-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FUUt/eC1uFJi3YgbsoMfwedvnRx8viGoI8AzaXjLYiWI+0aiU7/wtk5Q5sov0I8f cwxYcv9DbxvPwedDC4COkw== 0001047469-98-032932.txt : 19980828 0001047469-98-032932.hdr.sgml : 19980828 ACCESSION NUMBER: 0001047469-98-032932 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 33 FILED AS OF DATE: 19980827 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN CARD TECHNOLOGY INC CENTRAL INDEX KEY: 0001029916 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 061403123 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-52169 FILM NUMBER: 98698957 BUSINESS ADDRESS: STREET 1: 1355 TERRELL MILL ROAD STREET 2: BUILDING 1462, SUITE 200 CITY: MARIETTA STATE: GA ZIP: 30067 BUSINESS PHONE: 7709512284 SB-2/A 1 SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 25, 1998 REGISTRATION NO. 333-52169 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- AMERICAN CARD TECHNOLOGY, INC. (Name of Small Business Issuer as specified in its charter) DELAWARE 7379 06-1403123 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification Incorporation or Organization) Number)
AMERICAN CARD TECHNOLOGY, INC. 1355 TERRELL MILL ROAD. BUILDING 1462, SUITE 200 MARIETTA, GEORGIA 30067 (612) 929-5249 (Address and Telephone Number of Principal Executive Offices and Address of Principal Place of Business or Intended Principal Place of Business.) RAYMOND FINDLEY, JR. 1355 TERRELL MILL ROAD. BUILDING 1462, SUITE 200 MARIETTA, GEORGIA 30067 (612) 929-5249 (Name, Address and Telephone Number of Agent for Service) -------------------------- COPIES TO: R. JOHN BARTZ, ESQ. Bartz & Bartz Southdale Office Centre 6750 France Avenue South, Suite 350 Edina, MN. 55435 (612) 920-3959 (612) 920 6494 (Fax) -------------------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT. -------------------------- If any of the Securities being registered in 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. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE Common Stock $.001 par value................ 648,900 $11.00 $7,137,900 $2,107 Total....................................... $7,137,900 $2,107
(1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended, solely for purposes of computing the registration fee. -------------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. PROSPECTUS SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED AUGUST 25, 1998 AMERICAN CARD TECHNOLOGY, INC. 1355 TERRELL MILL ROAD, BUILDING 1462, SUITE 200, MARIETTA, GEORGIA 30067 (770) 951-2284 648,900 SHARES (MAXIMUM OFFERING) 454,600 SHARES (MINIMUM OFFERING) COMMON STOCK (PAR VALUE $.001) $11.00 PER SHARE ------------------ All of the shares of Common Stock, par value $.001 (the "Common Stock"), offered hereby are being sold by American Card Technology, Inc. ("the Company"). Prior to this Offering there has been no public market for the Common Stock. See "Underwriting" for a discussion of factors considered in determining the initial public offering price. This Offering is being made by the Company's Underwriter, Rockcrest Securities L.L.C. of Dallas, Texas (the "Underwriter") on a "best efforts" basis. There can be no assurance that the minimum number of shares will be sold. All shares sold will be held in escrow with The Bank of New York (the "Escrow Agent") until the minimum number of shares have been sold, pursuant to an escrow agreement between the Company and Escrow Agent. If 454,600 shares (the minimum offering) are not sold within one hundred eighty (180) days following commencement of the public offering, the offering will terminate automatically and all funds paid for shares will be returned to the purchasers without deductions and without interest. See "Introductory Statement," "Risk Factors" and "Underwriting". 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" BEGINNING ON PAGE 9 AND "DILUTION" ON PAGE 19. --------------------- 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 COMMISSSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING DISCOUNTS & PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(1) THE COMPANY(2) Per Share................................................ $11.00 $1.10 $9.90 Total Minimum (454,600 shares)........................... $5,000,600 $500,060 $4,500,540 Total Maximum (648,900 shares)........................... $7,137,900 $713,790 $6,424,110
(1) The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) The Company will have prepaid costs and expenses of the Offering totaling $235,947, which sum represents estimated legal, accounting, copying, advertising, underwriting and other miscellaneous items. ------------------------ The shares of Common Stock are offered by the Underwriter subject to prior sale, when, as and if delivered to and accepted by the Underwriter, and subject to the right of the Underwriter to reject any order in whole or in part and to withdraw, cancel or modify this offer without notice. It is expected that delivery of the shares of Common Stock will be made at the offices of Rockcrest Securities L.L.C. in Dallas, Texas on or about , 1998, subject to the minimum offering being attained ($5,000,600) or thereafter against payment therefor in immediately available funds. ------------------------ ROCKCREST SECURITIES L.L.C. THE DATE OF THIS PROSPECTUS IS , 1998 AVAILABLE INFORMATION INVESTORS SHOULD CAREFULLY REVIEW THE FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF THIS PROSPECTUS. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Company is not currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of this Offering, the Company will become subject to such requirements and, in accordance therewith, will file periodic reports, proxy materials and other information with the Securities and Exchange Commission (the "Commission"). In addition, the Company will furnish its stockholders with annual reports containing audited financial statements certified by its independent accountants and such interim reports containing unaudited financial information as it may determine to be necessary or desirable. The Company will provide without charge to each person who receives a copy of this Prospectus, upon written or oral request, a copy of any of the information that is incorporated by reference in this Prospectus (not including exhibits to the information that is incorporated by reference unless the exhibits are themselves specifically incorporated by reference). Such request should be directed to American Card Technology, Inc., 1355 Terrell Mill Road, Building 1462, Suite 200, Marietta, Georgia 30067. No person is authorized in connection with any offering made hereby to give any information or to make any representation other than as contained in this Prospectus, and if given or made, such information or representation must not be relied upon as having been authorized by the Company or by any Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the shares of Common Stock offered hereby, nor does it constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which it is unlawful to make such an offer or solicitation to such person. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstance create any implication that the information contained herein is correct as of any date subsequent to the date hereof. In this Prospectus, references to "dollars" and "$" are to United States dollars, and the terms "United States" and "U.S." mean the United States of America, its states, its territories, its possessions and all areas subject to its jurisdiction. 2 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, GIVES EFFECT TO A 4.06-FOR-1 STOCK SPLIT EFFECTED IN JANUARY 1996, A 2.500-FOR-1 STOCK SPLIT EFFECTED IN DECEMBER 1996 AND 1.545-FOR-1 STOCK SPLIT EFFECTED IN JULY 1998. THERE CAN BE NO ASSURANCE THAT THE MINIMUM NUMBER OF SHARES WILL BE SOLD. IF THE MINIMUM OFFERING IS NOT SOLD WITHIN ONE HUNDRED EIGHTY (180) DAYS FOLLOWING THE COMMENCEMENT OF THIS OFFERING, THE OFFERING WILL TERMINATE AUTOMATICALLY AND ALL FUNDS PAID FOR SHARES WILL BE RETURNED TO THE PURCHASERS WITHOUT DEDUCTIONS AND WITHOUT INTEREST. SEE "UNDERWRITING." THE COMPANY American Card Technology, Inc. (the "Company"), a development stage company incorporated in June 1994, 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 has received United States Patent Number 5629508 with respect to its dual card access technology and methods. 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 User information and 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, health care and various government applications, and can design each system to perform various functions in virtually any industry, depending on the System Sponsors' needs. 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 Authorized Service Provider's card. For example, a health maintenance organization ("HMO") could sponsor a system whereby each User patient enrolled in the HMO would receive a smart card with his or her medical records and insurance information stored on the card's microprocessor chip. The HMO would issue Access Cards to its member physicians as Authorized Service Providers and, when a patient visits any of these HMO-affiliated physicians, the physician would be able to review and update the patient's medical record and history. The Authorized Service Provider could be issued separate Access Cards from the HMO allowing different functions for different security levels. For example, the receptionist's Access Card may allow access only to insurance information; the nurse's Access Card may allow the nurse to view but not modify patient records; and the doctor's Access Card may allow the doctor to access and update patient medical records. The dual card access technology provides enhanced security for the information on the User Card by preventing unauthorized persons from accessing or modifying such data without the proper Access Card and allowing each Access Card to view or manipulate only the information on the User Card which corresponds to that Access Card's authorization level. Each System Sponsor determines how much security it desires at each level, and the Company designs the smart card system for that System Sponsor around those parameters. 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 3 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. According to the market researcher Dataquest, the microprocessor and memory based smart card market will grow from 544 million cards in 1995 to 3.4 billion cards by 2001. Most smart cards currently in use are low capacity memory-only phone cards that 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. 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 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. To the best of the Company's knowledge there are no other cards in use or under development that meet the same dual card access and multiple application specifications as the Company's proprietary system. However there is no guarantee that such cards which function in a similar or superior fashion to the Company's proprietary system are not under development at this time. See "Competition" under "Risk Factors." Although the use of smart cards is increasing, most cards currently used in electronic transactions are magnetic stripe cards, such as ordinary credit 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 Company's smart cards are 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 System Sponsors or Authorized Service Providers with access to different application layers on one User's smart card. Therefore, an HMO could 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 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 executed two contracts with the North American Pari-Mutuel Regulators Association ("NAPRA") to provide and maintain an internet-based regulatory tracking system that includes a database with licensing information, infraction records and digital photographs of the licensees in its jurisdictions. NAPRA is an organization comprised of nineteen pari-mutuel wagering jurisdictions located in North America, including horse and dog racing, jai alai and card rooms. In addition to the contracts with NAPRA, the Company has developed and installed smart card based employee identification and licensing systems in five NAPRA jurisdictions: the Birmingham Racing Commission and the Macon County Racing Commission, both in Alabama, the Oregon Racing Commission, the Idaho State Racing Commission and the Wyoming Pari-Mutuel Commission. The Company recently submitted a proposal to an additional NAPRA jurisdiction, the Arizona Racing Commission, to provide a smart card based employee identification and licensing system. The Company is in the process of installing a smart 4 card based employee identification and licensing system at the Colorado Racing Commission (not a NAPRA member jurisdiction), to be completed by the end of September 1998. The Company has also entered into a contract with the Florida Department of Pari-Mutuel Wagering to develop and maintain an internet accessible smart card based employee identification and licensing database system for their 27 pari- mutuel wagering facilities around the state. The licensing system the Company is developing for the State of Florida will be a database maintained by ACTI and will be accessible by the Internet. The smart card licenses of the employees will be utilized to provide secure access to the web site and the database through the Internet. The Company has completed a pilot program in New Jersey and Pennsylvania for the issuance of "equine medical passport" smart cards for monitoring the identity, interstate and intrastate movement and medical records of thoroughbred horses. The Florida Department of Agriculture and Consumer Services Bureau of Disease Control has proposed a similar pilot project anticipated to begin as soon as possible. The Bureau of Disease Control is responsible for ensuring the health and marketability of livestock in the state of Florida. To prevent the spread of a deadly disease, the federal government requires any horse crossing state lines to have a negative Coggins Report which evidences a negative test result for Equine Infectious Anemia. A Coggins Report is valid for one year from the issue date. Further, each state requires a valid health certificate for any horse entering the state. The states of Florida, Georgia and Alabama have formed an alliance whereby a special ninety (90) day pass authorized by any of the three states can be used to cross state lines between these states. The proposed Florida pilot program will involve a test "livestock medical passport" program in which each of 100 animals will be implanted with an "electronic identification transponder" used in conjunction with smart cards to verify each animal's identity and federal and state medical certifications. This pilot program will replace the required paper passports for horses crossing between these states. Although completed programs in New Jersey and Pennsylvania successfully tested the equine medical passport smart card system and similar electronic transponder implants are in use which are not coordinated with smart card technology, such equine medical passport pilot programs have 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 entered into a Memorandum of Understanding with Traquer Systems, Inc. ("Traquer") to market the Company's smart card systems to Indian gaming and wagering facilities in North America. Traquer has significant expertise with the rules and regulations for Indian gaming environments. In February 1998, the Company received its first order from Traquer to provide a smart card based employee licensing system to an Indian tribe in Arizona. The Company expects this system to be installed by October 1998. The Company received a request from Foundation Health, a Florida based HMO, to structure a smart card system to assist and expedite the verification of patient insurance coverage by hospital employees. The pilot program involves Palmetto Hospital, one of the largest hospitals in Miami, Florida, and the Company anticipates the initial phase will be installed by November 1998. Other phases of this proposed project may include expanding the smart card based verification capability to all Foundation Health member hospitals and Authorized Service Providers in south Florida. The final phase may provide all Foundation Health members with enhanced smart card member identification capabilities. The Company has also been selected as a subcontractor to Paradigm 4 for the proposed New York City Time Project. The City of New York has significant problems tracking city employees and verifying the accuracy of actual hours worked. This project will pilot a number of technologies, including the use of smart cards, for time and attendance management and tracking of city employees. The Company is negotiating an exclusive distributorship agreement with AVID Identification Devices, Inc. ("AVID"). AVID uses PETtrac, a worldwide computerized tracking system for companion animals. Under the terms of the agreement, AVID will have the right to sell a unique smart card based system developed by the Company exclusively for AVID and to be used in conjunction with AVID's radio 5 frequency identification devices currently being sold worldwide to veterinarians and other customers. Owners of animals will carry with them the Company's smart card containing animal tracking information related to the existing PETtrac identification system as well as other AVID related applications, including animal records. There can be no assurance that the Company will be successful in negotiating this agreement. The Company has issued a two year Non-Exclusive Representation Agreement to DTEC/Comprehensive Pharmacy Services, Inc., a wholly owned subsidiary of Service Master Corporation. DTEC/CPS provides a full range of services and technologies to the health care industry. The core of the company's business is in pharmacy consulting and pharmacy management expertise. DTEC/CPS has the right to market the Company's smart card products and services to its extensive customer base throughout the world. DTEC/CPS and the University of Tennessee are currently engaged in several research projects where smart cards could play a significant role. It is anticipated that the Company will greatly benefit from these projects, however, there can be no assurance that the Company's involvement will result in sales to the University of Tennessee or to any other DTEC/CPS customer. 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. Although the Company expects to continue to market smart card systems directly through its management and employees, including a recently appointed Director of 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 anticipates that, under certain circumstances, its smart card products will be bundled with its strategic partners' 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 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. RECENT FINANCING From July 1997 through January 1998, three directors, Raymond A. Roncari, Harold Rothstein and Lawrence O. Perl, have provided loans to the Company in the amounts of $320,000, $460,000 and $15,000, respectively (the "Stockholder Loans"), each bearing interest at an annual rate of ten percent (10%). These loans provided the Company with working capital and covered some costs associated with this 6 Offering. The Stockholder Loans are expected to be repaid upon the closing of subsequent debt financing, but in no event later than January 1, 2001. In February and March 1998, the Company sold investment units to investors for an aggregate of $1,500,000 in a private placement offering (the "1998 Private Placement"). Each unit consisted of (i) an unsecured, nonnegotiable promissory note in the principal amount of $50,000 (the "Bridge Notes"), (A) bearing interest at the rate of ten percent (10%) per annum, payable annually in arrears, and (B) providing for a loan fee payable upon payoff of the Bridge Note in an amount equal to $5,000 less interest accrued under the Bridge Note during the first year through the date of payoff; (ii) 3,863 shares of Common Stock (the "Bridge Shares"); and (iii) 3,863 bridge warrants, each bridge warrant representing the right to purchase one share of Common Stock at a price of eighty percent (80%), subsequently amended to eighty-five percent (85%), of the per share market price of the Common Stock on the exercise date (the "Bridge Warrants"). In addition, Messrs. Roncari and Rothstein entered into certain loan agreements (the "Director Loan Agreements") committing each of them to loan $450,000 (for a total of $900,000) to the Company to be used for working capital and certain costs of this Offering (the "Director Loans"). In consideration for this commitment, Messrs. Rothstein and Roncari were each granted 19,313 shares of Common Stock of the Company and warrants to purchase 19,313 shares of Common Stock at an exercise price of eighty percent (80%), subsequently amended to eighty-five percent (85%), of the market price of the Common Stock on the exercise date (the "Commitment Warrants"). The Company intends to use a portion of the proceeds from this Offering to repay certain loans and other indebtedness. The Bridge Notes are to be repaid from the proceeds of the minimum offering, but in no event later than March 3, 2001. The accrued interest due on the Bridge Notes is to be repaid in two parts, $67,157 from the proceeds of the minimum offering and $109,589 from the proceeds of the maximum offering, but in no event later than March 3, 2001. The Director Loans are to be repaid upon closing of subsequent debt financing, but in no event later than January 1, 2001. See "Use of Proceeds," "Plan of Operation" and "Certain Transactions." THE OFFERING Common Stock offered by the Company Minimum.................................... 454,600 Maximum.................................... 648,900 Common Stock to be outstanding after Offering(1) Minimum.................................... 4,355,736 Maximum.................................... 4,550,036 Use of Proceeds.............................. The Company intends to use the net proceeds of this Offering for repayment of the Bridge Notes; research and development; sales and marketing; repayment of certain outstanding obligations; administrative payroll cost; and 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 symbol....................... Common Stock--"ACRD."
- ------------------------ (1) Does not include (i) 417,150 shares of Common Stock reserved for issuance upon exercise of options granted or available for future grant under the Stock Option Plan, as defined herein; (ii) 46,350 shares of Common Stock reserved for issuance upon exercise of options granted or available for future grant 7 under the Directors' Plan, as defined herein; (iii) 154,500 shares of Common Stock reserved for issuance upon exercise of the Shreveport Option, as defined herein; (iv) 77,250 shares of Common Stock reserved for issuance upon exercise of the Chapman Option, as defined herein; (v) 38,626 shares of Common Stock reserved for issuance upon exercise of the Commitment Warrants; or (vi) 115,882 shares of Common Stock reserved for issuance upon exercise of the Bridge Warrants. 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.
JUNE 21, 1994 YEAR ENDED DEC 31, SIX MOS ENDED JUNE 30, (INCEPTION) ---------------------------- --------------------------- TO JUNE 30, 1996 1997 1997 1998 1998 ------------- ------------- ------------ ------------- ------------- STATEMENT OF OPERATIONS DATA Revenues............................... $ 27,034 $ 76,912 $ 1,100 $ 93,292 $ 270,710 Cost of sales.......................... 16,279 86,995 250 117,879 289,774 Research and development expense....... 167,000 260,000 110,000 323,000 930,000 General and administrative expense..... 919,546 1,176,885 476,537 966,888 4,152,093 Write-off of license fee............... 20,000 -- -- -- 168,000 Interest and financing costs, net...... 129,126 1,065,240 328,744 749,432 1,988,030 Net loss............................... (1,224,917) (2,512,208) (914,431) (2,063,907) (7,257,187) Net loss per share--basic and diluted.............................. (.35) (.62) (.23) (.53) Weighted average number of shares outstanding.......................... 3,506,642 4,040,705 4,025,369 3,929,836
JUNE 30, 1998 ------------------------------------------- AS ADJUSTED FOR DECEMBER 31, ---------------------------- 1997 ACTUAL MINIMUM(1) MAXIMUM(2) ------------- ------------- ------------- ------------- BALANCE SHEET DATA Working capital (deficit)............................. $ (4,066,580) $ (2,055,676) $ (858,041) $ 2,726,194 Total assets.......................................... 594,536 1,161,430 3,804,126 5,018,107 Total liabilities..................................... 4,144,316 5,874,885 4,439,811 3,785,639 Total stockholders' equity (deficit).................. (3,549,780) (4,713,455) (635,685) 1,232,468
- ------------------------ (1) Gives effect to the sale of the 454,600 shares of Common Stock being offered hereby and the anticipated application of the estimated net proceeds therefrom, including $1,500,000 representing the repayment of the Bridge Notes plus $67,157 representing partial payment of accrued interest, including a non-recurring charge of $32,083, plus a non-recurring charge of $100,000 representing the unamortized loan discount, $54,740 representing unamortized deferred financing costs associated with the 1998 Private Placement and $235,947 representing prepaid costs of this Offering. See "Use of Proceeds." (2) Gives effect to the sale of the 648,900 shares of Common Stock being offered hereby and the anticipated application of the estimated net proceeds therefrom, $1,500,000 representing the repayment of the Bridge Notes plus $176,746 representing payment of accrued interest, including a non-recurring charge of $87,500, plus a non-recurring charge of $100,000 representing the unamortized loan discount, $54,740 representing unamortized deferred financing costs associated with the 1998 Private Placement, $600,000 representing repayment of all outstanding bank debt and $235,947 representing prepaid costs of this Offering. See "Use of Proceeds." 8 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 THE LOSS OF THEIR 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. 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." 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 operating period since its inception, resulting in an accumulated deficit at June 30, 1998 of $7,257,187, 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 1998 Private Placement of approximately $187,000 upon closing of the minimum offering. Furthermore, the Company has incurred costs related to a possible debt placement, which costs have to date been deferred. In the event the planned debt placement is not successful, these costs will be subsequently charged to operations. 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. 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 9 consultants; hire and retain skilled management as well as 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." 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 System 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." SIGNIFICANT CAPITAL REQUIREMENTS; WORKING CAPITAL DEFICIT; DEPENDENCE ON PROCEEDS OF THIS OFFERING; POSSIBLE FUTURE FINANCING. The Company's capital requirements have been and will continue to be significant. At June 30, 1998, the Company had a working capital deficit of $2,055,676 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 1998 Private Placement), as well as on capital contributions and loans from affiliates and certain financial institutions guaranteed by 10 certain stockholders of the Company. During the period from inception through the date of this Prospectus, the Company has raised capital in the estimated aggregate amount of $6,100,000 (including approximately $5,500,000 through June 30, 1998) 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 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 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 the minimum 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. Further, if the minimum closing of this Offering is delayed, the Company may not have sufficient capital to fund operations and the anticipated expenses of this Offering. There can be no assurance that additional financing will be available to the Company on commercially reasonable terms, or at all. Although the Company believes it may be able to raise at least a portion of its future financing requirements for such period among its officers, directors and/or stockholders, no officer, director or stockholder of the Company has made any further commitment to the Company to provide any portion of the Company's future financing requirements and there are no assurances that any officer, director or stockholder will do so. At some future date, the Company intends to offer up to approximately $30 million in debt financing, to be negotiated by Lilly Beter Capital Group, Ltd. ("Beter"). The Company has no written agreement with Beter with regard to such possible future financing. There can be no assurance that such additional financing, or any other additional financing, will be available to the Company on reasonable terms, or at all. Further, if such additional financing is attempted, there can be no assurance that such additional financing, or any other additional financing, will be successful. Any inability to obtain additional financing when needed may 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." 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. It will be the role of the Company's management and its Director of Sales to guide the Company from the research and development phase to a company with full marketing and sales strategies for direct and indirect sales. Although the Company expects to continue to market smart card systems directly through the Company's management and employees, 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 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 11 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" and "Management." 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 PTS (a unit of Groupe Bull), Schlumberger Electronic Transactions (a business segment of Schlumberger Limited), Orga Kartensysteme GMBH, Giesecke & Devrient and Mondex International, which design, manufacture and/or market smart card systems. Although the Company believes its proprietary 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 may be 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." 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." The Company has entered into an agreement with SoftChip Israel Ltd. of Jerusalem, Israel and its affiliate, SoftChip Technologies (3000) Ltd. (collectively, "SoftChip"), to purchase the DVK-1 Chip Mask Operating System and architecture ("DVK-1 System") for a purchase price of $100,000 and for SoftChip to provide technical support and development to the Company for at least a two-year period for an additional $450,000 plus royalties ranging from $.125 to $.25 for each smart card sold by the Company that incorporates the DVK-1 System. Upon its closing, which is scheduled to occur after the minimum closing of this Offering, this agreement will provide the Company ownership of its own chip mask and access to the technical resources needed to develop a completely new and proprietary chip mask and operating system. 12 The chip mask provides the basic instructions to the microchip and its internal components and facilitates the orderly utilization of all of the microchip's components and allows the device to be utilized. The Company has also executed a purchase order with SoftChip for technical services for a monthly fee of $18,000, which commenced December 1, 1997. The Company is obligated to pay the amount payable under the purchase order, the purchase price and the fees for technical support, no later than November 1, 1998, which will reduce the amount of working capital available to the Company. Under the agreement, ownership of the DVK-1 System will be transferred to the Company at closing upon payment in full of the purchase price and technical support fees. If the closing of the minimum offering is delayed beyond November 1, 1998, the Company believes it may be able to reach a mutual agreement with SoftChip to extend the closing date of the agreement, but there can be no assurance that the Company will be able to reach such agreement with SoftChip, or that the Company will ultimately secure ownership of the DVK-1 System if the closing of the minimum offering is delayed beyond November 1, 1998. Additionally there can be no assurance that ownership of the DVK-1 System will result in the successful development of new technology. See "Plan of Operation" and "Business--Intellectual Property." PROPRIETARY RIGHTS. The Company's success will depend in part on its ability to enforce its patents, protect trade secrets and operate without infringing on the proprietary rights of others. The Company has received United States patent number 5629508 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. 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 foreign patents could have a material adverse effect on the Company's ability to successfully commercialize its smart card systems outside the U.S. Even though the Company has been able to obtain a U.S. patent, there can be no assurance that this 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 occur 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 received a federal trademark registration for its SMART-ID-Registered Trademark- mark and design and has applied for a federal trademark registration for its Cheeze! mark. SMART-ID-Registered Trademark- is a smart card based system that provides positive identification, transaction tracking and the ability to layer multiple applications on a single smart card. Cheeze! is a program currently used by nineteen pari-mutuel licensing jurisdictions to photograph licensees and transmit the photograph and license data to a central database, which is currently housed at the Company's offices. 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 13 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." 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." 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 and Canada. 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 most 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 could incur losses, which could adversely affect the Company's operating margins and results of operations. Moreover, in most instances, the Company may 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." BROAD DISCRETION IN APPLICATION OF PROCEEDS; ALLOCATION OF PROCEEDS TO PAY CERTAIN OBLIGATIONS, INCLUDING INDEBTEDNESS TO PRINCIPAL STOCKHOLDERS; BENEFIT TO RELATED PARTIES. Approximately $499,540 (11.1%) of the estimated net proceeds of the minimum offering or $508,110 (7.9%) of the estimated net proceeds of the maximum 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 $1,567,000 (34.8%) of the estimated net proceeds of the minimum offering or $2,277,000 (35.4%) of the estimated net proceeds of the maximum offering to repay indebtedness (including all the Bridge Notes to be repaid from the proceeds of the minimum offering and the accrued interest due on the Bridge Notes, to be repaid in two parts, $67,157 from the proceeds of the minimum offering and $109,589 from the proceeds of the maximum offering; both the Notes and the interest are to be repaid no later than March 3, 2001) and satisfy pre-existing obligations 14 and, therefore, such funds will be unavailable to fund future growth. Included in the indebtedness to be repaid from the proceeds of the minimum offering are the Bridge Notes payable to Lawrence O. Perl, the Company's Chairman of the Board and Chief Executive Officer, in the principal amount of $25,000, together with accrued interest thereon, and Bridge Notes payable to Harold Rothstein and Raymond A. Roncari, each a director of the Company, in the principal amounts of $475,000 and $475,000, respectively. Included in the indebtedness to be repaid from the proceeds of the maximum offering are the interest due on the Bridge Notes payable to Messrs. Rothstein and Roncari. Included in certain outstanding obligations to be repaid from the proceeds of the maximum offering is approximately $42,000 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 National 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. The Company intends to use approximately $600,000 of the proceeds from the closing of the maximum offering to repay this indebtedness; repayment of such indebtedness will, in effect, release such guarantees or pledges. The Company will also use a portion of the proceeds of the minimum and maximum offerings to pay compensation (including accrued compensation) of its executive officers (for a total anticipated to be approximately $625,000 if the minimum offering is reached and $1,400,000 if the maximum offering is reached, during the twelve months following the date of this Prospectus). See "Use of Proceeds," "Plan of Operation," "Management" and "Certain Transactions." DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL. The success of the Company will be largely dependent on the personal efforts of Lawrence O. Perl, its Chairman of the Board and Chief Executive Officer, Raymond Findley, Jr., its President and Chief Operating Officer, Frank Fuino Jr., its Chief Financial Officer and Vice President of Finance, Robert H. Dixon, its Vice President of Technical Operations, Robert Cartagine, its recently appointed Director of Sales, and other key personnel. Although the Company has entered into an employment agreement with each of the above gentlemen, the loss of services of any of these key personnel would have a material adverse effect on the Company's business and prospects. The Company has obtained "key man" insurance on the lives 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 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." CONTROL BY MANAGEMENT. After the closing 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, no less than approximately 78.6 percent of the outstanding shares of Common Stock (assuming no exercise of any warrants or other options) issued in the minimum offering, or no less than approximately 75.2 percent of the outstanding shares of Common Stock (assuming no exercise of any warrants or other options) issued in the maximum offering. Accordingly, such persons, acting together, will be in a position to elect the directors, adopt amendments to the Company's Certificate of Incorporation (the "Certificate") and By-Laws (the "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." POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK. The Certificate, as amended, authorizes the Company's Board of Directors (the "Board") 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 15 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." IMMEDIATE AND SUBSTANTIAL DILUTION. Investors in this Offering will incur immediate and substantial dilution of $11.27 per share (102%) if the minimum offering is reached, or $10.85 per share (99%), if the maximum offering is reached, between the adjusted net tangible book value per share after this Offering and the initial public offering price of $11.00 per share. See "Dilution." ABSENCE OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK; LIMITED STATE REGISTRATION. Prior to this Offering, there has been no public trading market for the Common Stock. Consequently, the initial public offering price of the Common Stock has been determined by negotiations between the Company and the Underwriter and is 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 the Common Stock 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. The factors considered in determining the offering price included an evaluation by management of the history of and prospects for the industry in which the Company competes and the prospects for earnings of the Company. 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 the operating performance of such companies. The Underwriter will register this Offering in a limited number of states, which may limit or prohibit possible resale of the Common Stock in certain states in which the Offering is not registered. See "Underwriting." 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 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." 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 By-Laws also include provisions to the effect that (subject to certain 16 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 that 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." 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 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." OUTSTANDING OPTIONS. As of the date of this Prospectus, the Company has outstanding options to purchase 441,873 shares of Common Stock, of which 332,178 shares are exercisable at $7.77 per share and 109,695 shares are exercisable at $11.00 per share. Further, the Company has granted warrants to purchase (i) 77,250 shares of Common Stock at an exercise price equal to eighty percent, subsequently amended to eighty-five percent (85%) of the per share market price of Common Stock at the time of exercise to Chapman Group, LLC (the "Chapman Option"); (ii) 38,626 shares to Messrs. Rothstein and Roncari, in consideration for entering into their respective Director Loan Agreements, at an exercise price equal to eighty percent, subsequently amended to eighty-five percent (85%) of the per share market price of Common Stock at the time of exercise, represented by 19,313 warrants to purchase 19,313 shares of Common Stock to each of Messrs. Rothstein and Roncari (collectively, the "Commitment Warrants"); and (iii) 115,882 shares to investors in a March 1998 private placement offering ("the 1998 Private Placement") at an exercise price equal to eighty percent, subsequently amended to eighty-five percent (85%) of the per share market price of Common Stock at the time of exercise (the "Bridge Warrants"). In addition, the Company plans to issue additional options to acquire shares of Common Stock to employees and directors in the future. Exercise 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, if they choose to exercise the options, can be expected to exercise them at a time when the Company would likely 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" and "Underwriting." 17 SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. From the proceeds of the maximum offering, the Company will have between 4,355,736 shares, if the minimum is attained, and 4,550,036 shares, if the maximum is attained, of Common Stock outstanding, of which the shares of Common Stock offered hereby (a minimum of 454,600 shares and a maximum of 648,900 shares) will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"). All of the remaining 3,901,136 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 the exemption provisions of Rule 144 or pursuant to another exemption under the Securities Act. The 3,901,136 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 "piggyback" registration rights to the holders of 193,133 shares of Common Stock and the 231,758 shares of Common Stock underlying the Bridge Warrants and the Commitment Warrants, and to the holder of the Chapman Option. 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, as defined herein, and Bridge Warrant Shares, as defined herein, 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 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," "Management" and "Underwriting." NASDAQ REQUIREMENTS; DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's stock is not presently included for trading on the Nasdaq system and there can be no assurances that the Company will ultimately qualify for inclusion within that system. In order for an issuer to be included in the Nasdaq system, the Company must maintain $2,000,000 in net tangible assets, $35,000,000 in market capitalization or $500,000 net income. In addition the Company must maintain 50,000 shares of public float (shares not held directly or indirectly by any officer or director of the Company or by any other person who is the beneficial owner of more than ten percent (10%) of the total shares outstanding) with a minimum market value of $4,000,000. Further, continued inclusion requires two market makers, a minimum bid price of $1.00 per share and at least 300 round lot shareholders (holders of 100 shares or more). In addition to quantitative standards, the staff of Nasdaq may also consider other factors including, but not limited to, the nature and scope of the Company's operations in conjunction with any and all conditions and/or circumstances surrounding an entity's operations. The Company's initial application for inclusion in the Nasdaq Small Cap Market was denied because the Company does not meet the above qualitative standards. No assurances can be given that the Company will ever qualify for inclusion on the Nasdaq system and qualification for inclusion is not a prerequisite to proceeding with this Offering. Until the Company's shares qualify for inclusion in the Nasdaq system, the Company's securities will be traded in the over-the-counter markets through the "pink sheets" or on the OTC Bulletin Board. The Securities and Exchange Commission has adopted regulations which generally define "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price less than $5.00 per share, subject to certain exceptions. Since the securities offered hereby will be offered at a market price of $11.00 per share, such securities will initially be exempt from the definition of penny stock. During such periods when the Company's Common Stock does not qualify for inclusion on the Nasdaq Small Cap Market, if the securities offered hereby become offered at a market price less than $5.00 per share, and do not qualify for another exemption from the penny stock regulations, the Company's securities may become subject to additional regulations relating to low-priced securities adopted by the Securities and Exchange 18 Commission that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchase and receive the purchaser's written agreement to the transaction prior to the sale. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing the recent price information for the penny stock held in the account and information on the limited market in penny stocks. In addition, certain broker-dealers are precluded from acting as market makers for non-NASDAQ securities and these securities may be ineligible for margin loans. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could severely limit the market liquidity of the Common Stock and the ability of purchasers in this Offering to sell the Common Stock in the secondary market. LACK OF PUBLIC MARKET; MINIMUM/MAXIMUM. Prior to this Offering, there has been no public market for the Company's securities. There can be no assurances that a public trading market for the securities offered hereby will develop or that a public trading market, if developed, will be sustained. Although the Company anticipates that upon completion of this Offering, the Common Stock will be eligible for inclusion on the OTC Bulletin Board, no assurance can be given that the Common Stock will be listed on the OTC Bulletin Board as of the effective date. Consequently, there can be no assurance that a regular trading market for the Common Stock, other than the pink sheets, will develop after the completion of this Offering. If a trading market does in fact develop for the Common Stock offered hereby, there can be no assurance that it will be maintained. If for any reason the Common Stock is not listed on the OTC Bulletin Board or a public trading market does not develop, purchasers of the Common Stock may have difficulty in selling their securities should they desire to do so. In any event, because certain restrictions may be placed upon the sale of securities at prices under $5.00, unless such securities qualify for an exemption from the "penny stock" rules, such as a listing on the Nasdaq Small Cap Market, some brokerage firms will not effect transactions in the Company's securities if their market price falls below $5.00, and it is unlikely that any bank or financial institution will accept such securities as collateral, which could have an adverse effect in developing or sustaining any market for the Common Stock. There can be no assurance that the minimum number of shares will be sold. If the minimum offering is not sold within one hundred eighty (180) days following commencement of this Offering, the Offering will terminate automatically and all funds paid for shares will be returned to the purchasers without deductions and without interest. Even if the minimum number of shares is sold, there can be no assurance that the maximum number of shares will be sold. If the minimum number of shares is sold but the maximum number of shares is not sold, the Company would be able to continue its operations for at least twelve months but the proceeds from this Offering would be less than anticipated and could have a material adverse effect on the Company's future operations. 19 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby are estimated to be approximately $4,500,540 if the minimum offering is attained and $6,424,110 if the maximum offering is attained. The expenses of this Offering will have been prepaid by the Company to the extent of $235,947 as of June 30, 1998. The Company expects to use the net proceeds approximately as follows: APPLICATION OF PROCEEDS
MINIMUM OFFERING MAXIMUM OFFERING ------------------------- ------------------------- AMOUNT PERCENT AMOUNT PERCENT ------------ ----------- ------------ ----------- Repayment of indebtedness(1)....................................... $ 1,567,000 34.8% $ 2,277,000 35.4% Sales and marketing(2)............................................. 445,000 9.9% 532,000 8.3% Research and development(3)........................................ 1,140,000 25.4% 1,184,000 18.4% Repayment of certain outstanding obligations(4).................... 375,000 8.3% 1,252,000 19.5% Administrative payroll costs(5).................................... 474,000 10.5% 671,000 10.5% Working capital and general corporate purposes(6).................. 499,540 11.1% 508,110 7.9% ------------ ----- ------------ ----- Total.......................................................... $ 4,500,540 100.0% $ 6,424,110 100.0% ------------ ----- ------------ ----- ------------ ----- ------------ -----
- ------------------------ (1) The minimum offering figure represents the payment of the Bridge Notes, together with partial payment of accrued interest in the aggregate amount of $67,157. Included in the Bridge Notes to be repaid are $25,000, plus accrued interest, payable to Lawrence O. Perl, the Company's Chairman of the Board and Chief Executive Officer, $475,000 payable to Harold Rothstein, a director of the Company, and $475,000 payable to Raymond A. Roncari, a director of the Company. The maximum offering figure represents all items paid in the minimum offering plus the payment of accrued interest related to the Bridge Notes payable to Messrs. Rothstein and Roncari, in the aggregate amount of $109,589, plus the repayment of bank debt, in the aggregate amount of $600,000, which has been personally guaranteed or secured with the private assets of Messrs. Roncari and Rothstein. See "Plan of Operation" and "Certain Transactions." (2) Consists of salaries of sales and 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 $712,000 payable to SoftChip in connection with the purchase of the DVK-1 System and 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 accountants, attorneys and consultants, and deferred compensation to both current and past employees. In addition, the Company intends to use $42,000 of the proceeds from the maximum offering to repay a payable due to Lawrence Owen Associates, a Company wholly owned by Mr. Perl. See "Management." (5) Consists of the proportionate amount of salaries deemed to be administrative in nature. (6) Includes amounts for the payment of relocation expenses, rent, professional fees and other operating expenses. 20 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 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." DILUTION The net tangible book value of the Company at June 30, 1998 was a deficit of $(5,547,472) (excludes intangible assets of $54,740 in deferred financing costs, $151,131 in software development and $628,146 in deferred registration and debt costs), or $(1.42) per share of Common Stock. 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. MINIMUM OFFERING After giving effect to the sale by the Company of the 454,600 shares offered hereby in the minimum offering, at an assumed initial public offering price of $11.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses, the net tangible book value, as adjusted, of the Company at June 30, 1998 would have been a deficit of approximately $(1,179,015) or $(.27) per share, representing an immediate increase in such net tangible book value of $1.15 per share to existing stockholders and an immediate dilution in net tangible book value of $11.27 per share to purchasers of Common Stock in the minimum offering. The following table illustrates this per share dilution applicable to the minimum offering: Initial public offering price....................... $ 11.00 Net tangible book value (deficit) before minimum offering........................................ $ (1.42) Increase attributable to new investors............ 1.15 --------- Adjusted pro-forma net tangible book value after minimum offering.................................. (.27) --------- Dilution per share to new investors................. $ 11.27 --------- ---------
MAXIMUM OFFERING After giving effect to the sale by the Company of the 648,900 shares offered hereby in the maximum offering, at an assumed initial public offering price of $11.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses, the net tangible book value as adjusted of the Company at June 30, 1998 would have been approximately $689,138, or $.15 per share, representing an immediate increase in such net tangible book value of $1.57 per share to existing stockholders and an immediate dilution in net tangible book value of $10.85 per share to purchasers of Common Stock in the 21 maximum offering. The following table illustrates this per share dilution applicable to the maximum offering: Initial public offering price....................... $ 11.00 Net tangible book value (deficit) before maximum offering........................................ $ (1.42) Increase attributable to new investors............ 1.57 --------- Adjusted pro-forma net tangible book value after maximum offering.................................. .15 --------- Dilution per share to new investors................. $ 10.85 --------- ---------
The following tables set forth as of June 30, 1998 a comparison between the existing stockholders 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: MINIMUM OFFERING
SHARES PURCHASED TOTAL CONSIDERATION ----------------------- ----------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ----------- ---------- ----------- ------------- Existing stockholders.................................. 3,901,136 89.6% 2,548,700 33.8% $ .65 New Investors.......................................... 454,600 10.4% 5,000,600 66.2% $ 11.00 ---------- ----- ---------- ----- Total.............................................. 4,355,736 100.0% 7,549,300 100.0% ---------- ----- ---------- ----- ---------- ----- ---------- -----
MAXIMUM OFFERING
SHARES PURCHASED TOTAL CONSIDERATION ----------------------- ----------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ----------- ---------- ----------- ------------- Existing stockholders.................................. 3,901,136 85.7% 2,548,700 26.3% $ .65 New Investors.......................................... 648,900 14.3% 7,137,900 73.7% $ 11.00 ---------- ----- ---------- ----- Total.............................................. 4,550,036 100.0% 9,686,600 100.0% ---------- ----- ---------- ----- ---------- ----- ---------- -----
The foregoing table assumes no exercise of any outstanding options. See "Management--1996 Stock Option Plan," "--Nonemployee Directors' Stock Option Plan" and "Certain Transactions." 22 CAPITALIZATION The following table sets forth the capitalization of the Company (i) on an actual basis, (ii) as adjusted to give effect to the sale of the minimum offering of shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom, and (iii) as adjusted to give effect to the sale of the maximum offering of shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom.
