MEMORANDUM OF UNDERSTANDING
To: Smart Cards Integrators, Inc.
From: Rapidtron, Inc.
Date: July 19, 2004
cc: Raymond A. Lee
Mark Jacobs
Re: Rapidtron Acquisition of Assets of Smart Card Integrators, Inc.
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This Memorandum of Understanding (this "MOU") sets forth the terms and
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conditions of the acquisition by Rapidtron, Inc., a Nevada corporation
("RAPIDTRON") of all or substantially all of the equity stock of Smart Card
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Integrators, Inc., a California corporation (the "SCI") issued and outstanding
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as of the date of this MOU (the "SCI STOCK") from the holders of the SCI Stock
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(the "SELLERS"), and SCI's and Rapidtron's agreement regarding Rapidtron's due
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diligence investigation of the Business (as defined below).
I. THE BUSINESS
Rapidtron and SCI acknowledge that the parties intend to minimize the tax
obligations of SCI and the owners of the SCI Stock and to minimize any
registration requirements under the Securities Act of 1933 in connection with
the offer and sale of common stock of Rapidtron as consideration for the SCI
Stock. The structure of the acquisition of the Business set forth in this MOU
is based upon the following assumptions: (1) The exchange of SCI Stock for
"Preferred Stock" (defined below) qualifies as a tax-free reorganization under
Section 368 of the Internal Revenue Code, (2) none of the holders of SCI Stock
will be entitled to dissenter's rights as a result of the transaction, and (3)
the offer and sale of the Preferred Stock and Warrants (defined below) qualifies
under an exemption from registration provided by Section 4(2) of the Securities
Act of 1933 and Regulation D, Rule 506 promulgated thereunder, and any
applicable state law. If any of these assumptions is inaccurate, then SCI and
Rapidtron shall in good faith mutually agree to modify the terms as may be
necessary to achieve the foregoing goals. The parties intend to close the
transactions contemplated herein on or before November 30, 2004 (the "Closing
Date") If any Rapidtron underwriter or placement agent requires additional
time, the Closing Date may be extended by Rapidtron for up to sixty days.
Rapidtron and SCI further acknowledge that the on-going business operations
of SCI involve the design, development, and marketing of smart card technology,
products, systems and related integration services (collectively, the
"BUSINESS"). Upon execution hereof until the Closing Date or earlier termination
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of this MOU, none of the SCI Stock presently owned by any officer or director of
SCI shall be sold, pledged, encumbered, transferred, or disposed of in any way,
whether voluntarily, involuntarily, or by operation of law, without the prior
written consent of Rapidtron, and SCI shall not issue any common stock or other
equity securities, or any derivatives thereof, or any right to acquire any such
securities, without the prior written consent of Rapidtron.
II. DUE DILIGENCE INVESTIGATION
1. License. Upon SCI countersigning this MOU and delivering it to
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Rapidtron (the "EFFECTIVE DATE"), SCI grants a license (the "SCI LICENSE") to
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Rapidtron and Rapidtron's employees, agents, contractors, lawyers and other
representatives (a) to examine the books and records of SCI and its
subsidiaries, and (b) to enter upon and inspect physically the various locations
at which SCI and its
subsidiaries conduct their business, including environmental investigations of
all of the real property, all during reasonable times. Upon the Effective Date,
Rapidtron grants a license (the "RPDT LICENSE") to SCI and SCI's employees,
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agents, contractors, lawyers and other representatives and SCI's employees,
agents, contractors, lawyers, and other representatives (a) to examine the books
and records of Rapidtron and its subsidiaries , and (b) to enter upon and
inspect physically the various locations at which Rapidtron and its subsidiaries
conduct their business, including environmental investigations of all of the
real property, all during reasonable times. The SCI License and RPDT License,
together with all reports, audits and valuations obtained pursuant thereto,
shall be subject to the existing confidentiality agreement between the parties.
The term of the SCI License and the RPDT License shall be ninety (90) calendar
days following the receipt of the Documents and Materials (defined below) (the
"DUE DILIGENCE PERIOD"). The Due Diligence Period may be extended by mutual
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agreement of the parties.
2. Conduct of Investigation. In examining such books and records,
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entering upon and inspecting such locations and otherwise conducting the
respective party's due diligence investigation of the Business and the Stock,
Rapidtron and SCI agree not to unreasonably interfere with the other party's
conduct of its business. Any and all costs of such due diligence investigation
shall be borne and paid the party performing due diligence, and each party shall
repair any damage to any property caused thereby.
