1995.
Notes receivable for $250 were obtained in 1994 and $30,000 in 1996 in connection with the issuance of common stock.
Loans payable of $300,000 and accrued interest of $30,000 were extinguished in 1996 with the issuance of common stock.
====================================================================================================================================
See accompanying summary of significant accounting policies
and notes to financial statements.
F-7
American Card Technology, Inc.
(a development stage company)
Summary of Significant Accounting Policies
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
Organization and Business The financial statements include the
accounts of American Card Technology,
Inc. (a development stage company) (the
"Company") and its majority-owned
Canadian subsidiary, which was formed in
June 1996 and whose results of
operations have been immaterial through
September 30, 1996. All significant
intercompany accounts and transactions
have been eliminated in consolidation.
The Company, a Delaware corporation, was
incorporated on June 21, 1994 to design,
develop and market high security,
flexible multiple application smart card
systems.
The Company is in the development stage
and its activities to date have been
limited to organizational activities
including developing a business plan,
hiring personnel and developing and
enhancing its proprietary smart card
technology and software, and it has only
recently commenced the limited marketing
of its smart card systems. Revenues to
date have been immaterial.
Certain stock splits were effected in
1996 (see Note 7) and reflected
retroactively in these financial
statements.
Use of Estimates In preparing the financial statements in
conformity with generally accepted
accounting principles, management is
required 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
reported period. Actual results could
differ from those estimates.
Fair Value of Financial The carrying amounts of cash, accounts
Instruments payable and accrued expenses approximate
fair value because of the short-term
nature of these items. It was not
considered practical to determine the
current fair value of the notes payable
to stockholders and affiliate.
F-8
American Card Technology, Inc.
(a development stage company)
Summary of Significant Accounting Policies
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
Equipment Equipment is stated at cost, less
accumulated depreciation. Depreciation
is computed over the estimated useful
lives (3 to 5 years) of the assets using
declining balance methods.
Income Taxes The Company was an S corporation
and, accordingly, income or losses were
not subject to corporate income taxes,
rather the amounts of taxable income or
loss were passed through to its
stockholders.
In connection with the formation of a
Canadian subsidiary in June 1996, the
Company became a C corporation. No taxes
resulted from this change in tax status.
Deferred tax assets and/or liabilities
are recorded for the expected future tax
consequences of temporary differences
between the tax basis and financial
reporting basis of assets and
liabilities. At September 30, 1996,
deferred tax assets, relating primarily
to start-up costs deferred for tax
purposes, have been offset by a
valuation reserve since the utilization
of this amount cannot be determined.
Software Development Software development costs for products
Costs and certain product enhancements are
capitalized subsequent to the
establishment of their technological
feasibility (as defined in Statement of
Financial Accounting Standards No. 86)
based upon the existence of working
models of the products which are ready
for initial customer testing. Costs
incurred prior to such technological
feasibility or subsequent to a product's
general release to customers are
expensed as incurred. During 1995, the
technological feasibility of the
Company's basic products was established
and the Company incurred and capitalized
costs totaling $94,608 in 1995 and
$72,689 in 1996. Amortization of these
costs will commence when the products
are marketed and sold.
Research and development expense,
charged to operations and included in
general and administrative expenses in
1994 and 1995 and the nine months ended
September 30, 1995 and 1996,
approximated $99,000, $140,000, $105,000
and $128,000, respectively.
F-9
American Card Technology, Inc.
(a development stage company)
Summary of Significant Accounting Policies
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
Deferred Financing Costs Costs associated with the financing
described in Note 1 have been deferred
and will be amortized, commencing in
January 1997, over the life of the debt.
Interim Financial The financial statements as of September
Information 30, 1996 and for the nine months ended
September 30, 1996 and 1995 are
unaudited but include all adjustments
(consisting of normal recurring
adjustments) that the Company considers
necessary for a fair presentation of its
financial position, results of
operations and cash flows for the
interim periods. Results for the interim
period ended September 30, 1996 are not
necessarily indicative of results for
the entire year.
Pro forma Loss Per Share Pro forma loss per share is computed
based upon the weighted average number
of shares of common stock and common
stock equivalents outstanding, as
adjusted for the effects of applying
Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 83,
using the treasury stock method.