JUNE 30, 1998 ---------------------------------------------- AS ADJUSTED FOR ---------------------------- ACTUAL MINIMUM(1) MAXIMUM(2) ------------- ------------- ------------- Notes Payable............................................... $ 2,729,956 $ 2,729,956 $ 2,129,956 Bridge Note................................................. 1,400,000(3) -- -- 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; 3,901,136 shares issued and outstanding, actual; 4,355,736, as adjusted for the minimum offering; 4,550,036, as adjusted for the maximum offering(4)...... 3,901 4,356 4,550 Additional paid-in capital................................ 2,544,831 6,808,969 8,732,345 Stock subscriptions receivable............................ (5,000) (5,000) (5,000) Accumulated deficit during the development stage.......... (7,257,187) (7,444,010) (7,499,427) ------------- ------------- ------------- Total stockholders' equity (deficit).................... (4,713,455) (635,685) 1,232,468 ------------- ------------- ------------- Total capitalization.................................. $ (583,499) $ 2,094,271 $ 3,362,424 ------------- ------------- ------------- ------------- ------------- -------------
- ------------------------ (1) Gives effect to the sale of the 454,600 shares of Common Stock being offered hereby and the anticipated application of the estimated net proceeds therefrom, including $1,500,000 representing the repayment of the Bridge Notes plus $67,157 representing partial payment of accrued interest, including a non-recurring charge of $32,083, plus a non-recurring charge of $100,000 representing the unamortized loan discount, $54,740 representing unamortized deferred financing costs associated with the 1998 Private Placement and $235,947 representing prepaid costs of this Offering. See "Use of Proceeds." (2) Gives effect to the sale of the 648,900 shares of Common Stock being offered hereby and the anticipated application of the estimated net proceeds therefrom, $1,500,000 representing the repayment of the Bridge Notes plus $176,746 representing payment of accrued interest, including a non-recurring charge of $87,500, plus a non-recurring charge of $100,000 representing the unamortized loan discount, $54,740 representing unamortized deferred financing costs associated with the 1998 Private Placement, $600,000 representing repayment of all outstanding bank debt and $235,947 representing prepaid costs of this Offering. See "Use of Proceeds." (3) Net of $100,000 loan discount. (4) Does not include (i) 417,150 shares of Common Stock reserved for issuance upon exercise of options granted or available for future grant under the Stock Option Plan; (ii) 46,350 shares of Common Stock reserved for issuance upon exercise of options granted or available for future grant under the Directors' Plan; (iii) 154,500 shares of Common Stock reserved for issuance upon exercise of the Shreveport Option; (iv) 77,250 shares of Common Stock reserved for issuance upon exercise of the Chapman Option; (v) 38,625 shares of Common Stock reserved for issuance upon exercise of the Commitment Warrants; or (vi) 115,882 shares of Common Stock reserved for issuance upon exercise of the Bridge Warrants. See "Management--1996 Stock Option Plan," "--Nonemployee Directors' Stock Option Plan," "Certain Transactions," and "Description of Securities." 23 SELECTED FINANCIAL DATA The following selected financial data for the years ended December 31, 1996 and 1997 and the balance sheet data at December 31, 1997 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 six-month periods ended June 30, 1997 and 1998 and the period from inception to June 30, 1998 and the balance sheet data at June 30, 1998 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 six months ended June 30, 1998 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 this Prospectus. STATEMENT OF OPERATIONS DATA
YEAR ENDED DEC 31, SIX MOS ENDED JUNE 30, INCEPTION(1) ---------------------------- ---------------------------- TO JUNE 30, 1996 1997 1997 1998 1998 ------------- ------------- ------------- ------------- ------------- Revenues.............................. $ 27,034 $ 76,912 $ 1,100 $ 93,292 $ 270,710 Cost of sales......................... 16,279 86,995 250 117,879 289,774 Research and development expense...... 167,000 260,000 110,000 323,000 930,000 General and administrative expense.... 919,546 1,176,885 476,537 966,888 4,152,093 Write-off of license fee.............. 20,000 -- -- -- 168,000 Interest and financing costs, net..... 129,126 1,065,240 328,744 749,432 1,988,03 Net loss(2)........................... (1,224,917) (2,512,208) (914,431) (2,063,907) (7,257,187) Net loss per share--basic and diluted............................. (.35) (.62) (.23) (.53) Weighted average number of shares outstanding......................... 3,506,642 4,040,705 4,025,369 3,929,836
- ------------------------ (1) The Company's date of inception is June 21, 1994. (2) During the periods presented through June 30, 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 July 1, 1996. See Notes to Financial Statements. BALANCE SHEET DATA
DECEMBER 31, 1997 JUNE 30, 1998 ----------------- ------------- Working capital deficit..................................... $ (4,066,580) $ (2,055,676) Total assets................................................ 594,536 1,161,430 Total liabilities........................................... 4,144,316 5,874,885 Total stockholders' deficit................................. (3,549,780) (4,713,455)
24 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. To date, the Company has executed two contracts with the North American Pari-Mutuel Regulators Association ("NAPRA") to provide and maintain an internet-based regulatory tracking system that includes a database with licensing information, infractions records and digital photographs of the licensees in its jurisdictions. NAPRA is an organization comprised of nineteen pari-mutuel wagering jurisdictions located in North America, including horse and dog racing, jai alai and card rooms. In addition to the contracts with NAPRA, the Company has developed and installed smart card based employee identification and licensing systems in five NAPRA jurisdictions: the Birmingham Racing Commission and the Macon County Race Course, both in Alabama, the Oregon Racing Commission, the Idaho State Racing Commission and the Wyoming Pari-Mutuel Commission. The Company recently submitted a proposal to an additional NAPRA jurisdiction, the Arizona Racing Commission, to provide a smart card based employee identification and licensing system. The Company is in the process of installing a smart card based employee identification and licensing system at the Colorado Racing Commission (not a NAPRA member jurisdiction), to be completed by the end of September, 1998. The Company has also entered into a contract with the Florida Department of Pari-Mutuel Wagering to develop and maintain an internet accessible smart card based employee identification and licensing database system for their 27 pari- mutuel wagering facilities around the state. The licensing system the Company is developing for the State of Florida will be a database maintained by ACTI and will be accessible by the Internet. The smart card licenses of the employees will be utilized to provide secure access to the web site and the database through the Internet. In addition, the Company has completed a pilot program in New Jersey and Pennsylvania for the issuance of "equine medical passport" smart cards for monitoring the identity, interstate and intrastate movement and medical records of thoroughbred horses. The Florida Department of Agriculture and Consumer Services Bureau of Disease Control has proposed a similar pilot project anticipated to begin as soon as possible. The Bureau of Disease Control is responsible for ensuring the health and marketability of livestock in the state of Florida. To prevent the spread of a deadly disease, the federal government requires any horse crossing state lines to have a negative Coggins Report which evidences a negative test result for Equine Infectious Anemia. A Coggins Report is valid for one year from the issue date. Further, each state requires a valid health certificate for any horse entering the state. The states of Florida, Georgia and Alabama have formed an alliance whereby a special ninety (90) day pass authorized by any of the three states can be used to cross state lines between these states. The proposed Florida pilot program will involve a test "livestock medical passport" program in which each of 100 animals will be implanted with an "electronic identification transponder" used in conjunction with smart cards to verify each animal's identity and federal and state medical certifications. This pilot program will replace the required paper passports for horses crossing between these states. Although completed programs in New Jersey and Pennsylvania successfully tested the equine medical passport smart card system and similar electronic transponder implants are in use which are not coordinated with smart card technology, such equine medical passport pilot programs have 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 entered into a Memorandum of Understanding with Traquer Systems, Inc. ("Traquer") to market the Company's smart card systems to Indian gaming and wagering facilities in North America. Traquer has significant expertise with the rules and regulations for Indian gaming environments. In February 1998, the Company received its first order from Traquer to provide a smart card based 25 employee licensing system to an Indian tribe in Arizona. This system is expected to be installed by October 1998. The Company received a request from Foundation Health, a Florida based HMO, to structure a smart card system to assist and expedite the verification of patient insurance coverage by hospital employees. The pilot program involves Palmetto Hospital, one of the largest hospitals in Miami, Florida, and the Company anticipates the initial phase will be installed by November 1998. Other phases of this proposed project may include expanding the smart card based verification capability to all Foundation Health member hospitals and Authorized Service Providers in south Florida. The final phase may provide all Foundation Health members with enhanced smart card member identification capabilities. The Company has also been selected as a subcontractor to Paradigm 4 for the proposed New York City Time Project. The City of New York has significant problems tracking city employees and verifying the accuracy of actual hours worked. This project will pilot a number of technologies, including the use of smart cards, for time and attendance management and tracking of city employees. The Company is negotiating an exclusive distributorship agreement with AVID Identification Devices, Inc. ("AVID"). AVID uses PETtrac, a worldwide computerized tracking system for companion animals. Under the terms of the agreement, AVID will have the right to sell a unique smart card based system developed by the Company exclusively for AVID and to be used in conjunction with AVID's radio frequency identification devices currently being sold worldwide to veterinarians and other customers. Owners of animals will carry with them the Company's smart card containing animal tracking information related to the existing PETtrac identification system as well as other AVID related applications, including animal records. There can be no assurance that the Company will be successful in negotiating this agreement. The Company has entered into a two year Non-Exclusive Representation Agreement to DTEC/ Comprehensive Pharmacy Services, Inc., a wholly owned subsidiary of Service Master Corporation. DTEC/ CPS provides a full range of services and technologies to the health care industry. The core of the company's business is in pharmacy consulting and pharmacy management expertise. DTEC/CPS has the right to market the Company's smart card products and services to its extensive customer base throughout the world. DTEC/CPS and the University of Tennessee are currently engaged in several research projects where smart cards could play a significant role. It is anticipated that the Company will greatly benefit from these projects, however, there can be no assurance that the Company's involvement will result in sales to the University of Tennessee or to any other DTEC/CPS customer. 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 its strategic partners' 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 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 operating period since its inception, resulting in an accumulated deficit at June 30, 1998 of $7,257,187, 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 26 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 1998 Private Placement of approximately $187,000 upon closing of the minimum offering. Furthermore, the Company has incurred costs related to a possible debt placement, which costs have to date been deferred. In the event the planned debt placement is not successful, these costs will be subsequently charged to operations. 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 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 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. As of the date of this Prospectus, the Company has ten full-time employees, consisting of four executive officers and six employees engaged in engineering, technical support, product development, marketing and sales, and administration, including the Company's recently appointed Director of Sales. See "Management." 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. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1998, the Company had cash on hand of $85,764, a working capital deficit of $2,055,676 and a stockholders' deficit of $4,713,455. 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, Lawrence O. Perl, the Chairman of the Board and Chief Executive Officer of the Company, (both individually and through The 1994 Perl Trust Indenture, a trust for the benefit of the family of Lawrence O. Perl (the "Perl Trust")), Raymond Findley, the Chief Operating Officer of the Company, Raymond A. Roncari, a director of the Company, and Harold Rothstein, a director of the Company, (both individually and through The Rothstein Family Trust, a trust 27 for the benefit of the family of Harold Rothstein (the "Rothstein Trust")), (each of the foregoing being referred to individually as an "Original Stockholder"), have made the loans to the Company in amounts aggregating $30,177, $15,177, $1,008,854 and $1,300,747, respectively (the "Stockholder Loans"). The Stockholder Loans bear interest at ten percent (10%) per annum and are to be repaid with the proceeds of subsequent debt financing, but in no event later than January 1, 2001. These loans were to provide the Company working capital and cover costs associated with this Offering. See "Use of Proceeds," "Plan of Operation" and "Certain Transactions." 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"). 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. Upon the consummation of a January, 1997 private placement offering (the "1997 Private Placement"), $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. See "Certain Transactions." 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 ten percent (10%) per annum 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 370,800 shares of Common Stock, for a per share value of $.89. In July, September and November 1996, the Company borrowed an aggregate of $300,000 from The First National Bank of Suffield ("First Suffield"). Interest accrues on such borrowings at the prime lending rate established by First Suffield from time to time, which was 9.0% as of June 30, 1998, and is payable monthly. The aggregate outstanding principal amount owed by the Company to First Suffield, together with accrued interest thereon, is payable on September 1, 1998. 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. This debt is to be repaid from the proceeds of the maximum offering. See "Certain Transactions." From July through October 1996, the Company borrowed $150,000 from Fleet National Bank ("Fleet"). Such amount is payable on demand. Interest accrues on such borrowings at the prime lending rate established by Fleet from time to time, which was 8.5% as of June 30, 1998, and is payable monthly. The Company's indebtedness to Fleet (the "Fleet Loan") 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. This debt is to be repaid from the proceeds of the maximum offering. See "Certain Transactions." 28 In October 1996, the Company borrowed $100,000 from The Chase Manhattan Bank ("Chase"). Such amount was payable on August 11, 1998, however the Company is presently seeking an extension of such loan. Interest accrues at the prime lending rate established by Chase from time to time, which was 8.5% as of June 30, 1998, and is payable monthly. 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. This debt is to be repaid from the proceeds of the maximum offering. 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 closing of the maximum offering, subsequent debt financing or March 3, 2001, 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 closing of the maximum offering, subsequent debt financing or March 3, 2001. See "Certain Transactions." In December 1996, the Company borrowed $50,000 from First Southern Bank ("FSB"). Such amount is payable on December 9, 1998 and bears interest at a rate of 8.5% payable monthly. 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. This debt is to be repaid from the proceeds of the maximum offering. See "Certain Transactions." In January 1997, pursuant to the 1997 Private Placement, the Company completed the sale to 23 private investors (including Lawrence O. Perl, an officer and director of the Company, and Mr. Roncari, Mr. Rothstein and Bruce Bonadies, all directors of the Company) of 25 units (the "1997 Units"); each 1997 Unit consisted of (i) an unsecured 9% non-negotiable bridge note in the principal amount of $50,000 due on the earlier of the consummation of an initial public offering or January 16, 1998 (the "1997 Bridge Notes"); (ii) 7,725 bridge shares (the "1997 Bridge Shares"); and (iii) 38,625 bridge warrants, each bridge warrant representing the right to purchase one share of Common Stock at an exercise price of $2.59 per share, subject to adjustment in certain circumstances (the "1997 Bridge Warrants"). The purchase price per 1997 Unit was $50,000. The Company received gross proceeds of $1,250,000 from the sale of the 1997 Private Placement. After payment of $125,000 in placement fees to the underwriting firm (not the Underwriter in this Offering), which acted as placement agent for the Company with respect to the 1997 Private Placement, and other offering expenses of approximately $105,000, the Company received net proceeds of approximately $1,020,000 in connection with the 1997 Private Placement. The net proceeds from the 1997 Private Placement were 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. From July 1997 through January 1998, three directors, Raymond A. Roncari, Harold Rothstein and Lawrence O. Perl, provided the Stockholder Loans to the Company in the amounts of $320,000, $460,000 and $15,000, respectively, each bearing interest at an annual rate of ten percent (10%). These Loans provided the Company working capital and covered some costs associated with this Offering and are to be repaid with the proceeds of subsequent debt financing, but in no event later than January 1, 2001. In March 1998, the Company entered into the 1998 Private Placement, through which the Company completed the sale to fourteen private investors (holders included Lawrence O. Perl, the Company's Chairman of the Board and Chief Executive Officer, Raymond A. Roncari, a director of the Company, Harold Rothstein, a director of the Company and Bruce R. Bonadies, a director of the Company) of 30 Units, each Unit consisting of (i) an unsecured non-negotiable promissory note in the principal amount of $50,000 (the "Bridge Notes"), (A) bearing interest at the rate of ten percent (10%) per annum, payable 29 annually in arrears, and (B) providing for a loan fee payable upon payoff of the Bridge Note in an amount equal to $5,000 less interest accrued under the Bridge Note during the first year through the date of payoff; (ii) 3,863 shares of Common Stock (the "Bridge Shares"); and (iii) 3,863 Bridge Warrants. The purchase price per Unit was $50,000. The Company received gross proceeds of $1,500,000 from the sale of such Units. After payment of approximately $10,000 in costs associated with the 1998 Private Placement, the Company received net proceeds of approximately $1,490,000 in connection with the 1998 Private Placement. Approximately $1,345,000 of the net proceeds was used to exercise certain options to repurchase securities sold in the 1997 Private Placement. Some holders of the 1997 Units chose to invest in the 1998 Private Placement and defer all interest due them from the 1997 Units; such holders included Lawrence O. Perl, the Company's Chairman of the Board and Chief Executive Officer, Raymond A. Roncari, a director of the Company, Harold Rothstein, a director of the Company and Bruce R. Bonadies, a director of the Company, Richard Shelton, Susan Shelton and Ronald Seplowitz. These holders deferred a total of $26,764 in interest, to be repaid in two parts: $12,157 from the proceeds of the minimum offering and $14,607 from the proceeds of the maximum offering. The balance of the net proceeds are being used for working capital and general corporate purposes, as well as to fund some expenses of this Offering. The Bridge Notes, together with accrued interest thereon, are due on the earlier of March 3, 2001 or the closing of an IPO by the Company. The Bridge Notes are to be repaid from the proceeds of the minimum offering. The accrued interest due on the Bridge Notes is to be repaid in two parts, $67,157 from the proceeds of the minimum offering and $109,589 from the proceeds of the maximum offering, but in no event later than March 3, 2001. In conjunction with the closing of the 1998 Private Placement, the Company entered into Director Loan Agreements with each of Harold Rothstein and Raymond A. Roncari pursuant to which Messrs. Rothstein and Roncari each committed to loan $450,000 (for a total of $900,000) to the Company to be used for working capital and certain costs of this Offering. These amounts, together with approximately $157,000 of the proceeds of the 1998 Private Placement, were used to fund certain costs of this Offering and provide required working capital. In consideration for this commitment, Messrs. Rothstein and Roncari were each granted 19,313 shares of Common Stock of the Company and 19,313 Commitment Warrants. Pursuant to each Director Loan Agreement, the Company has the right to draw down advances from each of Messrs. Rothstein and Roncari (each a "Director Lender") as funds are required and the Director Lender is obligated to so advance funds within three (3) business days of any such request. Any amounts advanced will bear interest at a rate of ten percent (10%) per annum. All amounts so advanced, together with accrued interest thereon will be due and payable in full on the earlier of (i) January 1, 2001, or (ii) the closing of subsequent debt financing. 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, 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 through such means in the estimated aggregate amount of $6,100,000 (including approximately $5,500,000 through June 30, 1998). 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 assumptions relating to its current 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 closing of the minimum 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 30 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. There can be no assurance that additional financing will be available to the Company on commercially reasonable terms, or at all. Further, if the closing of this Offering is delayed, the Company may not have sufficient capital to fund operations and the anticipated expenses of this Offering. Although the Company believes it may be able to raise at least a portion of the Company's future financing requirements for such period among the officers, directors and/or stockholders of the Company, no officer, director or stockholder of the Company has made any further commitment to the Company to provide any portion of the Company's future financing requirements and there are no assurances that any officer, director or stockholder will do so. Any inability to obtain additional financing when needed may 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 of the interests of the Company's then-existing stockholders. At some future date, the Company intends to offer up to approximately $30 million in debt financing, to be negotiated by Beter. There can be no assurance that such additional financing, or any other additional financing, will be available to the Company on commercially reasonable terms, or at all. Further, if such additional financing is attempted, there can be no assurance that such additional financing, or any other additional financing, will be successful. 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. POSSIBLE FLUCTUATIONS IN OPERATING RESULTS The sales cycle for a prospective System Sponsor is expected to commence at the time the 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. 31 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 User information and 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, health care and various government agency applications and can design each system to perform various functions in virtually any industry, 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. According to the market researcher Dataquest, the microprocessor and memory based smart card market will grow from 544 million cards in 1995 to 3.4 billion cards by 2001. 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. 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 and the National Hockey League's St. Louis Blues have each installed smart card systems to be used for the purchase of concession items at their respective sports games. Government Technology Magazine stated in a February 1996 issue that U.S. welfare reform legislation mandates that every state replace its paper food stamp system with an Electronic Benefit Transfer (EBT) scheme by the year 2002, consistent with the government's push towards a paperless society. Pursuant to this mandate, many states use magnetic stripe cards for their food stamp programs, and the States of Mississippi, Ohio and Wyoming have each proposed plans to replace food stamps with a card-based system to improve convenience and efficiency, as well as to decrease fraud. A joint pilot program in Manhattan's Upper West Side between MasterCard, Chase Manhattan Bank, VISA and 32 Citibank brings the idea of electronic cash to New York consumers and merchants, with almost 700 merchants participating in the program. The Company's smart cards are based on concepts similar to these applications, but the Company's cards can contain more information due to the Company's patented method of multiple application layering. In addition, only the Company can utilize its patented dual card access technology. The Company believes the enhanced security features and multiple function capabilities of its cards take existing smart card technology several steps further. 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 an unalterable 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 and expensive 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 patented 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." By virtue of the dual card 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 application layer 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. For example, one User's smart card provided by the Company could generate a medical history when activated by an HMO's 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 and 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's patented method of 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. The Company 33 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, photograph or personal identification number system to a fingerprint, retinal scan 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 provide 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 systems establish 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. 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 with varying amounts of memory, depending upon each System Sponsor's requirements. 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 between the Access Card and the User Card 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 software within the Company's smart cards. In addition, because the Company's smart cards conform to 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. These printers may also include a chip encoder that can write information to the chip at the same time as the smart card is printed. Numerous such printers are available in the industry. 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 that performs certain basic functions, as well as software that performs the specific functions required by the particular system. The Company has developed software that 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 34 for use on a workstation personal computer. In addition, the Company is a member of the Microsoft developer network and participates in alpha and beta testing of new Microsoft products. The Company's proprietary software is compatible with Windows 3.x-TM-, Windows 95-TM-, Windows NT-TM-, and Windows 98-TM-. The Company intends to provide each System Sponsor with a customized configuration of its products based upon the System 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. Each System Sponsor will utilize 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 an Authorized 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 comprised of a personal computer, notebook computer and/or hand-held display device, read/write devices and system software. One personal computer may in some cases function as issue station, update station and display station, depending on the rights encoded in the Access Card used. 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. 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 personal computers, notebook computers and hand-held display devices) will be offered at then-prevailing market prices. WARRANTY AND SERVICE. The Company offers a limited warranty covering both parts and labor, pursuant to which the Company or its authorized service representatives will make repairs and replace parts that 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. TECHNICAL SUPPORT. The Company offers technical support to its System Sponsors at no charge on a limited basis, as described in each individual System Sponsor contract. Beyond the specified level, the Company charges an hourly rate for additional technical support. The Company does not anticipate that the cost of offering such technical support services will be material. SMART CARD PRODUCT DEVELOPMENT The Company believes there are numerous potential applications for its smart card systems, including but not limited to the following: EMPLOYEE LICENSING--Licensing and identifying 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. 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 and domestic pets. 35 GOVERNMENT APPLICATIONS--Issuing citizen photo identification and government licenses (such as motor vehicle, professional and weapons licenses) and maintaining and processing government entitlement information (including Medicare, Medicaid and welfare information). 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. GAMING--Controlling and monitoring loss limits, employee licensing and frequent player tracking. HEALTH CARE--Simplifying and expediting the verification of patient insurance coverage and maintaining paperless medical records by medical service providers. SOFT TRADING DESK--Reconfiguring the hardware and software of a securities trading desk through the use of information embedded in each individual trader's smart card to accommodate each trader's individual screen and information preferences. The Company has installed an employee licensing system for the Birmingham Racing Commission. The agreement provides for the Company to deliver smart cards and hardware in connection with the licensing and monitoring of racetrack 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. To date, the Company has provided the Birmingham Racing Commission with over 15,000 smart cards, a smart card printer and chip encoder and two (2) 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. The Company has installed a similar system at the Macon County Race Course in Alabama under a separate contract. See "Certain Transactions." The Company has also installed an employee licensing system at the Oregon Racing Commission and, to date, the Company has sold approximately 9,500 smart cards and four (4) read/write devices to the Oregon Racing Commission. The Company also has two contracts with NAPRA for a national licensing system that includes a database for nineteen racing jurisdictions, including information on licensing data, infractions and digital photographs. In March 1998, the Company installed an employee licensing system at the Idaho Racing Commission. The system utilizes approximately 1,500 processor cards for mobile employees who travel between racing facilities, such as jockeys, owners and trainers, plus over 2,000 memory only cards for stationary employees, such as food vendors and ticket takers. In June, 1998, the Company received contracts or purchase orders from the Florida, Wyoming and Colorado racing commissions to provide smart card based licensing systems. 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 medical passport smart cards to track the identity, movement and medical records of thoroughbred racehorses. To prevent the spread of a deadly disease, the federal government requires any horse crossing state lines to have a negative Coggins Report which evidences a negative test result for Equine Infectious Anemia. A Coggins Report is valid for one year from the issue date. Further, each state requires a valid health certificate for any horse entering the state. Under the New Jersey and Pennsylvania 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 medical passport smart cards. The Company is currently developing enhancements to the smart card system utilized in the 36 pilot program in order to address certain operational issues that arose during the program. Although the completed program successfully tested the equine medical passport smart card system, such pilot program has not resulted in any system sales to date. There can be no assurances that any of the Company's pilot programs will result in system purchases by any potential System Sponsor. The Florida Department of Agriculture and Consumer Services Bureau of Disease Control has proposed a similar pilot project anticipated to begin as soon as possible. The Bureau of Disease Control is responsible for ensuring the health and marketability of livestock in the state of Florida. The states of Florida, Georgia and Alabama have formed an alliance whereby a special ninety (90) day pass authorized by any of the three states can be used to cross state lines between these states. The proposed Florida pilot program will involve a test "livestock medical passport" program in which each of 100 animals will be implanted with an "electronic identification transponder" used in conjunction with smart cards to verify each animal's identity and federal and state medical certifications. This pilot program will replace the required paper passports for horses crossing between these states. Although completed programs in New Jersey and Pennsylvania successfully tested the equine medical passport smart card system and similar electronic transponder implants are in use which are not coordinated with smart card technology, such equine medical passport pilot programs have not resulted in any system sales to date. The Company has entered into a Memorandum of Understanding with Traquer to market the Company's smart card systems to Indian gaming and wagering facilities in North America. Traquer has significant expertise with the rules and regulations for Indian gaming environments. In February 1998, the Company received its first order from Traquer to provide a smart card based employee licensing system to an Indian tribe in Arizona. This system is expected to be installed by October 1998. The Company received a request from Foundation Health, a Florida based HMO, to structure a smart card system to assist and expedite the verification of patient insurance coverage by hospital employees. The pilot program involves Palmetto Hospital, one of the largest hospitals in Miami, Florida, and the Company anticipates the initial phase will be installed by November 1998. Other phases of this proposed project may include expanding the smart card based verification capability to all Foundation Health member hospitals and Authorized Service Providers in south Florida. The final phase may provide all Foundation Health members with enhanced smart card member identification capabilities. The Company has also been selected as a subcontractor to Paradigm 4 for the proposed New York City Time Project. The City of New York has significant problems tracking city employees and verifying the accuracy of actual hours worked. This project will pilot a number of technologies, including the use of smart cards, for time and attendance management and tracking of city employees. The Company is negotiating an exclusive distributorship agreement with AVID Identification Devices, Inc. ("AVID"). AVID uses PETtrac, a worldwide computerized tracking system for companion animals. Under the terms of the agreement, AVID will have the right to sell a unique smart card based system developed by the Company exclusively for AVID and to be used in conjunction with AVID's radio frequency identification devices currently being sold worldwide to veterinarians and other customers. Owners of animals will carry with them the Company's smart card containing animal tracking information related to the existing PETtrac identification system as well as other AVID related applications, including animal records. There can be no assurance that the Company will be successful in negotiating this agreement. The Company has entered into a two year Non-Exclusive Representation Agreement to DTEC/ Comprehensive Pharmacy Services, Inc., a wholly owned subsidiary of Service Master Corporation. DTEC/ CPS provides a full range of services and technologies to the health care industry. The core of the company's business is in pharmacy consulting and pharmacy management expertise. DTEC/CPS has the right to market the Company's smart card products and services to its extensive customer base throughout the world. DTEC/CPS and the University of Tennessee are currently engaged in several research projects where smart cards could play a significant role. It is anticipated that the Company will greatly benefit from 37 these projects, however, there can be no assurance that the Company's involvement will result in sales to the University of Tennessee or to any other DTEC/CPS customer. 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, through the Subsidiary, has entered into a Memorandum of Understanding with SHL Systemhouse, an international systems integrator owned by MCI, to form a joint venture for the purpose of attempting to secure a project to develop a smart card system for the Province of Ontario, Canada. There can be no assurance that any such projects will be implemented or, if implemented, generate meaningful revenues. MARKETING AND SALES 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. Because the Company believes 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 its strategic partners' 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 System Sponsors and strategic partners and attempt to increase the visibility of the Company. It will be the role of the Director of Sales, under the direction of management, to guide the Company from the research and development phase to a company with full marketing and sales strategies for direct and indirect sales. The Company intends to market its smart card systems directly through its management and employees and may also retain the services of third parties such as independent sales representatives and marketing and other consultants. The Company utilizes 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 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 AND TECHNOLOGY PURCHASE For the years ended December 31, 1996 and December 31, 1997, the Company incurred costs relating to research and development activities in the approximate amounts of $167,000 and $260,000, respectively. The Company intends to utilize a portion of the proceeds of this Offering for research and development, including $712,000 (of which $126,000 has been expensed through June 30, 1998, $100,000 is expected to be capitalized and $486,000 is expected to be expensed ratably over approximately a two year period) payable to SoftChip in connection with the purchase of the DVK-1 System and the further enhancement of 38 the Company's proprietary technology as well as the development of system applications and pilot programs for potential System Sponsors. The Company further intends to pursue additional patents on various aspects of its technology. MANUFACTURING The Company does not manufacture its own microprocessor chips or associated hardware or assemble its own smart cards. 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 is under no obligation to purchase any such components from any one particular manufacturer and therefore may obtain quality components at the best possible prices the Company can find. 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 PTS (a unit of Groupe Bull), Schlumberger Electronic Transactions (a business segment of Schlumberger Limited), Orga Kartensysteme GMBH, Giesecke & Devrient and Mondex International, 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 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 regulations 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 Authorized 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. The European Community and others have adopted these standards as their preferred quality standards. However, as technological advances occur in the smart card industry, other emerging standards may gain 39 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 and Canada. 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. The Company will also be required to obtain most 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 some 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 in part on its ability to enforce its patents, protect trade secrets and operate without infringing on the proprietary rights of others. The Company has received United States patent number 5629508 with respect to its dual card access technology and methods. In addition, the Company has filed a continuation-in-part on its patent. If granted, this will significantly expand the Company's intellectual property rights pertaining to dual card-based data retrieval and access control. 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. 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 foreign patents could have a material adverse effect on the Company's ability to successfully commercialize its smart card systems outside the U.S. Even though the Company has been able to obtain a patent, there can be no assurance that this 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, or at all, 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 occur in the smart card and computer industries and there can be no assurance 40 that the Company will have the financial resources to enforce or defend a patent infringement or proprietary rights action. In addition, the Company has received a federal trademark registration for its SMART-ID-Registered Trademark- mark and design and has applied for a federal trademark registration for its Cheeze! mark. SMART-ID-Registered Trademark- is a smart card based system that provides positive identification, transaction tracking and the ability to layer multiple applications on a single smart card. Cheeze! is a program currently used by nineteen pari-mutuel licensing jurisdictions to photograph licensees and transmit the photograph and license data to a central database, which is currently housed at the Company's offices. The Company's use of its software, name and marks may be subject to challenge by others, which, if successful, could have a material adverse effect on the Company. The Company has entered into an agreement with SoftChip Israel Ltd. of Jerusalem, Israel and its affiliate, SoftChip Technologies (3000) Ltd. (collectively, "SoftChip"), to purchase the DVK-1 Chip Mask Operating System and architecture ("DVK-1 System") for a purchase price of $100,000 and for SoftChip to provide technical support and development to the Company for at least a two-year period for an additional $450,000 plus royalties ranging from $.125 to $.25 for each smart card sold by the Company that incorporates the DVK-1 System. Upon its closing, which is scheduled to occur after the minimum closing of this Offering, this agreement will provide the Company ownership of its own chip mask and access to the technical resources needed to develop a completely new and proprietary chip mask and operating system. The chip mask provides the basic instructions to the microchip and its internal components and facilitates the orderly utilization of all of the microchip's components and allows the device to be utilized. The Company has also executed a purchase order with SoftChip for technical services for a monthly fee of $18,000, which commenced December 1, 1997. The Company is obligated to pay the amount payable under the purchase order, the purchase price and the fees for technical support, no later than November 1, 1998, which will reduce the amount of working capital available to the Company. Under the agreement, ownership of the DVK-1 System will be transferred to the Company at closing upon payment in full of the purchase price and technical support fees. If the closing of the minimum offering is delayed beyond November 1, 1998, the Company believes it may be able to reach a mutual agreement with SoftChip to extend the closing date of the agreement, but there can be no assurance that the Company will be able to reach such agreement with SoftChip, or that the Company will ultimately secure ownership of the DVK-1 System if the closing of the minimum offering is delayed beyond November 1, 1998. Additionally there can be no assurance that ownership of the DVK-1 System will result in the successful development of new technology. See "Plan of Operation" and "Business--Intellectual Property." 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. 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 the date of this Prospectus, the Company had ten full-time employees, consisting of four executive officers and six employees engaged in engineering, technical support, product development, marketing and sales, including the Company's recently appointed Director and Sales. See "Management." The Company also uses the resources of independent programmers and consultants from time to time on 41 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. 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 January 1, 1997 and will continue through January 31, 2000. Pursuant to the sublease, the Company is required to pay rent of approximately $3,005 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 $481 per month. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The current directors and executive officers of the Company are as follows:
NAME AGE POSITION - ------------------------------------ --- --------------------------------------------------------------------- Lawrence O. Perl.................... 55 Chief Executive Officer, Chairman of the Board & Director Raymond Findley, Jr................. 50 President, Chief Operating Officer & Director Frank S. Fuino, Jr.................. 52 Chief Financial Officer & Vice President of Finance Robert H. Dixon..................... 38 Vice President of Technical Operations Lilly Beter......................... 64 Secretary & Director Harold Rothstein.................... 75 Director Raymond A. Roncari.................. 73 Director Bruce R. Bonadies................... 55 Director Gordon W. Walker.................... 56 Director
LAWRENCE O. PERL, a co-founder of the Company, has served as Chairman of the Board and 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 Systems, Inc. ("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. FRANK S. FUINO, JR. was appointed as the Company's Chief Financial Officer and Vice President of Finance on August 4, 1998. From January 1996 to July 1998, Mr. Fuino was Senior Vice President and Chief Financial Officer of Mayor's Jewelers, Inc. From June 1988 to December 1995, Mr. Fuino was both an independent consultant providing financial services and a reorganization and management specialist for various corporations, most recently as Executive Vice President of Finance and Chief Financial Officer of Jan Bell Marketing, Inc., a position he held from May 1993 to May 1995. In prior years, Mr. Fuino served 42 in various capacities, including Vice President and Treasurer for Allied Stores Corporation from May 1977 to September 1987. 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 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 January 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 A. RONCARI, a co-founder of the Company, has been a director of the Company since January 1996. From 1979 to July 1995, Mr. Roncari served as the President and Chief Executive Officer of Roncari Industries, Inc., thereafter serving as President and Chief Executive Officer of Tilcon-Roncari, Inc., a partial successor-in-interest to Roncari Industries, Inc. until January 1997, at which time he retired. Mr. Roncari continues to serve as President and Chief Executive Officer of 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. LILLY BETER, newly appointed Secretary and member of the Board, is President of Lilly Beter Capital Group, Ltd., with offices in Washington, D.C., Minneapolis, Minnesota and Century City, California. She co-founded the firm over thirty years ago with her late husband, with whom she was also associated in his law practice, providing government representation to clients. Ms. Beter represents companies doing business in the Pacific Rim, South America, Europe and the Caribbean. She is a member of the American League of Lobbyists and the American Arbitration Association. BRUCE R. BONADIES, a newly appointed member of the Board, retired in March 1998 from his position as Vice President, Business Development of Marriott Health Care Services, a division of Marriott International. Mr. Bonadies has held numerous positions with various Marriott companies since 1977, including Senior Vice President of National Food Services and Facilities, Vice President of Sales and Vice President of Area Sales, and Director of Sales, and is currently president of Brandon Scott Associates, LLC, a recently formed sales training and consulting company. GORDON W. WALKER became a director of the Company in February 1997. Mr. Walker serves as counsel to Miller Thomson, a Toronto, Ontario law firm. From 1978 to 1985, Mr. Walker held various government cabinet positions for the Province of Ontario, including Minister of Correctional Services, Provincial Secretary for Justice, Minister of Industry and Trade, and Minster of Consumer and Commercial Relations. Between 1971 and 1985, Mr. Walker served three terms as a member of the Ontario legislature. 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 is classified into three classes of directors, with each class serving a staggered three-year term. Messrs. Bonadies and Findley and Ms. Beter are Class I directors, Messrs. Roncari and Walker are Class II directors, 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 2000, 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 43 future). Pursuant to the Nonemployee Directors' Stock Option Plan, non-employee 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 3,863 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 (the "Audit Committee") consisting of at least two directors who are not employees of the Company. 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 (the "Compensation Committee") consisting of at least two directors who are not employees of the Company. 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 (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. ADVISOR TO THE BOARD The Company has secured the services of Dr. Mary Mundinger as advisor to the Board. Dr. Mundinger currently holds the position of Dean and Professor at the School of Nursing, as well as an Associate Dean in the Faculty of Medicine, at Columbia University in New York. She sits as a consultant and advisor to various state and federal commissions including: The Federally Commissioned Committee to advise the Department of Veteran Affairs on Innovations in Nursing, 1997; The White House Steering Committee on Health, 1996; Co-Chair of the International Society of Technology Assessment in Health Care, Nursing and Technology Assessment Panel, 1993; and the Health Professions Review Group, appointed by President Clinton to review proposals of the Health Reform Task Force, 1993. She has authored two books on nursing and healthcare, as well as numerous articles in various nursing journals and magazines. Dr. Mundinger is also on the Boards of Directors of Cell Therapeutics, Inc. and United Healthcare. Her contacts and experience are expected to be instrumental in promoting smart card technology in the healthcare industry. KEY EMPLOYEE INSURANCE The Company has obtained "key man" insurance on the lives of Messrs. Perl and Findley in the amount of two million dollars each. OTHER KEY EMPLOYEE ROBERT J. CARTAGINE, a 1984 graduate of New York University with a Business Administration degree and a 1985 graduate of the New York Institute of Technology with a Sales Management degree, brings several years of sales experience to the Company as its newly appointed Director of Sales. He has developed training syllabuses for the Regional Bell Operating Companies and was employed for several years with Nynex, New York Telephone, Bell Atlantic and New Jersey Bell as Northeast Regional Sales Director. Mr. Cartagine performed sales services for the Company on a contract basis beginning in 44 February 1998 and became a regular employee in April 1998. Mr. Cartagine will enter into a two-year employment agreement no later than the closing of the minimum offering. EXECUTIVE COMPENSATION The following table sets forth certain information regarding the compensation in each of the last three fiscal years paid to the person who served as the Company's Chief Executive Officer and to the other officers of the Company who earned $100,000 or more during such periods (collectively, the "Named Officers"). SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR ANNUAL SALARY($) ALL OTHER COMPENSATION($) - ------------------------------------------------------------- --------- ---------------- --------------------------- Lawrence O. Perl, ........................................... 1997 156,000(1) -- Chief Executive Officer 1996 200,000(2) 1995 192,308 Raymond Findley, Jr., ....................................... 1997 189,955(1) -- President and Chief Operating Officer 1996 200,000(2) 1995 192,308
- ------------------------ (1) Does not include $94,000 and $60,045 in accrued but unpaid salary payable to each of Messrs. Perl and Findley, respectively. (2) Does not include $50,000 in accrued but unpaid salary payable to each of Messrs. Perl and Findley. EMPLOYMENT AGREEMENTS Each of the Company's officers, with the exception of Ms. Beter, has executed a five-year employment agreement to be effective upon closing of the minimum offering. 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 417,150 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 "1996 Options." The Stock Option Plan is administered by the Board or, at its discretion, by the Compensation Committee. The Board or the Compensation Committee have complete authority to administer and interpret the Stock Option Plan, to determine the terms upon which 1996 Options may be granted, to prescribe, amend and rescind such interpretations and determinations and to grant 1996 Options. The Board or the Compensation Committee has 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. 45 The price at which shares covered by a 1996 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 ten percent (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 one hundred ten percent (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 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 1996 Options into account in the order or sequence in which they were granted. The number of shares covered by an option is subject to adjustment for stock splits, mergers, consolidations, combinations of shares, reorganizations and recapitalizations. The 1996 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. 1996 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. As of August 4, 1998, Employee Incentive Options to purchase an aggregate of 268,058 shares of Common Stock were outstanding under the Stock Option Plan, including 77,250 shares to Robert Dixon and 92,700 shares to Frank S. Fuino, Jr., both officers of the Company; plus 15,450 shares to Robert Cartagine and 1,545 shares to Phyllis Burke, both employees of the Company. All of such Incentive Options will be exercisable at a per share price equal to $7.77, with the exception of the Incentive Options granted to Mr. Fuino, Mr. Cartagine and Ms. Burke, all of whose Incentive Options will be exercisable at a per share price equal to $11.00, and will vest in annual installments of twenty-five percent (25%) beginning on the date of grant. No Non-incentive Options have been granted under the Stock Option Plan. 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 46,350 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 "Nonemployee 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 in 1999 will receive, as of the date of each such election or re-election, options to purchase 3,863 shares of the Company's Common Stock at the fair market value thereof on the date of grant. In addition, each Nonemployee Director shall be granted options to purchase 3,863 shares of 46 Common Stock at each annual meeting of the Board during the term of such Nonemployee Director's directorship. All options granted under the Directors' Plan are to be Non-incentive Options. On February 2, 1998, each Nonemployee Director was issued an option to purchase 3,863 shares of Common Stock (aggregating 19,315 shares) at an exercise price of $7.77 per share, pursuant to the Directors' Plan. 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 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. 47 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 a minimum of 454,600 and a maximum of 648,900 shares of Common Stock offered hereby and the exercise of the options, 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 five percent (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.