3. Due Diligence.
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A. Within fifteen (15) business days following the Effective Date,
each of Rapidtron (as to both Rapidtron and its subsidiaries) and SCI (as to
SCI) shall deliver to the other a complete copy of the following (collectively,
the "DOCUMENTS AND MATERIALS"):
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(i) Articles of Incorporation and Bylaws;
(ii) Corporate minute book;
(iii) "Material Contracts" (defined below), including a reasonably
detailed description of any oral Material Contracts;
(iv) Unaudited financial statements for the last three fiscal years plus
any interim period; and
(v) Any and all other internal reports, studies, analysis or other
documents pertaining to the business of the respective Companies.
Rapidtron and SCI shall examine and review such Documents and Materials and
otherwise investigate the condition of each of SCI, Rapidtron, and the Rapidtron
subsidiaries, the stock and the business, to the extent deemed necessary and
appropriate. As used herein, "MATERIAL CONTRACT" shall mean the burden and
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benefit of and the right, title and interest of SCI and/or Rapidtron in, to and
under all trade and non-trade contracts, engagements or commitments, whether
written or oral, any current proposals, offers and requests for proposals,
either (a) between SCI and/or Rapidtron and any of its officers, directors or
shareholders, or their affiliates, (b) between SCI and/or Rapidtron and any
other party, including any Seller, or (c) to which SCI and/or Rapidtron or any
of its subsidiaries is entitled and whereby SCI and/or Rapidtron or such
subsidiary is or could be obligated to pay or entitled to receive the sum of
$10,000 or more (in any form) including, without limitation, any partnership or
joint venture agreement, options, warrants, pension plans, profit sharing plans,
bonus plans, loan agreements, security agreements, indemnities and guarantees,
leases, confidentiality agreements, licenses, any agreements with employees,
licensees, managers, accountants, suppliers, agents, distributors, officers,
directors, attorneys or others, any agreement under which the consequences of
default or termination could have a material adverse effect on the business or
the stock of SCI and/or Rapidtron, or other agreements which cannot be
terminated without liability on not more than one month's notice. For purposes
of this subparagraph A., the term "Rapidtron" shall mean to include Rapidtron
and each of its subsidiaries.
B. Within five business days following the Effective Date,
Rapidtron shall deliver to SCI a questionnaire for each Seller to complete and
execute regarding such Seller's qualifications as an accredited or qualified
investor (the "INVESTOR QUESTIONNAIRE"). Within ten (10) business days
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following
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receipt, SCI shall use its best efforts to cause each Seller to return to
Rapidtron the completed and signed Investor Questionnaire.
4. Definitive Agreement. Promptly following the Effective Date,
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Rapidtron shall prepare, and Rapidtron and SCI, for and on behalf of Sellers,
shall negotiate diligently and in good faith the terms and conditions of, a
definitive written agreement for the purchase and sale of the SCI Stock (the
"PURCHASE AGREEMENT"), based on the parties' understanding and intention as set
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forth in this MOU. This MOU is binding upon Rapidtron and Sellers only to the
extent of the provisions set forth in this Article II, does not constitute an
offer to purchase or sell the Business or the SCI Stock, and sets forth only the
parties' understanding and intention regarding the License and the potential
purchase and sale of the Business and the Stock.
5. Dividends. Upon execution hereof until the Closing Date, neither
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Rapidtron nor SCI shall pay or declare any dividends, either in cash or in-kind.
6. Conduct of Business. Upon execution hereof until the Closing Date:
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(a) SCI will manage, maintain and operate the Business in a manner not
dissimilar to the manner in which it has historically operated the Business; (b)
Rapidtron and its subsidiaries will manage, maintain and operate their
businesses in a manner not dissimilar to the manner in which they have
historically operated their businesses; and (c) neither SCI nor Rapidtron
(including any subsidiary of Rapidtron) shall do either of the following without
the prior written consent of the other party: (i) sell, lease, transfer, or
assign any material assets, tangible or intangible, outside the ordinary course
of business, or (ii) enter into or terminate any Material Contract with any
shareholder and/or affiliate, including without limitation any employment
contracts; provided, however, Rapidtron shall be permitted to raise additional
capital through the sale of securities on terms Rapidtron deems appropriate in
its sole and absolute discretion, to engage new professional service providers
to comply with SEC rules, and to enter into other Material Contracts as may be
advisable to complete its due diligence contemplated herein.
7. Attorneys' Fees and Costs. Sellers, SCI and Rapidtron shall each
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bear their own attorneys fees and costs in connection with the proposed
transaction, provided, however, that Rapidtron shall, at Rapidtron's sole cost
and expense, pay for the cost and expense of the audit of SCI's financial
statements and/or of a fairness opinion required to complete the transaction.