Pursuant to SAB No. 83, common stock
issued by the Company at prices less
than the initial public offering price
during the twelve months preceding the
initial filing of the registration
statement of which these financial
statements form a part, together with
the number of shares of common stock
subject to options and warrants issued
during such period having exercise
prices below the initial public offering
price, have been treated as outstanding
for all periods presented. The shares
and warrants issued in January 1997
(see Note 9) havebeen included in the
calculation.
Supplemental pro forma loss per share is
$(.34) and $(.29) for the year ended
December 31, 1995 and nine months ended
September 30, 1996, respectively.
Supplemental pro forma loss per share is
computed by dividing net loss (as
adjusted by approximately $37,000 for
the year ended December 31, 1995 and
$83,000 for the nine months ended
September 30, 1996, the amount of
interest expense on debt repaid with the
proceeds of the January 1997 private
placement (see Note 9) and the
conversion of debt to equity (see Note
7)), by the weighted average number of
shares that would have been outstanding
(2,912,000) including the shares to be
sold in connection with the Company's
initial public offering to fund debt
repayments.
F-10
American Card Technology, Inc.
(a development stage company)
Summary of Significant Accounting Policies
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
Historical loss per share data is not
considered meaningful and, therefore,
not presented.
Recent Accounting SFAS No. 121 - In March 1995, the
Standards Financial Accounting Standards Board
issued Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed
of", which requires that certain
long-lived assets be reviewed for
impairment whenever events or changes in
circumstances indicate that the carrying
amount may not be recoverable. The
adoption of this pronouncement in 1996
did not have a significant effect on the
Company's financial statements.
SFAS No. 123 - In October 1995, the
Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for
Stock-Based Compensation", which allows
the choice of either the intrinsic value
method or the fair value method of
accounting for employee stock options.
The Company has selected the option to
continue the use of the current
intrinsic value method in 1996.
F-11
American Card Technology, Inc.
(a development stage company)
Notes to Financial Statements
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
1. Basis of Presentation The accompanying financial statements
have been prepared assuming the Company
will continue as a going concern. This
basis of accounting contemplates the
recovery of the Company's assets and the
satisfaction of its liabilities in the
normal course of operations. Since
inception, the Company has been involved
in organizational activities. The
Company's ultimate ability to attain
profitable operations is dependent upon
obtaining additional financing adequate
to complete its development activities,
and to achieve a level of sales adequate
to support its cost structure. Through
December 31, 1995, the Company has
incurred losses totaling $1,456,000 and
at December 31, 1995 has a deficiency in
working capital of $1,247,000. These
circumstances raise substantial doubt
about the Company's ability to continue
as a going concern. The financial
statements do not include any
adjustments that might result from the
outcome of this uncertainty.
The Company has entered into a letter of
intent with an underwriter for a private
placement of debt and equity securities
and a subsequent initial public offering
of equity securities. In January 1997,
the private placement was consummated
(see Note 9) and the Company received
net proceeds of $1,020,000. Certain debt
was converted to equity upon
consummation of the private placement
(see Note 7). If the Company is not
successful in consummating the proposed
initial public offering, the Company
intends to fund future development
activities by obtaining additional funds
from investors. However, there can be no
assurance that the Company will be
successful in consummating its plans, or
that such plans, if consummated, will
enable the Company to attain profitable
operations or continue as a going
concern.
2. Lines of Credit At September 30, 1996, the Company had
lines of credit with banks having an
aggregate borrowing availability of
$450,000, expiring in July 1997, with
outstanding borrowings of $370,000.
Subsequent to September 30, 1996, the
balance of the lines was borrowed. The
loans bear interest at the respective
banks' prime interest rates. Borrowings
of $150,000 under the lines of credit
are secured by certificates of deposit
of one of the Company's stockholders
held by the banks. Another stockholder
has guaranteed the balance of the loans.
F-12
American Card Technology, Inc.
(a development stage company)
Notes to Financial Statements
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
Subsequent to September 30, 1996, the
Company borrowed $150,000 from banks.
The amounts are payable on demand, bear
interest at prime interest rate and are
secured by certificates of deposit of
one of the Company's stockholders.
In January 1997, the Company obtained a
commitment for a new line of credit
facility for $300,000 with one of the
existing banks. The loan will bear
interest at 8.75% and the Company will
be required to maintain a minimum daily
checking account balance of $350,000. No
amounts have been borrowed to date.