SHARES BENEFICIALLY SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED BEFORE OWNED AFTER MINIMUM OWNED AFTER MAXIMUM OFFERING(2) OFFERING OFFERING ----------------------- ----------------------- ----------------------- NUMBER OF NUMBER OF NUMBER OF NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES PERCENT SHARES PERCENT SHARES PERCENT - ----------------------------------------------- ---------- ----------- ---------- ----------- ---------- ----------- Lawrence O. Perl(3)............................ 743,587 19.1% 743,587 17.1% 743,587 16.3% Raymond Findley................................ 741,655 19.0% 741,655 17.0% 741,655 16.3% Harold Rothstein(4)............................ 967,988 24.8% 967,988 22.2% 967,988 21.3% Raymond A. Roncari(5).......................... 943,845 24.2% 943,845 21.7% 943,845 20.7% Lilly Beter(6)................................. 3,863 0.1% 3,863 0.1% 3,863 0.1% Bruce Bonadies(7).............................. 5,795 0.1% 5,795 0.1% 5,795 0.1% Gordon Walker(8)............................... 3,863 0.1% 3,863 0.1% 3,863 0.1% Joseph Basch................................... 370,800 9.5% 370,800 8.5% 370,800 8.1% All officers and directors as a group (eight persons)..................................... 3,483,984 89.3% 3,483,984 80.1% 3,483,984 76.6%
Lawrence O. Perl, Raymond Findley, Harold Rothstein and Raymond A. Roncari may be deemed "promoters" of the Company, as such term is defined under the federal securities laws. - ------------------------ (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 3,901,136 shares of Common Stock outstanding prior to this Offering, 4,355,736 shares of Common Stock outstanding immediately after the minimum offering and 4,550,036 shares of Common Stock outstanding immediately after the maximum offering, before any consideration is given to outstanding options, warrants or convertible securities. (3) Includes 741,655 shares held by the Perl Trust, a family trust for the benefit of the family of Lawrence O. Perl, of which Mr. Perl is a beneficiary. As of May 1, 1998, the Perl Trust entered into a voting trust agreement with respect to the 741,655 shares held by the Perl Trust. As of July 8, 1998 Lilly Beter has been appointed the voting trustee of such shares; such appointment shall expire April 30, 1999. Does not include 1,932 shares issuable upon exercise of warrants received in connection with the 1998 Private Placement. (4) Includes 908,118 shares held by the Rothstein Trust, a family trust for the benefit of the family of Harold Rothstein, and 3,863 shares issuable upon exercise of the option issued pursuant to the Directors' Plan. As of May 1, 1998, the Rothstein Trust entered into a voting trust agreement with 48 Lilly Beter pursuant to which Ms. Beter was appointed the voting trustee with respect to the 908,118 shares held by the Rothstein Trust; such appointment shall expire April 30, 1999. Does not include 36,694 shares issuable upon exercise of warrants received in connection with the 1998 Private Placement or the 19,313 shares issuable upon exercise of his Commitment Warrants. (5) Includes 3,863 shares issuable upon exercise of the option issued pursuant to the Directors' Plan. Does not include 36,694 shares issuable upon exercise of warrants received in connection with the 1998 Private Placement or 19,313 shares issuable upon exercise of his Commitment Warrants. Does not include shares issuable upon exercise of an option to purchase 154,500 shares granted to Shreveport, pursuant to the Shreveport Option, which has since been assigned to Mr. Roncari. (6) Includes 3,863 shares issuable upon exercise of the option issued pursuant to the Directors' Plan. (7) Includes 3,863 shares issuable upon exercise of the option issued pursuant to the Directors' Plan. Does not include 1,931 shares issuable upon exercise of warrants received in connection with the 1998 Private Placement. (8) Includes 3,863 shares issuable upon exercise of the option issued pursuant to the Directors' Plan. CERTAIN TRANSACTIONS Pursuant to an agreement dated as of January 1, 1993, Shreveport Acquisition Corp. ("Shreveport"), a corporation which was founded by Lawrence O. Perl, the Chairman of the Board and Chief Executive Officer and Raymond A. Roncari, a director of the Company, and which was owned by Mr. Perl, Mr. Roncari and Harold Rothstein, a director of the Company, but was dissolved on December 31, 1997, 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 Amazing Controls!, Inc. 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 Amazing Controls!, Inc.'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. The Jockey Club purchased the balance of the McKinnie stock from Shreveport effective December 31, 1997. In December 1996, the Company issued to Shreveport the Shreveport Option to purchase 154,500 shares of Common Stock at an exercise price of $3.24 per share, which has since been increased to $7.77 per share and assigned to Mr. Roncari. The Shreveport Option is exercisable at any time during the five-year period commencing the earlier of January 1, 1999 or 90 days following the closing of the minimum 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 49 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 784,088 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, 7,725 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 $30,177, $15,177, $1,008,854 and $1,300,747, respectively. The Stockholder Loans bear interest at ten percent (10%) per annum and are to be repaid from the proceeds of subsequent debt financing, but in no event later than January 1, 2001. 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 issued to Mr. Roncari, and the Perl Trust issued to the Rothstein Trust, Capital Contribution Notes, each in the amount of $125,000. Pursuant to the Debt Conversion which occurred upon the consummation of the 1997 Private Placement 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 3,917, 3,917, 68,988 and 93,130 shares of Common Stock, respectively. Mr. Findley and the Perl Trust subsequently transferred 38,625 shares of Common Stock to Mr. Roncari and the Rothstein Trust, respectively, in satisfaction of the indebtedness represented by the Capital Contribution Notes. 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. The Company extended this arrangement until December 31, 1997, after which time the agreement expired. Upon expiration $42,000 was due to Lawrence Owen Associates from the Company. 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 ten percent (10%) per annum 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 370,800 shares of Common Stock. In January 1996, the Company sold 154,500 shares of Common Stock to Stephen S. Weisglass at a price of $.16 per share. Mr. Weisglass became a director of the Company in November 1996. In July 1997, Mr. Weisglass resigned from the Board and transferred his shares to Lilly Beter Capital Group, Ltd. Mr. Weisglass introduced the Company to Whale Securities Corp L.P. ("Whale"). Whale was thereafter retained by the Company to act as placement agent for a private placement to be followed by an initial public offering. The private placement was effected, but Whale subsequently refused to underwrite the public offering. Because of Mr. Weisglass' relationship with Whale, and the Company's dispute with Whale over Whale's failure to underwrite the public offering, the Company asked Mr. Weisglass to resign from the Board and to divest himself of his shares of Common Stock in the Company at his cost. Mr. Weisglass did as requested. 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 50 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 closing of the maximum offering, subsequent debt financing or March 3, 2001, 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 closing of the maximum offering, subsequent debt financing or March 3, 2001. See "Plan of Operation--Liquidity and Capital Resources." In January 1997, pursuant to the 1997 Private Placement, the Company completed the sale to 23 private investors (including Lawrence O. Perl, an officer and director of the Company, and Mr. Roncari, Mr. Rothstein and Bruce Bonadies, all directors of the Company) of 25 1997 Units. Each 1997 Unit consisted of (i) one 1997 Bridge Note; (ii) 7,725 1997 Bridge Shares; and (iii) 38,625 1997 Bridge Warrants. The purchase price per 1997 Unit was $50,000. The Company received gross proceeds of $1,250,000 from the sale of the 1997 Private Placement. A total of $262,500 of the 1997 Private Placement funds was assigned to the value of the common stock and warrants, which resulted in an effective interest rate of 30% on the 1997 Bridge Notes. After payment of $125,000 in placement fees to Whale, which acted as placement agent for the Company with respect to the 1997 Private Placement, and other offering expenses of approximately $105,000, the Company received net proceeds of approximately $1,020,000 in connection with the 1997 Private Placement. The net proceeds from the 1997 Private Placement were 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. It was anticipated that the Company would shortly thereafter undertake an initial public offering underwritten by Whale pursuant to a letter of intent between the Company and Whale. However, Whale eventually declined to underwrite the initial public offering, and in July of 1997, the Company commenced exploration of alternative financing arrangements. In connection with that initiative, the Company retained Beter as a consultant to work with the Company to obtain new financing. During the course of the Company's discussions with Beter and a number of the prospective underwriters, it became evident that the structure of the 1997 Private Placement was an impediment to additional financing. In order to meet the requirements for the Company to undertake a best efforts initial public offering to be underwritten by the Underwriter, it was necessary for the Company to redeem the 1997 Units. The Company entered into a series of option agreements dated November 19, 1997 to purchase the 1997 Units sold to investors for an aggregate of $1,250,000 in the 1997 Private Placement. The 1997 Units were redeemed with a portion of the net proceeds from the 1998 Private Placement. In January 1997, in connection with the 1997 Private Placement, the Company borrowed from Messrs. Perl, Rothstein and Roncari $175,000 and issued to them 1997 Bridge Notes in such aggregate principal amount, an aggregate of 27,038 1997 Bridge Shares, at the same price per share as that paid by purchasers of the 1997 Private Placement, and 135,188 1997 Bridge Warrants. Such 1997 Bridge Notes, 1997 Bridge Shares and 1997 Bridge Warrants were repurchased by the Company as part of the 1998 Private Placement. Between July 1997 and January 1998, Messrs. Rothstein, Roncari, and Perl provided a portion of the Stockholder Loans to the Company in the amounts of $460,000, $320,000, and $15,000, respectively. These loans were to provide the Company working capital and cover costs associated with this Offering, and are to be repaid from the proceeds of subsequent debt financing, but in no event later than January 1, 2001. In addition, various employees of the Company have deferred salary totaling approximately $550,000 as of June 30, 1998. Such employees continue to defer salaries and such deferred salary amounts are to be paid, together with interest at ten percent (10%), in two parts, $50,000 at the closing of the minimum offering 51 and the remainder, estimated to be $575,000 as of August 31, 1998, from the proceeds of the maximum offering, but in no event later than January 1, 2001. In March 1998, the Company entered into the 1998 Private Placement, through which the Company completed the sale to fourteen private investors (including certain officers and directors of the Company) of 30 Units, each Unit consisting of (i) one Bridge Note; (ii) 3,863 Bridge Shares; and (iii) 3,863 Bridge Warrants. The purchase price per Unit was $50,000. The Company received gross proceeds of $1,500,000 from the sale of such Units. After payment of approximately $10,000 in costs associated with the 1998 Private Placement, the Company received net proceeds of approximately $1,490,000 in connection with the 1998 Private Placement. A total of $300,000 of the 1998 Private Placement funds was assigned to the value of the common stock and warrants. Approximately $1,345,000 of the net proceeds was used to exercise certain options to repurchase securities sold in the 1997 Private Placement. Some holders of the 1997 Units chose to invest in the 1998 Private Placement and defer all interest due them from the 1997 Units; such holders included Lawrence O. Perl, the Company's Chairman of the Board, Chief Executive Officer and Chief Financial Officer, Raymond A. Roncari, a director of the Company, Harold Rothstein, a director of the Company and Bruce R. Bonadies, a director of the Company, Richard Shelton, Susan Shelton and Ronald Seplowitz. These holders deferred a total of $26,764 in interest, to be repaid in two parts: $12,157 from the proceeds of the minimum offering and $14,607 from the proceeds of the maximum offering. The balance of the net proceeds are being used for working capital and general corporate purposes, as well as to fund some expenses of this Offering. In conjunction with the closing of the 1998 Private Placement, the Company issued 38,625 shares of Common Stock, valued at $7.77 per share for a total of $300,116, and an option to purchase 77,250 shares of Common Stock, exercisable at 85% of the per share market price of the Common Stock on the exercise date, subject to adjustment (the "Chapman Option") to Chapman Group LLC, a company affiliated with Cohn & Birnbaum P.C., general counsel to the Company. These shares and options were issued in partial consideration for services rendered by Cohn & Birnbaum P.C. from the date of the Company's inception through the closing of an IPO by the Company and in consideration of deferral of fees at different times during such same time period. In conjunction with the closing of the 1998 Private Placement, the Company entered into Director Loan Agreements with each of Harold Rothstein and Raymond A. Roncari pursuant to which Messrs. Rothstein and Roncari each committed to loan $450,000 (for a total of $900,000) to the Company to be used for working capital and certain costs of the anticipated IPO. These amounts, together with approximately $155,000 of the proceeds of the 1998 Private Placement, were used to fund certain costs of this Offering, and provide required working capital. In consideration for this commitment, Messrs. Rothstein and Roncari were each granted 19,313 shares of Common Stock of the Company, valued at $7.77 per share for a total of $300,116, and 19,313 Commitment Warrants. Pursuant to each Director Loan Agreement, the Company has the right to draw down advances from each of Messrs. Rothstein and Roncari (each a "Director Lender") as funds are required and the Director Lender is obligated to so advance funds within three (3) business days of any such request. Any amounts advanced will bear interest at a rate of ten percent (10%) per annum. All amounts so advanced, together with accrued interest thereon, will be due and payable in full on the earlier of (i) January 1, 2001, or (ii) the closing of subsequent debt financing. As of May 1, 1998 the Perl Trust and the Rothstein Trust had each entered into separate voting trust agreements. Respectively on July 8, 1998 and May 1, 1998, Lilly Beter was appointed voting trustee with respect to the 741,655 shares held by the Perl Trust and the 908,118 shares held by the Rothstein Trust, respectively. Pursuant to the voting trust agreements, Ms. Beter is empowered to vote these shares as voting trustee until April 30, 1999. 52 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. In addition, all future material affiliated transactions and loans, and any forgiveness of loans, must be approved by a majority of the Company's independent directors who do not have an interest in the transactions and who have access, at the Company's expense, to the Company's or independent legal counsel. 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 (i) if the minimum offering is reached, 20,000,000 shares of Common Stock, $.001 par value per share, of which 4,355,736 shares will be outstanding and 1,000,000 shares of Preferred Stock, $.001 par value per share, of which no shares will be outstanding, or (ii) if the maximum offering is reached, 20,000,000 shares of Common Stock, $.001 par value per share, of which 4,550,036 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 Certificate of Incorporation and By-Laws is a summary and, while all material provisions are included, the following description 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 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. 53 WARRANTS ISSUED IN 1998 PRIVATE PLACEMENT The Bridge Warrants and Commitment Warrants issued in connection with the 1998 Private Placement (collectively, the "Warrants") will be exercisable at any time commencing on March 3, 1999 through and including March 3, 2003 at a price per share of eighty-five percent (85%) of the per share market price of the Common Stock on the exercise date, subject to adjustment. The Warrants provide that, upon exercise, in lieu of a cash payment, the Warrants to be exercised may be exchanged for a number of the warrant shares underlying the warrants (the "Warrant Shares") equal to (a) the total number of Warrant Shares issuable upon exercise of such Warrants for cash minus (b) a number of Warrant Shares equal to the quotient of (i) the aggregate exercise price of the exercised Warrants, divided by (ii) the then current market price of a share of the Company's Common Stock. The Warrants are redeemable by the Company at any time commencing on March 3, 2000, upon notice of not less than 30 days, at a price of $.10 per 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 $11.65. The Warrants will be exercisable until the close of business on the date fixed for redemption. REGISTRATION RIGHTS In connection with the 1998 Private Placement, the Company has agreed to grant certain "piggyback" registration rights in connection with the Bridge Shares and the Bridge Warrants and the Commitment Shares and Commitment Warrants. The Company has also agreed to grant certain "piggyback" registration rights in connection with the Chapman Option. The Company has also agreed to include the Bridge Shares and the shares underlying the Bridge Warrants (the "Bridge Warrant Shares") in any registration statement (the "Post-IPO Registration Statement") which the Company prepares and files with the Commission on a date following the one-year anniversary of the closing of this Offering so as to permit the public trading of the Bridge Shares and Bridge Warrant Shares pursuant thereto, subject to customary underwriter cutbacks. Notwithstanding the foregoing, the holders of the Bridge Shares and the Bridge Warrant Shares must agree not to sell any of such securities at least until the expiration of any applicable holding period established by the NASD and/ or any of the various state securities commissions in those states where the anticipated IPO will be effected. The Company shall bear all fees and expenses incurred in the preparation and filing of the Post-IPO Registration Statement. ANTI-TAKEOVER 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 eighty-five percent (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, 54 by the affirmative vote of at least 66% 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 ten percent (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 and Registrar is The Bank of New York. 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 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. SHARES ELIGIBLE FOR FUTURE SALE From the proceeds of this Offering, the Company will have 4,355,736 shares of Common Stock outstanding if the minimum offering is reached and 4,550,036 shares of Common Stock outstanding if the maximum offering is reached, of which the minimum 454,600 and maximum 648,900 shares of Common Stock offered herein by the Company will be freely tradable 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 3,901,136 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 3,901,136 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 one year 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 55 beneficially owned shares of Common Stock for at least one year is entitled to sell such shares under Rule 144 without regard to any of the limitations described above. The Company has granted certain "piggyback" registration rights to the holders of 193,133 shares of Common Stock and the 231,758 shares of Common Stock underlying the Warrants and the Chapman Option. 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 the 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 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 could impair the Company's ability to raise capital through the sale of its equity securities. 56 UNDERWRITING In May 1998, the Company entered into an Underwriting Agreement with the Underwriter to underwrite this Offering on a best efforts basis. The Underwriter has agreed, subject to the terms and conditions of the Underwriting Agreement, to use its best efforts to sell the shares as the Company's agent. The Underwriter will offer the shares on a "best efforts" basis, and has made no firm commitment to purchase any of the shares. The maximum number of shares to be offered will be 648,900 shares, which, if sold at the offering price, will generate proceeds to the Company, net of sales commissions, in the approximate amount of $6,424,110. The minimum number of shares to be sold is 454,600, which, if sold at the offering price, would generate proceeds to the Company, net of sales commissions, in the approximate amount of $4,500,540. All funds received by the Underwriter with respect to the first 454,600 shares will be deposited with The Bank of New York as Escrow Agent. In the event 454,600 shares are not sold within 180 days from the commencement of this Offering, the funds in escrow will be refunded to the subscribers in full without deductions and without interest. The shares are to be sold fully paid only. Stock certificates will be issued to purchasers only if the proceeds from the sale of 454,600 shares are released to the Company. Until such time as the funds have been released from escrow and the certificates delivered to the purchasers thereof, the purchasers will be deemed subscribers only and not shareholders. The Underwriter is to receive a cash commission of $1.10 per share sold. In addition, the Company has deposited with the Underwriter $25,000 to fund all anticipated expenses of this Offering. The obligations of the Underwriter are subject to certain terms and conditions set forth in the Underwriting Agreement, including the right of the Underwriter to terminate the Underwriting Agreement under the conditions and circumstances set forth therein. The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933. Prior to the Offering made hereby, there has been no public market for the Common Stock. Accordingly, the initial public offering price has been determined by negotiation between the Company and the Underwriter and is 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 the Common Stock 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. The factors considered in determining the offering price included an evaluation by management of the history of and prospects for the industry in which the Company competes and the prospects for earnings of the Company. 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 the operating performance of such companies. The Underwriter expects to register this Offering in a limited number of states, which action may limit or prohibit possible resale of the Common Stock in certain states in which the Offering is not registered. Under the terms of the Underwriting Agreement, the Company may not enter into any securities offering for a period of one year without the prior written consent of the Underwriter. The Underwriter has granted the Company written consent to pursue up to $30 million in any subsequent debt financing negotiated by Beter. 57 The foregoing is a brief summary of the provisions of the Underwriting Agreement and does not purport to be a complete statement of its terms and conditions. The Underwriting Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by the Law Offices of Bartz & Bartz, Southdale Office Centre, 6750 France Avenue South, Suite 350, Edina, Minnesota 55435. The validity of the Common Stock offered hereby will be passed upon by the Underwriter by its internal counsel. The Company is represented in general corporate matters by Cohn & Birnbaum P.C., 100 Pearl Street, Hartford, Connecticut 06103-4500. 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 to 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. 58 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY) FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1997 PERIODS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED) AND PERIOD FROM JUNE 21, 1994 (INCEPTION) TO JUNE 30, 1998 (UNAUDITED) F-1 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-3 FINANCIAL STATEMENTS Balance sheets............................................ F-4 Statements of operations.................................. F-5 Statements of stockholders' deficit....................... F-6 Statements of cash flows.................................. F-7 - F-8 Summary of Significant accounting policies................ F-9 - F-12 Notes to financial statements............................. F-13 - F-16
F-2 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, 1997, and the related statements of operations and cash flows for the years ended December 31, 1996 and 1997 and the statements of stockholders' deficit for each of the years (period) from June 21, 1994 (inception) to December 31, 1997. 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, 1997, and the results of its operations and its cash flows for the years ended December 31, 1996 and 1997 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 March 10, 1998, except for Note 8, which is as of July 9, 1998 F-3 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
DECEMBER 31, JUNE 30, 1997 1998 ------------ -------------- (UNAUDITED) ASSETS CURRENT: Cash................................................................ $ 27,203 $ 85,764 Accounts receivable................................................. 6,730 81,201 Inventory........................................................... 3,918 44,491 Prepaid expenses and other current assets........................... 11,657 23,057 Deferred financing costs............................................ 28,228 54,740 ------------ -------------- TOTAL CURRENT ASSETS.............................................. 77,736 289,253 EQUIPMENT, NET OF ACCUMULATED DEPRECIATION OF $69,692 AND $88,060..... 91,405 85,329 OTHER ASSETS: Software development costs, net..................................... 188,913 151,131 Deferred registration and debt costs................................ 228,911 628,146 Other............................................................... 7,571 7,571 ------------ -------------- $ 594,536 $ 1,161,430 ------------ -------------- ------------ -------------- LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT: Accounts payable.................................................... $ 398,397 $ 620,848 Accrued interest expense............................................ 310,154 369,666 Accrued salary and benefits......................................... 369,126 619,084 Other accrued expenses.............................................. 42,620 135,331 Notes payable to banks (Note 2)..................................... 600,000 600,000 Bridge financing notes payable (Note 4(a)).......................... 1,239,063 -- ------------ -------------- TOTAL CURRENT LIABILITIES......................................... 2,959,360 2,344,929 NOTES PAYABLE TO STOCKHOLDERS (NOTE 3)................................ 1,184,956 2,129,956 BRIDGE FINANCING NOTES PAYABLE (NOTE 4(b))............................ -- 1,400,000 ------------ -------------- TOTAL LIABILITIES................................................. 4,144,316 5,874,885 ------------ -------------- COMMITMENTS AND CONTINGENCIES (NOTES 1, 5 AND 7) STOCKHOLDERS' DEFICIT (NOTE 8): 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 4,055,625 and 3,901,136........................... 4,056 3,901 Additional paid-in capital.......................................... 1,669,444 2,544,831 Stock subscriptions receivable...................................... (30,000) (5,000) Accumulated deficit during the development stage.................... (5,193,280) (7,257,187) ------------ -------------- TOTAL STOCKHOLDERS' DEFICIT....................................... (3,549,780) (4,713,455) ------------ -------------- $ 594,536 $ 1,161,430 ------------ -------------- ------------ --------------
See accompanying summary of significant accounting policies and notes to financial statements. F-4 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
PERIOD FROM YEAR ENDED SIX MONTHS ENDED JUNE 21, 1994 DECEMBER 31, JUNE 30 (INCEPTION) ---------------------------- --------------------------- TO JUNE 30, 1996 1997 1997 1998 1998 ------------- ------------- ------------ ------------- ------------- (UNAUDITED) (UNAUDITED) REVENUES............................... $ 27,034 $ 76,912 $ 1,100 $ 93,292 $ 270,710 COSTS OF SALES......................... 16,279 86,995 250 117,879 289,774 ------------- ------------- ------------ ------------- ------------- GROSS PROFIT (LOSS).................. 10,755 (10,083) 850 (24,587) (19,064) ------------- ------------- ------------ ------------- ------------- EXPENSES: General and administrative........... 919,546 1,176,885 476,537 966,888 4,152,093 Research development................. 167,000 260,000 110,000 323,000 930,000 Write-off of license fee (Note 5).... 20,000 -- -- -- 168,000 Interest and financing costs, net (Notes 2 and 3).................... 129,126 1,065,240 328,744 749,432 1,988,030 ------------- ------------- ------------ ------------- ------------- 1,235,672 2,502,125 915,281 2,039,320 7,238,123 ------------- ------------- ------------ ------------- ------------- NET LOSS............................... $ (1,224,917) $ (2,512,208) $ (914,431) $ (2,063,907) $ (7,257,187) ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- ------------- BASIC LOSS PER SHARE................... $ (.35) $ (.62) $ (.23) $ (.53) ------------- ------------- ------------ ------------- ------------- ------------- ------------ ------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.......................... 3,506,642 4,040,705 4,025,369 3,929,836 ------------- ------------- ------------ ------------- ------------- ------------- ------------ -------------
See accompanying summary of significant accounting policies and notes to financial statements. F-5 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' DEFICIT
PERIOD FROM JUNE 21, 1994 (INCEPTION) TO JUNE 30, 1998 ------------------------------------------------------------------------------- ACCUMULATED DEFICIT COMMON STOCK ADDITIONAL STOCK DURING THE --------------------- PAID-IN SUBSCRIPTIONS DEVELOPMENT SHARES AMOUNT CAPITAL RECEIVABLE STAGE TOTAL ---------- --------- ------------ ------------ ------------- ------------- Issuance of shares to founders................... 3,136,350 $ 3,136 $ (2,136) $ (250) $ -- $ 750 Net loss......................................... -- -- -- -- (434,545) (434,545) ---------- --------- ------------ ------------ ------------- ------------- BALANCE, DECEMBER 31, 1994....................... 3,136,350 3,136 (2,136) (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....................... 3,136,350 3,136 497,864 (250) (1,456,155) (955,405) Issuance of shares............................... 185,400 186 29,814 (30,000) -- -- Issuance of shares for debt...................... 370,800 371 329,629 -- -- 330,000 Net loss......................................... -- -- -- -- (1,224,917) (1,224,917) Receipt of stock subscriptions................... -- -- -- 250 -- 250 ---------- --------- ------------ ------------ ------------- ------------- BALANCE, DECEMBER 31, 1996....................... 3,692,550 3,693 857,307 (30,000) (2,681,072) (1,850,072) Shares and warrants issued in connection with the first bridge financing (Note 4(a))............. 193,125 193 262,307 -- -- 262,500 Issuance of shares for debt...................... 169,950 170 549,830 -- -- 550,000 Net loss......................................... -- -- -- -- (2,512,208) (2,512,208) ---------- --------- ------------ ------------ ------------- ------------- BALANCE, DECEMBER 31, 1997....................... 4,055,625 4,056 1,669,444 (30,000) (5,193,280) (3,549,780) Period ended March 31, 1998 (unaudited) Forfeiture of shares........................... (154,500) (154) (24,846) 25,000 -- -- Shares and warrants redeemed in connection with the first bridge financing (Note 4(a))......... (193,125) (193) 193 -- -- -- Shares and warrants issued in connection with second bridge financing (Note 4(b))............ 115,886 116 299,884 -- -- 300,000 Issuance of shares for services rendered......... 38,625 38 300,078 -- -- 300,116 Issuance of shares for loan commitment........... 38,625 38 300,078 -- -- 300,116 Net loss......................................... -- -- -- -- (2,063,907) (2,063,907) ---------- --------- ------------ ------------ ------------- ------------- BALANCE, JUNE 30, 1998 (UNAUDITED)............... 3,901,136 $ 3,901 $ 2,544,831 $ (5,000) $ (7,257,187) $ (4,713,455) ---------- --------- ------------ ------------ ------------- ------------- ---------- --------- ------------ ------------ ------------- -------------
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
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE PERIOD FROM 30, JUNE 21, 1994 ------------------------ ---------------------- (INCEPTION) 1996 1997 1997 1998 JUNE 30, 1998 ----------- ----------- --------- ----------- ------------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss......................... $(1,224,917) $(2,512,208) $(914,431) $(2,063,907) $(7,257,187) ----------- ----------- --------- ----------- ------------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................. 23,541 71,726 6,077 56,551 163,626 Amortization of deferred financing costs.............. -- 220,417 105,417 36,963 257,380 Issuance of debt for services rendered..................... -- -- -- -- 72,774 Issuance of stock for services rendered..................... -- -- -- 300,078 300,078 Issuance of stock for loan commitment................... -- -- -- 300,078 300,078 Deferred registration costs written off.................. -- 352,966 -- -- 352,966 Amortization of bridge financing discount........... -- 251,563 120,313 210,937 462,500 Changes in assets and liabilities: (Increase) decrease in assets: Accounts receivable........ -- (6,730) (1,100) (74,471) (81,201) Inventory.................. (1,813) (855) (12,289) (40,573) (44,491) Prepaid expenses and other current assets........... 5,676 (6,558) (21,644) (11,400) (23,057) Other assets............... (6,991) 1,390 -- -- (7,571) Increase (decrease) in liabilities: Accounts payable........... 320,810 942 (85,042) 222,451 620,848 Accrued expenses........... 219,391 458,850 82,368 402,258 1,154,158 ----------- ----------- --------- ----------- ------------- TOTAL ADJUSTMENTS........ 560,614 1,343,711 194,100 1,402,872 3,528,088 ----------- ----------- --------- ----------- ------------- NET CASH USED IN OPERATING ACTIVITIES... (664,303) (1,168,497) (720,331) (661,035) (3,729,099) ----------- ----------- --------- ----------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............. $ (23,980) $ (78,231) $ (49,402) $ (12,693) $ (173,389) Software development costs....... (110,152) (21,936) (21,936) -- (226,696) ----------- ----------- --------- ----------- ------------- NET CASH USED IN INVESTING ACTIVITIES..................... (134,132) (100,167) (71,338) (12,693) (400,085) ----------- ----------- --------- ----------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock......... 250 -- -- -- 1,000 Deferred registration costs--original................ (200,711) (152,255) (29,289) -- (352,966) Deferred registration costs--current................. -- (228,912) (340,900) (399,234) (628,146) Deferred financing costs......... -- (248,644) -- (63,476) (312,120) Borrowings on line of credit..... 600,000 -- -- -- 600,000 Proceeds from the issuance of notes to stockholders.......... 388,931 685,000 -- 967,499 3,439,680 Payments on notes to stockholders................... -- (10,000) -- (22,500) (32,500) Payments on bridge financing..... -- -- -- (1,250,000) (1,250,000) Proceeds from the issuance of bridge financing............... -- 1,250,000 1,250,000 1,500,000 2,750,000 ----------- ----------- --------- ----------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES................... 788,470 1,295,189 879,811 732,289 4,214,948 ----------- ----------- --------- ----------- ------------- NET INCREASE (DECREASE) IN CASH.... (9,965) 26,525 88,142 58,561 85,764 CASH, BEGINNING OF PERIOD.......... 10,643 678 678 27,203 -- ----------- ----------- --------- ----------- ------------- CASH, END OF PERIOD................ $ 678 $ 27,203 $ 88,820 $ 85,764 $ 85,764 ----------- ----------- --------- ----------- ------------- ----------- ----------- --------- ----------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest....................... $ 12,578 $ 53,076 $ 23,980 $ 118,115 $ 195,659 ----------- ----------- --------- ----------- ------------- ----------- ----------- --------- ----------- ------------- Income taxes................... $ -- $ -- $ -- $ -- $ -- ----------- ----------- --------- ----------- ------------- ----------- ----------- --------- ----------- -------------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING INFORMATION: Loans totaling $500,000 were converted into capital contributions in 1995. Notes receivable for $30,000 were obtained 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. Loans payable of $550,000 were extinguished in 1997 with the issuance of common stock. Notes receivable of $25,000 were cancelled in 1998 upon forfeiture 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 JUNE 30, 1998 AND FOR THE PERIODS ENDED JUNE 30, 1997 AND 1998 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 June 30, 1998. 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, which have been received from few customers, have been immaterial. Certain stock splits were effected in 1996 and 1998 (see Note 8) and reflected retroactively in these financial statements. REVENUE RECOGNITION The Company recognizes revenue upon the shipment of products or the performance of services. 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 INSTRUMENTS The carrying amounts of cash, accounts payable, accrued expenses, short-term notes payable to banks and the bridge financings 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 affiliates. 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. F-8 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (INFORMATION AS OF JUNE 30, 1998 AND FOR THE PERIODS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) INCOME TAXES (CONTINUED) In June 1996, the Company became a C corporation. No deferred 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 December 31, 1997, deferred tax assets of approximately $1,200,000 relating primarily to net operating losses of approximately $2,741,000 (and which expire through 2012), have been offset by a valuation reserve since the utilization of this asset cannot be determined. SOFTWARE DEVELOPMENT COSTS Software development costs for products and certain product enhancements are capitalized subsequent to the establishment of their technological feasibility (as defined in Statement of Financial Accounting Standards ("SFAS") 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 $226,696 through June 30, 1997. Amortization of these costs commenced on July 1, 1997 and these costs are being amortized over 3 years. Amortization expense is included in cost of sales and for the year ended December 31, 1997 and the six months ended June 30, 1998 totalled $38,000 and $38,000, respectively. DEFERRED COSTS Costs associated with the first bridge financing described in Note 4(a) were deferred and were amortized, commencing in January 1997, over the life of the debt (one year). Costs associated with the second bridge financing described in Note 4(b) have been deferred and are being amortized, commencing in February 1998, over the anticipated life of the debt (six months). Costs associated with an earlier planned initial public offering (totaling $352,996) were written off in 1997 when the offering did not occur and are included in interest and financing costs, net. Costs associated with the Company's currently planned initial public offering have been deferred and will be charged to equity upon the successful closing of the offering or written off to expense if the offering is not successful. Costs associated with the Company's planned debt offering have been deferred and will be amortized over the life of the debt upon closing or written-off to expense if the offering is not successful. LOSS PER COMMON SHARE Effective for the year ended December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share" ("SFAS 128"). In accordance with SFAS 128, the Company is required to provide basic and dilutive loss per common share information. The basic loss per common share is computed by dividing the net loss available to common shareholders by the weighted average number of common shares outstanding. F-9 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (INFORMATION AS OF JUNE 30, 1998 AND FOR THE PERIODS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) LOSS PER COMMON SHARE (CONTINUED) Diluted loss per common share is computed by dividing the net loss available to common shareholders, adjusted on an as-if-converted basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended December 31, 1996 and 1997 and the six months ended June 30, 1997 and 1998, potential dilutive securities had an anti-dilutive effect and, accordingly, were not included in the calculation of diluted loss per common share. The assumed exercise of options and warrants may impact diluted earnings per common share in future periods. The adoption of SFAS 128 had no effect on net loss per common share for the year ended December 31, 1996, accordingly, no restatement was necessary. LONG-LIVED ASSETS Long-lived assets are evaluated for impairment when events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to their fair value. This policy is in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", which became effective for fiscal 1996. No write-downs have been necessary through June 30, 1998. STOCK-BASED COMPENSATION The Company accounts for its stock option awards under the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount the employee must pay to acquire the stock. The Company adopted the disclosure provision of SFAS 123,"Accounting for Stock-Based Compensation" and will disclose (beginning in 1998, when employee options were granted) the pro forma amounts of net income and earnings per share as if the fair value based method of accounting had been applied. UNAUDITED INTERIM FINANCIAL STATEMENTS In the opinion of the Company's management, the balance sheet as of June 30, 1998, the statements of operations and cash flows for the six months ended June 30, 1997 and 1998 (and the period from inception to June 30, 1998), and the statement of stockholders' deficit for the six months ended June 30, 1998 contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein. The results of operations for the six months ended June 30, 1998 are not necessarily indicative of the results for the year ending December 31, 1998. F-10 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF JUNE 30, 1998 AND FOR THE PERIODS ENDED JUNE 30, 1997 AND 1998 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, 1997, the Company has incurred losses totaling $5,193,280 and, at December 31, 1997, has deficiencies in working capital and equity of $4,066,580 and $3,549,780, respectively. 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. In 1996, the Company 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, a private placement was consummated (see Note 4(a)) and the Company received gross proceeds of $1,250,000. Certain debt was converted to equity upon consummation of this private placement (see Note 8). The initial public offering did not occur as originally planned, and all costs previously deferred in connection with that offering were written off. In February 1998, a second private placement was consummated (see Note 4(b)) and the Company utilized substantially all of the gross proceeds of $1,500,000 to redeem the debt incurred and accrued interest thereon from the January 1997 private placement. The Company is currently attempting to raise capital from various sources including an anticipated initial public offering ("IPO") and a debt offering. In 1997, the Company entered into a letter of intent with another underwriter for an initial public offering of equity securities. 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. NOTES PAYABLE TO BANKS At December 31, 1997 and June 30, 1998, the Company had lines of credit with banks. The loans bear interest at the respective banks' prime interest rates and are due on demand or through December 1998. Borrowings of $300,000 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. 3. NOTES PAYABLE TO STOCKHOLDERS Notes payable to stockholders totaling $1,184,956 at December 31, 1997 and $2,129,956 at June 30, 1998, bear interest at 10% per annum and were originally payable on demand. The due dates of these notes have been extended to the earlier of January 1, 2001 or the closing of a subsequent debt financing. These notes have been used to finance operations. Notes totaling $500,000 were converted to equity in 1995 and notes totaling $550,000 were converted to equity in January 1997. In February 1998, in connection with the bridge financing (see Note 4(b)), the Company entered into Director Loan Agreements with two shareholders pursuant to which each of the shareholders committed F-11 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE PERIODS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 3. NOTES PAYABLE TO STOCKHOLDERS (CONTINUED) to loan $450,000 ($900,000 in total) to the Company to be used for working capital and certain costs of the anticipated IPO. In consideration for this commitment, each of the shareholders were granted 19,313 shares of common stock of the Company and warrants to purchase 19,313 shares of common stock at an exercise price of 85% of the market price of the common stock on the exercise date. The Company included $300,116 in financing costs in the period ended June 30, 1998 for these securities. Pursuant to each Director Loan Agreement, the Company shall have the right to draw down advances from each of the shareholders as funds are required. Any amounts advanced will bear interest at a rate of ten percent (10%) per annum and will be due and payable in full on the earlier of (i) January 1, 2001, and (ii) the closing of a debt offering by the Company. Interest expense to stockholders totaled approximately $114,000, $74,000, $39,000 and $78,000 for the years ended December 31, 1996 and 1997 and the six months ended June 30, 1997 and 1998, respectively. 4. BRIDGE FINANCING (a) In January 1997, the Company received $1,020,000, net of costs of $230,000, through a private placement of 25 units (the "1997 Units"), at a cost of $50,000 per 1997 Unit. Each 1997 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 IPO of the Company's securities registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended; (ii) 7,725 shares of common stock of the Company, and (iii) warrants exercisable until the fifth anniversary of the Initial Bridge Closing to purchase 38,625 shares of common stock (the "Bridge Warrant Shares") at an exercise price of $2.59 per Bridge Warrant Share, subject to adjustment in certain circumstances. A total of $262,500 of the private placement funds was assigned to the value of the common stock and warrants, which resulted in an effective interest rate of 30% on the notes. In February 1998, the Company repurchased all of the 1997 Units and paid related accrued interest with proceeds obtained from a second private placement bridge financing (see Note 4(b)). (b) In February 1998 the Company received $1,490,000, net of costs of $10,000, through a private placement of 30 units (the "1998 Units"), at a cost of $50,000 per 1998 Unit (each a "Bridge Note"). Substantially all of the proceeds were utilized to repurchase the 1997 Units and related accrued interest (see Note 4(a)). Each 1998 Unit consists of: (i) an unsecured nonnegotiable promissory note in the principal amount of $50,000, bearing interest at the rate of 10% per annum, payable annually in arrears, and providing for a loan fee payable upon payoff of the Bridge Note in an amount equal to $5,000 less interest accrued during the first year through the date of payoff. The Bridge Note shall mature on the earlier date to occur of: (a) the third anniversary of the final closing (the "Bridge Closing") of such bridge financing; and (b) the consummation of an IPO of the Company's securities registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended; (ii) 3,863 shares of common stock of the Company and (iii) warrants exercisable until the sixth anniversary of the Bridge Closing to purchase 3,863 shares of common stock (the "Bridge Warrant Shares") at an exercise price of 80% (subsequently amended to 85%) of the market price of the Company's common stock on the exercise F-12 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE PERIODS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 4. BRIDGE FINANCING (CONTINUED) date per Bridge Warrant Share. A total of $300,000 of the private placement funds was assigned to the value of the common stock and warrants, resulting in a 30% effective rate on the debt. 5. LICENSE AGREEMENTS (a) 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. Subsequent to June 30, 1996, the Company paid $20,000 under the agreement. 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. 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. (b) In March 1998, the Company entered into an agreement with a company located in Israel to purchase an operating system to be utilized with its smart card systems. The operating system will cost $100,000 and provides for two years of technical support and development costs of an additional $450,000 plus royalties ranging from $.125 to $.25 for each smart card sold by the Company that incorporates the operating system. In addition, commencing December 1997, the Company is obligated to pay $18,000 per month for technical services related to the development of the operating system. Through June 30, 1998, the Company has incurred $126,000 relating to these technical services which are included in research and development expense. All amounts due under this agreement must be paid no later than November 1, 1998. 6. RELATED PARTY TRANSACTIONS In addition to the notes payable to stockholders (see Note 3), the Company had 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 commenced July 1, 1994 and concluded December 31, 1997, and covered accounting and various other general and administrative services performed for the Company. At December 31, 1997 and June 30, 1998, $42,000 and $42,000, respectively, are payable to this affiliate for these services. 7. COMMITMENTS LEASE The Company rents office space in Atlanta, Georgia. Commencing December 1996, the Company entered into a new lease which provides for annual rent of approximately $36,000 through January 31, 2000. F-13 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE PERIODS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 7. COMMITMENTS (CONTINUED) Rent charged to operations was approximately $17,000, $36,000, $18,000 and $18,000 for the years ended December 31, 1996 and 1997, and the six months ended March 31, 1997 and 1998, respectively. EMPLOYMENT CONTRACTS As of June 30, 1998, the Company had entered into employment agreements with three of its executive officers. The agreements become effective upon the closing of the Company's IPO and provide for aggregate salaries up to $700,000 per year for a term of five years. 8. 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 169,950 shares of common stock ($3.24 per share) (see Note 3). In January 1996, the Company sold 185,400 shares of stock for notes totaling $30,000. The notes bear interest at 8% per annum and were payable on July 1, 1997. In 1998, 154,500 shares of stock were returned to the Company and the related note, totaling $25,000, was forgiven. In July 1996, the Company issued 370,800 shares of common stock to retire the $300,000 note payable to an affiliate and related accrued interest of $30,000 ($.89 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. On July 9, 1998, the Company effected a split of its common stock of 1.545-for-1. All share amounts have been retroactively adjusted to reflect the stock splits. In December 1996, the Company granted options to acquire 154,500 shares of its common stock to an affiliate. The options had an exercise price of $3.24 per share (subsequently increased to $7.77 per share), are immediately exercisable and have a term of 10 years. The estimated fair value of these options at their date of grant was immaterial. In December 1996, the Company adopted the 1996 Stock Option Plan, pursuant to which 417,150 shares of the Company's common stock may be granted to its employees, directors and consultants. The option exercise price will be no less than the fair value of the common stock at the date of grant. The options will include vesting provisions and generally have ten year maturity periods. The Company also adopted the 1996 Non-employee Director Stock Option Plan for its non-employee directors pursuant to which 46,350 shares of common stock may be granted. Through December 31, 1997, no options under either of these plans have been granted. Through June 30, 1998, the Company has issued 158,363 options under the 1996 Stock Option Plan at an exercise price of $7.77 per share, which will vest over four years and 19,313 options under the 1996 Non- F-14 AMERICAN CARD TECHNOLOGY, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE PERIODS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 8. STOCKHOLDERS' DEFICIT (CONTINUED) employee Director Stock Option Plan at an exercise price of $7.77, which vested upon issuance. The fair value of the non-employee director options were immaterial. In February 1998, the Company issued 38,625 shares of common stock and warrants to purchase 77,250 shares of common stock, at an exercise price of 80% (subsequently amended to 85%) of the market price of the common stock on the date of exercise, to an affiliated company of the Company's general counsel in consideration for corporate legal services rendered. The Company expensed $300,116 in connection with this transaction which has been included in general and administrative expenses. F-15 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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.............................................................. 9 Use of Proceeds........................................................... 20 Dividend Policy........................................................... 21 Dilution.................................................................. 21 Capitalization............................................................ 23 Selected Financial Data................................................... 24 Plan of Operation......................................................... 25 Business.................................................................. 32 Management................................................................ 42 Principal Stockholders.................................................... 48 Certain Transactions...................................................... 49 Description of Securities................................................. 53 Shares Eligible for Future Sale........................................... 55 Underwriting.............................................................. 57 Legal Matters............................................................. 58 Experts................................................................... 58 Additional Information.................................................... 58 Index to Financial Statements............................................. F-2
------------------------ UNTIL , 1998 (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. MINIMUM OFFERING: 454,600 SHARES OF COMMON STOCK MAXIMUM OFFERING: 648,900 SHARES OF COMMON STOCK --------------------- PROSPECTUS --------------------- , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 102(b) 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 believe 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 of 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. 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. The Company's Bylaws provide that the Company shall indemnify officers and directors, and to the extent authorized by the Board of Directors, employees and agents of the Company, to the fullest extent permitted by and in the manner permissible under the laws of the State of Delaware. The Bylaws also permit the Board of Directors to authorize the Company to purchase and maintain insurance against any liability asserted against any director, officer, employee or agent of the Company arising out of his capacity as such. The Company intends to enter into and execute indemnity agreements with present and future directors for indemnification to the fullest extent permitted by law. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses in connection with the sale of the Common Stock. All amounts are estimated. The Company has prepaid all such fees. SEC Filing Fee.............................................. $2,107 Blue Sky Expenses........................................... 21,340 Accounting Fees and Expenses................................ 30,000 Legal Fees and Expenses..................................... 42,500 Legal Writing (outsourced).................................. 20,000 Postage..................................................... 15,000 Printing Fees............................................... 30,000 Escrow Agent Fees........................................... 10,000 Transfer Agent Fees......................................... 10,000 Due Diligence Fees.......................................... 30,000 Underwriting Fees........................................... 25,000 TOTAL....................................................... $235,947
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES The Registrant has issued securities without registration under the Securities Act of 1933, as amended (the "Securities Act"), in the following transactions: In July 1996, loans to the registrant in the aggregate principal amount of $300,000 (plus interest of $29,738) 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 370,800 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 154,500 shares of Common Stock at an exercise price of $3.24 per share which has since been increased to $7.77 per share and assigned to Mr. Roncari. 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 169,952 shares of Common Stock. In January 1996, the Company sold 154,500 shares of Common Stock to Stephen S. Weisglass at a price of $.16 per share. Mr. Weisglass became a director of the Company in November 1996. In July 1997, Mr. Weisglass resigned from the Board. His shares were subsequently transferred to Beter at the direction of the Company, and then distributed as part of the 1998 Private Placement. In January 1996 the Registrant sold 30,900 shares to Richard Shelton at a price of $0.16 per share. The registrant received a note in the amount of $5,000 from Dr. Shelton. This note has been satisfied by offset against amounts owed by the Company to Mr. Shelton for expenses incurred by Mr. Shelton as a sales consultant to the Company. In January 1997, pursuant to the 1997 Private Placement, the Company completed the sale to 23 private investors (including certain officers and directors of the Company) of 25 1997 Units. Each 1997 Unit consisted of (i) one 1997 Bridge Note; (ii) 7,725 1997 Bridge Shares; and (iii) 38,625 1997 Bridge Warrants. The purchase price per 1997 Unit was $50,000. Such 1997 Bridge Notes, 1997 Bridge Shares and 1997 Bridge Warrants were repurchased by the Company as part of the 1998 Private Placement. In January 1997, in connection with the 1997 Private Placement, the Company borrowed from Messrs. Perl, Rothstein and Roncari $175,000 and issued to them 1997 Bridge Notes in such aggregate principal amount, an aggregate of 27,038 1997 Bridge Shares and 135,188 1997 Bridge Warrants. Such 1997 II-2 Bridge Notes, 1997 Bridge Shares and 1997 Bridge Warrants were repurchased by the Company as part of the 1998 Private Placement. In March 1998, the Company entered into the 1998 Private Placement, through which the Company completed the sale to fourteen private investors (including certain officers and directors of the Company) of 30 Units, each Unit consisting of (i) one Bridge Note; (ii) 3,863 Bridge Shares; and (iii) 3,863 Bridge Warrants. The purchase price per Unit was $50,000 On March 15, 1995 Messrs. Roncari and Rothstein recharacterized $500,000 of loans to the Registrant as paid in capital. This capital contribution was allocated equally among the Original Stockholders in consideration for which Messrs. Findley and Perl subsequently transferred 38,625 shares of common stock to Mr. Roncari and the Rothstein Trust. In conjunction with the closing of the 1998 Private Placement, the Company issued 38,625 shares of Common Stock and the Chapman Option to Chapman Group LLC, a company affiliated with Cohn & Birnbaum P.C., general counsel to the Company. These shares and options were issued in partial consideration for services rendered by Cohn & Birnbaum P.C. from the date of the Company's inception through the closing of an IPO by the Company and in consideration for the deferral of fees at different times during such same time period. In conjunction with the closing of the 1998 Private Placement, the Company entered into Director Loan Agreements with each of Harold Rothstein and Raymond A. Roncari pursuant to which Messrs. Rothstein and Roncari each committed to loan $450,000 (for a total of $900,000) to the Company to be used for working capital and certain costs of the anticipated IPO. These amounts, together with approximately $155,000 of the proceeds of the 1998 Private Placement, were used to fund certain costs of this Offering, and provide required working capital. In consideration for this commitment, Messrs. Rothstein and Roncari were each granted 19,313 shares of Common Stock of the Company and 19,313 Commitment Warrants. ITEM 27. EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------------------- 1.1 Underwriting Agreement / Registrant and Rockcrest Securities, LLC., Incorporated by Reference. 3.1 Articles of Incorporation of Registrant, Incorporated by Reference. 3.2 By-Laws of Registrant, Incorporated by Reference. 3.2.1 Amended By-laws of Registrant. 4.1 Sample Certificate for Common Stock, Incorporated by Reference. 5.1 Opinion of Counsel regarding Legality, Incorporated by Reference. 5.1.1 Opinion of Counsel regarding Legality, Dated August 24, 1998. 8.1 Opinion of BDO Seidman, LLP., Incorporated by Reference. 8.1.1 Opinion of BDO Seidman, LLP. 9.1 Voting Trust Agreement for Lawrence O. Perl, Incorporated by Reference. 9.1.1 Amended, Voting Trust Agreement for Lawrence O. Perl. 9.2 Voting Trust Agreement for Harold Rothstein, Incorporated by Reference. 10.1 Employment Agreement between the Registrant and Lawrence O. Perl, revised. 10.2 Employment Agreement between the Registrant and Raymond Findley, Jr., Incorporated by Reference.
II-3
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------------------- 10.3 Employment Agreement between the Registrant and Robert H. Dixon, revised. 10.3.1 Employment Agreement between the Registrant and Frank S. Fuino, Jr. 10.4 Escrow Agreement, Bank of New York, Incorporated by Reference. 10.7.1 Subscription Agreement for American Card Technology, Inc., Incorporated by Reference. 10.7.2 Stock Option Agreement (warrant), Chapman Group, LLC., Incorporated by Reference. 10.7.2.1 Amended, Stock Option Agreement (warrant), Chapman Group, LLC. 10.7.3 Stock Option Agreement (warrant), Harold Rothstein, Incorporated by Reference. 10.7.3.1 Amended, Stock Option Agreement (warrant), Harold Rothstein. 10.7.4 Stock Option Agreement (warrant), Raymond Roncari, Incorporated by Reference. 10.7.4.1 Amended, Stock Option Agreement (warrant), Raymond Roncari. 10.8.1 Stock Option Agreement for non-employees and Amendment, Lilly Beter, Incorporated by Reference. 10.8.2 Stock Option Agreement / non-employees and Amendment, Harold Rothstein, Incorporated by Reference. 10.8.3 Stock Option Agreement / non-employees and Amendment, Raymond Roncari, Incorporated by Reference. 10.8.4 Stock Option Agreement for non-employees and Amendment, Bruce Bonadies, Incorporated by Reference. 10.8.5 Stock Option Agreement for non-employees and Amendment, Gordon Walker, Incorporated by Reference. 10.8.6 1996 Nonemployee Director's Stock Option Plan, Incorporated by Reference. 10.8.6.1 Amended, 1996 Nonemployee Director's Stock Option Plan. 10.8.7 1996 Stock Option Plan for Employees, Incorporated by Reference. 10.8.7.1 Amended, 1996 Stock Option Plan for Employees. 10.8.8 Director Loan Agreement, Harold Rothstein, revised. 10.8.9 Director Loan Agreement, Raymond Roncari, revised. 10.9.1 Agreement with Softchip Israel and Registrant, revised. 10.9.1.1 Amended, Agreement with Softchip Israel and Registrant. 10.9.2 Agreement with Softchip Technology (3000) Ltd. and Registrant, Incorporated by Reference. 10.9.3 Stock Option Agreement and Amendment, Shreveport Acquisition Corp., Incorporated by Reference. 10.9.3.1 Amended, Stock Option Agreement, Amendment and second Amendment, Shreveport Acquisition Corp. 10.9.4 Amended, Stock Option Agreement for employee, Robert Dixon. 10.9.5 Amended, Stock Option Agreement for employee, Michael Pate. 10.9.6 Amended, Stock Option Agreement for employee, Robert Patten. 10.9.7.1 Amended, Stock Option Agreement for employee, Shawn Nixon. 10.9.7.2 Amended, Stock Option Agreement for employee, Jeremy Zela. 10.9.7.3 Stock Option Agreement for employee, Phyllis Burke. 10.9.8 Stock Option Agreement for employee, Robert Cartagine. 10.9.9 Stock Option Agreement for employee, Frank S. Fuino, Jr.
II-4
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------------------- 23.1 Consent of Independent Accountant, BDO Seidman, LLP., Incorporated by Reference. 23.1.1 Consent of Independent Accountant, BDO Seidman, LLP, Dated August 20, 1998. 23.2 Consent of Legal Counsel, Bartz & Bartz (Opinion is filed as Exhibit 5.1), Incorporated by Reference. 23.2.1 Consent of Legal Counsel, Bartz & Bartz (Opinion is filed as Exhibit 5.1), Dated August 24, 1998. 23.3 Consent of Underwriter, Rockcrest Securities L. L. C., Incorporated by Reference. 23.3.1 Consent of Underwriter, Rockcrest Securities L. L. C., Dated August 24, 1998. 27.0 Financial Data Schedule, Revised. 99.1 Dual Smart Card Access, Patent Number # TX 3-639-032 for ACTI, Incorporated by Reference. 99.2 Rothstein personal guarantee, revised. 99.3 Database Services Agreement and Addendum (Florida). 99.4 Falcetta, Wachtel & Knochenhauer, LLC. Regarding American Card Technology, Inc.
ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes to: (1) File, during any period in which it offers or 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. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the forgoing provisions , or otherwise, the small business issuer 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 small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer 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 small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submitted to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. 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 authorized this registration statement to be signed on its behalf by the undersigned, in Hartford, Connecticut, on August 21st , 1998. AMERICAN CARD TECHNOLOGY, INCORPORATED By: /s/ LAWRENCE O. PERL ----------------------------------------- Lawrence O. Perl, CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this Registration Statement on Form SB-2 was signed by the following persons in the capacities and on the dates stated.
NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ LAWRENCE O. PERL - ------------------------------ Chief Executive Officer, August 21, 1998 Lawrence O. Perl Chairman of Board /s/ RAYMOND FINDLEY, JR. - ------------------------------ President, Chief Operating August 21, 1998 Raymond Findley, Jr. Officer, Director /s/ FRANK S. FUINO, JR. - ------------------------------ Chief Financial Officer August 21, 1998 Frank S. Fuino, Jr. /s/ HAROLD ROTHSTEIN - ------------------------------ Director August 21, 1998 Harold Rothstein /s/ RAYMOND RONCARI - ------------------------------ Director August 21, 1998 Raymond Roncari /s/ LILLY BETER - ------------------------------ Corporate Secretary, August 21, 1998 Lilly Beter Director /s/ BRUCE R. BONADIES - ------------------------------ Director August 21, 1998 Bruce R. Bonadies /s/ GORDON W.WALKER - ------------------------------ Director August 21, 1998 Gordon W. Walker
II-6 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ----------------------------------------------------------------------------------------------- 1.1 Underwriting Agreement / Registrant and Rockcrest Securities, LLC., Incorporated by Reference. 3.1 Articles of Incorporation of Registrant, Incorporated by Reference. 3.2 By-Laws of Registrant, Incorporated by Reference. 3.2.1 Amended By-laws of Registrant. 4.1 Sample Certificate for Common Stock, Incorporated by Reference. 5.1 Opinion of Counsel regarding Legality, Incorporated by Reference. 5.1.1 Opinion of Counsel regarding Legality, Dated August 24, 1998. 8.1 Opinion of BDO Seidman, LLP., Incorporated by Reference. 8.1.1 Opinion of BDO Seidman, LLP. 9.1 Voting Trust Agreement for Lawrence O. Perl, Incorporated by Reference. 9.1.1 Amended, Voting Trust Agreement for Lawrence O. Perl. 9.2 Voting Trust Agreement for Harold Rothstein, Incorporated by Reference. 10.1 Employment Agreement between the Registrant and Lawrence O. Perl, revised. 10.2 Employment Agreement between the Registrant and Raymond Findley, Jr., Incorporated by Reference. 10.3 Employment Agreement between the Registrant and Robert H. Dixon, revised. 10.3.1 Employment Agreement between the Registrant and Frank S. Fuino, Jr. 10.4 Escrow Agreement, Bank of New York, Incorporated by Reference. 10.7.1 Subscription Agreement for American Card Technology, Inc., Incorporated by Reference. 10.7.2 Stock Option Agreement (warrant), Chapman Group, LLC., Incorporated by Reference. 10.7.2.1 Amended, Stock Option Agreement (warrant), Chapman Group, LLC. 10.7.3 Stock Option Agreement (warrant), Harold Rothstein, Incorporated by Reference. 10.7.3.1 Amended, Stock Option Agreement (warrant), Harold Rothstein. 10.7.4 Stock Option Agreement (warrant), Raymond Roncari, Incorporated by Reference. 10.7.4.1 Amended, Stock Option Agreement (warrant), Raymond Roncari. 10.8.1 Stock Option Agreement for non-employees and Amendment, Lilly Beter, Incorporated by Reference. 10.8.2 Stock Option Agreement/non-employees and Amendment, Harold Rothstein, Incorporated by Reference. 10.8.3 Stock Option Agreement/non-employees and Amendment, Raymond Roncari, Incorporated by Reference. 10.8.4 Stock Option Agreement for non-employees and Amendment, Bruce Bonadies, Incorporated by Reference. 10.8.5 Stock Option Agreement for non-employees and Amendment, Gordon Walker, Incorporated by Reference. 10.8.6 1996 Nonemployee Director's Stock Option Plan, Incorporated by Reference. 10.8.6.1 Amended, 1996 Nonemployee Director's Stock Option Plan. 10.8.7 1996 Stock Option Plan for Employees, Incorporated by Reference. 10.8.7.1 Amended, 1996 Stock Option Plan for Employees.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ----------------------------------------------------------------------------------------------- 10.8.8 Director Loan Agreement, Harold Rothstein, revised. 10.8.9 Director Loan Agreement, Raymond Roncari, revised. 10.9.1 Agreement with Softchip Israel and Registrant, revised. 10.9.1.1 Amended, Agreement with Softchip Israel and Registrant. 10.9.2 Agreement with Softchip Technology (3000) Ltd. and Registrant, Incorporated by Reference. 10.9.3 Stock Option Agreement and Amendment, Shreveport Acquisition Corp., Incorporated by Reference. 10.9.3.1 Amended, Stock Option Agreement, Amendment and second Amendment, Shreveport Acquisition Corp. 10.9.4 Amended, Stock Option Agreement for employee, Robert Dixon. 10.9.5 Amended, Stock Option Agreement for employee, Michael Pate. 10.9.6 Amended, Stock Option Agreement for employee, Robert Patten. 10.9.7.1 Amended, Stock Option Agreement for employee, Shawn Nixon. 10.9.7.2 Amended, Stock Option Agreement for employee, Jeremy Zela. 10.9.7.3 Stock Option Agreement for employee, Phyllis Burke. 10.9.8 Stock Option Agreement for employee, Robert Cartagine. 10.9.9 Stock Option Agreement for employee, Frank S. Fuino, Jr. 23.1 Consent of Independent Accountant, BDO Seidman, LLP., Incorporated by Reference. 23.1.1 Consent of Independent Accountant, BDO Seidman, LLP, Dated August 20, 1998. 23.2 Consent of Legal Counsel, Bartz & Bartz (Opinion is filed as Exhibit 5.1), Incorporated by Reference. 23.2.1 Consent of Legal Counsel, Bartz & Bartz (Opinion is filed as Exhibit 5.1), Dated August 24, 1998. 23.3 Consent of Underwriter, Rockcrest Securities L. L. C., Incorporated by Reference. 23.3.1 Consent of Underwriter, Rockcrest Securities L. L. C., Dated August 24, 1998. 27.0 Financial Data Schedule, Revised. 99.1 Dual Smart Card Access, Patent Number # TX 3-639-032 for ACTI, Incorporated by Reference. 99.2 Rothstein personal guarantee, revised. 99.3 Database Services Agreement and Addendum (Florida). 99.4 Falcetta, Wachtel & Knochenhauer, LLC. Regarding American Card Technology, Inc.
EX-3.2-1 2 EXHIBIT 3.2.1 AMENDMENT TO AMENDED AND RESTATED BYLAWS OF AMERICAN CARD TECHNOLOGY, INC. As adopted by resolution of the Board of Directors of the Corporation, July 9, 1998. RESOLVED: that the Company hereby amends its Bylaws to conform to the foregoing amendment to the Certificate of Incorporation by adding the following sentence to Section 1 of Article III of the Bylaws: "At all times, there shall be at least two (2) Independent Directors (as such term is defined in the Statement of Policy Regarding Corporate Securities Definitions of the North American Securities Administrators Association, Inc. as in effect on July 9, 1998 (the "Statement of Policy")) serving on the Corporation's board of directors. All future material transactions and loans with Promoters (as such term is defined in the Statement of Policy), and any forgiveness of such loans to Promoters, must be approved by a majority of the Independent Directors who (i) do not have an interest in the transaction and (ii) who have access, at the Corporation's expense, to the Corporation's or to independent legal counsel, PROVIDED, HOWEVER, that all such future loans and transactions shall be made on terms that are no less favorable to the Corporation than those that can be obtained from unaffiliated third parties." IN WITNESS WHEREOF, the undersigned has set his hand and seal as of the 9th day of July, 1998. AMERICAN CARD TECHNOLOGY, INC. By /s/ Raymond Findley, Jr. ----------------------------------- Raymond Findley, Jr. Its President EX-5.1-1 3 EXHIBIT 5.1.1 Securities Commissioner August 21, 1998 Securities and Exchange Commission 450 5th Street NW Washington, DC. 20549 Dear Commissioner, We have acted as counsel to American Card Technology, Incorporated, a Delaware corporation, in connection with the preparation of a Regulation SB Offering Statement (the "Offering Statement" on Form SB-2, to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933. The Offering Statement relates to the sale of 648,900 shares of Common Stock, with par value of $.001 (the "Common Stock") as more particularly described in the Offering Statement. In connection therewith, we have examined (i) the Articles of Incorporation and the By-Laws of American Card Technology, Incorporated; (ii) records of the corporate proceedings of American Card Technology, Incorporated with respect to the issuance of shares of Common Stock by American Card Technology, Incorporated; (iii) the Offering Statement; and (iv) and such other documents as we have deemed necessary for the expression of the opinions contained herein. In making the foregoing examinations, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as certified or photo-static copies. As to questions of fact material to this opinion, where such facts have not been independently established by us, and as to the content and form of Articles of Incorporation, By-Laws, minutes and resolutions and other documents or writings, we have relied to the extent we deemed reasonably appropriate, upon representations of corporate officers or certificates of governmental officials. We express no opinion as to compliance with applicable state anti-fraud statutes, rules or regulations concerning the issuance of securities. Opinion of Consul Page 2 of 2 Based upon and subject to the foregoing and having due regard for such legal considerations that we deem relevant, we are of the opinion (i) that the Common Stock has been duly authorized for issuance and (ii) that upon payment for, and issuance of, the Common Stock in accordance with the terms of the Offering Statement, the Common stock will be validly issued and will be fully paid and non-assessable. Sincerely, /s/ R. John Bartz BARTZ & BARTZ, P.A. R. John Bartz Attorney at Law EX-8.1-1 4 EXHIBIT 8.1.1 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, 1997, and the related statements of operations and cash flows for the years ended December 31, 1996 and 1997 and the statements of stockholders' deficit for each of the years (period) from June 21, 1994 (inception) to December 31, 1997. 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, 1997, and the results of its operations and its cash flows for the years ended December 31, 1996 and 1997 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 I 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 March 10, 1998, except for Note 8, which is as of July 9, 1998 F-3 EX-9.1-1 5 EXHIBIT 9.1.1 THE 1994 PERL TRUST INDENTURE 251 CRANDON BOULEVARD, SUITE 342 KEY BISCAYNE, FLORIDA 33149 - -------------------------------------------------------------------------------- July 8, 1998 Ms. Lilly Beter Lilly Beter Capital Group Ltd. 3925 Excelsior Boulevard Minneapolis, Minnesota 55416 Dear Ms. Beter: The undersigned, as trustees of The 1994 Perl Trust Indenture, beneficial owner of shares of common stock, par value $.001 per share (the "Trust Shares"), of American Card Technology, Inc. (the "Company"), hereby name Lilly Beter as the successor trustee under that certain Voting Trust Agreement dated as of May 1, 1998 with respect to the Trust Shares (the "Voting Trust Agreement"), with the exclusive right to vote upon the Trust Shares or to give written consents in lieu of voting thereon, subject to any limitation on the right to vote contained in the Company's certificate of incorporation or other certificate filed pursuant to law, in person or by proxy at all meetings of the shareholders of the Company, and in all proceedings wherein the vote or written consent of shareholders may be required or authorized by law, for the balance of the term of said voting trust set forth in the Voting Trust Agreement. Please indicate your acceptance of such appointment by countersigning below. THE 1994 PERL TRUST INDENTURE By /s/ Heidi G. Perl ------------------------- Heidi G. Perl, Trustee By /s/ Bradley Hoffman ------------------------- Bradley Hoffman, Trustee I HEREBY ACCEPT APPOINTMENT AS SUCCESSOR TRUSTEE UNDER THE VOTING TRUST AGREEMENT: /s/ Lilly Beter - ------------------------------- Lilly Beter EX-10.1 6 EXHIBIT 10.1 EMPLOYMENT AGREEMENT Employment Agreement made as of the _____ day of _____, 1998 by and between American Card Technology, Inc. (the "Company"), a Delaware corporation, and Lawrence O. Perl, of Key Biscayne, Florida (the "Employee"). W I T N E S E T H : WHEREAS, Employee is employed by the Company as its Chief Executive Officer, and as a condition of closing on an initial public offering of the Company's common stock (the "IPO Closing")through Rockcrest Securities L.L.C. ("Rockcrest"), Rockcrest, Employee and the Company have required that this Employment Agreement be entered into to be effective on the IPO Closing; NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth below, the parties hereby agree as follows: 1. EMPLOYMENT 1.1 Position and Duties. The Company shall employ Employee to serve in and to have the authority and responsibilities for the position of chief executive officer and to perform such other duties as relate to such position or for such other position and duties as the Board of Directors of the Company (the "Board") in its discretion may from time to time determine and assign to him. The Board will have the authority to determine the means and manner by which Employee is to perform his duties. 1.2 Exclusiveness. The Employee shall devote substantially all of his business time, attention and energies to the business of the Company and the performance of his responsibilities and duties and shall carry out such responsibilities and duties diligently and to the best of his abilities. The Employee recognizes that the Company is entering into this Agreement because of the Employee's expertise, skills, and talents and his agreement to devote all of such expertise, skills, and talents to the tasks assigned him pursuant to this Agreement. The Employee agrees that he shall not engage in any other business activities of any kind which would give rise to a conflict of interest for the Employee with respect to his duties and obligations to the Company. 1.3 Compliance with Policies and Laws. Employee will at all times comply with all applicable policies, standards and regulations of the Company as may be established from time to time and will comply with all applicable laws and regulations. 1.4 Personal Service. Employee's personal performance of his duties is the essence of this Agreement. Employee's rights and obligations under this Agreement are not assignable by Employee. 2. COMPENSATION 2.1 Base Salary. For all services to be rendered by Employee in any capacity hereunder, including services as an officer, director, member of any committee or any other duties assigned to him by the directors or officers of the Company, the Company agrees to pay Employee an initial base salary of Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00) per year payable in equal bi-weekly installments in arrears. Employee's Base Salary may be adjusted upward at the sole discretion of the Company during the term of this Agreement. 2.2 Incentive Bonus. Employee shall be entitled to participate in the Company's Key Officer Incentive Bonus Plan if and when established by the Board. This plan shall be established or changed as the circumstances warrant by the Board and the amount which shall be paid to Employee as well as when such payment will be made will likewise be established by the Board. 2.3 Other Bonuses or Incentive Compensation. Employee may also receive such other bonuses, grants of stock, stock options, warrants or stock appreciation rights as may be determined by the Board, in its sole discretion. 2.4 Other Benefits. Employee shall be entitled to such fringe benefits, including, but not limited to, vacation, sick leave, participation in medical, dental and life insurance plans and pension or profit-sharing plans, as are customarily provided to the senior executives of the Company as determined by the Board of Directors of the Company and as provided by the terms of the applicable benefit plans. 2.5 Reimbursement of Expenses. The Company shall reimburse the reasonable travel, entertainment and other expenses incurred by Employee in connection with the performance of his duties in accordance with such policies as may be adopted from time to time by the Company. 3. TERM OF THE AGREEMENT Employee's employment under this Agreement will commence upon the IPO Closing and continue, subject to early termination as provided in Paragraph 4 below, for a term of five years. 4. EARLY TERMINATION; SEVERANCE 4.1 Employee's employment under this Agreement may or will, as appropriate, be terminated prior to the expiration of the term set forth above in Paragraph 3 in the following circumstances. (a) Disability. If Employee is disabled and fails to perform his duties hereunder on account of illness or other incapacity which prevents Employee from performing his duties for a continuous period of one hundred eighty days, the Company thereafter may, upon ten days written notice, terminate Employee's employment under this Agreement. (b) Death. In the event of the death of Employee, this Agreement will terminate immediately. (c) By the Company for Cause. The Company may terminate Employee's employment under this Agreement for Cause. For purposes of this subparagraph, the Company will have "Cause" to terminate this Agreement upon (i) the willful and continued failure by Employee to substantially perform his duties hereunder (other than such failure resulting from Employee's incapacity due to physical or mental illness), after a written demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Employee has not substantially performed his duties, or (ii) the willful engaging by Employee in misconduct which is materially injurious to the Company, monetarily or otherwise, (iii) the willful violation by Employee of the provisions of this Agreement, (iv) a material breach of any fiduciary duty owed by Employee to the Company or its relationships with employees, suppliers, customers or others with whom the Company does business or (v) the habitual or repeated misuse of alcohol or controlled substances. For purposes of this subparagraph, no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith or without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Employee will not be deemed to have been terminated for Cause without reasonable notice to Employee setting forth the reasons for the Company's intention to terminate for Cause, an opportunity for Employee to be heard before the Board, and thereafter, a determination that in the good faith opinion of the Board, "Cause" exists within the meaning set forth in clause (i), (ii), (iii), (iv) or (v) of this subparagraph. (d) By Company Without Cause. The Company may terminate Employee's employment under this Agreement unilaterally at any time for any reason or for no reason by giving Employee ninety (90) days' advance notice of the intention to terminate. Employee may, at the sole discretion of the Company, be relieved of his duties during such ninety (90) day period, although Employee must be paid during such period. (e) By Employee. Employee may terminate his employment under this Agreement at any time upon ninety (90) days written notice to the Company. Employee may, at the sole discretion of the Company, be relieved of his duties during such ninety-day period, but continue to be paid during such period. 4.2 In the event of termination of Employee's employment prior to the end of the Term, Employee shall be entitled to a lump sum severance payment payable on the date of termination as follows: (a) In the event the Employee's employment is terminated due to Employee's death or disability, the Employee or Employee's estate shall be entitled to a payment equal to the sum of (i) six months of the then current base annual salary (including accrued portions), (ii) any accrued salary which has not been paid, and (iii) any expense reimbursements due and owing to him at the time of such termination. (b) If the Employee's employment is terminated by the Company without Cause as defined above, or Employee terminates his employment for Good Reason (as hereafter defined), the Employee shall be entitled to a payment equal to the sum of (i) the greater of one year of the then current base annual salary, or the total base annual salary which would be payable for the balance of the Term, and (ii) a pro-rata portion of what the Incentive Bonus for the then current year would be if the calculation for the year through such date of termination annualized out for the year would have resulted in an Incentive Bonus for the year, and (iii) any accrued salary which has not been paid, and (iv) any expense reimbursements due and owing to him at the time of such termination. (c) In the event that Employee's employment is terminated by the Company for Cause or is terminated by Employee voluntarily prior to the end of the Term other than for Good Reason, Employee shall not be entitled to any severance payment. 4.3 For purposes hereof: "Good Reason" is defined to mean (i) the Board substantially diminishing Employee's responsibilities and activities to a degree which is not commensurate with the position held by Employee; or (ii) the Board taking action in material breach of this Agreement; or (iii) requiring the Employee to relocate to anywhere other than the metropolitan Atlanta area; or (iv) the voluntary resignation of Employee at any time within sixty days after a Change in Control (as hereinafter defined). "Change of Control" shall mean any transaction or series of transactions (including, without limitation, a tender offer, merger or consolidation) the result of which is that any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended), other than Lawrence O. Perl, Raymond Findley, Jr., Raymond Roncari and Harold Rothstein, or trusts for the benefit of any of the foregoing or their respective families, and any "person" or "group" solicited by any of such persons: (i) becomes the beneficial owner of more than 50 percent of the total aggregate voting power of all classes of the voting stock of the Company and/or warrants or options to acquire such voting stock, calculated on a fully diluted basis; or (ii) acquires all or substantially all of the assets of the Company. 5. COVENANT NOT TO COMPETE; CONFIDENTIALITY 5.1 Noncompetition. (a) Employee acknowledges and understands that the Business (as defined below) in which the Company is engaged can be and will be effectively and efficiently conducted anywhere in the world and the Company's business is international in scope (as opposed to national and regional). Therefore, as a material consideration of the Company's entering into this Agreement, Employee agrees that during the Term and for a period of one year following termination of Employee's employment under this Agreement for any reason whatsoever, in the entire world, directly or indirectly, Employee shall not, in any location whatsoever, (i) own (as a proprietor, partner, stockholder, or otherwise) an interest in or (ii) participate (as an officer, director, or in any other capacity) in the management, operation or control of, or (iii) perform services as or act in the capacity of an employee, independent contractor, consultant or agent of any enterprise, which competes, or intends to compete with the Company's Business (the "Non-Compete Covenant") except with the prior written consent of the Board, which consent may be withheld or granted in the Board's sole and absolute discretion. The Company's "Business" as that term is used in this Paragraph 5.1 means the development, manufacture, marketing, selling or distribution of smart cards or smart card related systems. (b) Notwithstanding the foregoing, in the event that Employee's employment is terminated due to expiration of the Term without early termination under Section 4, and Employee's employment is not otherwise renewed, Employee shall not be bound to the Non-Compete Covenant unless the Company makes the following election. The Company shall have the option to bind Employee to the Non-Compete Covenant for one year after the termination of his employment due to expiration of the Term by electing to do so and agreeing to pay to Employee the Non-Compete Consideration (as hereafter defined) in equal monthly installments over the one year period. To make such election, the Company shall give Employee notice of such election (which shall include an agreement to pay the Non-Compete Consideration) by no later than the Election Date (as hereafter defined). Failure to give such notice by the Election Date shall be deemed an election by the Company to not bind Employee to the Non-Compete Covenant for the one year period following expiration of the Term. In the event that the Company shall default in its payment of any installment of the Non-Compete Consideration, Employee shall be relieved from the Non-Compete Covenant, in addition to any other rights and remedies which Employee may have. For purposes hereof: the "Non-Compete Consideration" is the amount equal to the current base annual salary being paid to Employee on the day prior to the date of expiration of the Term, and the "Election Date" is the date which is three (3) months prior to the date on which the Term expires. 5.2 Covenant Not to Promote Termination of Relationships. As a material consideration for the Company's entering into this Agreement, Employee covenants and agrees that for a period of two years commencing on the termination of Employee's employment with the Company, Employee shall not persuade or entice, or attempt to persuade or entice any customer or client of the Company to terminate its business or contractual relationship with the Company, or refrain from establishing any such relationship with the Company. 5.3 Inducement of Breach. Employee shall promptly notify the Company if any person, firm, partnership, limited liability company, association, corporation or other entity attempts to induce Employee to breach any of the terms or provisions of this Agreement. 5.4 Confidentiality. Employee acknowledges and agrees that all product or service information, marketing information, lists or identities of the Company's customers, pricing and cost information, financial information, technical data, technical know-how, and other information and data related to the Company's business ("Confidential Information") are valuable assets of the Company. Except for Confidential Information which is a matter of public record through no action or fault of the Employee, Employee shall not, during the Term or after termination of Employee's employment hereunder for any reason whatsoever, use, divulge, disclose, or communicate any Confidential Information to any person or entity or use any Confidential Information for the benefit of Employee or any other person or entity, except with the prior consent of the Board of Directors of the Company, which consent may be withheld or granted in the Board's sole and absolute discretion. 5.5 Return of Documents. Employee acknowledges and agrees that all originals and copies of records, reports, documents, lists, memoranda, notes and other documentation related to the business of the Company or containing any Confidential Information shall be the sole and exclusive property of the Company and shall be returned to the Company by Employee upon the termination of Employee's employment hereunder for any reason whatsoever, or upon the written request of the Company at any time. 5.6 No Solicitation. As a material consideration of the Company's entering into this agreement, Employee covenants and agrees that during the Term and for a period of two years after the termination of Employee's employment hereunder for any reason whatsoever, neither Employee, nor any person or entity controlled by Employee (including without limitation, members of Employee's family), shall, directly or indirectly: (i) solicit for employment any person employed by, or serving as a consultant to, the Company or the Company's affiliates, successors or assigns or (ii) solicit or aid in the solicitation of persons or business entities with whom the Company has done business or with whom the Company has attempted to do business. 5.7 Equitable relief; Other Remedies. Employee acknowledges and agrees that it would be difficult to measure damage to the Company from any breach by Employee of any matter described in this Section 5 of this Agreement and that monetary damages would be an inadequate remedy for any such breach. Accordingly, Employee agrees that if Employee shall directly or indirectly breach or take steps preliminary to breaching any of the provisions of this Section 5 of this Agreement, the Company shall be entitled, in addition to all other remedies it may have at law or in equity, to an injunction or other appropriate orders or equitable relief to restrain any such breach, without showing or proving any actual damage sustained by the Company. Employee further agrees that, for any period during which the breach of any provision of this Agreement has not been enjoined, the Company shall be entitled, upon proof of same, to actual and consequential damages caused by such breach, including, but not limited to loss of business relationships, loss of goodwill and loss of prospective business advantage. 5.8 No release. Employee agrees that the termination of this Agreement shall not release Employee from any of Employee's obligations under this Section 5, all of which shall survive such termination. 6. INDEMNIFICATION To the fullest extent permitted under the law, the Company will defend, advance funds, indemnify and hold Employee harmless with respect to any expenses incurred, claims made against and other liabilities arising in connection with any actual or threatened action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise (including any suit or proceeding by or in the right of the Company) to which Employee is made a party, is threatened to be made a party or is an actual or potential witness by reason of the fact that Employee is an officer, employee, director or agent of the Company, or at the request of the Company, an officer, employee, director or agent of any other entity, unless, in connection with such action, suit or proceeding or in connection with the claims made therein, Employee has engaged in acts of bad faith, willful misconduct, gross negligence or reckless disregard of his duties to the Company or the best interests of the Company. 7. GENERAL PROVISIONS 7.1 Entire Agreement. This Agreement contains the entire agreement and understanding of the parties with respect to the employment of Employee by the Company and supersedes all prior and contemporaneous agreements between them with respect to such subject matter. 7.2 Modification. This Agreement may not be changed, modified, released, discharged, abandoned, or otherwise amended, in whole or in part, except by an instrument in writing, signed by an employee and an authorized officer of the Company. 7.3 Waiver. Failure of any party at any time to require performance of any provision of this Agreement shall not limit such party's right to enforce such provision, nor shall any waiver of any breach of this Agreement constitute a waiver of such provision itself. No attempted or purposed waiver of any provision of this Agreement shall be effective unless set forth in writing and signed by the party to be bound. 7.4 Severability. The agreements and covenants contained in this Agreement are severable, and in the event any of the agreements and covenants contained in this Agreement should be held to be invalid by an arbitrator or by any court or tribunal of competent jurisdiction, this agreement shall be interpreted as if such valid agreements and covenants were not contained herein; provided however, that if any legal proceeding or arbitrator or a court shall hold unenforceable the covenants contained in Section 5 above by reason of their geographic extent or duration or otherwise, any such covenant shall be reduced in scope to the extent required by law and enforced in its reduced form. 7.5 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the state of Georgia. 7.6 Controversies or Disputes. Any controversy, claim, or dispute arising under or relating to this agreement, or that arises out of or that is based upon the employment relationship (including any wage claim, any claim for wrongful termination, or any claim based upon any statute, regulation, or law including those concerning employment discrimination, sexual harassment, civil rights, age or disabilities), including tort claims (except a tort that is a "compensable injury" under workers' compensation law), or a dispute between the parties that arose or arises before, during or after employment, other than any matter as to which a party seeks injunctive relief, shall be resolved by a single, neutral arbitrator in an arbitration conducted in Georgia, in accordance with the then-current rules of commercial arbitration of the American Arbitration Association. Employee and the Company agree that neither party is entitled to recover punitive damages. The decision or award rendered by the arbitrator shall be final, nonappealable, and binding upon the parties, and judgment may be entered upon it in accordance with applicable law in a court of competent jurisdiction. The arbitrator shall be an attorney with at least ten years of experience in employment law. Arbitration in accordance with this paragraph is the sole and exclusive method, means and procedure to resolve any and all claims or disputes other than those seeking exclusively injunctive relief. Employee and the Company hereby irrevocably waive any and all rights to resolve disputes in a manner contrary to the provisions of this paragraph. Any and all attempts to circumvent the terms of this paragraph shall be null and void and of no force and effect whatsoever. 8. NOTICES Any notice given pursuant this Agreement shall be in writing and shall be deemed given on the earlier of the date the notice is (i) personally delivered to the party to be notified, (ii) mailed, postage prepaid, certified with return receipt requested, addressed as follows, or to such other address as a party may from time to time designate by notice to the other party, or (iii) delivered at the party's address via courier service. To the Company: American Card Technology, Inc. 1355 Terrell Mill Road Building 1462, Suite 200 Marietta, Georgia 30067 Attention: President To the Employee: Lawrence O. Perl 251 Crandon Boulevard - Unit 342 Key Biscayne, Florida 33149 AMERICAN CARD TECHNOLOGY, INC. By ---------------------------------- Its President Duly Authorized EMPLOYEE --------------------------------- Lawrence O. Perl ACKNOWLEDGED AND AGREED TO AS IF THIS 1ST DAY OF MAY, 1998 /s/Lawrence O. Perl - ---------------------------- Lawrence O. Perl AMERICAN CARD TECHNOLOGY, INC. 1355 TERRELL MILL ROAD BUILDING 1462, SUITE 200 MARIETTA, GEORGIA 30067 - -------------------------------------------------------------------------------- May 1, 1998 Mr. Lawrence 0. Perl 251 Crandon Boulevard - Unit 342 Key Biscayne, Florida 33149 Dear Larry: I refer to that certain Employment Agreement dated as of the date hereof by and between American Card Technology, Inc. (the "Company"), as Employer, and Lawrence 0. Perl, as Employee (the "Agreement"). Notwithstanding anything to the contrary contained Section 2 of in the Agreement, until such time (the "Conversion Date") as the Company (i) raises an amount equal to or greater than Six Million Four Hundred Thousand and 00/100 Dollars ($6,400,000. 00), net of underwriting commissions, through an initial public offering, or (ii) the closing of a subsequent debt financing arranged through Lilly Beter Capital Group, Ltd., the bi-weekly payments to be made in arrears with respect to base salary shall be calculated as if the base salary was One Hundred Fifty Thousand and 00/100 Dollars ($150,000.00). Any balance of the base salary shall accrue and bear interest at a rate of ten percent (10%) per annum and be payable in full on the Conversion Date. Please acknowledge your consent to the foregoing by countersigning the enclosed duplicate copy of this letter below. Very truly yours, Raymond Findley, Jr. Presidentt ACKNOWLEDGED AND AGREED TO AS OF THIS IST DAY OF MAY 1998 /s/ Lawrence 0. Perl - ------------------------------- Lawrence 0. Perl EX-10.3 7 EXHIBIT 10.3 EMPLOYMENT AGREEMENT Employment Agreement made as of the _____ day of _____, 1998 by and between American Card Technology, Inc. (the "Company"), a Delaware corporation, and Robert H. Dixon, of Marietta, Georgia (the "Employee"). W I T N E S E T H : WHEREAS, Employee is employed by the Company as its Vice President of Technical Operations, and as a condition of closing on an initial public offering of the Company's common stock (the "IPO Closing") through Rockcrest Securities L.L.C. ("Rockcrest"), Rockcrest, Employee and the Company have required that this Employment Agreement be entered into to be effective on the IPO Closing; NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth below, the parties hereby agree as follows: 1. EMPLOYMENT 1.1 Position and Duties. The Company shall employ Employee to serve in and to have the authority and responsibilities for the position of vice president of technical operations and to perform such other duties as relate to such position or for such other position and duties as the Board of Directors of the Company (the "Board") in its discretion may from time to time determine and assign to him. The Board will have the authority to determine the means and manner by which Employee is to perform his duties. 1.2 Exclusiveness. The Employee shall devote substantially all of his business time, attention and energies to the business of the Company and the performance of his responsibilities and duties and shall carry out such responsibilities and duties diligently and to the best of his abilities. The Employee recognizes that the Company is entering into this Agreement because of the Employee's expertise, skills, and talents and his agreement to devote all of such expertise, skills, and talents to the tasks assigned him pursuant to this Agreement. The Employee agrees that he shall not engage in any other business activities of any kind which would give rise to a conflict of interest for the Employee with respect to his duties and obligations to the Company. 1.3 Compliance with Policies and Laws. Employee will at all times comply with all applicable policies, standards and regulations of the Company as may be established from time to time and will comply with all applicable laws and regulations. 1.4 Personal Service. Employee's personal performance of his duties is the essence of this Agreement. Employee's rights and obligations under this Agreement are not assignable by Employee. 2. COMPENSATION 2.1 Base Salary. For all services to be rendered by Employee in any capacity hereunder, including services as an officer, director, member of any committee or any other duties assigned to him by the directors or officers of the Company, the Company agrees to pay Employee an initial base salary of Two Hundred Thousand and 00/100 Dollars ($200,000.00) per year payable in equal bi-weekly installments in arrears. Employee's Base Salary may be adjusted upward at the sole discretion of the Company during the term of this Agreement. 2.2 Incentive Bonus. Employee shall be entitled to participate in the Company's Key Officer Incentive Bonus Plan if and when established by the Board. This plan shall be established or changed as the circumstances warrant by the Board and the amount which shall be paid to Employee as well as when such payment will be made will likewise be established by the Board. 2.3 Other Bonuses or Incentive Compensation. Employee may also receive such other bonuses, grants of stock, stock options, warrants or stock appreciation rights as may be determined by the Board, in its sole discretion. 2.4 Other Benefits. Employee shall be entitled to such fringe benefits, including, but not limited to, vacation, sick leave, participation in medical, dental and life insurance plans and pension or profit-sharing plans, as are customarily provided to the senior executives of the Company as determined by the Board of Directors of the Company and as provided by the terms of the applicable benefit plans. 2.5 Reimbursement of Expenses. The Company shall reimburse the reasonable travel, entertainment and other expenses incurred by Employee in connection with the performance of his duties in accordance with such policies as may be adopted from time to time by the Company. 3. TERM OF THE AGREEMENT Employee's employment under this Agreement will commence upon the IPO Closing and continue, subject to early termination as provided in Paragraph 4 below, for a term of five years. 4. EARLY TERMINATION; SEVERANCE 4.1 Employee's employment under this Agreement may or will, as appropriate, be terminated prior to the expiration of the term set forth above in Paragraph 3 in the following circumstances. (a) Disability. If Employee is disabled and fails to perform his duties hereunder on account of illness or other incapacity which prevents Employee from performing his duties for a continuous period of one hundred eighty days, the Company thereafter may, upon ten days written notice, terminate Employee's employment under this Agreement. (b) Death. In the event of the death of Employee, this Agreement will terminate immediately. (c) By the Company for Cause. The Company may terminate Employee's employment under this Agreement for Cause. For purposes of this subparagraph, the Company will have "Cause" to terminate this Agreement upon (i) the willful and continued failure by Employee to substantially perform his duties hereunder (other than such failure resulting from Employee's incapacity due to physical or mental illness), after a written demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Employee has not substantially performed his duties, or (ii) the willful engaging by Employee in misconduct which is materially injurious to the Company, monetarily or otherwise, (iii) the willful violation by Employee of the provisions of this Agreement, (iv) a material breach of any fiduciary duty owed by Employee to the Company or its relationships with employees, suppliers, customers or others with whom the Company does business or (v) the habitual or repeated misuse of alcohol or controlled substances. For purposes of this subparagraph, no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith or without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Employee will not be deemed to have been terminated for Cause without reasonable notice to Employee setting forth the reasons for the Company's intention to terminate for Cause, an opportunity for Employee to be heard before the Board, and thereafter, a determination that in the good faith opinion of the Board, "Cause" exists within the meaning set forth in clause (i), (ii), (iii), (iv) or (v) of this subparagraph. (d) By Company Without Cause. The Company may terminate Employee's employment under this Agreement unilaterally at any time for any reason or for no reason by giving Employee ninety (90) days' advance notice of the intention to terminate. Employee may, at the sole discretion of the Company, be relieved of his duties during such ninety (90) day period, although Employee must be paid during such period. (e) By Employee. Employee may terminate his employment under this Agreement at any time upon ninety (90) days written notice to the Company. Employee may, at the sole discretion of the Company, be relieved of his duties during such ninety-day period, but continue to be paid during such period. 4.2 In the event of termination of Employee's employment prior to the end of the Term, Employee shall be entitled to a lump sum severance payment payable on the date of termination as follows: (a) In the event the Employee's employment is terminated due to Employee's death or disability, the Employee or Employee's estate shall be entitled to a payment equal to the sum of (i) six months of the then current base annual salary (including accrued portions), (ii) any accrued salary which has not been paid, and (iii) any expense reimbursements due and owing to him at the time of such termination. (b) If the Employee's employment is terminated by the Company without Cause as defined above, or Employee terminates his employment for Good Reason (as hereafter defined), the Employee shall be entitled to a payment equal to the sum of (i) the greater of one year of the then current base annual salary, or the total base annual salary which would be payable for the balance of the Term, and (ii) a pro-rata portion of what the Incentive Bonus for the then current year would be if the calculation for the year through such date of termination annualized out for the year would have resulted in an Incentive Bonus for the year, and (iii) any accrued salary which has not been paid, and (iv) any expense reimbursements due and owing to him at the time of such termination. (c) In the event that Employee's employment is terminated by the Company for Cause or is terminated by Employee voluntarily prior to the end of the Term other than for Good Reason, Employee shall not be entitled to any severance payment. 4.3 For purposes hereof: "Good Reason" is defined to mean (i) the Board substantially diminishing Employee's responsibilities and activities to a degree which is not commensurate with the position held by Employee; or (ii) the Board taking action in material breach of this Agreement; or (iii) requiring the Employee to relocate to anywhere other than the metropolitan Atlanta area; or (iv) the voluntary resignation of Employee at any time within sixty days after a Change in Control (as hereinafter defined). "Change of Control" shall mean any transaction or series of transactions (including, without limitation, a tender offer, merger or consolidation) the result of which is that any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended), other than Lawrence O. Perl, Raymond Findley, Jr., Raymond Roncari and Harold Rothstein, or trusts for the benefit of any of the foregoing or their respective families, and any "person" or "group" solicited by any of such persons: (i) becomes the beneficial owner of more than 50 percent of the total aggregate voting power of all classes of the voting stock of the Company and/or warrants or options to acquire such voting stock, calculated on a fully diluted basis; or (ii) acquires all or substantially all of the assets of the Company. 5. COVENANT NOT TO COMPETE; CONFIDENTIALITY 5.1 Noncompetition. (a) Employee acknowledges and understands that the Business (as defined below) in which the Company is engaged can be and will be effectively and efficiently conducted anywhere in the world and the Company's business is international in scope (as opposed to national and regional). Therefore, as a material consideration of the Company's entering into this Agreement, Employee agrees that during the Term and for a period of one year following termination of Employee's employment under this Agreement for any reason whatsoever, in the entire world, directly or indirectly, Employee shall not, in any location whatsoever, (i) own (as a proprietor, partner, stockholder, or otherwise) an interest in or (ii) participate (as an officer, director, or in any other capacity) in the management, operation or control of, or (iii) perform services as or act in the capacity of an employee, independent contractor, consultant or agent of any enterprise, which competes, or intends to compete with the Company's Business (the "Non-Compete Covenant") except with the prior written consent of the Board, which consent may be withheld or granted in the Board's sole and absolute discretion. The Company's "Business" as that term is used in this Paragraph 5.1 means the development, manufacture, marketing, selling or distribution of smart cards or smart card related systems. (b) Notwithstanding the foregoing, in the event that Employee's employment is terminated due to expiration of the Term without early termination under Section 4, and Employee's employment is not otherwise renewed, Employee shall not be bound to the Non-Compete Covenant unless the Company makes the following election. The Company shall have the option to bind Employee to the Non-Compete Covenant for one year after the termination of his employment due to expiration of the Term by electing to do so and agreeing to pay to Employee the Non-Compete Consideration (as hereafter defined) in equal monthly installments over the one year period. To make such election, the Company shall give Employee notice of such election (which shall include an agreement to pay the Non-Compete Consideration) by no later than the Election Date (as hereafter defined). Failure to give such notice by the Election Date shall be deemed an election by the Company to not bind Employee to the Non-Compete Covenant for the one year period following expiration of the Term. In the event that the Company shall default in its payment of any installment of the Non-Compete Consideration, Employee shall be relieved from the Non-Compete Covenant, in addition to any other rights and remedies which Employee may have. For purposes hereof: the "Non-Compete Consideration" is the amount equal to the current base annual salary being paid to Employee on the day prior to the date of expiration of the Term, and the "Election Date" is the date which is three (3) months prior to the date on which the Term expires. 5.2 Covenant Not to Promote Termination of Relationships. As a material consideration for the Company's entering into this Agreement, Employee covenants and agrees that for a period of two years commencing on the termination of Employee's employment with the Company, Employee shall not persuade or entice, or attempt to persuade or entice any customer or client of the Company to terminate its business or contractual relationship with the Company, or refrain from establishing any such relationship with the Company. 5.3 Inducement of Breach. Employee shall promptly notify the Company if any person, firm, partnership, limited liability company, association, corporation or other entity attempts to induce Employee to breach any of the terms or provisions of this Agreement. 5.4 Confidentiality. Employee acknowledges and agrees that all product or service information, marketing information, lists or identities of the Company's customers, pricing and cost information, financial information, technical data, technical know-how, and other information and data related to the Company's business ("Confidential Information") are valuable assets of the Company. Except for Confidential Information which is a matter of public record through no action or fault of the Employee, Employee shall not, during the Term or after termination of Employee's employment hereunder for any reason whatsoever, use, divulge, disclose, or communicate any Confidential Information to any person or entity or use any Confidential Information for the benefit of Employee or any other person or entity, except with the prior consent of the Board of Directors of the Company, which consent may be withheld or granted in the Board's sole and absolute discretion. 5.5 Return of Documents. Employee acknowledges and agrees that all originals and copies of records, reports, documents, lists, memoranda, notes and other documentation related to the business of the Company or containing any Confidential Information shall be the sole and exclusive property of the Company and shall be returned to the Company by Employee upon the termination of Employee's employment hereunder for any reason whatsoever, or upon the written request of the Company at any time. 5.6 No Solicitation. As a material consideration of the Company's entering into this agreement, Employee covenants and agrees that during the Term and for a period of two years after the termination of Employee's employment hereunder for any reason whatsoever, neither Employee, nor any person or entity controlled by Employee (including without limitation, members of Employee's family), shall, directly or indirectly: (i) solicit for employment any person employed by, or serving as a consultant to, the Company or the Company's affiliates, successors or assigns or (ii) solicit or aid in the solicitation of persons or business entities with whom the Company has done business or with whom the Company has attempted to do business. 5.7 Equitable relief; Other Remedies. Employee acknowledges and agrees that it would be difficult to measure damage to the Company from any breach by Employee of any matter described in this Section 5 of this Agreement and that monetary damages would be an inadequate remedy for any such breach. Accordingly, Employee agrees that if Employee shall directly or indirectly breach or take steps preliminary to breaching any of the provisions of this Section 5 of this Agreement, the Company shall be entitled, in addition to all other remedies it may have at law or in equity, to an injunction or other appropriate orders or equitable relief to restrain any such breach, without showing or proving any actual damage sustained by the Company. Employee further agrees that, for any period during which the breach of any provision of this Agreement has not been enjoined, the Company shall be entitled, upon proof of same, to actual and consequential damages caused by such breach, including, but not limited to loss of business relationships, loss of goodwill and loss of prospective business advantage. 5.8 No release. Employee agrees that the termination of this Agreement shall not release Employee from any of Employee's obligations under this Section 5, all of which shall survive such termination. 6. INDEMNIFICATION To the fullest extent permitted under the law, the Company will defend, advance funds, indemnify and hold Employee harmless with respect to any expenses incurred, claims made against and other liabilities arising in connection with any actual or threatened action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise (including any suit or proceeding by or in the right of the Company) to which Employee is made a party, is threatened to be made a party or is an actual or potential witness by reason of the fact that Employee is an officer, employee, director or agent of the Company, or at the request of the Company, an officer, employee, director or agent of any other entity, unless, in connection with such action, suit or proceeding or in connection with the claims made therein, Employee has engaged in acts of bad faith, willful misconduct, gross negligence or reckless disregard of his duties to the Company or the best interests of the Company. 7. GENERAL PROVISIONS 7.1 Entire Agreement. This Agreement contains the entire agreement and understanding of the parties with respect to the employment of Employee by the Company and supersedes all prior and contemporaneous agreements between them with respect to such subject matter. 7.2 Modification. This Agreement may not be changed, modified, released, discharged, abandoned, or otherwise amended, in whole or in part, except by an instrument in writing, signed by an employee and an authorized officer of the Company. 7.3 Waiver. Failure of any party at any time to require performance of any provision of this Agreement shall not limit such party's right to enforce such provision, nor shall any waiver of any breach of this Agreement constitute a waiver of such provision itself. No attempted or purposed waiver of any provision of this Agreement shall be effective unless set forth in writing and signed by the party to be bound. 7.4 Severability. The agreements and covenants contained in this Agreement are severable, and in the event any of the agreements and covenants contained in this Agreement should be held to be invalid by an arbitrator or by any court or tribunal of competent jurisdiction, this agreement shall be interpreted as if such valid agreements and covenants were not contained herein; provided however, that if any legal proceeding or arbitrator or a court shall hold unenforceable the covenants contained in Section 5 above by reason of their geographic extent or duration or otherwise, any such covenant shall be reduced in scope to the extent required by law and enforced in its reduced form. 7.5 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the state of Georgia. 7.6 Controversies or Disputes. Any controversy, claim, or dispute arising under or relating to this agreement, or that arises out of or that is based upon the employment relationship (including any wage claim, any claim for wrongful termination, or any claim based upon any statute, regulation, or law including those concerning employment discrimination, sexual harassment, civil rights, age or disabilities), including tort claims (except a tort that is a "compensable injury" under workers' compensation law), or a dispute between the parties that arose or arises before, during or after employment, other than any matter as to which a party seeks injunctive relief, shall be resolved by a single, neutral arbitrator in an arbitration conducted in Georgia, in accordance with the then-current rules of commercial arbitration of the American Arbitration Association. Employee and the Company agree that neither party is entitled to recover punitive damages. The decision or award rendered by the arbitrator shall be final, nonappealable, and binding upon the parties, and judgment may be entered upon it in accordance with applicable law in a court of competent jurisdiction. The arbitrator shall be an attorney with at least ten years of experience in employment law. Arbitration in accordance with this paragraph is the sole and exclusive method, means and procedure to resolve any and all claims or disputes other than those seeking exclusively injunctive relief. Employee and the Company hereby irrevocably waive any and all rights to resolve disputes in a manner contrary to the provisions of this paragraph. Any and all attempts to circumvent the terms of this paragraph shall be null and void and of no force and effect whatsoever. 