8. Exclusivity. Upon the mutual execution of this MOU until the
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Closing Date, SCI hereby grants to Rapidtron the exclusive right to investigate
the proposed transactions contemplated herein, including without limitation the
acquisition of SCI Stock by Rapidtron, the proposed merger and the acquisition
of the Business by Rapidtron, and effective simultaneously therewith, Rapidtron
hereby grants to SCI the exclusive right to investigate the proposed
transactions contemplated herein.
III. PURCHASE AND SALE
1. Purchase Price. The purchase price for all of the SCI Stock will be
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5,000,000 shares of Series A Convertible Preferred Stock (the "PREFERRED STOCK")
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and warrants to purchase a total of 1,000,000 shares of common stock for a
period of five years after closing at an exercise price of $1.25 per share (the
"WARRANTS"), both to be payable at closing to the Sellers as determined by
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Sellers. SCI shall use its best efforts to cause all of the shareholders of SCI
to participate in the exchange. The Preferred Stock shall have the following
rights and privileges:
A. Voting. In the aggregate, the Preferred Stock (including any
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common shares derived from the conversion of any of such shares into common
shares) shall be entitled to that number of votes which results in the Preferred
Stock (including any common shares derived from the conversion of the preferred
shares) maintaining the percentage in voting control of RPTD as set forth in
Table "C, column X".
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B. Dividend. The Preferred Stock shall, in the aggregate, be
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entitled to an annual dividend in the form of common shares. The amount of the
dividend shall be equal to two and two-thirds percent (2.67%) of the total
number of common shares then issued and outstanding.
C. Conversion. The Preferred Stock shall be convertible into
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common shares by election of the holders at any time beginning 105 days
following the fiscal year ending December 31, 2005 and ending three (3) years
thereafter. Each share of common stock issued in connection with such
conversion shall hereinafter be referred to as a "New Common Share". The
aggregate number of Preferred shares shall be convertible into that number of
New Common Shares that will, after conversion, when added to the common shares
issued as dividends to the Preferred Stock shareholders, equal that percentage
set forth in column "Y", below, of the sum of the New Common Shares, plus all
other common shares then issued and outstanding. The applicable Gross Revenue
amount shall be based upon the highest annual gross revenue of SCI or the SCI
operations as disclosed on any audited financial statement of Rapidtron
previously filed with the SEC.
TABLE "C"
GROSS REVENUE X Y
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5 million or more 32.33% 35.00%
4.5 million up to $5 million 31.33% 34.00%
4.0 million up to $4.5 million 30.33% 33.00%
3.5 million up to $4.0 million 29.34% 32.00%
3.0 million up to $3.5 million 28.34% 31.00%
Less than $3.0 million 27.34% 30.00%
As an illustration, assume that there are now 20,000,000 common shares of
RPTD outstanding and in December of 2004, RPTD sells 10,000,000 common shares
for a purchase price of $1.00 per share, thereby increasing the total number of
issued and outstanding common shares to 30,000,000. Assume that on May 1, 2005,
the Preferred Stock shareholders exercise their right to convert their shares
and that for the fiscal year ended December 31, 2004, SCI had gross revenue of
$5,100,000. In that case, the Preferred Stock would be convertible into
16,153,846 shares of common stock (less the number of shares of common stock
theretofore issued to the Preferred Stock shareholders as dividends). If, at
any particular time, some but not all Preferred Stock shareholders shall elect
to convert their shares, or any Preferred Stock shareholder shall elect to
convert some but not all of his or her shares, the conversion rate formula
described above shall be proportionately applied.
All outstanding shares of Preferred Stock will be automatically converted
105 days following the fiscal year ending December 31, 2008.
2. Merger & Exchange of Stock. Upon closing, SCI shall either (a)
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merge into a newly formed, subsidiary corporation of Rapidtron formed in the
State of California and SCI shall survive the merger, or (b) become a subsidiary
corporation of Rapidtron (either corporation, the "SURVIVING COMPANY"). Each
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share of SCI Stock participating in the exchange shall be exchanged for the
number of shares of Preferred Stock determined by dividing the total number of
shares of Preferred Stock by the total issued and outstanding shares of SCI
Stock (whether or not held by an SCI shareholder participating in the exchange)
(such quotient, the "EXCHANGE RATIO"). Upon closing, Rapidtron shall deliver to
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each Seller participating in the exchange, stock certificates for their
respective share of Preferred Stock. Any remaining shares of Preferred Stock
shall be returned to treasury.