3. Notes Payable to Notes payable to stockholders total
Stockholders and $675,024 at December 31, 1995 and
Affiliate $1,059,955 at September 30, 1996, bear
interest at 10% per annum (5.63% in
1995) and are payable on demand. These
notes have been used to finance
operations. Notes totaling $500,000 were
converted to capital in 1995. Loans
totaling $550,000 were converted to
equity in January 1997 and the balance
of the loans will be repaid from the
proceeds of the proposed initial public
offering (see Notes 7 and 9).
Notes payable to an affiliate total
$296,000 at December 31, 1995 and $-0-
at September 30, 1996, bear interest at
10% per annum (6.97% in 1995) and were
payable on demand (see Note 7).
Interest expense to stockholders and
affiliate totaled $6,996 and $37,236 for
the periods ended December 31, 1994 and
1995, respectively, and $23,703 and
$89,939 for the periods ended September
30, 1995 and 1996, respectively.
4. Other Payable In 1995, the Company acquired a license
for certain technology rights. The total
cost was $296,000; $148,000 of which was
paid upon signing the agreement and
$148,000 which was payable in various
amounts through December 31, 1996. The
Company has paid $20,000 under the
agreement through September 30, 1996.
The recoverability of this fee was in
question and, in 1996, the Company
determined that it would not utilize the
technology acquired in this license and
terminated the agreement and future
obligations thereunder. The licensor
agreed on December 2, 1996 to waive all
future obligations, including the
$128,000 remaining balance of the
license fee.
F-13
American Card Technology, Inc.
(a development stage company)
Notes to Financial Statements
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
In 1995, the Company wrote off the
portion of the license fee paid in cash
($148,000) and recorded an asset and
liability for the remaining balance due
under the agreement. In 1996, the asset
was written off and the liability was
reduced by $128,000. The balance
($20,000) was expensed.
5. Related Party In addition to the notes payable to
Transactions stockholders and an affiliate (see Note
3), the Company has an agreement to pay
a fee of $1,000 per month to a company
owned by the Company's chief executive
officer (who is a major stockholder).
The agreement covers accounting and
various other general and administrative
services performed for the Company. The
agreement commenced July 1, 1994 and
concluded in January 1997 upon
consummation of the private placement.
At December 31, 1995 and September 30,
1996, $18,000 and $27,000, respectively,
are payable to this affiliate for these
services.
6. Commitment The Company rents office space in
Atlanta, Georgia. The lease was
originally to cover a period through
2000; however, in 1996, the lease was
changed to a month-to-month lease.
Commencing December 1996, the Company
entered into a new lease which provides
for annual rent of approximately $36,000
through January 31, 2000.
Rent charged to operations was $200 and
$15,582 in 1994 and 1995, respectively.
7. Stockholders' Deficit The Company's founders capitalized the
Company in 1994 with $1,000. Certain
stockholders either individually or
through trusts have loaned funds to the
Company since its incorporation. In
1995, loans totaling $500,000 were
converted to capital. In connection with
the consummation in January 1997 of the
private placement for the financing,
loans totaling $550,000 were converted
to 110,000 shares of common stock ($5
per share).
In January 1996, the Company sold
120,000 shares of stock for notes
totaling $30,000. The notes bear
interest at 8% per annum and are payable
on July 1, 1997.
F-14
American Card Technology, Inc.
(a development stage company)
Notes to Financial Statements
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
In July 1996, the Company issued 240,000
shares of common stock to retire the
$300,000 note payable to an affiliate and
related accrued interest of $30,000
($1.375 per share) (see Note 3).
On January 2, 1996, the Company effected
a split of its common stock of
4.06-for-1. On December 11, 1996, the
Company (i) increased its authorized
shares of common stock from 1,500 to
20,000,000, (ii) authorized 1,000,000
shares of preferred stock to be issued at
the discretion of the Board of Directors,
(iii) changed the common stock from no
par value to $.001 par value, and (iv)
effected a split of its common stock of
2,500-for-1. All share amounts have been
retroactively adjusted to reflect the
stock splits.
8. Major Customers The Company's sales are to two customers
and Supplier for all periods presented.
The Company has a contract with a
supplier to provide all of the Company's
requirements for smart cards and smart
card hardware. The loss of this contract
or substantial price increases could
materially, adversely affect the Company.
Failure or delay by such manufacturer in
supplying cards to the Company on
favorable terms could also adversely
affect the Company.