8. NOTICES Any notice given pursuant this Agreement shall be in writing and shall be deemed given on the earlier of the date the notice is (i) personally delivered to the party to be notified, (ii) mailed, postage prepaid, certified with return receipt requested, addressed as follows, or to such other address as a party may from time to time designate by notice to the other party, or (iii) delivered at the party's address via courier service. To the Company: American Card Technology, Inc. 1355 Terrell Mill Road Building 1462, Suite 200 Marietta, Georgia 30067 Attention: President To the Employee: Robert H. Dixon 4141 Christacy Way Marietta, Georgia 30066 AMERICAN CARD TECHNOLOGY, INC. By ----------------------------- Its President Duly Authorized EMPLOYEE ------------------------------ Robert H. Dixon AMERICAN CARD TECHNOLOGY, INC. 1355 TERRELL MILL ROAD BUILDING 1462, SUITE 200 MARIETTA, GEORGIA 30067 - -------------------------------------------------------------------------------- May 1, 1998 Mr. Robert H. Dixon 4141 Christacy Way Marietta, Georgia 30066 Dear Rob: I refer to that certain Employment Agreement dated as of the date hereof by and between American Card Technology, Inc. (the "Company"), as Employer, and Robert H. Dixon as Employee (the "Agreement"). Notwithstanding anything to the contrary contained Section 2 of in the Agreement, until such time (the "Conversion Date") as the Company (i) raises an amount equal to or greater than Six Million Four Hundred Thousand and 00/100 Dollars ($6,400,000.00), net of underwriting commissions, through an initial public offering, or (ii) the closing of a subsequent debt financing arranged through Lilly Beter Capital Group, Ltd., the bi-weekly payments to be made in arrears with respect to base salary shall be calculated as if the base salary was One Hundred Thousand and 00/100 Dollars ($100,000.00). Any balance of the base salary shall accrue and bear interest at a rate of ten percent (10%) per annum and be payable in full on the Conversion Date. Please acknowledge your consent to the foregoing by countersigning the enclosed duplicate copy of this letter below. Very truly yours, Raymond Findley, Jr. President ACKNOWLEDGED AND AGREED TO THIS ___ DAY OF _________, 1998 - -------------------------------- Robert H. Dixon EX-10.3-1 8 EXHIBIT 10.3.1 EMPLOYMENT AGREEMENT Employment Agreement made as of the 4th day of August, 1998 by and between American Card Technology, Inc. (the "Company"), a Delaware corporation, and Frank S. Fuino, Jr. of Plantation, Florida (the "Employee"). W I T N E S E T H : WHEREAS, Employee is employed by the Company as its Chief Financial Officer and Treasurer, and as a condition of closing on an initial public offering of the Company's common stock (the "IPO Closing") through Rockcrest Securities L.L.C. ("Rockcrest"), Rockcrest, Employee and the Company have required that this Employment Agreement be entered into to be effective on the IPO Closing; NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth below, the parties hereby agree as follows: 1. EMPLOYMENT 1.1 Position and Duties. The Company shall employ Employee to serve in and to have the authority and responsibilities for the positions of chief financial officer and treasurer, and to perform such other duties as relate to such positions or for such other position and duties as the Board of Directors of the Company (the "Board") in its discretion may from time to time determine and assign to him. The Board will have the authority to determine the means and manner by which Employee is to perform his duties. 1.2 Exclusiveness. The Employee shall devote substantially all of his business time, attention and energies to the business of the Company and the performance of his responsibilities and duties and shall carry out such responsibilities and duties diligently and to the best of his abilities. The Employee recognizes that the Company is entering into this Agreement because of the Employee's expertise, skills, and talents and his agreement to devote all of such expertise, skills, and talents to the tasks assigned him pursuant to this Agreement. The Employee agrees that he shall not engage in any other business activities of any kind which would give rise to a conflict of interest for the Employee with respect to his duties and obligations to the Company. 1.3 Compliance with Policies and Laws. Employee will at all times comply with all applicable policies, standards and regulations of the Company as may be established from time to time and will comply with all applicable laws and regulations. 1.4 Personal Service. Employee's personal performance of his duties is the essence of this Agreement. Employee's rights and obligations under this Agreement are not assignable by Employee. 2. COMPENSATION 2.1 Base Salary. For all services to be rendered by Employee in any capacity hereunder, including services as an officer, director, member of any committee or any other duties assigned to him by the directors or officers of the Company, the Company agrees to pay Employee an annual base salary of (i) One Hundred Sixty Thousand and 00/100 Dollars ($160,000.00) during the first year of the term hereof, (ii) One Hundred Seventy Thousand and 00/100 Dollars ($170,000.00) during the second and third years of the term hereof, and (iii) One Hundred Seventy-Five Thousand and 00/100 Dollars ($175,000.00) during the fourth and fifth years of the term hereof, payable in equal bi-weekly installments in arrears. 2.2 Incentive Bonus. Employee shall be entitled to participate in the Company's Key Officer Incentive Bonus Plan if and when established by the Board. This plan shall be established or changed as the circumstances warrant by the Board and the amount which shall be paid to Employee as well as when such payment will be made will likewise be established by the Board. 2.3 Other Bonuses or Incentive Compensation. The Company hereby agrees to grant to Employee an option to purchase up to 92,700 shares of the Company's common stock, par value $.001, pursuant to the Company's 1996 Stock Option Plan (the "Plan"), on such terms and conditions as set forth in the Plan. Employee may also receive such other bonuses, grants of stock, stock options, warrants or stock appreciation rights as may be determined by the Board, in its sole discretion. 2.4 Other Benefits. Employee shall be entitled to such fringe benefits, including, but not limited to, vacation, sick leave, participation in medical, dental and life insurance plans and pension or profit-sharing plans, as are customarily provided to the senior executives of the Company as determined by the Board of Directors of the Company and as provided by the terms of the applicable benefit plans. 2.5 Reimbursement of Expenses. The Company shall reimburse the reasonable travel, entertainment and other expenses incurred by Employee in connection with the performance of his duties in accordance with such policies as may be adopted from time to time by the Company. 3. TERM OF THE AGREEMENT Employee's employment under this Agreement will commence upon the IPO Closing and continue, subject to early termination as provided in Paragraph 4 below, for a term of five years. 4. EARLY TERMINATION; SEVERANCE 4.1 Employee's employment under this Agreement may or will, as appropriate, be terminated prior to the expiration of the term set forth above in Paragraph 3 in the following circumstances. (a) Disability. If Employee is disabled and fails to perform his duties hereunder on account of illness or other incapacity which prevents Employee from performing his duties for a continuous period of one hundred eighty days, the Company thereafter may, upon ten days written notice, terminate Employee's employment under this Agreement. (b) Death. In the event of the death of Employee, this Agreement will terminate immediately. (c) By the Company for Cause. The Company may terminate Employee's employment under this Agreement for Cause. For purposes of this subparagraph, the Company will have "Cause" to terminate this Agreement upon (i) the willful and continued failure by Employee to substantially perform his duties hereunder (other than such failure resulting from Employee's incapacity due to physical or mental illness), after a written demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Employee has not substantially performed his duties, or (ii) the willful engaging by Employee in misconduct which is materially injurious to the Company, monetarily or otherwise, (iii) the willful violation by Employee of the provisions of this Agreement, (iv) a material breach of any fiduciary duty owed by Employee to the Company or its relationships with employees, suppliers, customers or others with whom the Company does business or (v) the habitual or repeated misuse of alcohol or controlled substances. For purposes of this subparagraph, no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith or without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Employee will not be deemed to have been terminated for Cause without reasonable notice to Employee setting forth the reasons for the Company's intention to terminate for Cause, an opportunity for Employee to be heard before the Board, and thereafter, a determination that in the good faith opinion of the Board, "Cause" exists within the meaning set forth in clause (i), (ii), (iii), (iv) or (v) of this subparagraph. (d) By Company Without Cause. The Company may terminate Employee's employment under this Agreement unilaterally at any time for any reason or for no reason by giving Employee ninety (90) days' advance notice of the intention to terminate. Employee may, at the sole discretion of the Company, be relieved of his duties during such ninety (90) day period, although Employee must be paid during such period. (e) By Employee. Employee may terminate his employment under this Agreement at any time upon ninety (90) days written notice to the Company. Employee may, at the sole discretion of the Company, be relieved of his duties during such ninety-day period, but continue to be paid during such period. 4.2 In the event of termination of Employee's employment prior to the end of the Term, Employee shall be entitled to a lump sum severance payment payable on the date of termination as follows: (a) In the event the Employee's employment is terminated due to Employee's death or disability, the Employee or Employee's estate shall be entitled to a payment equal to the sum of (i) six months of the then current base annual salary (including accrued portions), (ii) any accrued salary which has not been paid, and (iii) any expense reimbursements due and owing to him at the time of such termination. (b) If the Employee's employment is terminated by the Company without Cause as defined above, or Employee terminates his employment for Good Reason (as hereafter defined), the Employee shall be entitled to a payment equal to the sum of (i) the greater of one year of the then current base annual salary, or the total base annual salary which would be payable for the balance of the Term, and (ii) a pro-rata portion of what the Incentive Bonus for the then current year would be if the calculation for the year through such date of termination annualized out for the year would have resulted in an Incentive Bonus for the year, and (iii) any accrued salary which has not been paid, and (iv) any expense reimbursements due and owing to him at the time of such termination. (c) In the event that Employee's employment is terminated by the Company for Cause or is terminated by Employee voluntarily prior to the end of the Term other than for Good Reason, Employee shall not be entitled to any severance payment. 4.3 For purposes hereof: "Good Reason" is defined to mean (i) the Board substantially diminishing Employee's responsibilities and activities to a degree which is not commensurate with the position held by Employee; or (ii) the Board taking action in material breach of this Agreement; or (iii) requiring the Employee to relocate to anywhere other than the metropolitan Atlanta area; or (iv) the voluntary resignation of Employee at any time within sixty days after a Change in Control (as hereinafter defined). "Change of Control" shall mean any transaction or series of transactions (including, without limitation, a tender offer, merger or consolidation) the result of which is that any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended), other than Lawrence O. Perl, Raymond Findley, Jr., Raymond Roncari and Harold Rothstein, or trusts for the benefit of any of the foregoing or their respective families, and any "person" or "group" solicited by any of such persons: (i) becomes the beneficial owner of more than 50 percent of the total aggregate voting power of all classes of the voting stock of the Company and/or warrants or options to acquire such voting stock, calculated on a fully diluted basis; or (ii) acquires all or substantially all of the assets of the Company. 5. COVENANT NOT TO COMPETE; CONFIDENTIALITY 5.1 Noncompetition. (a) Employee acknowledges and understands that the Business (as defined below) in which the Company is engaged can be and will be effectively and efficiently conducted anywhere in the world and the Company's business is international in scope (as opposed to national and regional). Therefore, as a material consideration of the Company's entering into this Agreement, Employee agrees that during the Term and for a period of one year following termination of Employee's employment under this Agreement for any reason whatsoever, in the entire world, directly or indirectly, Employee shall not, in any location whatsoever, (i) own (as a proprietor, partner, stockholder, or otherwise) an interest in or (ii) participate (as an officer, director, or in any other capacity) in the management, operation or control of, or (iii) perform services as or act in the capacity of an employee, independent contractor, consultant or agent of any enterprise, which competes, or intends to compete with the Company's Business (the "Non-Compete Covenant") except with the prior written consent of the Board, which consent may be withheld or granted in the Board's sole and absolute discretion. The Company's "Business" as that term is used in this Paragraph 5.1 means the development, manufacture, marketing, selling or distribution of smart cards or smart card related systems. (b) Notwithstanding the foregoing, in the event that Employee's employment is terminated due to expiration of the Term without early termination under Section 4, and Employee's employment is not otherwise renewed, Employee shall not be bound to the Non-Compete Covenant unless the Company makes the following election. The Company shall have the option to bind Employee to the Non-Compete Covenant for one year after the termination of his employment due to expiration of the Term by electing to do so and agreeing to pay to Employee the Non-Compete Consideration (as hereafter defined) in equal monthly installments over the one year period. To make such election, the Company shall give Employee notice of such election (which shall include an agreement to pay the Non-Compete Consideration) by no later than the Election Date (as hereafter defined). Failure to give such notice by the Election Date shall be deemed an election by the Company to not bind Employee to the Non-Compete Covenant for the one year period following expiration of the Term. In the event that the Company shall default in its payment of any installment of the Non-Compete Consideration, Employee shall be relieved from the Non-Compete Covenant, in addition to any other rights and remedies which Employee may have. For purposes hereof: the "Non-Compete Consideration" is the amount equal to the current base annual salary being paid to Employee on the day prior to the date of expiration of the Term, and the "Election Date" is the date which is three (3) months prior to the date on which the Term expires. 5.2 Covenant Not to Promote Termination of Relationships. As a material consideration for the Company's entering into this Agreement, Employee covenants and agrees that for a period of two years commencing on the termination of Employee's employment with the Company, Employee shall not persuade or entice, or attempt to persuade or entice any customer or client of the Company to terminate its business or contractual relationship with the Company, or refrain from establishing any such relationship with the Company. 5.3 Inducement of Breach. Employee shall promptly notify the Company if any person, firm, partnership, limited liability company, association, corporation or other entity attempts to induce Employee to breach any of the terms or provisions of this Agreement. 5.4 Confidentiality. Employee acknowledges and agrees that all product or service information, marketing information, lists or identities of the Company's customers, pricing and cost information, financial information, technical data, technical know-how, and other information and data related to the Company's business ("Confidential Information") are valuable assets of the Company. Except for Confidential Information which is a matter of public record through no action or fault of the Employee, Employee shall not, during the Term or after termination of Employee's employment hereunder for any reason whatsoever, use, divulge, disclose, or communicate any Confidential Information to any person or entity or use any Confidential Information for the benefit of Employee or any other person or entity, except with the prior consent of the Board of Directors of the Company, which consent may be withheld or granted in the Board's sole and absolute discretion. 5.5 Return of Documents. Employee acknowledges and agrees that all originals and copies of records, reports, documents, lists, memoranda, notes and other documentation related to the business of the Company or containing any Confidential Information shall be the sole and exclusive property of the Company and shall be returned to the Company by Employee upon the termination of Employee's employment hereunder for any reason whatsoever, or upon the written request of the Company at any time. 5.6 No Solicitation. As a material consideration of the Company's entering into this agreement, Employee covenants and agrees that during the Term and for a period of two years after the termination of Employee's employment hereunder for any reason whatsoever, neither Employee, nor any person or entity controlled by Employee (including without limitation, members of Employee's family), shall, directly or indirectly: (i) solicit for employment any person employed by, or serving as a consultant to, the Company or the Company's affiliates, successors or assigns or (ii) solicit or aid in the solicitation of persons or business entities with whom the Company has done business or with whom the Company has attempted to do business. 5.7 Equitable relief; Other Remedies. Employee acknowledges and agrees that it would be difficult to measure damage to the Company from any breach by Employee of any matter described in this Section 5 of this Agreement and that monetary damages would be an inadequate remedy for any such breach. Accordingly, Employee agrees that if Employee shall directly or indirectly breach or take steps preliminary to breaching any of the provisions of this Section 5 of this Agreement, the Company shall be entitled, in addition to all other remedies it may have at law or in equity, to an injunction or other appropriate orders or equitable relief to restrain any such breach, without showing or proving any actual damage sustained by the Company. Employee further agrees that, for any period during which the breach of any provision of this Agreement has not been enjoined, the Company shall be entitled, upon proof of same, to actual and consequential damages caused by such breach, including, but not limited to loss of business relationships, loss of goodwill and loss of prospective business advantage. 5.8 No release. Employee agrees that the termination of this Agreement shall not release Employee from any of Employee's obligations under this Section 5, all of which shall survive such termination. 6. INDEMNIFICATION To the fullest extent permitted under the law, the Company will defend, advance funds, indemnify and hold Employee harmless with respect to any expenses incurred, claims made against and other liabilities arising in connection with any actual or threatened action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise (including any suit or proceeding by or in the right of the Company) to which Employee is made a party, is threatened to be made a party or is an actual or potential witness by reason of the fact that Employee is an officer, employee, director or agent of the Company, or at the request of the Company, an officer, employee, director or agent of any other entity, unless, in connection with such action, suit or proceeding or in connection with the claims made therein, Employee has engaged in acts of bad faith, willful misconduct, gross negligence or reckless disregard of his duties to the Company or the best interests of the Company. 7. GENERAL PROVISIONS 7.1 Entire Agreement. This Agreement contains the entire agreement and understanding of the parties with respect to the employment of Employee by the Company and supersedes all prior and contemporaneous agreements between them with respect to such subject matter. 7.2 Modification. This Agreement may not be changed, modified, released, discharged, abandoned, or otherwise amended, in whole or in part, except by an instrument in writing, signed by an employee and an authorized officer of the Company. 7.3 Waiver. Failure of any party at any time to require performance of any provision of this Agreement shall not limit such party's right to enforce such provision, nor shall any waiver of any breach of this Agreement constitute a waiver of such provision itself. No attempted or purposed waiver of any provision of this Agreement shall be effective unless set forth in writing and signed by the party to be bound. 7.4 Severability. The agreements and covenants contained in this Agreement are severable, and in the event any of the agreements and covenants contained in this Agreement should be held to be invalid by an arbitrator or by any court or tribunal of competent jurisdiction, this agreement shall be interpreted as if such valid agreements and covenants were not contained herein; provided however, that if any legal proceeding or arbitrator or a court shall hold unenforceable the covenants contained in Section 5 above by reason of their geographic extent or duration or otherwise, any such covenant shall be reduced in scope to the extent required by law and enforced in its reduced form. 7.5 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the state of Georgia. 7.6 Controversies or Disputes. Any controversy, claim, or dispute arising under or relating to this agreement, or that arises out of or that is based upon the employment relationship (including any wage claim, any claim for wrongful termination, or any claim based upon any statute, regulation, or law including those concerning employment discrimination, sexual harassment, civil rights, age or disabilities), including tort claims (except a tort that is a "compensable injury" under workers' compensation law), or a dispute between the parties that arose or arises before, during or after employment, other than any matter as to which a party seeks injunctive relief, shall be resolved by a single, neutral arbitrator in an arbitration conducted in Georgia, in accordance with the then-current rules of commercial arbitration of the American Arbitration Association. Employee and the Company agree that neither party is entitled to recover punitive damages. The decision or award rendered by the arbitrator shall be final, nonappealable, and binding upon the parties, and judgment may be entered upon it in accordance with applicable law in a court of competent jurisdiction. The arbitrator shall be an attorney with at least ten years of experience in employment law. Arbitration in accordance with this paragraph is the sole and exclusive method, means and procedure to resolve any and all claims or disputes other than those seeking exclusively injunctive relief. Employee and the Company hereby irrevocably waive any and all rights to resolve disputes in a manner contrary to the provisions of this paragraph. Any and all attempts to circumvent the terms of this paragraph shall be null and void and of no force and effect whatsoever. 8. NOTICES Any notice given pursuant this Agreement shall be in writing and shall be deemed given on the earlier of the date the notice is (i) personally delivered to the party to be notified, (ii) mailed, postage prepaid, certified with return receipt requested, addressed as follows, or to such other address as a party may from time to time designate by notice to the other party, or (iii) delivered at the party's address via courier service. To the Company: American Card Technology, Inc. 1355 Terrell Mill Road Building 1462, Suite 200 Marietta, Georgia 30067 Attention: President To the Employee: Frank S. Fuino, Jr. 10431 Northwest 12th Place Plantation, Florida 33322 AMERICAN CARD TECHNOLOGY, INC. By ----------------------------- Raymond Findley, Jr. Its President Duly Authorized EMPLOYEE ---------------------------- Frank S. Fuino, Jr. EX-10.7-2-1 9 EXHIBIT 10.7.2.1 AMENDMENT TO WARRANT THIS AMENDMENT TO WARRANT CERTIFICATE, dated as of the 9th day of July, 1998, by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"), and the undersigned holder (the "Holder"). WITNESSETH: WHEREAS, the Company issued to Holder a warrant certificate dated March 3, 1998 (the "Warrant") to purchase 50,000 shares (the "Shares") of the Company's Common Stock, par value $.001 per share ("Common Stock") at an exercise price of eighty percent (80%) of the per share Market Price (as defined in the Warrant) (the "Exercise Price"); and WHEREAS, the Company is engaged in effecting an initial public offering of Common Stock (the "IPO") in various states; and WHEREAS, in connection with the IPO, securities administrators of certain states have required that the Exercise Price of the outstanding warrants be adjusted in order to permit the IPO to be effected in such states; and WHEREAS, the Company is this day effecting a split of its Common Stock of 1.545 to 1 so that each stockholder shall receive an additional six (6) shares of Common Stock for each eleven (11) shares presently held; and WHEREAS, in connection with the aforementioned stock split, the Company and Holder desire to memorialize the adjustment in the number of shares of Common Stock which may be purchased by Holder pursuant to the Warrant by a multiple of 1.545 (the "Warrant Shares") as provided for in the Warrant. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The Warrant is hereby amended as follows: (a) Pursuant to Paragraph 7 of the Warrant, as a result of the stock split, the number of Warrant Shares which may be purchased pursuant to the Warrant is hereby adjusted so that the maximum number of shares of Common Stock which may be purchased by Holder pursuant to the Warrant (as set forth in the first paragraph of the Warrant) shall be adjusted by a multiple of 1.545, provided that any fractional share thereby created shall be eliminated by rounding such fraction to the next whole number (the "Adjusted Warrant Share Amount"). (b) The first sentence of Section 1(a) of the Warrant is hereby deleted in its entirety and the following substituted in lieu therefor: "(a) Each Warrant is initially exercisable to purchase one Warrant Share at an initial exercise price per Warrant Share of eighty-five percent (85%) of the per share Market Price (as defined in Section 1(b) hereof) of the Common Stock on the exercise date, subject to adjustment as set forth in Article 7 hereof, payable in cash or by check to the order of the Company, or any combination of cash or check." (c) Section 6.1 is hereby deleted in its entirety and the following substituted in lieu therefor: "6.1 INITIAL AND ADJUSTED EXERCISE PRICE. The initial exercise price of each Warrant shall be eighty-five percent (85%) of the per share Market Price of the Common Stock on the exercise date, per Warrant Share. The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Article 7 hereof." 2. Except as modified hereby, the Warrant remains in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written. Signed, Sealed, and Delivered in the Presence of: AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. - ---------------------------- ----------------------------------- Raymond Findley, Jr. Its President - ---------------------------- CHAPMAN GROUP, LLC By: /s/ Richard J. Shea - ---------------------------- ----------------------------------- Its Designee - ---------------------------- Adjusted Warrant Share Amount: 77,250 EX-10.7-3-1 10 EXHIBIT 10.7.3.1 AMENDMENT TO WARRANT THIS AMENDMENT TO WARRANT CERTIFICATE, dated as of the 9th day of July, 1998, by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"), and the undersigned holder (the "Holder"). WITNESSETH: WHEREAS, the Company issued to Holder a warrant certificate dated March 3, 1998 (the "Warrant") to purchase shares (the "Shares") of the Company's Common Stock, par value $.001 per share ("Common Stock") at an exercise price of eighty percent (80%) of the per share Market Price (as defined in the Warrant) (the "Exercise Price"); and WHEREAS, the Company is engaged in effecting an initial public offering of Common Stock (the "IPO") in various states; and WHEREAS, in connection with the IPO, securities administrators of certain states have required that the Exercise Price of the outstanding warrants be adjusted in order to permit the IPO to be effected in such states; and WHEREAS, the Company is this day effecting a split of its Common Stock of 1.545 to 1 so that each stockholder shall receive an additional six (6) shares of Common Stock for each eleven (11) shares presently held; and WHEREAS, in connection with the aforementioned stock split, the Company and Holder desire to memorialize the adjustment in the number of shares of Common Stock which may be purchased by Holder pursuant to the Warrant by a multiple of 1.545 (the "Warrant Shares") as provided for in the Warrant. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The Warrant is hereby amended as follows: (a) Pursuant to Paragraph 7 of the Warrant, as a result of the stock split, the number of Warrant Shares which may be purchased pursuant to the Warrant is hereby adjusted so that the maximum number of shares of Common Stock which may be purchased by Holder pursuant to the Warrant (as set forth in the first paragraph of the Warrant) shall be adjusted by a multiple of 1.545, provided that any fractional share thereby created shall be eliminated by rounding such fraction to the next whole number (the "Adjusted Warrant Share Amount"). (b) The first sentence of Section 1(a) of the Warrant is hereby deleted in its entirety and the following substituted in lieu therefor: "(a) Each Warrant is initially exercisable to purchase one Warrant Share at an initial exercise price per Warrant Share of eighty-five percent (85%) of the per share Market Price (as defined in Section 1(b) hereof) of the Common Stock on the exercise date, subject to adjustment as set forth in Article 7 hereof, payable in cash or by check to the order of the Company, or any combination of cash or check." (c) Section 6.1 is hereby deleted in its entirety and the following substituted in lieu therefor: "6.1 INITIAL AND ADJUSTED EXERCISE PRICE. The initial exercise price of each Warrant shall be eighty-five percent (85%) of the per share Market Price of the Common Stock on the exercise date, per Warrant Share. The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Article 7 hereof." 2. Except as modified hereby, the Warrant remains in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written. Signed, Sealed, and Delivered in the Presence of: AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. ______________________________ ----------------------------------- Raymond Findley, Jr. Its President ______________________________ WARRANT HOLDER: /s/ Harold Rothstein ______________________________ ---------------------------------------- Name: ______________________________ Adjusted Warrant Share Amount: 19,313 --------- EX-10.7-4-1 11 EXHIBIT 10.7.4.1 AMENDMENT TO WARRANT THIS AMENDMENT TO WARRANT CERTIFICATE, dated as of the 9th day of July, 1998, by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"), and the undersigned holder (the "Holder"). WITNESSETH: WHEREAS, the Company issued to Holder a warrant certificate dated March 3, 1998 (the "Warrant") to purchase shares (the "Shares") of the Company's Common Stock, par value $.001 per share ("Common Stock") at an exercise price of eighty percent (80%) of the per share Market Price (as defined in the Warrant) (the "Exercise Price"); and WHEREAS, the Company is engaged in effecting an initial public offering of Common Stock (the "IPO") in various states; and WHEREAS, in connection with the IPO, securities administrators of certain states have required that the Exercise Price of the outstanding warrants be adjusted in order to permit the IPO to be effected in such states; and WHEREAS, the Company is this day effecting a split of its Common Stock of 1.545 to 1 so that each stockholder shall receive an additional six (6) shares of Common Stock for each eleven (11) shares presently held; and WHEREAS, in connection with the aforementioned stock split, the Company and Holder desire to memorialize the adjustment in the number of shares of Common Stock which may be purchased by Holder pursuant to the Warrant by a multiple of 1.545 (the "Warrant Shares") as provided for in the Warrant. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The Warrant is hereby amended as follows: (a) Pursuant to Paragraph 7 of the Warrant, as a result of the stock split, the number of Warrant Shares which may be purchased pursuant to the Warrant is hereby adjusted so that the maximum number of shares of Common Stock which may be purchased by Holder pursuant to the Warrant (as set forth in the first paragraph of the Warrant) shall be adjusted by a multiple of 1.545, provided that any fractional share thereby created shall be eliminated by rounding such fraction to the next whole number (the "Adjusted Warrant Share Amount"). (b) The first sentence of Section 1(a) of the Warrant is hereby deleted in its entirety and the following substituted in lieu therefor: "(a) Each Warrant is initially exercisable to purchase one Warrant Share at an initial exercise price per Warrant Share of eighty-five percent (85%) of the per share Market Price (as defined in Section 1(b) hereof) of the Common Stock on the exercise date, subject to adjustment as set forth in Article 7 hereof, payable in cash or by check to the order of the Company, or any combination of cash or check." (c) Section 6.1 is hereby deleted in its entirety and the following substituted in lieu therefor: "6.1 INITIAL AND ADJUSTED EXERCISE PRICE. The initial exercise price of each Warrant shall be eighty-five percent (85%) of the per share Market Price of the Common Stock on the exercise date, per Warrant Share. The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Article 7 hereof." 2. Except as modified hereby, the Warrant remains in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written. Signed, Sealed, and Delivered in the Presence of: AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. ______________________________ ------------------------------- Raymond Findley, Jr. Its President ______________________________ WARRANT HOLDER: /s/ Raymond Roncari ______________________________ ------------------------------- Name: ______________________________ Adjusted Warrant Share Amount: 19,313 ------------ EX-10.8-6-1 12 EXHIBIT 10.8.6.1 SECOND AMENDMENT TO AMERICAN CARD TECHNOLOGY, INC. 1996 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN BACKGROUND American Card Technology, Inc. (the "Company") has effected a split of its common stock, par value $.001 per share (the "Common Stock") of 1.545 to 1 so that each stockholder shall receive an additional six (6) shares of Common Stock for each eleven (11) shares presently held, effective July 9, 1998. In connection with the aforementioned stock split, the Board of Directors of the Company, acting as a committee to administer the Plan, resolved to amend the Plan in accordance with Paragraph 8 thereof to adjust the total number of shares of Common Stock which may be issued and sold pursuant to options granted under the Plan by a multiple of 1.545. NOW THEREFORE, The American Card Technology, Inc. 1996 Nonemployee Directors' Stock Option Plan (the "Plan") is hereby amended pursuant to Paragraph 10 of the Plan by deleting the first sentence of Paragraph 4 of the Plan and substituting the following in lieu therefor: "The total number of shares which may be issued and sold pursuant to Options granted under this Directors' Plan shall be 46,350 shares of Common Stock (or the number and kind of shares of stock or other securities which, in accordance with paragraph 8 of this Directors' Plan, shall be substituted for such shares of Common Stock or to which such shares shall be adjusted; hereinafter, all references to shares of Common Stock are deemed to be references to said shares so adjusted)." As adopted by resolution of the Board of Directors of the Company, acting as a committee to administer the Plan, July 9, 1998. IN WITNESS WHEREOF, the undersigned has set his hand and seal as of the 9th day of July, 1998. AMERICAN CARD TECHNOLOGY, INC. By /s/ Raymond Findley, Jr. ------------------------------- Raymond Findley, Jr. Its President EX-10.8-7-1 13 EXHIBIT 10.8.7.1 AMENDMENT TO AMERICAN CARD TECHNOLOGY, INC. 1996 STOCK OPTION PLAN BACKGROUND American Card Technology, Inc. (the "Company") has effected a split of its common stock, par value $.001 per share (the "Common Stock") of 1.545 to 1 so that each stockholder shall receive an additional six (6) shares of Common Stock for each eleven (11) shares presently held, effective July 9, 1998. In connection with the aforementioned stock split, the Board of Directors of the Company, acting as a committee to administer the American Card Technology, Inc. 1996 Stock Option Plan (the "Plan"), resolved to amend the Plan in accordance with Paragraph 9 thereof to adjust the total number of shares of Common Stock which may be issued and sold pursuant to options granted under the Plan by a multiple of 1.545. NOW THEREFORE, the Plan is hereby amended pursuant to Paragraph 10 of the Plan by deleting the first sentence of Paragraph 4 of the Plan and substituting the following in lieu therefor: "The total number of shares which may be issued and sold pursuant to Options granted under this Plan shall be 417,150 shares of Common Stock (or the number and kind of shares of stock or other securities which, in accordance with paragraph 9 of this Plan, shall be substituted for such shares of Common Stock or to which such shares shall be adjusted; hereinafter, all references to shares of Common Stock are deemed to be references to said shares so adjusted)." As adopted by resolution of the Board of Directors of the Company, acting as a committee to administer the Plan, July 9, 1998. IN WITNESS WHEREOF, the undersigned has set his hand and seal as of the 9th day of July, 1998. AMERICAN CARD TECHNOLOGY, INC. By /s/ Raymond Findley, Jr. ------------------------------- Raymond Findley, Jr. Its President EX-10.8-8 14 EXHIBIT 10.8.8 DIRECTOR LOAN AGREEMENT THIS AGREEMENT made as of the 12th day of February, 1998, by and between HAROLD ROTHSTEIN, of Boca Raton, Florida ("Lender"), and AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"). W I T N E S S E T H : WHEREAS, the Company is this day closing on the sale of units of notes (the "Bridge Notes") and securities in the Company offered pursuant to a Confidential Private Placement Memorandum dated February 3, 1998 (the "Private Placement"); and WHEREAS, in connection with the Private Placement, and as a condition to the closing thereof, Lender has agreed to make available to the Company on an unconditional basis loans to the Company in the original principal amount of Four Hundred Fifty Thousand and 00/100 Dollars ($450,000.00) (the "Loans") to be used at the Company's discretion for working capital and certain expenses to be incurred in connection with an anticipated initial public offering of the Company's securities; WHEREAS, in partial consideration for making the Loans, Lender is being tendered 12,500 shares of common stock, par value $.001 per share, in the Company (the "Common Stock") to be transferred by Lilly Beter Capital Group. Ltd., a consultant to the Company, and to grant to Lender a warrant to purchase 12,500 shares of Common Stock at an exercise price of 80% of the per share market value of the Common Stock on the date of exercise. NOW, THEREFORE, in consideration of the foregoing and in further consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES. the Company represents and warrants to Lender that: (a) the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with all the requisite corporate power and authority to own, operate and lease its properties and to carry on its business as now being conducted and is duly qualified and in good standing in every jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary; (b) The execution and delivery of this Agreement and each and every other agreement, instrument or document required to be executed and delivered to Lender by the Company pursuant to the terms hereof, have been duly authorized, are each valid, legal and binding upon it and enforceable in accordance with their respective terms; (c) The execution and delivery of this Agreement and each and every other agreement, instrument or document required to be executed and delivered to Lender by the Company pursuant to the terms hereof, the consummation of the transactions herein contemplated, the fulfillment of or compliance with the terms and provisions hereof and of each and every other instrument, agreement or document required to be executed and delivered to Lender by the Company pursuant to the terms hereof, are within its powers, are not in contravention of any provisions of its certificate of incorporation or any amendments thereto, or of its by-Laws. 2. AMOUNT AND TERMS OF LOANS. Pursuant to the terms of this Agreement, Lender shall make Loans to the Company, upon its request and within three (3) business days of such request, which in the aggregate do not exceed Four Hundred Fifty Thousand and 00/100 Dollars ($450,000.00). The Loans and each of them shall be made upon the following terms and conditions: (a) The maximum aggregate principal amount of the Loans shall be in the amount of Four Hundred Fifty Thousand and 00/100 Dollars ($450,000.00), and shall be evidenced by a promissory grid note (the "Note") with appropriate insertions of names, dates and amounts. The Loans shall bear interest at a rate per annum equal to ten percent (10.00%). Interest shall be charged on the principal balance from time to time outstanding on the basis of the actual number of days elapsed computed on the basis of a three hundred sixty (360) day year. Interest shall be due and payable, in arrears on the Maturity Date (as hereinafter defined); (b) The Loans made by Lender to the Company pursuant to this Paragraph 2 shall be recorded in an account on the books of Lender bearing the Company's name (the "Company's Account"). There shall also be recorded in the Company's Account all payments made by the Company on the Loans and interest accrued thereon. (c) The outstanding principal amount owed hereunder, together with all accrued but unpaid interest thereon, shall be due and payable in full on the earlier of (i) the closing of an initial public offering of the Company's securities and (ii) March 3, 2002 (the "Maturity Date"); (d) Maker shall have the right to prepay the outstanding principal amount of this Note, in whole or in part at any time. (e) The provisions of this Paragraph 2 shall continue in effect until the Maturity Date, PROVIDED, HOWEVER, that Lender's obligations to advance Loans to the Company pursuant to the provisions of this Paragraph 2 shall cease upon the occurrence of an Event of Default (as defined in Paragraph 3 hereof) until such time as said Event of Default is cured. 3. DEFAULT PROVISIONS. Any one or more of the following shall constitute an Event of Default under this Agreement and the Note: (a) the institution of any bankruptcy proceedings against the Company and a failure to have such proceedings dismissed within a period of sixty (60) days; (b) the institution of any voluntary bankruptcy proceedings by the Company; (c) the Company ceases to do business; or (d) the Company dissolves or otherwise terminates its corporate existence. 2 4. GENERAL PROVISIONS. (a) This Agreement shall survive until the Loans have been paid in full; (b) This Agreement is an integrated document and all terms and provisions are embodied herein and shall not be varied by parol; (c) It is the specific desire and intention of the parties that it shall in all respects be construed under the laws of the State of Georgia; (d) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that the Company shall not assign, voluntarily, by operation of law or otherwise, any of its rights hereunder without the prior written consent of Lender and any such attempted assignment without such consent shall be null and void. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals, and to a duplicate instrument of the same tenor, the day and year first above written. SIGNED, SEALED, AND DELIVERED IN THE PRESENCE OF: AMERICAN CARD TECHNOLOGY, INC. _____________________________________ By /s/ Lawrence O. Perl ------------------------------- ______________________________ Its Chief Executive Officer ______________________________ /s/ Harold Rothstein ----------------------------------- Harold Rothstein ______________________________ 3 HAROLD ROTHSTEIN 650 BOCA MARINA COURT BOCA RATON, FLORIDA 33487 - -------------------------------------------------------------------------------- February 12, 1998 Cohn & Birnbaum P.C. 100 Pearl Street Hartford, Connecticut 06103-4500 Re: American Card Technology, Inc. (the "Company") Attention: Richard J. Shea, Jr., Esq. Ladies and Gentlemen: The undersigned is simultaneously with the execution of this letter entering into (i) a Letter Agreement dated as of the date hereof by and between the undersigned and the Company (the "Letter Agreement") whereby the undersigned is lending funds to the Company as a Closing Loan, as defined in the Letter Agreement, and (ii) a Director Loan Agreement dated as of the date hereof by and between the undersigned and the Company (the "Loan Agreement") whereby the undersigned shall make loans (the "Director Loans") to the Company. In connection with the Closing Loan, the undersigned has wired $400,000.00 into an escrow account for the benefit of the Company. The undersigned hereby authorizes Cohn & Birnbaum P.C., as Escrow Agent, to complete the Letter Agreement by filling in the dollar amount of the Closing Loan in an amount not to exceed $400,000.00. The undersigned further authorizes Cohn & Birnbaum P.C. to release to the Company from escrow the amount necessary to fund the undersigned's Closing Loan in such amount to the Company. Furthermore, the undersigned hereby authorizes Cohn & Birnbaum P.C. to release to the Company the difference between $400,000.00 and such Closing Loan amount as an advance to the Company pursuant to the Loan Agreement, which amount shall be treated as a Director Loan. Very truly yours, Harold Rothstein DIRECTOR LOAN PROMISSORY GRID NOTE $450,000.00 NEW YORK, NEW YORK FEBRUARY 12, 1998 FOR VALUE RECEIVED, AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation ("Maker"), promises to pay to the order of HAROLD ROTHSTEIN ("Holder"), at such place as may be designated in writing from time to time by Holder, the maximum aggregate principal sum of up to Four Hundred Fifty Thousand and 00/100 Dollars ($450,000.00), or such lesser amount as may from time to time be outstanding under this Note, together with interest accruing on the unpaid balance of this Note, before or after demand or judgment, at a fixed rate per annum equal to ten percent (10.00%). Interest shall be charged on the principal balance from time to time outstanding on the basis of the actual number of days elapsed computed on the basis of a three hundred sixty (360) day year. Interest shall be due and payable in arrears on the Maturity Date, as hereinafter defined. The outstanding principal amount, together with interest accrued thereon, shall be due and payable in full on the earlier of (i) the closing of an initial public offering of the Company's securities and (ii) March 3, 2002 (the "Maturity Date"). The principal amount of this Note shall be advanced by Holder upon request of Maker and within three (3) business days of such request. Advances and payments under this Note shall be evidenced by a ledger maintained by Holder and attached hereto which shall set forth, among other things, the principal amount of any advances and payments therefor. This Note is subject in all respects to the terms and conditions of that certain Director Loan Agreement dated this date between Maker and Holder, including, without limitation, Events of Default, repayment terms and the termin ion date set forth therein Maker hereof further promises to pay, in addition to said principal sum and interest, all taxes assessed upon this Note, and all reasonable costs and expenses, including, without limitation, attorneys' fees, incurred in the collection of this Note. Maker shall have the right to prepay the principal amount of this Note and interest accrued thereon in whole or in part at any time. Any partial prepayments shall be applied first to accrued and unpaid interest and second to the principal outstanding under this Note. Maker waives diligence, demand, presentment for payment, notice of nonpayment, protest and notice of protest, and notice of any renewals or extensions of this Note, and all rights under any statute of limitations, and agrees that the time for payment of this Note may be extended at Holder's sole discretion, without impairing Maker's liability thereon. This Note shall be governed by and construed in accordance with the laws of the State of Georgia. AMERICAN CARD TECHNOLOGY, INC. By /s/ Lawrence O. Perl ------------------------------ ______________________ Lawrence 0. Perl Its' Chief Executive Officer ALLONGE ENDORSEMENT TO PROMISSORY NOTE DATED APRIL 30, 1998 IN THE ORIGINAL PRINCIPAL AMOUNT OF $450,000.00 MADE BY AMERICAN CARD TECHNOLOGY, INC. TO THE ORDER OF HAROLD ROTHSTEIN Allonge annexed to and made a part of that certain Director Loan Promissory Grid Note (the "Note") in the original principal amount of Four Hundred Fifty Thousand and 00/100 Dollars ($450,000.00) dated February 12, 1998 made by American Card Technology, Inc. ("Maker") in favor of Harold Rothstein ("Holder"). Holder and Maker hereby agree that the Maturity Date of the Note is amended to the earlier of (i) the closing of debt financing negotiated by Lilly Beter Capital Group subsequent to the closing of the Maker's initial public offering or (ii) January 1, 2001. All other provisions of said Note, except those amended hereby, shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the undersigned has caused this Allonge to be executed as of the 30th day of April, 1998. AMERICAN CARD TECHNOLOGY, INC. By: /s/ Lawrence O. Perl. ---------------------------------- Its Chief Executive Officer HOLDER: /s/ Harold Rothstein ---------------------------------- Harold Rothstein EX-10.8-9 15 EXHIBIT 10.8.9 DIRECTOR LOAN AGREEMENT THIS AGREEMENT made as of the 12th day of February, 1998, by and between RAYMOND RONCARI, of Windsor Locks, Connecticut ("Lender"), and AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"). W I T N E S S E T H : WHEREAS, the Company is this day closing on the sale of units of notes (the "Bridge Notes") and securities in the Company offered pursuant to a Confidential Private Placement Memorandum dated February 3, 1998 (the "Private Placement"); and WHEREAS, in connection with the Private Placement, and as a condition to the closing thereof, Lender has agreed to make available to the Company on an unconditional basis loans to the Company in the original principal amount of Four Hundred Fifty Thousand and 00/100 Dollars ($450,000.00) (the "Loans") to be used at the Company's discretion for working capital and certain expenses to be incurred in connection with an anticipated initial public offering of the Company's securities; WHEREAS, in partial consideration for making the Loans, Lender is being tendered 12,500 shares of common stock, par value $.001 per share, in the Company (the "Common Stock") to be transferred by Lilly Beter Capital Group. Ltd., a consultant to the Company, and to grant to Lender a warrant to purchase 12,500 shares of Common Stock at an exercise price of 80% of the per share market value of the Common Stock on the date of exercise. NOW, THEREFORE, in consideration of the foregoing and in further consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES. the Company represents and warrants to Lender that: (a) the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with all the requisite corporate power and authority to own, operate and lease its properties and to carry on its business as now being conducted and is duly qualified and in good standing in every jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary; (b) The execution and delivery of this Agreement and each and every other agreement, instrument or document required to be executed and delivered to Lender by the Company pursuant to the terms hereof, have been duly authorized, are each valid, legal and binding upon it and enforceable in accordance with their respective terms; (c) The execution and delivery of this Agreement and each and every other agreement, instrument or document required to be executed and delivered to Lender by the Company pursuant to the terms hereof, the consummation of the transactions herein contemplated, the fulfillment of or compliance with the terms and provisions hereof and of each and every other instrument, agreement or document required to be executed and delivered to Lender by the Company pursuant to the terms hereof, are within its powers, are not in contravention of any provisions of its certificate of incorporation or any amendments thereto, or of its by-Laws. 2. AMOUNT AND TERMS OF LOANS. Pursuant to the terms of this Agreement, Lender shall make Loans to the Company, upon its request and within three (3) business days of such request, which in the aggregate do not exceed Four Hundred Fifty Thousand and 00/100 Dollars ($450,000.00). The Loans and each of them shall be made upon the following terms and conditions: (a) The maximum aggregate principal amount of the Loans shall be in the amount of Four Hundred Fifty Thousand and 00/100 Dollars ($450,000.00), and shall be evidenced by a promissory grid note (the "Note") with appropriate insertions of names, dates and amounts. The Loans shall bear interest at a rate per annum equal to ten percent (10.00%). Interest shall be charged on the principal balance from time to time outstanding on the basis of the actual number of days elapsed computed on the basis of a three hundred sixty (360) day year. Interest shall be due and payable, in arrears on the Maturity Date (as hereinafter defined); (b) The Loans made by Lender to the Company pursuant to this Paragraph 2 shall be recorded in an account on the books of Lender bearing the Company's name (the "Company's Account"). There shall also be recorded in the Company's Account all payments made by the Company on the Loans and interest accrued thereon. (c) The outstanding principal amount owed hereunder, together with all accrued but unpaid interest thereon, shall be due and payable in full on the earlier of (i) the closing of an initial public offering of the Company's securities and (ii) March 3, 2002 (the "Maturity Date"); (d) Maker shall have the right to prepay the outstanding principal amount of this Note, in whole or in part at any time. (e) The provisions of this Paragraph 2 shall continue in effect until the Maturity Date, PROVIDED, HOWEVER, that Lender's obligations to advance Loans to the Company pursuant to the provisions of this Paragraph 2 shall cease upon the occurrence of an Event of Default (as defined in Paragraph 3 hereof) until such time as said Event of Default is cured. 3. DEFAULT PROVISIONS. Any one or more of the following shall constitute an Event of Default under this Agreement and the Note: (a) the institution of any bankruptcy proceedings against the Company and a failure to have such proceedings dismissed within a period of sixty (60) days; (b) the institution of any voluntary bankruptcy proceedings by the Company; (c) the Company ceases to do business; or (d) the Company dissolves or otherwise terminates its corporate existence. 4. GENERAL PROVISIONS. (a) This Agreement shall survive until the Loans have been paid in full; (b) This Agreement is an integrated document and all terms and provisions are embodied herein and shall not be varied by parol; (c) It is the specific desire and intention of the parties that it shall in all respects be construed under the laws of the State of Georgia; (d) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that the Company shall not assign, voluntarily, by operation of law or otherwise, any of its rights hereunder without the prior written consent of Lender and any such attempted assignment without such consent shall be null and void. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals, and to a duplicate instrument of the same tenor, the day and year first above written. SIGNED, SEALED, AND DELIVERED IN THE PRESENCE OF: AMERICAN CARD TECHNOLOGY, INC. ______________________________ By /s/ Lawrence O. Perl ----------------------------- ______________________________ Its Chief Executive Officer ______________________________ /s/ Raymond Roncari -------------------------------- Raymond Roncari ______________________________ DIRECTOR LOAN PROMISSORY GRID NOTE $450,000.00 NEW YORK, NEW YORK FEBRUARY 12, 1998 FOR VALUE RECEIVED, AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation ("Maker"), promises to pay to the order of RAYMOND A. RONCARI ("Holder"), at such place as may be designated in writing from time to time by Holder, the maximum aggregate principal sum of up to Four Hundred Fifty Thousand and 00/100 Dollars ($450,000.00), or such lesser amount as may from time to time be outstanding under this Note, together with interest accruing on the unpaid balance of this Note, before or after demand or judgment, at a fixed rate per annum equal to ten percent (10.00%). Interest shall be charged on the principal balance from time to time outstanding on the basis of the actual number of days elapsed computed on the basis of a three hundred sixty (360) day year. Interest shall be due and payable in arrears on the Maturity Date, as hereinafter defined. The outstanding principal amount, together with interest accrued thereon, shall be due and payable in full on the earlier of (i) the closing of an initial public offering of the Company's securities and (ii) March 3, 2002 (the "Maturity Date"). The principal amount of this Note shall be advanced by Holder upon request of Maker and within three (3) business days of such request. Advances and payments under this Note shall be evidenced by a ledger maintained by Holder and attached hereto which shall set forth, among other things, the principal amount of any advances and payments therefor. This Note is subject in all respects to the terms and conditions of that certain Director Loan Agreement dated this date between Maker and Holder, including, without limitation, Events of Default, repayment terms, and the termination date set forth therein. Maker hereof further promises to pay, in addition to said principal sum and interest, all taxes assessed upon this Note, and all reasonable costs and expenses, including, without limitation, attorneys' fees, incurred in the collection of this Note. Maker shall have the right to prepay the principal amount of this Note and interest accrued thereon in whole or in part at any time. Any partial prepayments shall be applied first to accrued and unpaid interest and second to the principal outstanding under this Note. Maker waives diligence, demand, presentment for payment, notice of nonpayment, protest and notice of protest, and notice of any renewals or extensions of this Note, and all rights under any statute of limitations, and agrees that the time for payment of this Note may be extended at Holder's sole discretion, without impairing Maker's liability thereon. This Note shall be governed by and construed in accordance with the laws of the State of Georgia. AMERICAN CARD TECHNOLOGY, INC. By /s/ Lawrence O. Perl ---------------------------- ______________________ Lawrence 0. Perl Its' Chief Executive Officer ALLONGE ENDORSEMENT TO PROMISSORY NOTE DATED APRIL 30, 1998 IN THE ORIGINAL PRINCIPAL AMOUNT OF $450,000.00 MADE BY AMERICAN CARD TECHNOLOGY, INC. TO THE ORDER OF RAYMOND A. RONCARI Allonge annexed to and made a part of that certain Director Loan Promissory Grid Note (the "Note") in the original principal amount of Four Hundred Fifty Thousand and 00/100 Dollars ($450,000.00) dated February 12, 1998 made by American Card Technology, Inc. ("Maker") in favor of Raymond A. Roncari ("Holder"). Holder and Maker hereby agree that the Maturity Date of the Note is amended to the earlier of (i) the closing of debt financing negotiated by Lilly Beter Capital Group subsequent to the closing of the Maker's initial public offering or (ii) January 1, 2001. All other provisions of said Note, except those amended hereby, shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the undersigned has caused this Allonge to be executed as of the 30th day of April, 1998. AMERICAN CARD TECHNOLOGY, INC. By: /s/ Lawrence O. Perl ----------------------------------- Its Chief Executive Officer HOLDER: /s/ Raymond A. Roncari ------------------------------------ Raymond A. Roncari EX-10.9-1 16 EXHIBIT 10.9.1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TECHNOLOGY PURCHASE AGREEMENT by and between SOFTCHIP ISRAEL LTD. and AMERICAN CARD TECHNOLOGY, INC. Dated as of March 7th, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TECHNOLOGY PURCHASE AGREEMENT THIS TECHNOLOGY PURCHASE AGREEMENT ("Agreement") is made and entered into as of the 7th day of March, 1998, between SOFTCHIP ISRAEL LTD. a corporation organized under the laws of Israel ("Seller"), and AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation ("Buyer"). WITNESSETH: WHEREAS, Seller owns that certain DVK-1 Chip Operating System (the "DVK-1 System") and development environment; and WHEREAS, Seller desires to sell and assign and Buyer desires to purchase and acquire the DVK-1 System and development environment; and NOW THEREFORE, in consideration of the foregoing and of the mutual promises, covenants, and conditions set forth below, the parties hereby agree as follows: (1) CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth below. "Affiliate" shall mean, with respect to any Person, any shareholder, subsidiary, officer, director or partner of such Person and any other Person which directly or indirectly controls, is controlled by or is under common control with such Person. "Agreement" shall mean this Technology Purchase Agreement and all Exhibits hereto, as the same may from time to time be amended. "Closing" shall mean the closing of the transactions contemplated by this Agreement to be held at the offices of Cohn & Birnbaum P.C., 100 Pearl Street, Hartford Connecticut, on the Closing Date or in such other place as may be agreed to by the parties to this Agreement. "Closing Date" shall mean the earlier of (i) September 15, 1998 or (ii) the closing of an initial public offering of securities of the Buyer. "Intellectual Property Rights" shall mean and include all of the Seller's right, title and interest in and to the DVK-1 System and names "DVK-1," "DVK," and any other trade names used by the Seller with respect to the DVK-1 System and development environment, together with all trademarks, copyrights, patents, rights of privacy and all other intellectual property owned by the Seller in connection with the DVK-1 System and development environment. "Litigation Expense" shall mean any expenses reasonably incurred in connection with investigating, defending or asserting any claim, action, suit or proceeding incident to any matter indemnified against under this Agreement, including, without limitation, court filing fees, court costs, arbitration fees or costs, witness fees, and fees and disbursements of legal counsel, investigators, expert witnesses, accountants and other professionals. "Loss" shall mean any loss, obligation, claim, liability, settlement payment, award, judgment, fine, penalty, interest charge, expense, damage or deficiency or other charge, other than Litigation Expense. "Major Enhancement" shall mean a change to the DVK-1 silicon mask ROM code that (i) adds functionality, (ii) changes communication protocols or (iii) involves downloading EEPROM code of over one kilobyte that implements (i) or (ii) above. "Minor Enhancement" shall mean (i) any change to the software drivers in the host computer; (ii) porting host computer software to a different host computer operating system; (iii) porting host computer software to a different host computer central processing unit ("CPU"); (iv) downloading EEPROM code of less than one kilobyte that implements a Major Enhancement; or (v) downloading any amount of code to EEPROM for technical feasibility tasks, PROVIDED, HOWEVER, that if such amount is greater than one kilobyte, the intellectual property rights of such downloaded code shall, unless otherwise agreed to by the parties, remain those of the Seller, and the results of any such feasibility studies shall belong solely to the Buyer. "Minor Mask Release" shall mean porting the DVK-1 silicon mask ROM code to another chip, either with the same or different CPU type or memory configuration, provided protocols are preserved and functionality is preserved or reduced. "Person" shall mean and include an individual, a corporation, a partnership, a limited liability company, a limited liability partnership, a joint venture, a trust, an unincorporated association, a government or political subdivision or agency thereof or any other entity. "Purchased Assets" shall mean all of the assets of the Seller described in Section 3(a) hereof and more specifically set forth in EXHIBIT A hereto. (2) ACKNOWLEDGEMENTS. Buyer hereby acknowledges that the Seller has previously provided to Buyer the DVK-1 System which Buyer has fully examined and has found to be to its full satisfaction. Buyer hereby waives any claim of unsuitability and acknowledges that the DVK-1 System as delivered is fully in accordance with all representations of Seller regarding suitability and fully in keeping with the specifications set out in its accompanying documentation. (3) SALE OF ASSETS; LIMITATIONS. (a) Subject to the terms and conditions set forth in this Agreement, at the Closing, in consideration of the payment of the Purchase Price, as defined in Section 4 below, the Seller shall sell, transfer, assign, convey and deliver to the Buyer, and the Buyer shall purchase, accept and acquire from the Seller, all of the following assets and properties of the Seller (collectively, the "Purchased Assets"): (i) the DVK-1 System and development environment, including, without limitation, all source code, object code, derivative mask, and documentation; and (ii) all Intellectual Property Rights. (2) (b) Upon the Closing, Buyer shall have the sole and exclusive worldwide rights to develop, use, manufacture, modify, upgrade, improve and enhance, and license, the DVK-1 System (including, without limitation, making any Minor Enhancements thereto) and Seller shall have no further rights therein. Notwithstanding the foregoing, Buyer hereby acknowledges and agrees that Buyer shall not make any Major Enhancement or alter the code of the DVK-1 System in order to create a derivative mask (other than a Minor Mask Release) which differs from that embedded in the DVK-1 System. (c) The Buyer hereby agrees not to convey, transfer, or sell, (except to a purchaser of all or substantially all of the assets of Buyer other than a competitor of Seller), the DVK-1 System, Intellectual Property Rights or DVK-1 source code to any third party without the prior written consent of Seller, which consent shall not be unreasonably withheld. Withholding of consent of sale to a competitor of Seller shall not be deemed unreasonable. 4) PURCHASE PRICE. The aggregate purchase price to be paid by the Buyer for the Purchased Assets (the "Purchase Price") shall be One Hundred Thousand and 00/100 Dollars ($100,000.00), payable at the Closing in the manner described in Section 5(b) hereof. 5) INSTRUMENTS OF TRANSFER; PAYMENT OF PURCHASE PRICE; FURTHER ASSURANCES (a) SELLER'S DELIVERIES. At the Closing, the Seller shall deliver the following to the Buyer, each of which shall be in form reasonably satisfactory to the Buyer: (i) Bill of Sale for the Purchased Assets; (ii) instruments of transfer reasonably necessary to transfer to the Buyer all of the Seller's rights to any Intellectual Property Rights included as Purchased Assets, including any instruments of assignment to assign Seller's interest in such rights to be filed with the United States Patent and Trademark Office or the equivalent governmental office of any other country at Buyer's option; (iii) Director's Certificate regarding resolutions authorizing this transaction and the due authority of persons executing documents on behalf of the Seller; (iv) legal opinions of the Seller's counsel in form and substance satisfactory to Buyer and Buyer's counsel; (v) a Certificate as to the Seller's compliance with Sections 10(a) and (b) of this Agreement; (vi) Evidence reasonably satisfactory to the Buyer, of the Seller's ownership of and authority to convey the Purchased Assets; and (vii) Such other instrument or instruments of transfer, in such form as shall be reasonably necessary or appropriate to vest in the Buyer all of the Seller's right, interest and title to the Purchased Assets. (3) (b) BUYER'S DELIVERIES. At the Closing, the Buyer shall deliver the following to the Seller, each of which shall be in form reasonably satisfactory to the Seller: (i) bank checks or wire transfers of immediately available funds for an aggregate amount equal to the Purchase Price; (ii) a certificate as to the Buyer's compliance with Sections 9(a) and (b) of this Agreement; (iii) Secretary's Certificate regarding resolutions authorizing this transaction and the due authority of persons executing documents on behalf of the Buyer; and (iv) an opinion of counsel to the Buyer in form and substance satisfactory to Seller and Seller's counsel; and (v) such further instruments as the Seller may reasonably request to evidence the consummation of the transactions contemplated by this Agreement. (6) REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller represents and warrants to the Buyer as follows: (a) ORGANIZATION; GOOD STANDING; POWER. The Seller is a duly organized, validly existing corporation in good standing under the laws of the State of Israel. The Seller has the corporate power, authority and capacity to own, lease and operate its properties, and to carry on its business as and where the same is now being conducted. (b) AUTHORIZATION; EFFECTIVE AGREEMENT. The Seller has the requisite corporate power, authority and capacity to enter into this Agreement and to perform all of its obligations hereunder. All corporate proceedings required to be taken by the Seller to authorize the execution and delivery of this Agreement and the performance of the Seller's obligations hereunder have been duly taken, and this Agreement constitutes the legal, valid and binding obligation of the Seller, enforceable against it in accordance with its terms. The execution, delivery and performance of this Agreement by the Seller does not and will not conflict with, violate or result in the breach of any of the terms or conditions of, or constitute a default under, the Articles of Incorporation or By-Laws of the Seller or any indenture, mortgage, pledge, note, bond, license, permit or other agreement, commitment or lease to which the Seller is a party or by which the Seller or its assets are bound or affected, or any law, regulation, ordinance or decree to which the Seller or its assets are subject, except for such violations of any law, regulation, ordinance or decree which would not have a material adverse effect on the Purchased Assets. (c) CONSENTS. No permit, consent, approval, or authorization of any governmental authority or any other Person on the part of the Seller is required in connection with the execution or delivery by the Seller of this Agreement or the consummation of the transactions contemplated hereby. (d) ADEQUACY OF AND TITLE TO PURCHASED ASSETS. The Seller has good and marketable title to all of the Purchased Assets, none of which are subject to a mortgage, pledge, lien, security interest, lease, charge, encumbrance or conditional sale or other title retention agreement. (4) (e) INTELLECTUAL PROPERTY RIGHTS. The Seller is the sole and exclusive owner of any and all intellectual property rights in and to the Purchased Assets, including, without limitation, any and all trademarks, patents, copyrights, rights of privacy, and trade secrets. The Seller acknowledges, however, that the names "DVK-1" and "DVK" are not registered trademarks. The Seller has the sole and exclusive right to use all such intellectual property rights, the Seller's use of such intellectual property rights does not conflict with the intellectual property rights of any other party, and all such intellectual property rights are fully assignable to the Buyer without the consent of any third party and, to the best of Seller's knowledge, without infringing or violating the rights of any third party. (f) SELLER ACTIONS. The Seller has not sold, assigned, licensed, transferred, or otherwise conveyed any rights in any of the Purchased Assets, or entered into any agreements with any third party to do so. (g) LITIGATION, ETC. There is no suit, action or litigation, administrative hearing, arbitration, labor controversy, warranty claim, governmental inquiry, investigation or other proceeding or claim pending or, to the Seller's knowledge, threatened against or relating to the Seller with respect to the Purchased Assets. There are no judgments, consent decrees or injunctions against, affecting or binding upon the Seller with respect to the Purchased Assets. The Seller is in compliance with all laws, ordinances, requirements, orders and regulations applicable to it, the violation of which would have a material adverse effect on the Purchased Assets or on the ability of the Seller to consummate the transactions contemplated hereby. (h) DELIVERIES. The Seller has delivered or made available to the Buyer true, correct and complete copies of the by-laws, articles of incorporation and organizational documents of the Seller and if embodied in written form, all Intellectual Property Rights and other information or data referred to in this Section 7. (i) INACCURACIES. Neither this Agreement nor any certificate or statement furnished by or on behalf of the Seller at the Closing in connection with this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading; and there is no fact known to the Seller in connection with this Agreement which might reasonably be expected to materially adversely affect the ability of the Seller to consummate the transactions contemplated hereby which has not been set forth herein or in a certificate or statement furnished to the Buyer at the Closing by the Seller. (7) REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer represents and warrants to the Seller as follows: (a) ORGANIZATION; GOOD STANDING; POWER. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Buyer has the requisite power, authority and capacity to own, lease and operate its properties and to carry on its intended business. (b) AUTHORIZATION. The Buyer has the requisite power, authority and capacity to enter into this Agreement and to perform all of its obligations hereunder. The Buyer has duly taken all necessary action to approve this Agreement and the performance of its obligations hereunder. This Agreement (5) constitutes the legal, valid and binding obligation of the Buyer enforceable against it in accordance with its terms. (c) EFFECTIVE AGREEMENT. The execution, delivery and performance of this Agreement by the Buyer do not and will not (i) conflict with, violate or result in the breach of any of the terms or conditions of, or constitute a default under, the articles of organization or operating agreement of the Buyer, or any contract, agreement, commitment, indenture, mortgage, pledge, note, bond, license, permit or other instrument or obligation to which the Buyer is a party or by which the Buyer or its assets are bound or affected, or any law, regulation, ordinance or decree to which the Buyer or its assets are subject, or (ii) result in the creation or imposition of any lien, security interest, charge, encumbrance, restriction or right, including rights of termination or cancellation, in or with respect to, or otherwise materially adversely affect, any of the properties, assets or business of the Buyer. (d) CONSENTS. No permit, consent, approval or authorization of, or designation, declaration or filing with, any governmental authority or any other Person on the part of the Buyer is required in connection with the execution or delivery by the Buyer of this Agreement or the consummation of the transactions contemplated hereby, except where the failure to obtain such consent would not materially adversely affect the Buyer's ability to consummate the transactions contemplated by this Agreement. (e) SHAREHOLDERS. Attached hereto as EXHIBIT B is a list setting forth the names of shareholders of the Buyer. The Buyer agrees to give the Seller notice of any changes to such list within thirty (30) days of the effective date of any such changes, PROVIDED, HOWEVER, that Buyer's obligation to provide such information to the Seller terminates upon the closing of an initial public offering of securities of the Buyer. (f) LITIGATION. There is no suit, action or litigation, administrative hearing, governmental inquiry, investigation, arbitration or other proceeding pending or, to the Buyer's knowledge, threatened against or relating to the Buyer. There are no judgments, consent decrees or injunctions against, affecting or binding upon the Buyer. The Buyer is in compliance with all laws, ordinances, requirements, orders and regulations applicable to it, the violation of which would have a material adverse effect on its ability to consummate the transactions contemplated by this Agreement, and the Buyer has not received notice of any claimed violation with respect to any of the foregoing, and none of the foregoing will be affected by the consummation of the transactions contemplated by this Agreement. (8) USE OF NAME. The Seller agrees that from and after the Closing Date, neither the Seller nor any person under the control of the Seller shall use the name "DVK-1" or "DVK" for any computer chip operating system or software source documents, or any devices otherwise used in computer systems. Notwithstanding the foregoing, Seller may acknowledge that Seller created the DVK-1 System in advertisements and promotional material to which Buyer has given its prior written consent, which consent shall not be unreasonably withheld. (9) CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE SELLER. All obligations of the Seller under this Agreement are subject to the fulfillment, at or prior to the Closing Date, of each of the following conditions, which conditions may be waived only by the Seller: (6) (a) The representations and warranties of the Buyer herein contained shall be true and correct as of the date hereof. (b) The Buyer shall have performed or complied with all the obligations, agreements and covenants of the Buyer herein contained to be performed by it prior to or as of the Closing Date. (c) The Seller shall have received a certificate of the Buyer as to compliance with paragraphs (a) and (b) of this Section 9. (d) No action, suit or proceeding by or before any court or any governmental or regulatory authority shall have been commenced or threatened, and no investigation by any governmental or regulatory authority shall have been commenced or threatened, seeking to restrain, prevent or change the transactions contemplated hereby or seeking judgments against the Seller or the Buyer awarding substantial damages in respect of the transactions contemplated hereby. (e) All deliveries required to be made under this Agreement to the Seller at or before the Closing Date shall have been received by the Seller. (10) CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE BUYER. All obligations of the Buyer under this Agreement are subject to the fulfillment, at or prior to the Closing Date, of each of the following conditions, which conditions may be waived only by the Buyer. (a) The representations and warranties of the Seller herein contained shall be true and correct as of the date hereof. (b) The Seller shall have performed or complied with all the obligations, agreements and covenants herein contained to be performed by them prior to or as of the Closing Date. (c) The Buyer shall have received a certificate from the Seller as to compliance with paragraphs (a) and (b) of this Section 10. (d) No action, suit or proceeding by or before any court or any governmental or regulatory authority shall have been commenced or threatened, and no investigation by any governmental or regulatory authority shall have been commenced or threatened, seeking to restrain, prevent or change the transactions contemplated hereby or seeking judgments against the Seller or the Buyer awarding substantial damages in respect of the transactions contemplated hereby. (e) All deliveries required to be made under this Agreement to the Buyer on or before the Closing Date shall have been received by the Buyer. (11) INDEMNIFICATION; SURVIVAL (a) INDEMNIFICATION BY THE BUYER. The Buyer shall indemnify and save harmless the Seller, officers and directors of the Seller and their respective successors and assigns from, against, for and in respect of: (7) (i) any Loss incurred or required to be paid because of the breach of any representation, warranty, covenant or agreement of the Buyer in this Agreement; and (ii) any Litigation Expense incurred or required to be paid in connection with any matter indemnified against in Section 11(a)(i) hereof. (b) INDEMNIFICATION BY THE SELLER. The Seller shall indemnify and save harmless the Buyer, the Affiliates of the Buyer, employees, officers, and directors of the Buyer, and their respective successors and assigns from, against, for and in respect of: (i) any Loss incurred or required to be paid because of the breach of any representation, warranty, covenant or agreement of the Seller in this Agreement; (ii) any claims raised between the date of Closing and five years thereafter, to the extent they are based upon any claimed infringement or violation of any third party's copyright, patent, trademark or other property right by any of the Purchased Assets, except to the extent the claim is a result of the combination of the Purchased Assets with other software or equipment which is not included in the Purchased Assets. In the event that Buyer receives notice of any such claim, Buyer shall (i) promptly notify Seller of the claim, (ii) permit Seller to assume the defense of such claim or any negotiations related thereto at Seller's expense (though no settlement of such claim may be entered into without Buyer's approval which shall not be unreasonably withheld), and (iii) provide such information and assistance as is requested by Seller in connection with the defense of such claim. In addition to defending such claim as provided in the foregoing (regardless of the outcome), Seller will pay any amount finally awarded in a proceeding to the extent based upon such a claim (including attorney's fees, if any, in such award), provided that such award is based upon a finding that Seller knew or should have known of the infringement or violation of such third party's rights. Should any such claims be made or brought to the attention of the parties or either of them prior to the Closing, either party shall have the option to cancel this Agreement by written notice to the other prior to Closing, in which case the parties shall have no further obligations whatsoever to each other hereunder. If neither party elects to so cancel, Seller shall be obligated to act in accordance with this Section. (iii) any Litigation Expense incurred or required to be paid in connection with any matter indemnified against in Section 11(b)(i) or Section 11(b)(ii) hereof. (c) SURVIVAL. The representations, warranties, covenants and agreements of the parties hereto (including indemnification obligations of the parties hereunder with respect to all Losses and Litigation Expense incurred or required to be paid) shall survive the execution and delivery of this Agreement. (d) NOTICE. The indemnified party shall use its best efforts to give prompt written notice to the indemnifying party or parties of any claim or event known to it which does or may give rise to a claim by the indemnified party against the indemnifying party or parties based on this Agreement, stating the nature and basis of said claims or events and the amounts thereof, to the extent known. (e) DEFENSE OF CLAIMS OR ACTIONS. In the event any claim, action, suit or proceeding is made or brought by third parties with respect to which a party may be entitled to indemnity hereunder, the (8) indemnified parties shall given written notice of such claim, action, suit or proceeding and a copy of the claim, process and all legal pleadings with respect thereto to the indemnifying parties within ten (10) business days of being served with such claim, process or legal pleading. Such notice shall not be a condition precedent to any liability of the indemnifying parties under this Agreement unless the failure to give such notice results in any prejudice to the indemnifying parties. The indemnifying parties shall have the right to assume the defense of any such claim or action. If the indemnifying parties wish to assume the defense of such claim or action, such assumption shall be evidenced by written notice to the indemnified parties. After such notice, the indemnifying parties shall engage independent legal counsel of reputable standing selected by them to assume the defense and may contest, pay, settle or compromise any such claim or action on such terms and conditions as the indemnifying parties may determine. If the indemnifying parties assume the defense of any such claim, action, suit or proceeding, the indemnified parties shall have the right to employ their own counsel, at their own expense, and if the indemnified parties shall have reasonably concluded and specifically notified the indemnifying parties either that there may be specific defenses available to them which are different from or additional to those available to the indemnifying parties or that such claim, action, suit or proceeding involves or could have a material adverse effect upon them with respect to matters beyond the scope of the indemnity provided hereunder, then the counsel representing them, to the extent made necessary by such defenses, shall have the right to direct such defenses of such claim, action, suit or proceeding in its behalf at the indemnified party's expense. In the event that the indemnifying parties shall not agree in writing to assume the defense of such claim or action, the indemnified parties may engage independent counsel of reputable standing selected by them to assume the defense and may contest, pay, settle or compromise any such claim or action on such terms and conditions as the indemnified parties may determine; PROVIDED, HOWEVER, that the indemnified parties shall not settle or compromise any claim or action without the prior consent of the indemnifying parties (which consent shall not be unreasonably withheld). The fees and expenses of such counsel shall constitute Litigation Expenses. The indemnified parties and the indemnifying parties shall cooperate in good faith in connection with such defense, and all such parties shall have the right to employ their own counsel; but, except as provided above, the fees and expenses of their counsel shall be at their own expense. The indemnified parties or the indemnifying parties, as the case may be, shall be kept fully informed of such claim, action, suit or proceeding at all stages thereof, whether or not they are represented by their own counsel. (f) COOPERATION. The parties hereto agree to render to each other such assistance as they may reasonably require of each other and to cooperate in good faith with each other in order to ensure the proper and adequate defense of any claim, action, suit or proceeding brought by any third party. Where independent counsel has been selected by the indemnifying parties or by the indemnified parties pursuant to Section 11(e) hereof, the indemnifying parties or the indemnified parties, as the case may be, shall be entitled to rely upon the reasonable advice of such counsel in the reasonable conduct of the defense, and no indemnifying party shall be relieved of liability hereunder by reason of such reliance or the defense conducted by such counsel. (g) THE BUYER'S RIGHT OF OFFSET. Without limiting in any way the rights of the Buyer to be indemnified under this Section 11 for Losses and Litigation Expense (or the measure of amounts of loss and Litigation Expense for which the Buyer may be entitled to indemnification), the Buyer shall have a right to offset against the amounts due under Section 5 hereof and against the amounts due under Section 11 hereof for the amount of any Loss or Litigation Expenses incurred by the Buyer. (9) (12) RESTRICTIVE COVENANTS. The parties hereto acknowledge that (i) the Seller has developed trade secrets and confidential information concerning the Purchased Assets, and (ii) in the course of dealing with each other, the parties have acquired confidential information about the business, activities, operations, technical information, and trade secrets of each other, and (iii) the agreements and covenants contained in this Section 12 are essential to protect each of the parties following the consummation of the transactions contemplated hereby or in the event (i) of a failure to consummate such transactions, or (ii) this Agreement is terminated for any reason. Accordingly, each party covenants and agrees as follows: (a) CONFIDENTIAL INFORMATION. Each party shall keep secret and retain in strictest confidence, and shall not use, in competition with or in a manner otherwise detrimental to the interests of the other, for the benefit of itself or others other than the other party hereto, any confidential information, including, without limitation, any confidential technology, "know-how," trade secrets, processes, designs, specifications, inventions, methods, developmental work, improvements, unpublished patent applications, development tools, software programs, software source documents, licenses, customer lists, customer personnel information, details of client or consultant contracts, pricing policies, operational methods, marketing plans or strategies, or product development techniques or plans related to the Purchased Assets or the other party hereto ("Confidential Information"). Notwithstanding the foregoing, nothing herein shall prohibit Buyer from using the Purchased Assets in any manner whatsoever so long as such use is not in violation of this Agreement. The term "Confidential Information" does not include, and there shall be no obligation hereunder with respect to, (i) information concerning either Seller or Buyer that becomes generally available to the public other than as a result of a disclosure by the other party or any agent or other representative thereof after the Closing Date, and (ii) general business methods applicable to the Purchased Assets. The parties shall have no obligation hereunder to keep confidential any of the Confidential Information to the extent disclosure of any thereof is required by law, or determined in good faith by the disclosing party to be necessary or appropriate to comply with any legal or regulatory order, regulation or requirement; PROVIDED, HOWEVER, that in the event disclosure is required by law, the disclosing party shall use best efforts to provide the other party with prompt advance notice of such requirement so that the other party may seek an appropriate protective order. (b) RIGHTS AND REMEDIES UPON BREACH. In the event a party breaches, or threatens to commit a breach of, any of the provisions of this Section 12 or Section 3(c) hereof (the "Restrictive Covenants"), the non-breaching party may have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the non-breaching party and that money damages would not provide an adequate remedy to the non-breaching party. Such rights and remedies, shall be independent of any others and severally enforceable, and shall be in addition to, and not in lieu of, any other rights and remedies available to the non-breaching party at law or in equity. (c) SEVERABILITY OF COVENANTS. Each party acknowledges and agrees that the Restrictive Covenants are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, are invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. (10) (d) ENFORCEABILITY IN JURISDICTIONS. The parties hereto intend to and hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of the State of Georgia, U.S.A. (and the Buyer and the Seller hereby consent to the jurisdiction of such courts). (13) TERMINATION; BREACH. Notwithstanding anything to the contrary herein, this Agreement may be terminated and the transactions contemplated hereby may be abandoned: (a) by the Buyer if there exists a breach of any material representation, warranty, covenant or agreement made to the Buyer under this Agreement (which breach cannot be cured or is not cured upon fifteen (15) days' written notice); (b) by the Seller if there exists a breach of any representation, warranty, covenant or agreement made to the Seller under this Agreement (which breach cannot be cured or is not cured upon fifteen (15) days' written notice); (c) by the Seller or the Buyer, provided that the terminating party is not then in breach of any of its material representations, warranties, covenants or agreements set forth in this Agreement, if the Closing has not been consummated by the earlier of (i) September 15, 1998 or (ii) the closing of the initial public offering of securities of the Buyer, or such extended date as may be agreed to in writing by the parties. Upon the termination of this Agreement under Section 13(c), no party hereto shall have any further liability or obligation to any other party hereunder, except for the obligation of each party to pay its own expenses as set forth in Section 16 hereof and (ii) return to the Seller the DVK-1 System previously provided to Buyer, together with all modifications, upgrades, improvements and enhancements thereof made by Buyer or on Buyer's behalf. Upon the termination of this Agreement under Sections 13(a) or 13(b), the terminating party shall be entitled, in addition to pursuing other remedies, to recover its actual damages (including costs of enforcement and reasonable attorneys' fees), arising from the breach by the non-terminating party. In the event of a breach by the Seller of any material representation, warranty, covenant or agreement made by the Seller under this Agreement, the Buyer may, in lieu of exercising its right to terminate the Agreement, bring an action to enforce the terms of this Agreement by decree of specific performance, it being agreed that the property to be conveyed hereunder is unique and not readily available in the open market and, in any such event, the Seller hereby further agrees to waive any and all defenses against any such action for specific performance on the grounds that there is an adequate remedy for money damages available. (14) LIMITATION ON LIABILITY. Notwithstanding any provision of this Agreement, the liability of the Seller for damages, for any cause whatsoever, shall be limited to an amount equal to the amount which Seller has actually received in payment under the terms of this Agreement, provided, however that the foregoing limitation shall not apply with respect to damages resulting from any fraud, willful misconduct or intentional misrepresentation by Seller, and further provided that, in the event of indemnification of the Buyer pursuant to Section 11(b)(ii) hereof, Seller shall make pay annual payments in advance to the Buyer, amortized over a five-year period. (11) (15) AMENDMENTS. This Agreement may be amended, modified and supplemented only by written agreement of the parties hereto at any time prior to the Closing Date with respect to any of the terms contained herein. (16) EXPENSES. Except as otherwise provided in this Agreement, each party hereto shall bear all of its own expenses, including, without limitation, the fees and disbursements of its counsel. (17) NOTICES, ETC. All notices, consents, demands, requests, approvals and other communications which are required or may be given hereunder shall be in writing and shall be deemed to have been duly given (a) when delivered personally, (b) if sent by facsimile, when receipt thereof is acknowledged at the facsimile number below, (c) the second day following the day on which the same has been delivered prepaid to a national air courier service, or (d) three (3) business days following deposit in the mails registered or certified, postage prepaid, in each case, addressed as follows: if to the Seller: Softchip Israel Ltd. 418/3 Frankfurter Street Jerusalem, Israel Attention: Mr. Mickey Cohen with a copy to: Wine, Misheiker & Ernstoff Law Offices 12 Moshe Hess Street 94185 Jerusalem, Israel Attention: Brian D. Wine, Advocate if to the Buyer: American Card Technology, Inc. 1355 Terrell Mill Road Building 146, Suite 200 Marietta, Georgia 30067 Attention: President with a copy to: Cohn & Birnbaum P.C. 100 Pearl Street, 12th Floor Hartford, Connecticut 06103-4500 Attention: Richard J. Shea, Jr., Esq. or to such other Person or Persons at such address or addresses as may be designated by written notice hereunder. (18) ASSIGNMENT. No party may assign or convey this Agreement or any of their respective rights or obligations hereunder to any other party. Notwithstanding the foregoing, the Buyer may assign its rights and obligations hereunder to any purchaser of all or substantially all of its assets. (19) APPLICABLE LAW. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Georgia without giving effect to conflict of laws principles thereof. (20) CURRENCY. All sums of money payable hereunder are to be paid in U.S. dollars. (12) (21) ENTIRE AGREEMENT. This Agreement and all Exhibits hereto embody the entire agreement and understanding of the parties hereto and supersede any prior agreement or understanding between the parties. (22) COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. (23) HEADINGS. Headings of the Sections in this Agreement are for reference purposes only and shall not be deemed to have any substantive effect. (24) BINDING EFFECT; BENEFITS. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, administrators, executors, successors and assigns; PROVIDED, HOWEVER, that nothing in this Agreement, expressed or implied, is intended to confer on any Person other than the parties hereto or their respective successors and assigns, any rights and remedies, obligations or liabilities under or by reason of this Agreement. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date first above written. SELLER: SOFTCHIP ISRAEL LTD. By /s/ Michael Cohen --------------------------- Its Authorized Signatory BUYER: AMERICAN CARD TECHNOLOGY, INC. By /s/ Raymond Findley, Jr. --------------------------- Its President (13) TABLE OF CONTENTS
(1) CERTAIN DEFINITIONS . . . . . . . . . . . . . . . . . . . . . .(1) (2) ACKNOWLEDGEMENTS. . . . . . . . . . . . . . . . . . . . . . . .(2) (3) SALE OF ASSETS; LIMITATIONS . . . . . . . . . . . . . . . . . .(3) (4) PURCHASE PRICE. . . . . . . . . . . . . . . . . . . . . . . . .(3) (5) INSTRUMENTS OF TRANSFER; PAYMENT OF PURCHASE PRICE; FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . .(3) (6) REPRESENTATIONS AND WARRANTIES OF THE SELLER. . . . . . . . . .(4) (7) REPRESENTATIONS AND WARRANTIES OF THE BUYER . . . . . . . . . .(6) (8) USE OF NAME . . . . . . . . . . . . . . . . . . . . . . . . . .(7) (9) CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE SELLER . . . . .(7) (10) CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE BUYER. . . . . .(8) (11) INDEMNIFICATION; SURVIVAL . . . . . . . . . . . . . . . . . . .(8) (12) RESTRICTIVE COVENANTS . . . . . . . . . . . . . . . . . . . . (11) (13) TERMINATION; BREACH . . . . . . . . . . . . . . . . . . . . . (12) (15) AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . (13) (16) EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . (13) (17) NOTICES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . (13) (18) ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . (14) (19) APPLICABLE LAW. . . . . . . . . . . . . . . . . . . . . . . . (14) (20) CURRENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . (14) (21) ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . (14) (22) COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . (14) (23) HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . (14) (24) BINDING EFFECT; BENEFITS. . . . . . . . . . . . . . . . . . . (14)
(i) EXHIBIT A PURCHASED ASSETS (1.) DVK-1 Chip Operating System. EXHIBIT B SHAREHOLDERS Joseph Basch Bruce R. Bonadies Salvatore Cartagine Chapman Group LLC Lloyd R. Davis and Patricia P. Davis Robert Dixon Raymond Findley, Jr. Neil Greenbaum Barbara Hamill John Hamill Sidney O. Harriel Lawrence O. Perl The 1994 Perl Trust Indenture Harold Rothstein The Rothstein Family Trust Raymond A. Roncari Ronald Seplowitz Richard Shelton Susan Shelton Joseph Sweedler EX-10.9-1-1 17 EXHIBIT 10.9.1.1 AMENDMENT TO TECHNOLOGY PURCHASE AGREEMENT THIS AMENDMENT to Technology Purchase Agreement is made as of the 11th day of August, 1998, by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation ("American Card") and SOFTCHIP ISRAEL LTD., a corporation organized under the laws of Israel ("SoftChip"). WITNESSETH: WHEREAS, American Card and SoftChip are parties to a technology purchase agreement dated as of March 7, 1998 (the "Purchase Agreement"); and WHEREAS, the Purchase Agreement contemplates that American Card will close on an initial public offering of its securities (the "IPO") no later than September 15, 1998, which IPO is to provide funds for the purchase of the technology pursuant to the Purchase Agreement; and WHEREAS, American Card does not anticipate closing on the IPO prior to November 1, 1998; and WHEREAS, SoftChip is willing to extend the date by which American Card may purchase the technology pursuant to the Purchase Agreement through November 1, 1998 or the closing of the IPO, whichever is earlier. NOW THEREFORE, in consideration of the foregoing and the covenants contained herein, the parties hereto agree as follows: 1. The definition of "Closing Date" in Section 1 of the Purchase Agreement is hereby amended by deleting the reference to "September 15, 1998" and substituting "November 1, 1998" in lieu therefor. 2. Except as amended hereby, the Purchase Agreement remains in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written. SIGNED, SEALED, AND DELIVERED IN THE PRESENCE OF: AMERICAN CARD TECHNOLOGY, INC. - ------------------------------ By: /s/ Raymond Findley, Jr. -------------------------------- Its President - ------------------------------ (SIGNATURES CONTINUED NEXT PAGE) SOFTCHIP ISRAEL LTD. - ------------------------------ By: /s/ Michael Cohen -------------------------------- Its Managing Director - ------------------------------ EX-10.9-3-1 18 EXHIBIT 10.9.3.1 SECOND AMENDMENT TO OPTION AGREEMENT STOCK OPTION NOT UNDER A PLAN THIS AMENDMENT TO OPTION AGREEMENT, dated as of the 9th day of July, 1998, by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"), and RAYMOND RONCARI, of Windsor Locks, Connecticut (the "Optionee"). WITNESSETH: WHEREAS, the Company and Shreveport Acquisition Corp., a Connecticut corporation ("Shreveport"), entered into an Option Agreement dated as of December 11, 1996 and amended pursuant to an Amendment to Option Agreement dated as of January 2, 1998 (as amended, the "Option Agreement") whereby the Company granted to Optionee an option (the "Option") to purchase 100,000 shares of the Company's common stock, par value $.001 per share ("Common Stock") at the purchase price of $12.00 per share (the "Exercise Price"); and WHEREAS, Shreveport has assigned the Option to Optionee as of December 31, 1997; and WHEREAS, the Company is this day effecting a split of its Common Stock of 1.545 to 1, so that each shareholder shall receive an additional six (6) shares of Common Stock for each eleven (11) shares presently held; and WHEREAS, in connection with the aforementioned stock split, the Company and Optionee desire to memorialize the adjustment in the Exercise Price and the number of shares of Common Stock which may be purchased by Optionee pursuant to the Option Agreement as set forth in Paragraph 8 thereof. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Pursuant to Paragraph 8 of the Option Agreement, as a result of the stock split, the number of shares of Common Stock which may be purchased by Optionee pursuant to the Option Agreement shall be adjusted by a multiple of 1.545, and the Exercise Price shall be adjusted by a multiple of .6471. The Option Agreement is hereby amended by deleting Paragraph 1 of the Option Agreement in its entirety and substituting the following in lieu therefor: "1. GRANT. The Company grants to the Optionee an option (the "Option") to purchase 154,500 shares (the "Shares") of the Company's Common Stock, par value $.001 per share ("Common Stock") at the purchase price of $7.77 a share (the "Exercise Price"). The date of grant of the Option is December 11, 1996 (the "Date of Grant"). The grant is not made pursuant to any of the Company's stock option plans." 2. Except as modified hereby, the Option Agreement remains in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written. Signed, Sealed, and Delivered in the Presence of: AMERICAN CARD TECHNOLOGY, INC. - ------------------------------ By: /s/ Raymond Findley, Jr. -------------------------------- Raymond Findley, Jr. Its President - ------------------------------ - ------------------------------ /s/ Raymond Roncari ------------------------------- Raymond Roncari - ------------------------------ 2 EX-10.9-4 19 EXHIBIT 10.9.4 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT made as of the 15th day of March, 1998 by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation, with a business office at 1355 Terrell Mill Road, Suite 200, Marietta, Georgia 30067 (hereinafter called the "Corporation"), and ROBERT DIXON (hereinafter called the "Optionee"). The Corporation has adopted a 1996 Stock Option Plan (the "Plan") to be used to award options to purchase shares of its common stock to certain employees, consultants, and other persons who perform substantial services for the Corporation or any of its subsidiaries or affiliates, as determined by the Board of Directors of the Corporation (the "Board") or a special committee of the Board (the "Committee"). The Board or Committee has authorized the awarding of an option under the Plan to the Optionee. The options issued under the Plan may in some cases be entitled to favorable tax treatment afforded to "incentive stock options" under Sections 421 and 422 of the Internal Revenue Code (such an option being hereinafter sometimes referred to as an "Incentive Stock Option"). Wherever the context so requires, the "Corporation" shall be deemed to refer to any or all of the Corporation's subsidiaries or affiliates. NOW, THEREFORE, in consideration of the premises contained herein, it is hereby agreed as follows: 1. The Corporation hereby grants to the Optionee as of the date of this Agreement the right and option to purchase (hereinafter called the "Option") all or any part of an aggregate of 50,000 shares of the Corporation's common stock, with a par value of $.001 per share (hereinafter called the "Common Stock"), on the terms and conditions herein set forth. 2. The Option granted herein shall constitute an Incentive Stock Option. 3. The Optionee's right to exercise the Option shall be subject to the following terms and conditions: (a) OPTION PRICE. The price per share with respect to the Option shall be Twelve and 00/100 Dollars ($12.00). (b) EXERCISE OF OPTION. The Option shall be exercisable only as follows: (i) At any time after the date hereof, the Option may be exercised to the extent of one-fourth of the aggregate number of shares of Common Stock. (ii) At any time after the expiration of the next three successive anniversaries of the date hereof, the first such date being March 15, 1999, the Option may be exercised to the extent of an additional one-fourth of the aggregate number of shares originally covered by the Option, and the Option may also be exercised to the extent to which the right to exercise shall theretofore have accrued and not been exercised. (iii) No portion of the Option shall be exercisable after the tenth anniversary of the date of its grant, and after that date the Option shall lapse with respect to any shares of Common Stock not theretofore purchased. (iv) The Option may not be exercised for less than one hundred (100) shares of Common Stock at any one time, unless fewer than one hundred (100) shares of Common Stock remain covered by the Option, in which event the Option must be exercised for all such shares. (c) NOTICE OF EXERCISE; PAYMENT; SHAREHOLDERS' RIGHTS. The Optionee shall exercise the Option by giving a written notice of exercise, in the form attached to this Agreement as EXHIBIT A, to the President of the Corporation, indicating the number of shares of Common Stock to be purchased, and tendering payment in full (i) by cash or certified or bank check, (ii) by delivery of shares of Common Stock then owned by the Optionee with a fair market value at the time of exercise equal to the Option Price, or (iii) by a combination of (i) and (ii). No shares shall be issued or delivered until full payment therefor has been made. The Optionee shall have none of the rights of a shareholder, in respect of the Common Stock, except with respect to shares actually issued to the Optionee. (d) NON-TRANSFERABILITY OF OPTION. The Option shall not be transferable other than by will or by the laws of descent and distribution. During the Optionee's lifetime, only the Optionee may exercise the Option. (e) TERMINATION OF EMPLOYMENT. If the Optionee's employment shall be terminated by the Corporation or by the Optionee, with or without cause, for whatever reason other than by death, the Optionee shall have the right within three months after such termination to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of such a termination of employment, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said three months shall lapse. (f) DEATH OF OPTIONEE. (i) If the Optionee shall die, the Option shall lapse and neither the Optionee nor the Optionee's heirs or legal representatives shall have any further rights under this Agreement relating to any Option with respect to which the right to exercise shall not have accrued prior to the date of the Optionee's death. (ii) If the Optionee shall die while employed by the Corporation, or within the three-month period specified in Section 3(e) hereof, the executor or administrator of the estate of the Optionee, or the person or persons to whom the Option shall have been validly transferred by the executor or administrator pursuant to will or the laws of descent and distribution, shall have the right within one year from the date of the Optionee's death to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of death, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said one-year period shall lapse. 2 4. Shares of Common Stock issued upon the exercise of any portion of the Option granted under this Agreement shall be subject to the following terms and conditions: (a) TRANSFERABILITY. The Common Stock shall be transferable only in compliance with this Section 4 and only pursuant to an effective registration or exemption from registration under the Securities Act of 1933, as amended. All transfers, whether or not permitted by this section, shall be subject to all of the provisions of this Agreement. Stock certificates representing shares of Common Stock shall bear a legend in substantially the following form: The shares of the Corporation's common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred except pursuant to an effective registration, or exemption from registration, under said Act. In addition, such shares are subject to a right of repurchase by the Corporation. (b) REPURCHASE OF COMMON STOCK BY THE CORPORATION FOLLOWING TERMINATION OF EMPLOYMENT OR BY EXERCISE OF RIGHT OF FIRST REFUSAL. The Corporation shall have a right to repurchase, at the buy-back price set forth below, any or all of the Common Stock issued upon the exercise of the Option. Such right shall arise if the Optionee ceases to be employed by the Corporation for any reason, at the time of the Optionee's death, or if the Optionee elects to dispose of any such shares of Common Stock by sale, transfer or other disposition. (i) REPURCHASE ON DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT. In the event the Optionee dies or ceases to be employed by the Corporation for any reason, the Corporation shall, within thirty days immediately following the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (1) stating that the Corporation has the first right to purchase the Common Stock; (2) designating the number of shares of the Common Stock that the Optionee or the Optionee's legal representative must sell to the Corporation; (3) naming the buy-back price per share in cash at which the Optionee or the Optionee's legal representative is obligated to sell such shares, as determined herein; and (4) stating whether the Corporation elects to exercise its right to repurchase the Common Stock. (ii) REPURCHASE ON ATTEMPTED TRANSFER. In the event the Optionee elects to dispose of any of the Common Stock, the Optionee shall give to the President of the Corporation a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Corporation's principal office: (1) designating the number of shares of the Common Stock to be disposed of; (2) stating the specific manner in which the Optionee proposes to dispose of such shares if they are not purchased by the Corporation pursuant to this Agreement; (3) specifying the names and addresses of the persons to whom the Optionee desires to dispose of such shares to the extent not so purchased by the Corporation; (4) offering to sell such shares to the Corporation; (5) naming the price per share in cash at which the Optionee is willing to sell such shares to the Corporation, which price shall not be greater than the buy-back price as determined herein; and 3 (6) designating the Optionee's mailing address. The Corporation shall have a period of thirty days after the receipt of the notice within which to accept the Optionee's offer as contained in the Optionee's notice. Acceptance shall be by notice in writing to that effect hand delivered or mailed to the Optionee prior to the expiration date of said thirty-day period to the mailing address designated in the Optionee's notice. If the Corporation declines to accept such offer, the Optionee shall have a period of forty-five (45) days within which to dispose of such shares of Common Stock. Such forty-five (45) day period shall commence on the date of receipt of the Corporation's written rejection of such offer or, if the Corporation does not reject such offer in writing, on the expiration of the thirty-day period within which the Corporation may accept such offer. (iii) BUY-BACK. The buy-back price per share for purposes of this Section 4(b) shall be: (1) the price per share offered in a bona fide offer to purchase, or (2) in the absence of a bona fide offer to purchase, the fair market value per share as determined by the Board or the Committee, which amount shall not be less than the price per share at which shares of Common Stock were last sold by the Corporation other than pursuant to the Plan. (c) PROCEDURE FOR REPURCHASE. If any shares of the Common Stock are subject to repurchase as provided in Section 4(b) hereof, and the Corporation shall have exercised its right to repurchase, the Optionee or the Optionee's legal representative shall immediately deliver to the Corporation the certificates for the shares. The certificates shall be voided, and the shares of the Common Stock represented by the certificates shall be thereafter treated on the books of the Corporation as treasury shares. A person required to deliver a certificate for the Common Stock under this section shall be deemed irrevocably to have authorized the voiding of such certificate and the treatment of such Common Stock as treasury shares (regardless whether the certificates are in fact delivered) and irrevocably to have authorized the Board to terminate his status as a shareholder in respect of such shares. (d) PAYMENT FOR SHARES OF COMMON STOCK. The Corporation shall have the right to pay the purchase price for any shares purchased pursuant to this Section 4 over a one year period, in equal quarterly installments without interest, or, in the case of a bona fide offer to purchase, in the manner and over such period of time as provided for in such offer. (e) PRICE ADJUSTMENT. In all cases the buy-back price per share shall be adjusted to reflect previous capital changes, if any, as described in Section 8 hereof. No offer to purchase shall be deemed "bona fide" unless made by a third party unrelated to the Corporation or its shareholders with the intention that such purchase be an investment in the Corporation and not with a view to distribution or resale, nor shall any offer to purchase be deemed "bona fide" if made by a competitor of the Corporation regardless of the offeror's intention. 