3. Employment. Beginning as of closing and for a period of not less
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than five (5) years thereafter, , Rapidtron shall offer to employ Francois A.
Allal ("FAA") as President and a director of Rapidtron, and Ron Halvas ("RLH"),
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as General Manager and Vice-Chairman of the Board of Directors of Rapidtron, and
John Creel ("JC") as Chief Executive Officer and Chairman of the Board of
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Directors, each
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with equivalent employment terms and conditions, except that the salary of FAA
and RLH shall be $200,000 per year, and the salary of JC shall be $125,000, with
JC eligible for the first $75,000 bonus paid to any one of the three officers,
performance reviews semi-annually, and other terms and conditions equal to or
greater than any other employee or director. If such offer is accepted, Ron and
Francois shall also be engaged for the same five (5) year period as the
president and chief operating officer, respectively, and as the sole directors,
of SCI or its surviving entity. Notwithstanding the foregoing, Ron Halvas shall
have the right to resign from any one or more of the foregoing positions at any
time upon not less than thirty (30) days prior written notice to Rapidtron.
4. Directors. The board of directors will initially consist of five
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directors: FAA, RLH, JC, Steve Meineke, and one additional director either (a)
appointed by any recent or prospective securities underwriter or placement agent
which may so request and approved by the current directors or, if not, (b)
chosen by the other four directors, each until the next annual meeting of the
shareholders. [For purposes of the public offering we may need two independent
directors, one of whom is a "financial expert" to be chairman of the audit
committee].
5. Omitted
6. Conditions Precedent.
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6.1 Satisfactory Due Diligence. Rapidtron's purchase of the SCI
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Stock shall be contingent upon (a) Rapidtron's satisfactory inspection of the
Business; (b) availability of satisfactory financing, new capital, or
combination of both for Rapidtron; (c) Sellers' tender of 100% of the total
outstanding shares of common stock in SCI at the time of the closing. Rapidtron
shall have the right to waive any one or more of the foregoing conditions in
writing prior to closing. The obligation of the Sellers to consummate the sale
of their shares as contemplated herein shall be subject to SCI's satisfactory
approval of the books and records of Rapidtron and its subsidiaries during the
Due Diligence Period.
6.2 Investment in Rapidtron. SCI's obligation to close the
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Purchase Agreement will be contingent upon Rapidtron raising at least
$10,000,000 of investment gross proceeds into Rapidtron at or before the Closing
Date (the "INVESTMENT"). Immediately following Closing, $5,000,000 of such
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funding or fundings shall be contributed to SCI and used to pay liabilities of
SCI as provided in the definitive agreement for covenants not to compete and
similar obligations. The remaining proceeds will be divided between SCI and
Rapidtron as follows: $2,000,000 for use by Rapidtron Delaware, $2,000,000 for
use by SCI, and $1,000,000 for use by the parent company Rapidtron Nevada, as
determined by the board of directors.
6.3 Loan to SCI. SCI's obligation to enter into the Purchase
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Agreement shall be contingent upon Rapidtron loaning to SCI $350,000 (the
"LOAN") within thirty (30) days of execution of this MOU. The Loan shall be
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evidenced by a promissory note and shall be due on or before November 30, 2004,
or such later date that the purchase and sale contemplated herein shall be
extended to close. Interest shall accrue at the applicable federal rate for
mid-term loans effective as of the date of the Loan. Subject to Section 8
below, if SCI is not in default hereunder, and the closing fails to timely occur
under the Purchase Agreement (with time of the essence) solely as a result of
the failure of Rapidtron to perform, including the failure of Rapidtron to
satisfy its due diligence or to raise sufficient capital pursuant to Section 6.2
above, then the Loan shall be forgiven as liquidated damages to SCI.
7. Assignment. Neither party will transfer or assign any interest
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under this MOU or the Purchase Agreement without the prior written consent of
the other party. Subject to the limitations set forth in this Section 7, this
MOU and the Purchase Agreement will inure to the benefit of, and be binding
upon, the parties' successors and assigns.