9. Subsequent Events (a) The Company plans to enter into
employment agreements with three of
its executive officers and one
additional employee, effective upon
the consummation of the planned
initial public offering. The
agreements are for two or three year
terms and provide for aggregate
minimum annual salaries of $445,000
in the first year, $545,000 in the
second year, and $125,000 in the
third year, plus bonuses. Under
certain conditions, including death
or disability of the individual, or
change in control of the Company,
certain additional amounts may be
payable to the individuals.
(b) In December 1996, the Company
granted options to acquire 100,000
shares of its common stock to an
affiliate. The options have an
exercise price of $5 a share and a
10 year term.
F-15
American Card Technology, Inc.
(a development stage company)
Notes to Financial Statements
(Information as of September 30, 1996 and for the periods
ended September 30, 1995 and 1996 is unaudited)
================================================================================
(c) In December 1996, the Company
adopted stock option plans for its
employees and directors. The
aggregate number of shares
authorized under these plans is
300,000. No options have been
granted to date.
(d) In January 1997, the Company
received $1,020,000, net of costs of
$230,000, through a private
placement of 25 units (the "Units"),
at a cost of $50,000 per Unit. Each
Unit consisted of: (i) an unsecured
nonnegotiable promissory note in the
principal amount of $50,000 bearing
interest at the rate of 9% per annum,
payable semi-annually in arrears, and
maturing on the earlier date to
occur of: (a) the first anniversary
of the initial closing (the "Initial
Bridge Closing") of such bridge
financing; and (b) the consummation
of an initial public offering of the
Company's securities registered with
the Securities and Exchange
Commission pursuant to the
Securities Act of 1933, as amended;
(ii) 5,000 shares of the common stock
of the Company; and (iii) warrants
exercisable until the fifth
anniversary of the Initial Bridge
Closing to purchase 25,000 shares
of Common Stock (the "Bridge Warrant
Shares") at an exercise price of
$4.00 per Bridge Warrant Share,
subject to adjustment in certain
circumstances. At the time of the
financing, notes payable to
stockholders totaling $550,000 (see
Note 3) were converted into 110,000
shares of the Company's common
stock.
F-16
===============================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or the Underwriter. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
security other than the securities offered by this Prospectus, or an offer to
sell or a solicitation of an offer to buy any security by any person in any
jurisdiction in which such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, imply that the information in this Prospectus is correct as of
any time subsequent to the date of this Prospectus.
---------------
TABLE OF CONTENTS
Page
----
Prospectus Summary.......................................................3
Risk Factors.............................................................8
Use of Proceeds.........................................................18
Dividend Policy.........................................................19
Dilution ...............................................................20
Capitalization..........................................................21
Selected Financial Data.................................................22
Plan of Operation.......................................................23
Business ...............................................................28
Management..............................................................37
Principal Stockholders..................................................43
Certain Transactions....................................................44
Description of Securities...............................................46
Shares Eligible for Future Sale.........................................50
Underwriting............................................................51
Legal Matters...........................................................53
Experts.................................................................53
Additional Information..................................................53
Index to Financial Statements..........................................F-1
---------------
Until __________, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
===============================================================================
===============================================================================
AMERICAN CARD TECHNOLOGY, INC.
1,500,000 Shares of Common Stock
and
Redeemable Warrants to Purchase
1,500,000 shares of Common Stock
---------------
PROSPECTUS
---------------
Whale Securities Co., L.P.
, 1997
===============================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 102(b)(7) of the Delaware General Corporation Law ("Delaware Law")
permits a provision in the certificate of incorporation of each corporation
organized thereunder eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director. The
Certificate of Incorporation of the Registrant eliminates the personal liability
of directors to the fullest extent permitted by Delaware Law.
Section 145 of Delaware Law ("Section 145"), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by them in
connection with any nonderivative suit or proceeding, if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interest of the corporation, and, with respect to a criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
With respect to derivative actions, Section 145 permits a corporation to
indemnify its officers, directors, employees and agents against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of such action or suit, provided such person meets the
standard of conduct described in the preceding paragraph, except that no
indemnification is permitted in respect of any claim where such person has been
found liable to the corporation, unless the Court of Chancery or the court in
which such action or suit was brought approves such indemnification and
determines that such person is fairly and reasonably entitled to be indemnified.
Reference is made to Article V of the First Amended and Restated Certificate
of Incorporation, and Article VII of the By-Laws, as amended, of the Registrant
for the provisions which the Registrant has adopted relating to indemnification
of officers, directors, employees and agents.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Reference is also made to Section 7 of the Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement.