4 5. In the event the Optionee dies or ceases to be employed by the Corporation and the Optionee has accrued but not exercised rights to purchase shares of Common Stock, the following terms and conditions shall apply. (a) REPURCHASE ON TERMINATION OF EMPLOYMENT OR DEATH WITH RESPECT TO OPTIONS ACCRUED BUT NOT EXERCISED. Upon termination of the Optionee's employment, or upon the Optionee's death giving the Optionee, or the Optionee's legal representative, rights to exercise the Option under either Section 3(e) or 3(f)(ii) hereof, the Corporation shall, within thirty days immediately following the date on which the Corporation learns of the Optionee's death or the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (i) stating that the Corporation has the first right to purchase the Common Stock subject to the Option; (ii) designating the number of shares of the Common Stock which the Optionee or the Optionee's legal representative has a right to purchase under the Option and the option price per share under this Agreement; (iii) naming the buy-back price per share in cash which the Optionee or the Optionee's legal representative is obligated to sell the shares subject to the Option, as determined herein; and (iv) stating whether the Corporation will exercise its right to repurchase the Common Stock if the Optionee or the Optionee's legal representative exercised the Option. (b) SIMULTANEOUS EXERCISE OF OPTION AND REPURCHASE OF COMMON STOCK. The Optionee or the Optionee's legal representative may exercise the Option within the time period provided in Section 3(e) or Section 3(f)(ii) hereof, as the case may be, by giving the Corporation notice of exercise of the Option under Section 3(c) hereof. However, such notice need not be accompanied by tender of payment if the Corporation has elected to exercise its right to repurchase. Upon receipt of the notice of exercise from the Optionee or the Optionee's legal representative within the applicable time period, the Corporation shall pay the Optionee or the Optionee's legal representative for each share an amount equal to the buy-back price per share less the option price per share. If the Corporation does not exercise its right to repurchase under Section 5(a) hereof, then this Section 5(b) shall be of no effect, and the provisions for exercising the Option under Section 3(c) shall apply. (c) COMBINING NOTICES. If the Optionee, or the Optionee's legal representative, has both shares of Common Stock and a right to exercise the Option as to additional shares of Common Stock, then the Corporation may deliver one notice to the Optionee or the Optionee's legal representative to satisfy the provisions of Section 4(b)(i) hereof and Section 5(a) hereof provided the information required to be contained in each notice under such sections are contained in the single notice. 6. Failure by the Corporation to exercise its rights to repurchase the Common Stock upon the termination of employment of the Optionee shall not be a waiver of the Corporations right to repurchase on a subsequent sale, transfer or other disposition of Common Stock. 7. The Optionee acknowledges that the exercise by the Corporation of the repurchase rights set forth in Sections 4 or 5 hereof may, if such repurchase is effected within two (2) years after the date of grant of the Option or one (1) year after the date of issuance of such shares of Common Stock, result in disqualifying the Option from eligibility for the favorable tax treatment accorded Incentive Stock Options 5 under Section 421 of the Internal Revenue Code. The Optionee further acknowledges that other special rules must be complied with in order to ensure that the Option remains eligible for such favorable tax treatment, and that the Optionee, in addition to conferring with appropriate representatives of the Corporation, may wish to consult with his or her personal tax adviser. 8. In the event that a dividend shall be declared upon the shares of Common Stock payable in shares of Common Stock, the number of shares of Common Stock then subject to this Option shall be adjusted by adding to each of such shares the number of shares which would be distributable thereon if such shares had been outstanding on the date fixed for determining the stockholders entitled to receive such stock dividend. In the event that the outstanding shares of Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger, or consolidation, then there shall be substituted for each share of Common Stock subject to this Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged, PROVIDED, HOWEVER, that in the event that such change or exchange results from a merger or consolidation, and in the judgment of the Committee such substitution cannot be effected or would be inappropriate, or if the Corporation shall sell all or substantially all of its assets, the Corporation shall use reasonable efforts to effect some other adjustment of this Option which the Committee, in its sole discretion, shall deem equitable. In the event that there shall be any change, other than as specified above in this Section 8, in the number or kind of outstanding shares of Common Stock or of any stock or other securities into which such shares of Common Stock shall have been changed or for which they shall have been exchanged, then, if the Committee shall determine that such change equitably requires an adjustment in the number or kind of shares then subject to this Option, such adjustment shall be made by the Committee and shall be effective and binding for all purposes of this Option. In the case of any such substitution or adjustment as provided for in this paragraph, the Option Price in this Option for each share covered hereby prior to such substitution or adjustment will be the total option price for all shares of stock or other securities which shall have been substituted for each such share or to which such share shall have been adjusted pursuant to this Section 8. No adjustment or substitution provided for in this Section 8 shall require the Corporation to sell a fractional share; and the total substitution or adjustment with respect to this Option shall be limited accordingly. Any of the foregoing adjustments or substitutions in the shares subject to the Option shall not limit applicability of the restrictions hereunder and such restrictions shall automatically apply to all Common Stock or other securities issued by the Corporation and at any time held by the Optionee by virtue of having exercised the Option. 9. Subject to the restrictions of this Agreement, the Optionee shall have all the rights of a shareholder in respect of the Common Stock issued hereunder, beginning with the date of issuance of the Common Stock. The Common Stock shall be fully paid and non-assessable. 10. The Optionee represents and agrees to represent and agree at the time of the exercise of the Option that any and all Common Stock purchased pursuant to the exercise of the Option will be purchased for investment and not with a view to the distribution or resale thereof, and that the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in this Agreement or as may be imposed by law. 6 11. The Corporation shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. 12. If the Corporation registers any of its shares of common stock under the Securities Act of 1933, as amended (the "Act"), the provisions of Section 4 and Section 5 hereof shall terminate on the day the registration statement becomes effective. The Common Stock issued upon exercise of the Option shall thereupon be free of any restriction imposed hereby, except for the restriction requiring transfer pursuant to the Act if such registration does not include the Common Stock, and neither the Corporation nor the Optionee shall have any further rights or obligations under Section 4 or Section 5 hereof, except the Corporation's obligation to complete payments, under Section 4(b) hereof, for the Common Stock previously repurchased. 13. This Agreement shall be interpreted according to the laws of the State of Georgia. 14. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered may be entered in any Court having jurisdiction thereof. 15. This Agreement and the Plan which is hereby incorporated by reference herein contain the entire agreement of the parties with respect to the Common Stock. All prior agreements and understandings are merged herein. No amendment or modification hereof shall be binding unless in writing and signed by the party against whom enforcement is sought. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year as first above written. Seal AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. ----------------------------- Raymond Findley, Jr. Its President Attest: /s/ Richard J. Shea, Jr. /s/ Robert Dixon - ---------------------------------- ----------------------------------- Secretary Robert Dixon 7 EXHIBIT A -------------------------------------------------- Address of Person Exercising Option -------------------------- Date American Card Technology, Inc. 1355 Terrell Mill Road - Suite 200 Marietta, Georgia 30067 Attention: President Dear Sirs: I hereby elect to exercise the Option to purchase shares of Common Stock of the Corporation awarded to me on March 15, 1998. A. The number of shares being purchased: _______ shares at $12.00 per share for a total purchase price equal to $ ______________ (the "Purchase Price"). B. I desire to follow Procedures 1, 2, or 3 as indicated below: [CHECK EITHER PROCEDURE 1, 2, OR 3 AND FILL IN BLANKS UNDER THAT PROCEDURE ONLY]. _____ PROCEDURE 1: A certified or bank cashier's check payable to the order of the Corporation in the amount of $_____________ [insert the full purchase price of the shares being purchased] is attached. The certificate or certificates should be mailed or delivered to: ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- _____ PROCEDURE 2: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of ____________ shares of Common Stock surrendered herewith. The balance of the Purchase Price shall be paid with the certified or bank cashier's check payable to the order of the Corporation in the amount of $_____________. The (i) certificate(s) for such shares of Common Stock, (ii) a stock power conveying such shares of Common Stock to the Corporation, and (iii) the certified or bank cashier's check for the balance of the Purchase Price are attached hereto. _____ PROCEDURE 3: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of that number of such shares which is an amount equal to the Purchase Price. For example, if the fair market value of the shares being purchased is $24.00 per share, then 50% of the shares being so purchased shall be retained by the Corporation as payment for the other 50% of the shares. This method of exercise is only available to the extent that it is consistent with the Plan and is permissible for incentive stock options under Sections 421 and 422 of the Internal Revenue Code. C. The certificate or certificates for the shares being purchased should be registered and the name and address to be shown on the Corporation's stock records should be as follows: ----------------------------------- ----------------------------------- ----------------------------------- D. I represent and agree that the shares as to which I am hereby exercising an option are being purchased for investment and not with a view to the distribution or resale thereof, and the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in the Stock Option Agreement or as may be imposed by law. Sincerely yours, ---------------------------------- Robert Dixon AMENDMENT TO STOCK OPTION AGREEMENT THIS AMENDMENT TO STOCK OPTION AGREEMENT, dated as of the 9th day of July, 1998, by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"), and the undersigned holder (the "Holder"). WITNESSETH: WHEREAS, the Company and Holder entered into a Stock Option Agreement dated as of February 2, 1998 (the "Option Agreement") whereby the Company granted to Optionee an option (the "Option") to purchase 2,500 shares of the Company's common stock, par value $.001 per share ("Common Stock") at the purchase price of $12.00 per share (the "Exercise Price"); and WHEREAS, the Company is this day effecting a split of its Common Stock of 1.545 to 1 so that each stockholder shall receive an additional six (6) shares of Common Stock for each eleven (11) shares presently held; and WHEREAS, in connection with the aforementioned stock split, the Company and Holder desire to memorialize the adjustment in the Exercise Price and the number of shares of Common Stock which may be purchased by Holder pursuant to the Option Agreement as set forth in Paragraph 8 thereof. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The Option Agreement is hereby amended as follows: (a) Pursuant to Paragraph 8 of the Option Agreement, as a result of the stock split, the number of Option Shares which may be purchased pursuant to the Option is hereby adjusted so that the maximum number of shares of Common Stock which may be purchased by Holder pursuant to the Option Agreement (as set forth in paragraph 1 of the Option Agreement) shall be adjusted by a multiple of 1.545, provided that any fractional share thereby created shall be eliminated by rounding such fraction to the next whole number (the "Adjusted Option Share Amount"). (b) Pursuant to and consistent with Paragraph 8 of the Option Agreement, as a result of the stock split, the Exercise Price is hereby adjusted by a multiple of .6471. Therefore, Section 3(a) of the Option Agreement is hereby deleted in its entirety and the following substituted in lieu therefor: "(a) OPTION PRICE. The price per share with respect to the Option shall be Seven and 77/100 Dollars ($7.77) (the "Option Price")." 2. Except as modified hereby, the Option Agreement remains in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written. Signed, Sealed, and Delivered in the Presence of: AMERICAN CARD TECHNOLOGY, INC. - ------------------------------ By: /s/ Raymond Findley, Jr. --------------------------------- Raymond Findley, Jr. Its President - ------------------------------ HOLDER: /s/ Robert Dixon - ------------------------------ --------------------------------- Robert Dixon Name: - ------------------------------ Adjusted Option Share Amount: 77,250 EX-10.9-5 20 EXHIBIT 10.9.5 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT made as of the 15th day of March, 1998 by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation, with a business office at 1355 Terrell Mill Road, Suite 200, Marietta, Georgia 30067 (hereinafter called the "Corporation"), and MICHAEL PATE (hereinafter called the "Optionee"). The Corporation has adopted a 1996 Stock Option Plan (the "Plan") to be used to award options to purchase shares of its common stock to certain employees, consultants, and other persons who perform substantial services for the Corporation or any of its subsidiaries or affiliates, as determined by the Board of Directors of the Corporation (the "Board") or a special committee of the Board (the "Committee"). The Board or Committee has authorized the awarding of an option under the Plan to the Optionee. The options issued under the Plan may in some cases be entitled to favorable tax treatment afforded to "incentive stock options" under Sections 421 and 422 of the Internal Revenue Code (such an option being hereinafter sometimes referred to as an "Incentive Stock Option"). Wherever the context so requires, the "Corporation" shall be deemed to refer to any or all of the Corporation's subsidiaries or affiliates. NOW, THEREFORE, in consideration of the premises contained herein, it is hereby agreed as follows: 1. The Corporation hereby grants to the Optionee as of the date of this Agreement the right and option to purchase (hereinafter called the "Option") all or any part of an aggregate of 15,000 shares of the Corporation's common stock, with a par value of $.001 per share (hereinafter called the "Common Stock"), on the terms and conditions herein set forth. 2. The Option granted herein shall constitute an Incentive Stock Option. 3. The Optionee's right to exercise the Option shall be subject to the following terms and conditions: (a) OPTION PRICE. The price per share with respect to the Option shall be Twelve and 00/100 Dollars ($12.00). (b) EXERCISE OF OPTION. The Option shall be exercisable only as follows: (i) At any time after the date hereof, the Option may be exercised to the extent of one-fourth of the aggregate number of shares of Common Stock. (ii) At any time after the expiration of the next three successive anniversaries of the date hereof, the first such date being March 15, 1999, the Option may be exercised to the extent of an additional one-fourth of the aggregate number of shares originally covered by the Option, and the Option may also be exercised to the extent to which the right to exercise shall theretofore have accrued and not been exercised. (iii) No portion of the Option shall be exercisable after the tenth anniversary of the date of its grant, and after that date the Option shall lapse with respect to any shares of Common Stock not theretofore purchased. (iv) The Option may not be exercised for less than one hundred (100) shares of Common Stock at any one time, unless fewer than one hundred (100) shares of Common Stock remain covered by the Option, in which event the Option must be exercised for all such shares. (c) NOTICE OF EXERCISE; PAYMENT; SHAREHOLDERS' RIGHTS. The Optionee shall exercise the Option by giving a written notice of exercise, in the form attached to this Agreement as EXHIBIT A, to the President of the Corporation, indicating the number of shares of Common Stock to be purchased, and tendering payment in full (i) by cash or certified or bank check, (ii) by delivery of shares of Common Stock then owned by the Optionee with a fair market value at the time of exercise equal to the Option Price, or (iii) by a combination of (i) and (ii). No shares shall be issued or delivered until full payment therefor has been made. The Optionee shall have none of the rights of a shareholder, in respect of the Common Stock, except with respect to shares actually issued to the Optionee. (d) NON-TRANSFERABILITY OF OPTION. The Option shall not be transferable other than by will or by the laws of descent and distribution. During the Optionee's lifetime, only the Optionee may exercise the Option. (e) TERMINATION OF EMPLOYMENT. If the Optionee's employment shall be terminated by the Corporation or by the Optionee, with or without cause, for whatever reason other than by death, the Optionee shall have the right within three months after such termination to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of such a termination of employment, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said three months shall lapse. (f) DEATH OF OPTIONEE. (i) If the Optionee shall die, the Option shall lapse and neither the Optionee nor the Optionee's heirs or legal representatives shall have any further rights under this Agreement relating to any Option with respect to which the right to exercise shall not have accrued prior to the date of the Optionee's death. (ii) If the Optionee shall die while employed by the Corporation, or within the three-month period specified in Section 3(e) hereof, the executor or administrator of the estate of the Optionee, or the person or persons to whom the Option shall have been validly transferred by the executor or administrator pursuant to will or the laws of descent and distribution, shall have the right within one year from the date of the Optionee's death to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of death, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said one-year period shall lapse. 2 4. Shares of Common Stock issued upon the exercise of any portion of the Option granted under this Agreement shall be subject to the following terms and conditions: (a) TRANSFERABILITY. The Common Stock shall be transferable only in compliance with this Section 4 and only pursuant to an effective registration or exemption from registration under the Securities Act of 1933, as amended. All transfers, whether or not permitted by this section, shall be subject to all of the provisions of this Agreement. Stock certificates representing shares of Common Stock shall bear a legend in substantially the following form: The shares of the Corporation's common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred except pursuant to an effective registration, or exemption from registration, under said Act. In addition, such shares are subject to a right of repurchase by the Corporation. (b) REPURCHASE OF COMMON STOCK BY THE CORPORATION FOLLOWING TERMINATION OF EMPLOYMENT OR BY EXERCISE OF RIGHT OF FIRST REFUSAL. The Corporation shall have a right to repurchase, at the buy-back price set forth below, any or all of the Common Stock issued upon the exercise of the Option. Such right shall arise if the Optionee ceases to be employed by the Corporation for any reason, at the time of the Optionee's death, or if the Optionee elects to dispose of any such shares of Common Stock by sale, transfer or other disposition. (i) REPURCHASE ON DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT. In the event the Optionee dies or ceases to be employed by the Corporation for any reason, the Corporation shall, within thirty days immediately following the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (1) stating that the Corporation has the first right to purchase the Common Stock; (2) designating the number of shares of the Common Stock that the Optionee or the Optionee's legal representative must sell to the Corporation; (3) naming the buy-back price per share in cash at which the Optionee or the Optionee's legal representative is obligated to sell such shares, as determined herein; and (4) stating whether the Corporation elects to exercise its right to repurchase the Common Stock. (ii) REPURCHASE ON ATTEMPTED TRANSFER. In the event the Optionee elects to dispose of any of the Common Stock, the Optionee shall give to the President of the Corporation a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Corporation's principal office: (1) designating the number of shares of the Common Stock to be disposed of; (2) stating the specific manner in which the Optionee proposes to dispose of such shares if they are not purchased by the Corporation pursuant to this Agreement; (3) specifying the names and addresses of the persons to whom the Optionee desires to dispose of such shares to the extent not so purchased by the Corporation; (4) offering to sell such shares to the Corporation; (5) naming the price per share in cash at which the Optionee is willing to sell such shares to the Corporation, which price shall not be greater than the buy-back price as determined herein; and 3 (6) designating the Optionee's mailing address. The Corporation shall have a period of thirty days after the receipt of the notice within which to accept the Optionee's offer as contained in the Optionee's notice. Acceptance shall be by notice in writing to that effect hand delivered or mailed to the Optionee prior to the expiration date of said thirty-day period to the mailing address designated in the Optionee's notice. If the Corporation declines to accept such offer, the Optionee shall have a period of forty-five (45) days within which to dispose of such shares of Common Stock. Such forty-five (45) day period shall commence on the date of receipt of the Corporation's written rejection of such offer or, if the Corporation does not reject such offer in writing, on the expiration of the thirty-day period within which the Corporation may accept such offer. (iii) BUY-BACK. The buy-back price per share for purposes of this Section 4(b) shall be: (1) the price per share offered in a bona fide offer to purchase, or (2) in the absence of a bona fide offer to purchase, the fair market value per share as determined by the Board or the Committee, which amount shall not be less than the price per share at which shares of Common Stock were last sold by the Corporation other than pursuant to the Plan. (c) PROCEDURE FOR REPURCHASE. If any shares of the Common Stock are subject to repurchase as provided in Section 4(b) hereof, and the Corporation shall have exercised its right to repurchase, the Optionee or the Optionee's legal representative shall immediately deliver to the Corporation the certificates for the shares. The certificates shall be voided, and the shares of the Common Stock represented by the certificates shall be thereafter treated on the books of the Corporation as treasury shares. A person required to deliver a certificate for the Common Stock under this section shall be deemed irrevocably to have authorized the voiding of such certificate and the treatment of such Common Stock as treasury shares (regardless whether the certificates are in fact delivered) and irrevocably to have authorized the Board to terminate his status as a shareholder in respect of such shares. (d) PAYMENT FOR SHARES OF COMMON STOCK. The Corporation shall have the right to pay the purchase price for any shares purchased pursuant to this Section 4 over a one year period, in equal quarterly installments without interest, or, in the case of a bona fide offer to purchase, in the manner and over such period of time as provided for in such offer. (e) PRICE ADJUSTMENT. In all cases the buy-back price per share shall be adjusted to reflect previous capital changes, if any, as described in Section 8 hereof. No offer to purchase shall be deemed "bona fide" unless made by a third party unrelated to the Corporation or its shareholders with the intention that such purchase be an investment in the Corporation and not with a view to distribution or resale, nor shall any offer to purchase be deemed "bona fide" if made by a competitor of the Corporation regardless of the offeror's intention. 4 5. In the event the Optionee dies or ceases to be employed by the Corporation and the Optionee has accrued but not exercised rights to purchase shares of Common Stock, the following terms and conditions shall apply. (a) REPURCHASE ON TERMINATION OF EMPLOYMENT OR DEATH WITH RESPECT TO OPTIONS ACCRUED BUT NOT EXERCISED. Upon termination of the Optionee's employment, or upon the Optionee's death giving the Optionee, or the Optionee's legal representative, rights to exercise the Option under either Section 3(e) or 3(f)(ii) hereof, the Corporation shall, within thirty days immediately following the date on which the Corporation learns of the Optionee's death or the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (i) stating that the Corporation has the first right to purchase the Common Stock subject to the Option; (ii) designating the number of shares of the Common Stock which the Optionee or the Optionee's legal representative has a right to purchase under the Option and the option price per share under this Agreement; (iii) naming the buy-back price per share in cash which the Optionee or the Optionee's legal representative is obligated to sell the shares subject to the Option, as determined herein; and (iv) stating whether the Corporation will exercise its right to repurchase the Common Stock if the Optionee or the Optionee's legal representative exercised the Option. (b) SIMULTANEOUS EXERCISE OF OPTION AND REPURCHASE OF COMMON STOCK. The Optionee or the Optionee's legal representative may exercise the Option within the time period provided in Section 3(e) or Section 3(f)(ii) hereof, as the case may be, by giving the Corporation notice of exercise of the Option under Section 3(c) hereof. However, such notice need not be accompanied by tender of payment if the Corporation has elected to exercise its right to repurchase. Upon receipt of the notice of exercise from the Optionee or the Optionee's legal representative within the applicable time period, the Corporation shall pay the Optionee or the Optionee's legal representative for each share an amount equal to the buy-back price per share less the option price per share. If the Corporation does not exercise its right to repurchase under Section 5(a) hereof, then this Section 5(b) shall be of no effect, and the provisions for exercising the Option under Section 3(c) shall apply. (c) COMBINING NOTICES. If the Optionee, or the Optionee's legal representative, has both shares of Common Stock and a right to exercise the Option as to additional shares of Common Stock, then the Corporation may deliver one notice to the Optionee or the Optionee's legal representative to satisfy the provisions of Section 4(b)(i) hereof and Section 5(a) hereof provided the information required to be contained in each notice under such sections are contained in the single notice. 6. Failure by the Corporation to exercise its rights to repurchase the Common Stock upon the termination of employment of the Optionee shall not be a waiver of the Corporation's right to repurchase on a subsequent sale, transfer or other disposition of Common Stock. 7. The Optionee acknowledges that the exercise by the Corporation of the repurchase rights set forth in Sections 4 or 5 hereof may, if such repurchase is effected within two (2) years after the date of grant of the Option or one (1) year after the date of issuance of such shares of Common Stock, result in disqualifying the Option from eligibility for the favorable tax treatment accorded Incentive Stock Options 5 under Section 421 of the Internal Revenue Code. The Optionee further acknowledges that other special rules must be complied with in order to ensure that the Option remains eligible for such favorable tax treatment, and that the Optionee, in addition to conferring with appropriate representatives of the Corporation, may wish to consult with his or her personal tax adviser. 8. In the event that a dividend shall be declared upon the shares of Common Stock payable in shares of Common Stock, the number of shares of Common Stock then subject to this Option shall be adjusted by adding to each of such shares the number of shares which would be distributable thereon if such shares had been outstanding on the date fixed for determining the stockholders entitled to receive such stock dividend. In the event that the outstanding shares of Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger, or consolidation, then there shall be substituted for each share of Common Stock subject to this Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged, PROVIDED, HOWEVER, that in the event that such change or exchange results from a merger or consolidation, and in the judgment of the Committee such substitution cannot be effected or would be inappropriate, or if the Corporation shall sell all or substantially all of its assets, the Corporation shall use reasonable efforts to effect some other adjustment of this Option which the Committee, in its sole discretion, shall deem equitable. In the event that there shall be any change, other than as specified above in this Section 8, in the number or kind of outstanding shares of Common Stock or of any stock or other securities into which such shares of Common Stock shall have been changed or for which they shall have been exchanged, then, if the Committee shall determine that such change equitably requires an adjustment in the number or kind of shares then subject to this Option, such adjustment shall be made by the Committee and shall be effective and binding for all purposes of this Option. In the case of any such substitution or adjustment as provided for in this paragraph, the Option Price in this Option for each share covered hereby prior to such substitution or adjustment will be the total option price for all shares of stock or other securities which shall have been substituted for each such share or to which such share shall have been adjusted pursuant to this Section 8. No adjustment or substitution provided for in this Section 8 shall require the Corporation to sell a fractional share; and the total substitution or adjustment with respect to this Option shall be limited accordingly. Any of the foregoing adjustments or substitutions in the shares subject to the Option shall not limit applicability of the restrictions hereunder and such restrictions shall automatically apply to all Common Stock or other securities issued by the Corporation and at any time held by the Optionee by virtue of having exercised the Option. 9. Subject to the restrictions of this Agreement, the Optionee shall have all the rights of a shareholder in respect of the Common Stock issued hereunder, beginning with the date of issuance of the Common Stock. The Common Stock shall be fully paid and non-assessable. 10. The Optionee represents and agrees to represent and agree at the time of the exercise of the Option that any and all Common Stock purchased pursuant to the exercise of the Option will be purchased for investment and not with a view to the distribution or resale thereof, and that the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in this Agreement or as may be imposed by law. 6 11. The Corporation shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. 12. If the Corporation registers any of its shares of common stock under the Securities Act of 1933, as amended (the "Act"), the provisions of Section 4 and Section 5 hereof shall terminate on the day the registration statement becomes effective. The Common Stock issued upon exercise of the Option shall thereupon be free of any restriction imposed hereby, except for the restriction requiring transfer pursuant to the Act if such registration does not include the Common Stock, and neither the Corporation nor the Optionee shall have any further rights or obligations under Section 4 or Section 5 hereof, except the Corporation's obligation to complete payments, under Section 4(b) hereof, for the Common Stock previously repurchased. 13. This Agreement shall be interpreted according to the laws of the State of Georgia. 14. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered may be entered in any Court having jurisdiction thereof. 15. This Agreement and the Plan which is hereby incorporated by reference herein contain the entire agreement of the parties with respect to the Common Stock. All prior agreements and understandings are merged herein. No amendment or modification hereof shall be binding unless in writing and signed by the party against whom enforcement is sought. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year as first above written. Seal AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. ---------------------------- Raymond Findley, Jr. Its President Attest: /s/ Richard J. Shea, Jr. /s/ Michael Pate - ------------------------------- ----------------------------- Secretary Michael Pate 7 EXHIBIT A ----------------------------------------------- Address of Person Exercising Option -------------------------- Date American Card Technology, Inc. 1355 Terrell Mill Road - Suite 200 Marietta, Georgia 30067 Attention: President Dear Sirs: I hereby elect to exercise the Option to purchase shares of Common Stock of the Corporation awarded to me on March 15, 1998. A. The number of shares being purchased: ________ shares at $12.00 per share for a total purchase price equal to $ ________________ (the "Purchase Price"). B. I desire to follow Procedures 1, 2, or 3 as indicated below: [CHECK EITHER PROCEDURE 1, 2, OR 3 AND FILL IN BLANKS UNDER THAT PROCEDURE ONLY]. ______ PROCEDURE 1: A certified or bank cashier's check payable to the order of the Corporation in the amount of $_____________ [insert the full purchase price of the shares being purchased] is attached. The certificate or certificates should be mailed or delivered to: -------------------------------------- -------------------------------------- -------------------------------------- ______ PROCEDURE 2: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of ___________ shares of Common Stock surrendered herewith. The balance of the Purchase Price shall be paid with the certified or bank cashier's check payable to the order of the Corporation in the amount of $_______________. The (i) certificate(s) for such shares of Common Stock, (ii) a stock power conveying such shares of Common Stock to the Corporation, and (iii) the certified or bank cashier's check for the balance of the Purchase Price are attached hereto. ______ PROCEDURE 3: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of that number of such shares which is an amount equal to the Purchase Price. For example, if the fair market value of the shares being purchased is $24.00 per share, then 50% of the shares being so purchased shall be retained by the Corporation as payment for the other 50% of the shares. This method of exercise is only available to the extent that it is consistent with the Plan and is permissible for incentive stock options under Sections 421 and 422 of the Internal Revenue Code. C. The certificate or certificates for the shares being purchased should be registered and the name and address to be shown on the Corporation's stock records should be as follows: ---------------------------------------- ---------------------------------------- ---------------------------------------- D. I represent and agree that the shares as to which I am hereby exercising an option are being purchased for investment and not with a view to the distribution or resale thereof, and the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in the Stock Option Agreement or as may be imposed by law. Sincerely yours, ------------------------------ Michael Pate AMENDMENT TO STOCK OPTION AGREEMENT THIS AMENDMENT TO STOCK OPTION AGREEMENT, dated as of the 9th day of July, 1998, by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"), and the undersigned holder (the "Holder"). WITNESSETH: WHEREAS, the Company and Holder entered into a Stock Option Agreement dated as of February 2, 1998 (the "Option Agreement") whereby the Company granted to Optionee an option (the "Option") to purchase 2,500 shares of the Company's common stock, par value $.001 per share ("Common Stock") at the purchase price of $12.00 per share (the "Exercise Price"); and WHEREAS, the Company is this day effecting a split of its Common Stock of 1.545 to 1 so that each stockholder shall receive an additional six (6) shares of Common Stock for each eleven (11) shares presently held; and WHEREAS, in connection with the aforementioned stock split, the Company and Holder desire to memorialize the adjustment in the Exercise Price and the number of shares of Common Stock which may be purchased by Holder pursuant to the Option Agreement as set forth in Paragraph 8 thereof. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The Option Agreement is hereby amended as follows: (a) Pursuant to Paragraph 8 of the Option Agreement, as a result of the stock split, the number of Option Shares which may be purchased pursuant to the Option is hereby adjusted so that the maximum number of shares of Common Stock which may be purchased by Holder pursuant to the Option Agreement (as set forth in paragraph 1 of the Option Agreement) shall be adjusted by a multiple of 1.545, provided that any fractional share thereby created shall be eliminated by rounding such fraction to the next whole number (the "Adjusted Option Share Amount"). (b) Pursuant to and consistent with Paragraph 8 of the Option Agreement, as a result of the stock split, the Exercise Price is hereby adjusted by a multiple of .6471. Therefore, Section 3(a) of the Option Agreement is hereby deleted in its entirety and the following substituted in lieu therefor: "(a) OPTION PRICE. The price per share with respect to the Option shall be Seven and 77/100 Dollars ($7.77) (the "Option Price")." 2. Except as modified hereby, the Option Agreement remains in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written. Signed, Sealed, and Delivered in the Presence of: AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. - ------------------------------ ----------------------------------- Raymond Findley, Jr. Its President - ------------------------------ HOLDER: - ------------------------------ ------------------------------ Michael Pate Name: - ------------------------------ Adjusted Option Share Amount: 23,175 EX-10.9-6 21 EXHIBIT 10.9.6 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT made as of the 15th day of March, 1998 by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation, with a business office at 1355 Terrell Mill Road, Suite 200, Marietta, Georgia 30067 (hereinafter called the "Corporation"), and ROBERT PATTEN (hereinafter called the "Optionee"). The Corporation has adopted a 1996 Stock Option Plan (the "Plan") to be used to award options to purchase shares of its common stock to certain employees, consultants, and other persons who perform substantial services for the Corporation or any of its subsidiaries or affiliates, as determined by the Board of Directors of the Corporation (the "Board") or a special committee of the Board (the "Committee"). The Board or Committee has authorized the awarding of an option under the Plan to the Optionee. The options issued under the Plan may in some cases be entitled to favorable tax treatment afforded to "incentive stock options" under Sections 421 and 422 of the Internal Revenue Code (such an option being hereinafter sometimes referred to as an "Incentive Stock Option"). Wherever the context so requires, the "Corporation" shall be deemed to refer to any or all of the Corporation's subsidiaries or affiliates. NOW, THEREFORE, in consideration of the premises contained herein, it is hereby agreed as follows: 1. The Corporation hereby grants to the Optionee as of the date of this Agreement the right and option to purchase (hereinafter called the "Option") all or any part of an aggregate of 10,000 shares of the Corporation's common stock, with a par value of $.001 per share (hereinafter called the "Common Stock"), on the terms and conditions herein set forth. 2. The Option granted herein shall constitute an Incentive Stock Option. 3. The Optionee's right to exercise the Option shall be subject to the following terms and conditions: (a) OPTION PRICE. The price per share with respect to the Option shall be Twelve and 00/100 Dollars ($12.00). (b) EXERCISE OF OPTION. The Option shall be exercisable only as follows: (i) At any time after the date hereof, the Option may be exercised to the extent of one-fourth of the aggregate number of shares of Common Stock. (ii) At any time after the expiration of the next three successive anniversaries of the date hereof, the first such date being March 15, 1999, the Option may be exercised to the extent of an additional one-fourth of the aggregate number of shares originally covered by the Option, and the Option may also be exercised to the extent to which the right to exercise shall theretofore have accrued and not been exercised. (iii) No portion of the Option shall be exercisable after the tenth anniversary of the date of its grant, and after that date the Option shall lapse with respect to any shares of Common Stock not theretofore purchased. (iv) The Option may not be exercised for less than one hundred (100) shares of Common Stock at any one time, unless fewer than one hundred (100) shares of Common Stock remain covered by the Option, in which event the Option must be exercised for all such shares. (c) NOTICE OF EXERCISE; PAYMENT; SHAREHOLDERS' RIGHTS. The Optionee shall exercise the Option by giving a written notice of exercise, in the form attached to this Agreement as EXHIBIT A, to the President of the Corporation, indicating the number of shares of Common Stock to be purchased, and tendering payment in full (i) by cash or certified or bank check, (ii) by delivery of shares of Common Stock then owned by the Optionee with a fair market value at the time of exercise equal to the Option Price, or (iii) by a combination of (i) and (ii). No shares shall be issued or delivered until full payment therefor has been made. The Optionee shall have none of the rights of a shareholder, in respect of the Common Stock, except with respect to shares actually issued to the Optionee. (d) NON-TRANSFERABILITY OF OPTION. The Option shall not be transferable other than by will or by the laws of descent and distribution. During the Optionee's lifetime, only the Optionee may exercise the Option. (e) TERMINATION OF EMPLOYMENT. If the Optionee's employment shall be terminated by the Corporation or by the Optionee, with or without cause, for whatever reason other than by death, the Optionee shall have the right within three months after such termination to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of such a termination of employment, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said three months shall lapse. (f) DEATH OF OPTIONEE. (i) If the Optionee shall die, the Option shall lapse and neither the Optionee nor the Optionee's heirs or legal representatives shall have any further rights under this Agreement relating to any Option with respect to which the right to exercise shall not have accrued prior to the date of the Optionee's death. (ii) If the Optionee shall die while employed by the Corporation, or within the three-month period specified in Section 3(e) hereof, the executor or administrator of the estate of the Optionee, or the person or persons to whom the Option shall have been validly transferred by the executor or administrator pursuant to will or the laws of descent and distribution, shall have the right within one year from the date of the Optionee's death to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of death, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said one-year period shall lapse. 2 4. Shares of Common Stock issued upon the exercise of any portion of the Option granted under this Agreement shall be subject to the following terms and conditions: (a) TRANSFERABILITY. The Common Stock shall be transferable only in compliance with this Section 4 and only pursuant to an effective registration or exemption from registration under the Securities Act of 1933, as amended. All transfers, whether or not permitted by this section, shall be subject to all of the provisions of this Agreement. Stock certificates representing shares of Common Stock shall bear a legend in substantially the following form: The shares of the Corporations common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred except pursuant to an effective registration, or exemption from registration, under said Act. In addition, such shares are subject to a right of repurchase by the Corporation. (b) REPURCHASE OF COMMON STOCK BY THE CORPORATION FOLLOWING TERMINATION OF EMPLOYMENT OR BY EXERCISE OF RIGHT OF FIRST REFUSAL. The Corporation shall have a right to repurchase, at the buy-back price set forth below, any or all of the Common Stock issued upon the exercise of the Option. Such right shall arise if the Optionee ceases to be employed by the Corporation for any reason, at the time of the Optionee's death, or if the Optionee elects to dispose of any such shares of Common Stock by sale, transfer or other disposition. (i) REPURCHASE ON DEATH, DISABILITY OR TERMINATION OF EMPLOYMENT. In the event the Optionee dies or ceases to be employed by the Corporation for any reason, the Corporation shall, within thirty days immediately following the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (1) stating that the Corporation has the first right to purchase the Common Stock, (2) designating the number of shares of the Common Stock that the Optionee or the Optionee's legal representative must sell to the Corporation; (3) naming the buy-back price per share in cash at which the Optionee or the Optionee's legal representative is obligated to sell such shares, as determined herein; and (4) stating whether the Corporation elects to exercise its right to repurchase the Common Stock. (ii) REPURCHASE ON ATTEMPTED TRANSFER. In the event the Optionee elects to dispose of any of the Common Stock, the Optionee shall give to the President of the Corporation a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Corporation's principal office: (1) designating the number of shares of the Common Stock to be disposed of; (2) stating the specific manner in which the Optionee proposes to dispose of such shares if they are not purchased by the Corporation pursuant to this Agreement; (3) specifying the names and addresses of the persons to whom the Optionee desires to dispose of such shares to the extent not so purchased by the Corporation; (4) offering to sell such shares to the Corporation; (5) naming the price per share in cash at which the Optionee is willing to sell such shares to the Corporation, which price shall not be greater than the buy-back price as determined herein; and 3 (6) designating the Optionee's mailing address. The Corporation shall have a period of thirty days after the receipt of the notice within which to accept the Optionee's offer as contained in the Optionee's notice. Acceptance shall be by notice in writing to that effect hand delivered or mailed to the Optionee prior to the expiration date of said thirty-day period to the mailing address designated in the Optionee's notice. If the Corporation declines to accept such offer, the Optionee shall have a period of forty-five (45) days within which to dispose of such shares of Common Stock. Such forty-five (45) day period shall commence on the date of receipt of the Corporation's written rejection of such offer or, if the Corporation does not reject such offer in writing, on the expiration of the thirty-day period within which the Corporation may accept such offer. (iii) BUY-BACK. The buy-back price per share for purposes of this Section 4(b) shall be: (1) the price per share offered in a bona fide offer to purchase, or (2) in the absence of a bona fide offer to purchase, the fair market value per share as determined by the Board or the Committee, which amount shall not be less than the price per share at which shares of Common Stock were last sold by the Corporation other than pursuant to the Plan. (c) PROCEDURE FOR REPURCHASE. If any shares of the Common Stock are subject to repurchase as provided in Section 4(b) hereof, and the Corporation shall have exercised its right to repurchase, the Optionee or the Optionee's legal representative shall immediately deliver to the Corporation the certificates for the shares. The certificates shall be voided, and the shares of the Common Stock represented by the certificates shall be thereafter treated on the books of the Corporation as treasury shares. A person required to deliver a certificate for the Common Stock under this section shall be deemed irrevocably to have authorized the voiding of such certificate and the treatment of such Common Stock as treasury shares (regardless whether the certificates are in fact delivered) and irrevocably to have authorized the Board to terminate his status as a shareholder in respect of such shares. (d) PAYMENT FOR SHARES OF COMMON STOCK. The Corporation shall have the right to pay the purchase price for any shares purchased pursuant to this Section 4 over a one year period, in equal quarterly installments without interest, or, in the case of a bona fide offer to purchase, in the manner and over such period of time as provided for in such offer. (e) PRICE ADJUSTMENT. In all cases the buy-back price per share shall be adjusted to reflect previous capital changes, if any, as described in Section 8 hereof. No offer to purchase shall be deemed "bona fide" unless made by a third party unrelated to the Corporation or its shareholders with the intention that such purchase be an investment in the Corporation and not with a view to distribution or resale, nor shall any offer to purchase be deemed "bona fide" if made by a competitor of the Corporation regardless of the offeror's intention. 4 5. In the event the Optionee dies or ceases to be employed by the Corporation and the Optionee has accrued but not exercised rights to purchase shares of Common Stock, the following terms and conditions shall apply. (a) REPURCHASE ON TERMINATION OF EMPLOYMENT OR DEATH WITH RESPECT TO OPTIONS ACCRUED BUT NOT EXERCISED. Upon termination of the Optionee's employment, or upon the Optionee's death giving the Optionee, or the Optionee's legal representative, rights to exercise the Option under either Section 3(e) or 3(f)(ii) hereof, the Corporation shall, within thirty days immediately following the date on which the Corporation learns of the Optionee's death or the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (i) stating that the Corporation has the first right to purchase the Common Stock subject to the Option; (ii) designating the number of shares of the Common Stock which the Optionee or the Optionee's legal representative has a right to purchase under the Option and the option price per share under this Agreement; (iii) naming the buy-back price per share in cash which the Optionee or the Optionee's legal representative is obligated to sell the shares subject to the Option, as determined herein; and (iv) stating whether the Corporation will exercise its right to repurchase the Common Stock if the Optionee or the Optionee's legal representative exercised the Option. (b) SIMULTANEOUS EXERCISE OF OPTION AND REPURCHASE OF COMMON STOCK. The Optionee or the Optionee's legal representative may exercise the Option within the time period provided in Section 3(e) or Section 3(f)(ii) hereof, as the case may be, by giving the Corporation notice of exercise of the Option under Section 3(c) hereof. However, such notice need not be accompanied by tender of payment if the Corporation has elected to exercise its right to repurchase. Upon receipt of the notice of exercise from the Optionee or the Optionee's legal representative within the applicable time period, the Corporation shall pay the Optionee or the Optionee's legal representative for each share an amount equal to the buy-back price per share less the option price per share. If the Corporation does not exercise its right to repurchase under Section 5(a) hereof, then this Section 5(b) shall be of no effect, and the provisions for exercising the Option under Section 3(c) shall apply. (c) COMBINING NOTICES. If the Optionee, or the Optionee's legal representative, has both shares of Common Stock and a right to exercise the Option as to additional shares of Common Stock, then the Corporation may deliver one notice to the Optionee or the Optionee's legal representative to satisfy the provisions of Section 4(b)(i) hereof and Section 5(a) hereof provided the information required to be contained in each notice under such sections are contained in the single notice. 6. Failure by the Corporation to exercise its rights to repurchase the Common Stock upon the termination of employment of the Optionee shall not be a waiver of the Corporations right to repurchase on a subsequent sale, transfer or other disposition of Common Stock. 7. The Optionee acknowledges that the exercise by the Corporation of the repurchase rights set forth in Sections 4 or 5 hereof may, if such repurchase is effected within two (2) years after the date of grant of the Option or one (1) year after the date of issuance of such shares of Common Stock, result in disqualifying the Option from eligibility for the favorable tax treatment accorded Incentive Stock Options 5 under Section 421 of the Internal Revenue Code. The Optionee further acknowledges that other special rules must be complied with in order to ensure that the Option remains eligible for such favorable tax treatment, and that the Optionee, in addition to conferring with appropriate representatives of the Corporation, may wish to consult with his or her personal tax adviser. 