8. Liquidated Damages. Rapidtron and Sellers understand that the
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damages resulting from Sellers' or Rapidtron's failure to close the purchase of
the Business and Stock would be extremely difficult
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and impracticable to fix. If Sellers default with respect to the purchasing of
the Business and Stock without fault of Rapidtron, then Rapidtron will be
entitled to receive from SCI as liquidated damages, One Million Dollars
($1,000,000) plus repayment of the Loan. As used herein, Sellers' default shall
mean any Seller's failure to perform at closing despite Rapidtron's willingness
and ability to perform, including funding of the Loan within thirty (30) days of
execution of this MOU and ability to obtain adequate financing pursuant to
Section 6.2 above as evidenced by an engagement letter with a securities
underwriter or placement agent dated within ninety 90 days of execution of this
MOU. If Rapidtron defaults with respect to the purchasing of the Business and
Stock without fualt of SCI, then SCI will be entitled to receive from Rapidtron
as liquidated damages, One Million Dollars ($1,000,000) less the balance of the
Loan forgiven. As used herein, Rapidtron's default shall mean Rapidtron's
failure to perform at closing despite Rapidtron's satisfaction of its
contingencies and Sellers' willingness and ability to perform. If Rapidtron or
Sellers fail to close the purchase of the Business or Stock because of any of
the following reasons: (a) the parties reach an impasse on any material terms of
the definitive agreement not otherwise provided herein, (b) as part of the
Investment, Rapidtron is only able to raise at least $10,000,000 if it sells
common stock at a price that is below the closing trading price on the Effective
Date, or (c) immediately following closing, the officers, directors and
affiliates of Rapidtron and SCI, collectively, would have beneficially owned
less than a majority of the common stock of Rapidtron (on a fully diluted basis
and assuming that the Sellers received 15,000,000 shares of common stock in lieu
of the Preferred Stock), then neither party shall be in default on account of
their failure to consummate the purchase and sale contemplated herein, and no
party shall be entitled to liquidated damages provided, however that if (a)
above, shall be asserted as the reason, the party so asserting (a) shall have
acted reasonably and in good faith. In that event, SCI shall repay the Loan in
accordance with its terms, and each party shall be responsible for its own costs
and expenses, including attorney fees.
9. Brokers. SCI and Rapidtron each represent and warrant to the other
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that such party has not engaged the services of any broker in connection with
the transactions contemplated by this MOU. Each party will indemnify the other
party from any claim for broker's fee, finding fee or commission made by any
person or entity claiming through such party.
10. Notice. Any notice, offer, or other communication required or
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desired to be given in writing to any party shall be deemed given to (or
received by such party) (i) upon delivery, if personally delivered to that
party, (ii) at the expiration of three (3) days from the date of deposit in the
United States mails as registered or certified matter, postage prepaid,
addressed to that party at the respective address set forth below or, if
earlier, the date indicated in the return receipt as the date of (first
attempted) delivery, or (iii) if sent by a nationally recognized courier
service, such as Federal Express, on the date indicated in the courier's records
as the date of (first attempted) delivery to the address of such party set forth
on the signature page of this MOU. Notice may also be given by telecopy
(facsimile) transmission to any party to the "telecopy" number of such party set
forth on the signature page of this MOU. Any notice given by telecopy
(facsimile) transmission shall be deemed delivered when received by the
telecopier machine of the receiving party if received before 5:00 p.m. (Pacific
Time) on the business day received, or if received after 5:00 p.m. (Pacific
Time) or on a day other than a business day (i.e., a Saturday, Sunday or legal
holiday), then such notice shall be deemed delivered on the next following
business day. The transmittal confirmation receipt produced by the telecopier
machine of the sending party shall be prima facie evidence of such receipt. Any
party may change its address or telecopier number for notice purposes by giving
written notice to the other party.
11. General Provisions. Unless a Purchase Agreement is entered into, no
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party shall have any liability hereunder whatsoever except as set forth in
Article II and Article III, Sections 6.3, 7, 8 and 9. This MOU is entered into
and intended to be performed in the State of California, and this MOU and the
Purchase Agreement will be governed by the laws of the State of California.
If this MOU fully and accurately sets forth (a) the parties' agreement with
respect to the parties due diligence investigation of each other, the Business
and the SCI Stock and the other provisions of Article II hereof; and (b) the
parties' understanding and intention regarding the terms and conditions for the
Purchase
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Agreement, then please countersign this MOU in the place indicated below and
return the original by overnight mail to the address captioned above.
Smart Cards Integrators, Inc.,
a California corporation
By:
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Francois A. Allal, President
By:
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Ron Halvas
Its:
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Address for Notice:
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Smart Cards Integrators, Inc.
1380 W. Washington Blvd.
Los Angeles, CA 90007
Telephone: ____________________
Facsimile: ____________________
Rapidtron, Inc.,
a Nevada corporation
By:
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John Creel, President
Address for Notice:
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Rapidtron, Inc.
3151 Airway Avenue, Building Q
Costa Mesa, Ca. 92626
Telephone: (949) 798-0652
Facsimile: (949) 474-4550
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