In addition to the foregoing, the Registrant maintains a directors and
officers liability insurance policy insuring directors and officers of the
Registrant against certain liabilities.
II-1
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, in connection with the sale of the
Common Stock and Warrants being registered. All amounts are estimated, except
the SEC registration fee, the NASD filing fee and the Nasdaq listing fee.
SEC registration fee.......................................................$ $5,968
NASD filing fee............................................................. 2,469
Nasdaq listing fee.......................................................... 10,000
Boston Stock Exchange listing fee........................................... *
Underwriter's non-accountable expense allowance ............................ 229,500**
Underwriter's consulting fee................................................ 60,000
Legal fees and expenses..................................................... *
Blue Sky expenses and legal fees............................................ *
Printing and engraving expenses............................................. *
Registrar and transfer agent
fees and expenses......................................................... *
Accounting fees and expenses................................................ *
Miscellaneous fees and expenses............................................. *
-----
TOTAL.............................................................. $650,000
========
- -------------------
* To be filed by amendment.
** Assumes no exercise of the Underwriter's over-allotment option.
Item 26. Recent Sales of Unregistered Securities
Since its inception in June 1994, the Registrant has issued securities
without registration under the Securities Act of 1933, as amended (the
"Securities Act"), in the following transactions (in each case giving
retroactive effect to all subsequent stock splits):
The Registrant issued an aggregate of 2,030,000 shares of Common Stock
in June 1994 to its four founders for a purchase price of $250. In January 1996,
the Registrant sold 100,000 shares of Common Stock at a price of $.25 per share
to a private investor who subsequently became a director at the Company in
November 1996. In January 1996, the Registrant sold to a second private investor
20,000 shares of common stock at a price of $.25 per share.
In July 1996, loans to the Registrant in the aggregate principal amount
of $300,000 (plus interest) made by the President, Chief Executive Officer and
sole director of a subsidiary of the Registrant were converted, pursuant to an
agreement between the Company and such individual, into an aggregate of 240,000
shares of Common Stock.
In December 1996, the Registrant issued to an entity owned by certain
affiliates and directors of the Registrant an option to purchase 100,000 shares
of Common Stock at an exercise price of $5.00 per share.
In January 1997, the Registrant issued 25 Units, with each Unit
consisting of 5,000 shares of Common Stock, warrants to purchase 25,000 shares
of Common Stock and a promissory note in the principal amount of $50,000. The
Units were purchased by 23 accredited investors (including certain officers and
directors of the Registrant) in a private placement (the "Bridge Financing").
II-2
In connection with the Bridge Financing, in January 1997, loans in an
aggregate principal amount of $550,000 by the founders of the Registrant were
converted into an aggregate of 110,000 shares of Common Stock.
The sales and issuances of the securities described above were deemed
to be exempt from registration under the Securities Act in reliance upon Section
4(2) thereof as transactions not involving a public offering and/or pursuant to
regulations promulgated under the Securities Act.
Item 27. Exhibits
The following exhibits are filed as part of this registration
statement:
Exhibit
Number Description of Document
- ---------- -----------------------
1.1 Form of Underwriting Agreement between Registrant and Whale Securities Co., L.P.
3.1 First Amended and Restated Certificate of Incorporation of Registrant.
3.2 By-Laws of Registrant.
4.1 Form of Certificate for Common Stock.*
4.2 Form of Public Warrant Agreement between the Registrant, American Stock Transfer & Trust
Company and Whale Securities Co., L.P.
4.3 Form of Public Warrant Certificate.*
4.4 Form of Underwriter's Warrant Agreement.
5.1 Opinion of Zimet, Haines, Friedman & Kaplan.*
10.1 Form of loan agreement to be entered into by the Registrant and The First National Bank of
Suffield.*
10.2 Sublease dated as of November 4, 1996 between Wilson & Associates International, Inc. and the
Registrant re Atlanta office space.*
10.3 Option Agreement between the Registrant and Shreveport Acquisition Corp.
10.4 Form of Employment Agreement between the Registrant and Lawrence O. Perl.
10.5 Form of Employment Agreement between the Registrant and Raymond Findley, Jr.
10.6 Form of Employment Agreement between the Registrant and Robert H. Dixon.
10.7 Form of Employment Agreement between the Registrant and Peter J. Quadagno.
10.8 1996 Stock Option Plan.
10.9 Form of stock option agreement in respect of 1996 Stock Option Plan.*
10.10 Nonemployee Directors' Stock Option Plan.
II-3
10.11 Form of stock option agreement in respect of Nonemployee
Directors' Stock Option Plan.*
23.1 Consent of Zimet, Haines, Friedman & Kaplan (included in its
opinion to be filed as Exhibit 5.1).
23.2 Consent of BDO Seidman, LLP.
24.1 Power of Attorney (see page II-6)
27.0 Financial Data Schedule
- ------------------
* To be filed by amendment.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes to:
(1) file, during any period in which it offers of sells securities, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3)
of the Act,
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the Registration Statement, and
(iii) include any additional or changed material information
on the plan of distribution;
(2) for determining liability under the Act, treat such post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering;
and
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
The Registrant has agreed to indemnify the Underwriter and its
officers, directors, partners, employees, agents and controlling persons as to
any losses, claims, damages, expenses or liabilities arising out of any untrue
statement or omission of a material fact contained in the registration
statement. The Underwriter has agreed to indemnify the Registrant and its
directors, officers and controlling persons as to any losses, claims, damages,
expenses or liabilities arising out of any untrue statement or omission in the
registration statement based on information relating to the Underwriter
furnished by it for use in connection with the registration statement.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit
II-4
to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The Registrant hereby undertakes to provide to the Underwriter at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has authorized this Registration
Statement to be signed on its behalf by the undersigned in Marietta, Georgia on
February 3, 1997.
AMERICAN CARD TECHNOLOGY, INC.
By /s/ Raymond Findley, Jr.
Raymond Findley, Jr.
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Lawrence O. Perl and Raymond Findley,
Jr., and each of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments, including
post-effective amendments, to this Registration Statement, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or his or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form SB-2 has been signed below by the following
persons in the capacities and on the dates stated:
Name Title Date
- ---- ---- ----
/s/ Lawrence O. Perl Chief Executive Office February 3, 1997
- ------------------------ and Director
Lawrence O. Perl (Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
.
/s/ Raymond Findley, Jr President, Chief Operating February 3, 1997
- ------------------------ Officer and Director
Raymond Findley, Jr.
/s/ Harold Rothstein Director February 3, 1997
- ------------------------
Harold Rothstein
/s/ Raymond Roncari Director February 3, 1997
- ------------------------
Raymond Roncari
/s/ Stephen S. Weisglass Director February 3, 1997
- ------------------------
Stephen S. Weisglass
II-6
EXHIBIT INDEX
Exhibit
Number Description of Document
- ---------- -----------------------
1.1 Form of Underwriting Agreement between Registrant and Whale Securities Co., L.P.
3.1 First Amended and Restated Certificate of Incorporation of Registrant.
3.2 By-Laws of Registrant.
4.1 Form of Certificate for Common Stock.*
4.2 Form of Public Warrant Agreement between the Registrant, American Stock Transfer & Trust
Company and Whale Securities Co., L.P.
4.3 Form of Public Warrant Certificate.*
4.4 Form of Underwriter's Warrant Agreement.
5.1 Opinion of Zimet, Haines, Friedman & Kaplan.*
10.1 Form of loan agreement to be entered into by the Registrant and The First National Bank of
Suffield.*
10.2 Sublease dated as of November 4, 1996 between Wilson & Associates International, Inc. and the
Registrant re Atlanta office space.*
10.3 Option Agreement between the Registrant and Shreveport Acquisition Corp.
10.4 Form of Employment Agreement between the Registrant and Lawrence O. Perl.
10.5 Form of Employment Agreement between the Registrant and Raymond Findley, Jr.
10.6 Form of Employment Agreement between the Registrant and Robert H. Dixon.
10.7 Form of Employment Agreement between the Registrant and Peter J. Quadagno.
10.8 1996 Stock Option Plan.
10.9 Form of stock option agreement in respect of 1996 Stock Option Plan.*
10.10 Nonemployee Directors' Stock Option Plan.
10.11 Form of stock option agreement in respect of Nonemployee
Directors' Stock Option Plan.*
23.1 Consent of Zimet, Haines, Friedman & Kaplan (included in its
opinion to be filed as Exhibit 5.1).
23.2 Consent of BDO Seidman, LLP.
24.1 Power of Attorney (see page II-6)
27.0 Financial Data Schedule
- ------------------
* To be filed by amendment.