8. In the event that a dividend shall be declared upon the shares of Common Stock payable in shares of Common Stock, the number of shares of Common Stock then subject to this Option shall be adjusted by adding to each of such shares the number of shares which would be distributable thereon if such shares had been outstanding on the date fixed for determining the stockholders entitled to receive such stock dividend. In the event that the outstanding shares of Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger, or consolidation, then there shall be substituted for each share of Common Stock subject to this Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged, PROVIDED, HOWEVER, that in the event that such change or exchange results from a merger or consolidation, and in the judgment of the Committee such substitution cannot be effected or would be inappropriate, or if the Corporation shall sell all or substantially all of its assets, the Corporation shall use reasonable efforts to effect some other adjustment of this Option which the Committee, in its sole discretion, shall deem equitable. In the event that there shall be any change, other than as specified above in this Section 8, in the number or kind of outstanding shares of Common Stock or of any stock or other securities into which such shares of Common Stock shall have been changed or for which they shall have been exchanged, then, if the Committee shall determine that such change equitably requires an adjustment in the number or kind of shares then subject to this Option, such adjustment shall be made by the Committee and shall be effective and binding for all purposes of this Option. In the case of any such substitution or adjustment as provided for in this paragraph, the Option Price in this Option for each share covered hereby prior to such substitution or adjustment will be the total option price for all shares of stock or other securities which shall have been substituted for each such share or to which such share shall have been adjusted pursuant to this Section 8. No adjustment or substitution provided for in this Section 8 shall require the Corporation to sell a fractional share; and the total substitution or adjustment with respect to this Option shall be limited accordingly. Any of the foregoing adjustments or substitutions in the shares subject to the Option shall not limit applicability of the restrictions hereunder and such restrictions shall automatically apply to all Common Stock or other securities issued by the Corporation and at any time held by the Optionee by virtue of having exercised the Option. 9. Subject to the restrictions of this Agreement, the Optionee shall have all the rights of a shareholder in respect of the Common Stock issued hereunder, beginning with the date of issuance of the Common Stock. The Common Stock shall be fully paid and non-assessable. 10. The Optionee represents and agrees to represent and agree at the time of the exercise of the Option that any and all Common Stock purchased pursuant to the exercise of the Option will be purchased for investment and not with a view to the distribution or resale thereof, and that the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in this Agreement or as may be imposed by law. 6 11. The Corporation shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. 12. If the Corporation registers any of its shares of common stock under the Securities Act of 1933, as amended (the "Act"), the provisions of Section 4 and Section 5 hereof shall terminate on the day the registration statement becomes effective. The Common Stock issued upon exercise of the Option shall thereupon be free of any restriction imposed hereby, except for the restriction requiring transfer pursuant to the Act if such registration does not include the Common Stock, and neither the Corporation nor the Optionee shall have any further rights or obligations under Section 4 or Section 5 hereof, except the Corporation's obligation to complete payments, under Section 4(b) hereof, for the Common Stock previously repurchased. 13. This Agreement shall be interpreted according to the laws of the State of Georgia. 14. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered may be entered in any Court having jurisdiction thereof. 15. This Agreement and the Plan which is hereby incorporated by reference herein contain the entire agreement of the parties with respect to the Common Stock. All prior agreements and understandings are merged herein. No amendment or modification hereof shall be binding unless in writing and signed by the party against whom enforcement is sought. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year as first above written. Seal AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. ---------------------------- Raymond Findley, Jr. Its President Attest: /s/ Richard J. Shea, Jr. /s/ Robert Patten - -------------------------------- ------------------------------------ Secretary Robert Patten 7 EXHIBIT A ------------------------------------------------------ Address of Person Exercising Option ------------------------------ Date American Card Technology, Inc. 1355 Terrell Mill Road - Suite 200 Marietta, Georgia 30067 Attention: President Dear Sirs: I hereby elect to exercise the Option to purchase shares of Common Stock of the Corporation awarded to me on March 15, 1998. A. The number of shares being purchased: _______ shares at $12.00 per share for a total purchase price equal to $ ________________ (the "Purchase Price"). B. I desire to follow Procedures 1, 2, or 3 as indicated below: [CHECK EITHER PROCEDURE 1, 2, OR 3 AND FILL IN BLANKS UNDER THAT PROCEDURE ONLY]. ______ PROCEDURE 1: A certified or bank cashier's check payable to the order of the Corporation in the amount of $_______________ [insert the full purchase price of the shares being purchased] is attached. The certificate or certificates should be mailed or delivered to: ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ______ PROCEDURE 2: The Purchase Price of the. shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of _________ shares of Common Stock surrendered herewith. The balance of the Purchase Price shall be paid with the certified or bank cashier's check payable to the order of the Corporation in the amount of $_____________. The (i) certificate(s) for such shares of Common Stock, (ii) a stock power conveying such shares of Common Stock to the Corporation, and (iii) the certified or bank cashier's check for the balance of the Purchase Price are attached hereto. ______ PROCEDURE 3: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of that number of such shares which is an amount equal to the Purchase Price. For example, if the fair market value of the shares being purchased is $24.00 per share, then 50% of the shares being so purchased shall be retained by the Corporation as payment for the other 50% of the shares. This method of exercise is only available to the extent that it is consistent with the Plan and is permissible for incentive stock options under Sections 421 and 422 of the Internal Revenue Code. C. The certificate or certificates for the shares being purchased should be registered and the name and address to be shown on the Corporation's stock records should be as follows: ---------------------------------------- ---------------------------------------- ---------------------------------------- D. I represent and agree that the shares as to which I am hereby exercising an option are being purchased for investment and not with a view to the distribution or resale thereof, and the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in the Stock Option Agreement or as may be imposed by law. Sincerely yours, ---------------------------- Robert Patten AMENDMENT TO STOCK OPTION AGREEMENT THIS AMENDMENT TO STOCK OPTION AGREEMENT, dated as of the 9th day of July, 1998, by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"), and the undersigned holder (the "Holder"). WITNESSETH: WHEREAS, the Company and Holder entered into a Stock Option Agreement dated as of February 2, 1998 (the "Option Agreement") whereby the Company granted to Optionee an option (the "Option") to purchase 2,500 shares of the Company's common stock, par value $.001 per share ("Common Stock") at the purchase price of $12.00 per share (the "Exercise Price"); and WHEREAS, the Company is this day effecting a split of its Common Stock of 1.545 to 1 so that each stockholder shall receive an additional six (6) shares of Common Stock for each eleven (11) shares presently held; and WHEREAS, in connection with the aforementioned stock split, the Company and Holder desire to memorialize the adjustment in the Exercise Price and the number of shares of Common Stock which may be purchased by Holder pursuant to the Option Agreement as set forth in Paragraph 8 thereof. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The Option Agreement is hereby amended as follows: (a) Pursuant to Paragraph 8 of the Option Agreement, as a result of the stock split, the number of Option Shares which may be purchased pursuant to the Option is hereby adjusted so that the maximum number of shares of Common Stock which may be purchased by Holder pursuant to the Option Agreement (as set forth in paragraph 1 of the Option Agreement) shall be adjusted by a multiple of 1.545, provided that any fractional share thereby created shall be eliminated by rounding such fraction to the next whole number (the "Adjusted Option Share Amount"). (b) Pursuant to and consistent with Paragraph 8 of the Option Agreement, as a result of the stock split, the Exercise Price is hereby adjusted by a multiple of .6471. Therefore, Section 3(a) of the Option Agreement is hereby deleted in its entirety and the following substituted in lieu therefor: "(a) OPTION PRICE. The price per share with respect to the Option shall be Seven and 77/100 Dollars ($7.77) (the "Option Price")." 2. Except as modified hereby, the Option Agreement remains in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written. Signed, Sealed, and Delivered in the Presence of: AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. - ------------------------------ ----------------------------------- Raymond Findley, Jr. Its President - ------------------------------ HOLDER: - ------------------------------ ------------------------------ Robert Patten Name: - ------------------------------ Adjusted Option Share Amount: 15,450 EX-10.9-7-1 22 EXHIBIT 10.9.7.1 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT made as of the 15th day of March, 1998 by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation, with a business office at 1355 Terrell Mill Road, Suite 200, Marietta, Georgia 30067 (hereinafter called the "Corporation"), and SHAWN NIXON (hereinafter called the "Optionee"). The Corporation has adopted a 1996 Stock Option Plan (the "Plan") to be used to award options to purchase shares of its common stock to certain employees, consultants, and other persons who perform substantial services for the Corporation or any of its subsidiaries or affiliates, as determined by the Board of Directors of the Corporation (the "Board") or a special committee of the Board (the "Committee"). The Board or Committee has authorized the awarding of an option under the Plan to the Optionee. The options issued under the Plan may in some cases be entitled to favorable tax treatment afforded to "incentive stock options" under Sections 421 and 422 of the Internal Revenue Code (such an option being hereinafter sometimes referred to as an "Incentive Stock Option"). Wherever the context so requires, the "Corporation" shall be deemed to refer to any or all of the Corporation's subsidiaries or affiliates. NOW, THEREFORE, in consideration of the premises contained herein, it is hereby agreed as follows: 1. The Corporation hereby grants to the Optionee as of the date of this Agreement the right and option to purchase (hereinafter called the "Option") all or any part of an aggregate of 10,000 shares of the Corporation's common stock, with a par value of $.001 per share (hereinafter called the "Common Stock"), on the terms and conditions herein set forth. 2. The Option granted herein shall constitute an Incentive Stock Option. 3. The Optionee's right to exercise the Option shall be subject to the following terms and conditions: (a) OPTION PRICE. The price per share with respect to the Option shall be Twelve and 00/100 Dollars ($12.00). (b) EXERCISE OF OPTION. The Option shall be exercisable only as follows: (i) At any time after the date hereof, the Option may be exercised to the extent of one-fourth of the aggregate number of shares of Common Stock. (ii) At any time after the expiration of the next three successive anniversaries of the date hereof, the first such date being March 15, 1999, the Option may be exercised to the extent of an additional one-fourth of the aggregate number of shares originally covered by the Option, and the Option may also be exercised to the extent to which the right to exercise shall theretofore have accrued and not been exercised. (iii) No portion of the Option shall be exercisable after the tenth anniversary of the date of its grant, and after that date the Option shall lapse with respect to any shares of Common Stock not theretofore purchased. (iv) The Option may not be exercised for less than one hundred (100) shares of Common Stock at any one time, unless fewer than one hundred (100) shares of Common Stock remain covered by the Option, in which event the Option must be exercised for all such shares. (c) NOTICE OF EXERCISE; PAYMENT; SHAREHOLDERS' RIGHTS. The Optionee shall exercise the Option by giving a written notice of exercise, in the form attached to this Agreement as EXHIBIT A, to the President of the Corporation, indicating the number of shares of Common Stock to be purchased, and tendering payment in full (i) by cash or certified or bank check, (ii) by delivery of shares of Common Stock then owned by the Optionee with a fair market value at the time of exercise equal to the Option Price, or (iii) by a combination of (i) and (ii). No shares shall be issued or delivered until full payment therefor has been made. The Optionee shall have none of the rights of a shareholder, in respect of the Common Stock, except with respect to shares actually issued to the Optionee. (d) NON-TRANSFERABILITY OF OPTION. The option shall not be transferable other than by will or by the laws of descent and distribution. During the Optionee's lifetime, only the Optionee may exercise the Option. (e) TERMINATION OF EMPLOYMENT. If the Optionee's employment shall be terminated by the Corporation or by the Optionee, with or without cause, for whatever reason other than by death, the Optionee shall have the right within three months after such termination to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of such a termination of employment, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said three months shall lapse. (f) DEATH OF OPTIONEE. (i) If the Optionee shall die, the Option shall lapse and neither the Optionee nor the Optionee's heirs or legal representatives shall have any further rights under this Agreement relating to any Option with respect to which the right to exercise shall not have accrued prior to the date of the Optionee's death. (ii) If the Optionee shall die while employed by the Corporation, or within the three-month period specified in Section 3(e) hereof, the executor or administrator of the estate of the Optionee, or the person or persons to whom the Option shall have been validly transferred by the executor or administrator pursuant to will or the laws of descent and distribution, shall have the right within one year from the date of the Optionee's death to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of death, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said one-year period shall lapse. 2 4. Shares of Common Stock issued upon the exercise of any portion of the Option granted under this Agreement shall be subject to the following terms and conditions: (a) TRANSFERABILITY. The Common Stock shall be transferable only in compliance with this Section 4 and only pursuant to an effective registration or exemption from registration under the Securities Act of 1933, as amended. All transfers, whether or not permitted by this section, shall be subject to all of the provisions of this Agreement. Stock certificates representing shares of Common Stock shall bear a legend in substantially the following form: The shares of the Corporation's common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred except pursuant to an effective registration, or exemption from registration, under said Act. In addition, such shares are subject to a right of repurchase by the Corporation. (b) REPURCHASE OF COMMON STOCK BY THE CORPORATION FOLLOWING TERMINATION OF EMPLOYMENT OR BY EXERCISE OF RIGHT OF FIRST REFUSAL. The Corporation shall have a right to repurchase, at the buy-back price set forth below, any or all of the Common Stock issued upon the exercise of the Option. Such right shall arise if the Optionee ceases to be employed by the Corporation for any reason, at the time of the Optionee's death, or if the Optionee elects to dispose of any such shares of Common Stock by sale, transfer or other disposition. (i) REPURCHASE ON DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT. In the event the Optionee dies or ceases to be employed by the Corporation for any reason, the Corporation shall, within thirty days immediately following the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (1) stating that the Corporation has the first right to purchase the Common Stock; (2) designating the number of shares of the Common Stock that the Optionee or the Optionee's legal representative must sell to the Corporation; (3) naming the buy-back price per share in cash at which the Optionee or the Optionee's legal representative is obligated to sell such shares, as determined herein; and (4) stating whether the Corporation elects to exercise its right to repurchase the Common Stock. (ii) REPURCHASE ON ATTEMPTED TRANSFER. In the event the Optionee elects to dispose of any of the Common Stock, the Optionee shall give to the President of the Corporation a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Corporation's principal office: (1) designating the number of shares of the Common Stock to be disposed of; (2) stating the specific manner in which the Optionee proposes to dispose of such shares if they are not purchased by the Corporation pursuant to this Agreement; (3) specifying the names and addresses of the persons to whom the Optionee desires to dispose of such shares to the extent not so purchased by the Corporation; (4) offering to sell such shares to the Corporation; (5) naming the price per share in cash at which the Optionee is willing to sell such shares to the Corporation, which price shall not be greater than the buy-back price as determined herein; and 3 (6) designating the Optionee's mailing address. The Corporation shall have a period of thirty days after the receipt of the notice within which to accept the Optionee's offer as contained in the Optionee's notice. Acceptance shall be by notice in writing to that effect hand delivered or mailed to the Optionee prior to the expiration date of said thirty-day period to the mailing address designated in the Optionee's notice. If the Corporation declines to accept such offer, the Optionee shall have a period of forty-five (45) days within which to dispose of such shares of Common Stock. Such forty-five (45) day period shall commence on the date of receipt of the Corporation's written rejection of such offer or, if the Corporation does not reject such offer in writing, on the expiration of the thirty-day period within which the Corporation may accept such offer. (iii) BUY-BACK. The buy-back price per share for purposes of this Section 4(b) shall be: (1) the price per share offered in a bona fide offer to purchase, or (2) in the absence of a bona fide offer to purchase, the fair market value per share as determined by the Board or the Committee, which amount shall not be less than the price per share at which shares of Common Stock were last sold by the Corporation other than pursuant to the Plan. (c) PROCEDURE FOR REPURCHASE. If any shares of the Common Stock are subject to repurchase as provided in Section 4(b) hereof, and the Corporation shall have exercised its right to repurchase, the Optionee or the Optionee's legal representative shall immediately deliver to the Corporation the certificates for the shares. The certificates shall be voided, and the shares of the Common Stock represented by the certificates shall be thereafter treated on the books of the Corporation as treasury shares. A person required to deliver a certificate for the Common Stock under this section shall be deemed irrevocably to have authorized the voiding of such certificate and the treatment of such Common Stock as treasury shares (regardless whether the certificates are in fact delivered) and irrevocably to have authorized the Board to terminate his status as a shareholder in respect of such shares. (d) PAYMENT FOR SHARES OF COMMON STOCK. The Corporation shall have the right to pay the purchase price for any shares purchased pursuant to this Section 4 over a one year period, in equal quarterly installments without interest, or, in the case of a bona fide offer to purchase, in the manner and over such period of time as provided for in such offer. (e) PRICE ADJUSTMENT. In all cases the buy-back price per share shall be adjusted to reflect previous capital changes, if any, as described in Section 8 hereof. No offer to purchase shall be deemed "bona fide" unless made by a third party unrelated to the Corporation or its shareholders with the intention that such purchase be an investment in the Corporation and not with a view to distribution or resale, nor shall any offer to purchase be deemed "bona fide" if made by a competitor of the Corporation regardless of the offeror's intention. 4 5. In the event the Optionee dies or ceases to be employed by the Corporation and the Optionee has accrued but not exercised rights to purchase shares of Common Stock, the following terms and conditions shall apply. (a) REPURCHASE ON TERMINATION OF EMPLOYMENT OR DEATH WITH RESPECT TO OPTIONS ACCRUED BUT NOT EXERCISED. Upon termination of the Optionee's employment, or upon the Optionee's death giving the Optionee, or the Optionee's legal representative, rights to exercise the Option under either Section 3(e) or 3(f)(ii) hereof, the Corporation shall, within thirty days immediately following the date on which the Corporation learns of the Optionee's death or the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (i) stating that the Corporation has the first right to purchase the Common Stock subject to the Option; (ii) designating the number of shares of the Common Stock which the Optionee or the Optionee's legal representative has a right to purchase under the Option and the option price per share under this Agreement; (iii) naming the buy-back price per share in cash which the Optionee or the Optionee's legal representative is obligated to sell the shares subject to the Option, as determined herein; and (iv) stating whether the Corporation will exercise its right to repurchase the Common Stock if the Optionee or the Optionee's legal representative exercised the Option. (b) SIMULTANEOUS EXERCISE OF OPTION AND REPURCHASE OF COMMON STOCK. The Optionee or the Optionee's legal representative may exercise the Option within the time period provided in Section 3(e) or Section 3(f)(ii) hereof, as the case may be, by giving the Corporation notice of exercise of the Option under Section 3(c) hereof. However, such notice need not be accompanied by tender of payment if the Corporation has elected to exercise its right to repurchase. Upon receipt of the notice of exercise from the Optionee or the Optionee's legal representative within the applicable time period, the Corporation shall pay the Optionee or the Optionee's legal representative for each share an amount equal to the buy-back price per share less the option price per share. If the Corporation does not exercise its right to repurchase under Section 5(a) hereof, then this Section 5(b) shall be of no effect, and the provisions for exercising the Option under Section 3(c) shall apply. (c) COMBINING NOTICES. If the Optionee, or the Optionee's legal representative, has both shares of Common Stock and a right to exercise the Option as to additional shares of Common Stock, then the Corporation may deliver one notice to the Optionee or the Optionee's legal representative to satisfy the provisions of Section 4(b)(i) hereof and Section 5(a) hereof provided the information required to be contained in each notice under such sections are contained in the single notice. 6. Failure by the Corporation to exercise its rights to repurchase the Common Stock upon the termination of employment of the Optionee shall not be a waiver of the Corporations right to repurchase on a subsequent sale, transfer or other disposition of Common Stock. 7. The Optionee acknowledges that the exercise by the Corporation of the repurchase rights set forth in Sections 4 or 5 hereof may, if such repurchase is effected within two (2) years after the date of grant of the Option or one (1) year after the date of issuance of such shares of Common Stock, result in disqualifying the Option from eligibility for the favorable tax treatment accorded Incentive Stock Options 5 under Section 421 of the Internal Revenue Code. The Optionee further acknowledges that other special rules must be complied with in order to ensure that the Option remains eligible for such favorable tax treatment, and that the Optionee, in addition to conferring with appropriate representatives of the Corporation, may wish to consult with his or her personal tax adviser. 8. In the event that a dividend shall be declared upon the shares of Common Stock payable in shares of Common Stock, the number of shares of Common Stock then subject to this Option shall be adjusted by adding to each of such shares the number of shares which would be distributable thereon if such shares had been outstanding on the date fixed for determining the stockholders entitled to receive such stock dividend. In the event that the outstanding shares of Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger, or consolidation, then there shall be substituted for each share of Common Stock subject to this Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged; PROVIDED, HOWEVER, that in the event that such change or exchange results from a merger or consolidation, and in the judgment of the Committee such substitution cannot be effected or would be inappropriate, or if the Corporation shall sell all or substantially all of its assets, the Corporation shall use reasonable efforts to effect some other adjustment of this Option which the Committee, in its sole discretion, shall deem equitable. In the event that there shall be any change, other than as specified above in this Section 8, in the number or kind of outstanding shares of Common Stock or of any stock or other securities into which such shares of Common Stock shall have been changed or for which they shall have been exchanged, then, if the Committee shall determine that such change equitably requires an adjustment in the number or kind of shares then subject to this Option, such adjustment shall be made by the Committee and shall be effective and binding for all purposes of this Option. In the case of any such substitution or adjustment as provided for in this paragraph, the Option Price in this Option for each share covered hereby prior to such substitution or adjustment will be the total option price for all shares of stock or other securities which shall have been substituted for each such share or to which such share shall have been adjusted pursuant to this Section 8. No adjustment or substitution provided for in this Section 8 shall require the Corporation to sell a fractional share; and the total substitution or adjustment with respect to this Option shall be limited accordingly. Any of the foregoing adjustments or substitutions in the shares subject to the Option shall not limit applicability of the restrictions hereunder and such restrictions shall automatically apply to all Common Stock or other securities issued by the Corporation and at any time held by the Optionee by virtue of having exercised the Option. 9. Subject to the restrictions of this Agreement, the Optionee shall have all the rights of a shareholder in respect of the Common Stock issued hereunder, beginning with the date of issuance of the Common Stock. The Common Stock shall be fully paid and non-assessable. 10. The Optionee represents and agrees to represent and agree at the time of the exercise of the Option that any and all Common Stock purchased pursuant to the exercise of the Option will be purchased for investment and not with a view to the distribution or resale thereof, and that the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in this Agreement or as may be imposed by law. 6 11. The Corporation shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. 12. If the Corporation registers any of its shares of common stock under the Securities Act of 1933, as amended (the "Act"), the provisions of Section 4 and Section 5 hereof shall terminate on the day the registration statement becomes effective. The Common Stock issued upon exercise of the Option shall thereupon be free of any restriction imposed hereby, except for the restriction requiring transfer pursuant to the Act if such registration does not include the Common Stock, and neither the Corporation nor the Optionee shall have any further rights or obligations under Section 4 or Section 5 hereof, except the Corporation's obligation to complete payments, under Section 4(b) hereof, for the Common Stock previously repurchased. 13. This Agreement shall be interpreted according to the laws of the State of Georgia. 14. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered may be entered in any Court having jurisdiction thereof. 15. This Agreement and the Plan which is hereby incorporated by reference herein contain the entire agreement of the parties with respect to the Common Stock. All prior agreements and understandings are merged herein. No amendment or modification hereof shall be binding unless in writing and signed by the party against whom enforcement is sought. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year as first above written. Seal AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. -------------------------------- Raymond Findley, Jr. Its President Attest: /s/ Richard J. Shea, Jr. /s/ Shawn Nixon - -------------------------------- ------------------------------------- Secretary Shawn Nixon 7 EXHIBIT A _________________________________________________ Address of Person Exercising Option _____________________________ Date American Card Technology, Inc. 1355 Terrell Mill Road - Suite 200 Marietta, Georgia 30067 Attention: President Dear Sirs: I hereby elect to exercise the Option to purchase shares of Common Stock of the Corporation awarded to me on March 15, 1998. A. The number of shares being purchased: ________________ shares at $12.00 per share for a total purchase price equal to $________________ (the "Purchase Price"). B. I desire to follow Procedures 1, 2, or 3 as indicated below: [CHECK EITHER PROCEDURE 1, 2, OR 3 AND FILL IN BLANKS UNDER THAT PROCEDURE ONLY]. ______ PROCEDURE 1: A certified or bank cashier's check payable to the order of the Corporation in the amount of $_____________ [insert the full purchase price of the shares being purchase] is attached. The certificate or certificates should be mailed or delivered to: _____________________________________________________ _____________________________________________________ _____________________________________________________ ______ PROCEDURE 2: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of _____________ shares of Common Stock surrendered herewith. The balance of the Purchase Price shall be paid with the certified or bank cashier's check payable to the order of the Corporation in the amount of $______________. The (i) certificate(s) for such shares of Common Stock, (ii) a stock power conveying such shares of Common Stock to the Corporation, and (iii) the certified or bank cashier's check for the balance of the Purchase Price are attached hereto. ______ PROCEDURE 3: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of that number of such shares which is an amount equal to the Purchase Price. For example, if the fair market value of the shares being purchased is $24.00 per share, then 50% of the shares being so purchased shall be retained by the Corporation as payment for the other 50% of the shares. This method of exercise is only available to the extent that it is consistent with the Plan and is permissible for incentive stock options under Sections 421 and 422 of the Internal Revenue Code. C. The certificate or certificates for the shares being purchased should be registered and the name and address to be shown on the Corporation's stock records should be as follows: _____________________________________________________ _____________________________________________________ _____________________________________________________ D. I represent and agree that the shares as to which I am hereby exercising an option are being purchased for investment and not with a view to the distribution or resale thereof, and the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in the Stock Option Agreement or as may be imposed by law. Sincerely yours, ----------------------------------- Shawn Nixon AMENDMENT TO STOCK OPTION AGREEMENT THIS AMENDMENT TO STOCK OPTION AGREEMENT, dated as of the 9th day of July, 1998, by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"), and the undersigned holder (the "Holder"). WITNESSETH: WHEREAS, the Company and Holder entered into a Stock Option Agreement dated as of February 2, 1998 (the "Option Agreement") whereby the Company granted to Optionee an option (the "Option") to purchase 2,500 shares of the Company's common stock, par value $.001 per share ("Common Stock") at the purchase price of $12.00 per share (the "Exercise Price"); and WHEREAS, the Company is this day effecting a split of its Common Stock of 1.545 to 1 so that each stockholder shall receive an additional six (6) shares of Common Stock for each eleven (11) shares presently held; and WHEREAS, in connection with the aforementioned stock split, the Company and Holder desire to memorialize the adjustment in the Exercise Price and the number of shares of Common Stock which may be purchased by Holder pursuant to the Option Agreement as set forth in Paragraph 8 thereof. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The Option Agreement is hereby amended as follows: (a) Pursuant to Paragraph 8 of the Option Agreement, as a result of the stock split, the number of Option Shares which may be purchased pursuant to the Option is hereby adjusted so that the maximum number of shares of Common Stock which may be purchased by Holder pursuant to the Option Agreement (as set forth in paragraph 1 of the Option Agreement) shall be adjusted by a multiple of 1.545, provided that any fractional share thereby created shall be eliminated by rounding such fraction to the next whole number (the "Adjusted Option Share Amount"). (b) Pursuant to and consistent with Paragraph 7 of the Option Agreement, as a result of the stock split, the Exercise Price is hereby adjusted by a multiple of .6471. Therefore, Section 3(a) of the Option Agreement is hereby deleted in its entirety and the following substituted in lieu therefor: (a) OPTION PRICE. The price per share with respect to the Option shall be Seven and 77/100 Dollars ($7.77) (the "Option Price")." 2. Except as modified hereby, the Option Agreement remains in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written. Signed, Sealed, and Delivered in the Presence of: AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. - ------------------------------ --------------------------------------- Raymond Findley, Jr. Its President - ------------------------------ HOLDER: - ------------------------------ --------------------------------------- Shawn Nixon Name: - ------------------------------ Adjusted Option Share Amount: 15,450 EX-10.9-7-2 23 EXHIBIT 10.9.7.2 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT made as of the 15th day of March, 1998 by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation, with a business office at 1355 Terrell Mill Road, Suite 200, Marietta, Georgia 30067 (hereinafter called the "Corporation"), and JEREMY ZELA (hereinafter called the "Optionee"). The Corporation has adopted a 1996 Stock Option Plan (the "Plan") to be used to award options to purchase shares of its common stock to certain employees, consultants, and other persons who perform substantial services for the Corporation or any of its subsidiaries or affiliates, as determined by the Board of Directors of the Corporation (the "Board") or a special committee of the Board (the "Committee"). The Board or Committee has authorized the awarding of an option under the Plan to the Optionee. The options issued under the Plan may in some cases be entitled to favorable tax treatment afforded to "incentive stock options" under Sections 421 and 422 of the Internal Revenue Code (such an option being hereinafter sometimes referred to as an "Incentive Stock Option"). Wherever the context so requires, the "Corporation" shall be deemed to refer to any or all of the Corporation's subsidiaries or affiliates. NOW, THEREFORE, in consideration of the premises contained herein, it is hereby agreed as follows: 1. The Corporation hereby grants to the Optionee as of the date of this Agreement the right and option to purchase (hereinafter called the "Option") all or any part of an aggregate of 5,000 shares of the Corporation's common stock, with a par value of $.001 per share (hereinafter called the "Common Stock"), on the terms and conditions herein set forth. 2. The Option granted herein shall constitute an Incentive Stock Option. 3. The Optionee's right to exercise the Option shall be subject to the following terms and conditions: (a) OPTION PRICE. The price per share with respect to the Option shall be Twelve and 00/100 Dollars ($12.00). (b) EXERCISE OF OPTION. The Option shall be exercisable only as follows: (i) At any time after the date hereof, the Option may be exercised to the extent of one-fourth of the aggregate number of shares of Common Stock. (ii) At any time after the expiration of the next three successive anniversaries of the date hereof, the first such date being March 15, 1999, the Option may be exercised to the extent of an additional one-fourth of the aggregate number of shares originally covered by the Option, and the Option may also be exercised to the extent to which the right to exercise shall theretofore have accrued and not been exercised. (iii) No portion of the Option shall be exercisable after the tenth anniversary of the date of its grant, and after that date the Option shall lapse with respect to any shares of Common Stock not theretofore purchased. (iv) The Option may not be exercised for less than one hundred (100) shares of Common Stock at any one time, unless fewer than one hundred (100) shares of Common Stock remain covered by the Option, in which event the Option must be exercised for all such shares. (c) NOTICE OF EXERCISE; PAYMENT; SHAREHOLDERS' RIGHTS. The Optionee shall exercise the Option by giving a written notice of exercise, in the form attached to this Agreement as EXHIBIT A to the President of the Corporation, indicating the number of shares of Common Stock to be purchased, and tendering payment in full (i) by cash or certified or bank check, (ii) by delivery of shares of Common Stock then owned by the Optionee with a fair market value at the time of exercise equal to the Option Price, or (iii) by a combination of (i) and (ii). No shares shall be issued or delivered until full payment therefor has been made. The Optionee shall have none of the rights of a shareholder, in respect of the Common Stock, except with respect to shares actually issued to the Optionee. (d) NON-TRANSFERABILITY OF OPTION. The Option shall not be transferable other than by will or by the laws of descent and distribution. During the Optionee's lifetime, only the Optionee may exercise the Option. (e) TERMINATION OF EMPLOYMENT. If the Optionee's employment shall be terminated by the Corporation or by the Optionee, with or without cause, for whatever reason other than by death, the Optionee shaft have the right within three months after such termination to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of such a termination of employment, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said three months shall lapse. (f) DEATH OF OPTIONEE. (i) If the Optionee shall die, the Option shall lapse and neither the Optionee nor the Optionee's heirs or legal representatives shall have any further rights under this Agreement relating to any Option with respect to which the right to exercise shall not have accrued prior to the date of the Optionee's death. (ii) If the Optionee shall die while employed by the Corporation, or within the three-month period specified in Section 3(e) hereof, the executor or administrator of the estate of the Optionee, or the person or persons to whom the Option shall have been validly transferred by the executor or administrator pursuant to will or the laws of descent and distribution, shall have the right within one year from the date of the Optionee's death to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of death, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said one-year period shall lapse. 2 4. Shares of Common Stock issued upon the exercise of any portion of the Option granted under this Agreement shall be subject to the following terms and conditions: (a) TRANSFERABILITY. The Common Stock shall be transferable only in compliance with this Section 4 and only pursuant to an effective registration or exemption from registration under the Securities Act of 1933, as amended. All transfers, whether or not permitted by this section, shall be subject to all of the provisions of this Agreement. Stock certificates representing shares of Common Stock shall bear a legend in substantially the following form: The shares of the Corporation's common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred except pursuant to an effective registration, or exemption from registration, under said Act. In addition, such shares are subject to a right of repurchase by the Corporation. (b) REPURCHASE OF COMMON STOCK BY THE CORPORATION FOLLOWING TERMINATION OF EMPLOYMENT OR BY EXERCISE OF RIGHT OF FIRST REFUSAL. The Corporation shall have a right to repurchase, at the buy-back price set forth below, any or all of the Common Stock issued upon the exercise of the Option. Such right shall arise if the Optionee ceases to be employed by the Corporation for any reason, at the time of the Optionee's death, or if the Optionee elects to dispose of any such shares of Common Stock by sale, transfer or other disposition. (i) REPURCHASE ON DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT. In the event the Optionee dies or ceases to be employed by the Corporation for any reason, the Corporation shall, within thirty days immediately following the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (1) stating that the Corporation has the first right to purchase the Common Stock; (2) designating the number of shares of the Common Stock that the Optionee or the Optionee's legal representative must sell to the Corporation; (3) naming the buy-back price per share in cash at which the Optionee or the Optionee's legal representative is obligated to sell such shares, as determined herein; and (4) stating whether the Corporation elects to exercise its right to repurchase the Common Stock. (ii) REPURCHASE ON ATTEMPTED TRANSFER. In the event the Optionee elects to dispose of any of the Common Stock, the Optionee shall give to the President of the Corporation a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Corporation's principal office: (1) designating the number of shares of the Common Stock to be disposed of; (2) stating the specific manner in which the Optionee proposes to dispose of such shares if they are not purchased by the Corporation pursuant to this Agreement; (3) specifying the names and addresses of the persons to whom the Optionee desires to dispose of such shares to the extent not so purchased by the Corporation; (4) offering to sell such shares to the Corporation; (5) naming the price per share in cash at which the Optionee is willing to sell such shares to the Corporation, which price shall not be greater than the buy-back price as determined herein; and 3 (6) designating the Optionee's mailing address. The Corporation shall have a period of thirty days after the receipt of the notice within which to accept the Optionee's offer as contained in the Optionee's notice. Acceptance shall be by notice in writing to that effect hand delivered or mailed to the Optionee prior to the expiration date of said thirty-day period to the mailing address designated in the Optionee's notice. If the Corporation declines to accept such offer, the Optionee shall have a period of forty-five (45) days within which to dispose of such shares of Common Stock Such forty-five (45) day period shall commence on the date of receipt of the Corporation's written rejection of such offer or, if the Corporation does not reject such offer in writing, on the expiration of the thirty-day period within which the Corporation may accept such offer. (iii) BUY-BACK. The buy-back price per share for purposes of this Section 4(b) shall be: (1) the price per share offered in a bona fide offer to purchase, or (2) in the absence of a bona fide offer to purchase, the fair market value per share as determined by the Board or the Committee, which amount shall not be less than the price per share at which shares of Common Stock were last sold by the Corporation other than pursuant to the Plan. (c) PROCEDURE FOR REPURCHASE. If any shares of the Common Stock are subject to repurchase as provided in Section 4(b) hereof, and the Corporation shall have exercised its right to repurchase, the Optionee or the Optionee's legal representative shall immediately deliver to the Corporation the certificates for the shares. The certificates shall be voided, and the shares of the Common Stock represented by the certificates shall be thereafter treated on the books of the Corporation as treasury shares. A person required to deliver a certificate for the Common Stock under this section shall be deemed irrevocably to have authorized the voiding of such certificate and the treatment of such Common Stock as treasury shares (regardless whether the certificates are in fact delivered) and irrevocably to have authorized the Board to terminate his status as a shareholder in respect of such shares. (d) PAYMENT FOR SHARES OF COMMON STOCK. The Corporation shall have the right to pay the purchase price for any shares purchased pursuant to this Section 4 over a one year period, in equal quarterly installments without interest, or, in the case of a bona fide offer to purchase, in the manner and over such period of time as provided for in such offer. (e) PRICE ADJUSTMENT. In all cases the buy-back price per share shall be adjusted to reflect previous capital changes, if any, as described in Section 8 hereof. No offer to purchase shall be deemed "bona fide" unless made by a third party unrelated to the Corporation or its shareholders with the intention that such purchase be an investment in the Corporation and not with a view to distribution or resale, nor shall any offer to purchase be deemed "bona fide" if made by a competitor of the Corporation regardless of the offeror's intention. 4 5. In the event the Optionee dies or ceases to be employed by the Corporation and the Optionee has accrued but not exercised rights to purchase shares of Common Stock, the following terms and conditions shall apply. (a) REPURCHASE ON TERMINATION OF EMPLOYMENT OR DEATH WITH RESPECT TO OPTIONS ACCRUED BUT NOT EXERCISED. Upon termination of the Optionee's employment, or upon the Optionee's death giving the Optionee, or the Optionee's legal representative, rights to exercise the Option under either Section 3(e) or 3(f)(ii) hereof, the Corporation shall, within thirty days immediately following the date on which the Corporation learns of the Optionee's death or the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (i) stating that the Corporation has the first right to purchase the Common Stock subject to the Option; (ii) designating the number of shares of the Common Stock which the Optionee or the Optionee's legal representative has a right to purchase under the Option and the option price per share under this Agreement; (iii) naming the buy-back price per share in cash which the Optionee or the Optionee's legal representative is obligated to sell the shares subject to the Option, as determined herein; and (iv) stating whether the Corporation will exercise its right to repurchase the Common Stock if the Optionee or the Optionee's legal representative exercised the Option. (b) SIMULTANEOUS EXERCISE OF OPTION AND REPURCHASE OF COMMON STOCK. The Optionee or the Optionee's legal representative may exercise the Option within the time period provided in Section 3(e) or Section 3(f)(ii) hereof, as the case may be, by giving the Corporation notice of exercise of the Option under Section 3(c) hereof. However, such notice need not be accompanied by tender of payment if the Corporation has elected to exercise its right to repurchase. Upon receipt of the notice of exercise from the Optionee or the Optionee's legal representative within the applicable time period, the Corporation shall pay the Optionee or the Optionee's legal representative for each share an amount equal to the buy-back price per share less the option price per share. If the Corporation does not exercise its right to repurchase under Section 5(a) hereof, then this Section 5(b) shall be of no effect, and the provisions for exercising the Option under Section 3(c) shall apply. (c) COMBINING NOTICES. If the Optionee, or the Optionee's legal representative, has both shares of Common Stock and a right to exercise the Option as to additional shares of Common Stock, then the Corporation may deliver one notice to the Optionee or the Optionee's legal representative to satisfy the provisions of Section 4(b)(i) hereof and Section 5(a) hereof provided the information required to be contained in each notice under such sections are contained in the single notice. 6. Failure by the Corporation to exercise its rights to repurchase the Common Stock upon the termination of employment of the Optionee shall not be a waiver of the Corporations right to repurchase on a subsequent sale, transfer or other disposition of Common Stock. 7. The Optionee acknowledges that the exercise by the Corporation of the repurchase rights set forth in Sections 4 or 5 hereof may, if such repurchase is effected within two (2) years after the date of grant of the Option or one (1) year after the date of issuance of such shares of Common Stock, result in disqualifying the Option from eligibility for the favorable tax treatment accorded Incentive Stock Options 5 under Section 421 of the Internal Revenue Code. The Optionee further acknowledges that other special rules must be complied with in order to ensure that the Option remains eligible for such favorable tax treatment, and that the Optionee, in addition to conferring with appropriate representatives of the Corporation, may wish to consult with his or her personal tax adviser. 8. In the event that a dividend shall be declared upon the shares of Common Stock payable in shares of Common Stock, the number of shares of Common Stock then subject to this Option shall be adjusted by adding to each of such shares the number of shares which would be distributable thereon if such shares had been outstanding on the date fixed for determining the stockholders entitled to receive such stock dividend. In the event that the outstanding shares of Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger, or consolidation, then there shall be substituted for each share of Common Stock subject to this Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged, PROVIDED, HOWEVER, that in the event that such change or exchange results from a merger or consolidation, and in the judgment of the Committee such substitution cannot be effected or would be inappropriate, or if the Corporation shall sell all or substantially all of its assets, the Corporation shall use reasonable efforts to effect some other adjustment of this Option which the Committee, in its sole discretion, shall deem equitable. In the event that there shall be any change, other than as specified above in this Section 8, in the number or kind of outstanding shares of Common Stock or of any stock or other securities into which such shares of Common Stock shall have been changed or for which they shall have been exchanged, then, if the Committee shall determine that such change equitably requires an adjustment in the number or kind of shares then subject to this Option, such adjustment shall be made by the Committee and shall be effective and binding for all purposes of this Option. In the case of any such substitution or adjustment as provided for in this paragraph, the Option Price in this Option for each share covered hereby prior to such substitution or adjustment will be the total option price for all shares of stock or other securities which shall have been substituted for each such share or to which such share shall have been adjusted pursuant to this Section 8. No adjustment or substitution provided for in this Section 8 shall require the Corporation to sell a fractional share; and the total substitution or adjustment with respect to this Option shall be limited accordingly. Any of the foregoing adjustments or substitutions in the shares subject to the Option shall not limit applicability of the restrictions hereunder and such restrictions shall automatically apply to all Common Stock or other securities issued by the Corporation and at any time held by the Optionee by virtue of having exercised the Option. 9. Subject to the restrictions of this Agreement, the Optionee shall have all the rights of a shareholder in respect of the Common Stock issued hereunder, beginning with the date of issuance of the Common Stock. The Common Stock shall be fully paid and non-assessable. 10. The Optionee represents and agrees to represent and agree at the time of the exercise of the Option that any and all Common Stock purchased pursuant to the exercise of the Option will be purchased for investment and not with a view to the distribution or resale thereof, and that the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in this Agreement or as may be imposed by law. 6 11. The Corporation shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. 12. If the Corporation registers any of its shares of common stock under the Securities Act of 1933, as amended (the "Act"), the provisions of Section 4 and Section 5 hereof shall terminate on the day the registration statement becomes effective. The Common Stock issued upon exercise of the Option shall thereupon be free of any restriction imposed hereby, except for the restriction requiring transfer pursuant to the Act if such registration does not include the Common Stock, and neither the Corporation nor the Optionee shall have any further rights or obligations under Section 4 or Section 5 hereof, except the Corporation' s obligation to complete payments, under Section 4(b) hereof, for the Common Stock previously repurchased. 13. This Agreement shall be interpreted according to the laws of the State of Georgia. 14. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered may be entered in any Court having jurisdiction thereof. 15. This Agreement and the Plan which is hereby incorporated by reference herein contain the entire agreement of the parties with respect to the Common Stock. All prior agreements and understandings are merged herein. No amendment or modification hereof shall be binding unless in writing and signed by the party against whom enforcement is sought. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year as first above written. Seal AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. ---------------------------- Raymond Findley, Jr. Its President Attest: /s/ Richard J. Shea, Jr. /s/ Jeremy Zela - ------------------------------- ---------------------------------- Secretary Jeremy Zela 7 EXHIBIT A ------------------------------------------------- Address of Person Exercising Option ------------------------- Date American Card Technology, Inc. 1355 Terrell Mill Road - Suite 200 Marietta, Georgia 30067 Attention: President Dear Sirs: I hereby elect to exercise the Option to purchase shares of Common Stock of the Corporation awarded to me on March 15, 1998. A. The number of shares being purchased: shares at $12.00 per share for a total purchase price equal to $ (the "Purchase Price"). B. I desire to follow Procedures 1, 2, or 3 as indicated below: [CHECK EITHER PROCEDURE 1, 2, OR 3 AND FILL IN BLANKS UNDER THAT PROCEDURE ONLY]. PROCEDURE 1: A certified or bank cashier's check payable to the --- order of the Corporation in the amount of $ [insert the full purchase price of the shares being purchase] is attached. The certificate or certificates should be mailed or delivered to: --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- PROCEDURE 2: The Purchase Price of the shares being purchased --- which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of shares of Common Stock surrendered herewith. The balance of the Purchase Price shall be paid with the certified or bank cashier's check payable to the order of the Corporation in the amount of $ . The (i) certificate(s) for such shares of Common Stock, (ii) a stock power conveying such shares of Common Stock to the Corporation, and (iii) the certified or bank cashier's check for the balance of the Purchase Price are attached hereto. PROCEDURE 3: The Purchase Price of the shares being purchased --- which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of that number of such shares which is an amount equal to the Purchase Price. For example, if the fair market value of the shares being purchased is $24.00 per share, then 50% of the shares being so purchased shall be retained by the Corporation as payment for the other 50% of the shares. This method of exercise is only available to the extent that it is consistent with the Plan and is permissible for incentive stock options under Sections 421 and 422 of the Internal Revenue Code. C. The certificate or certificates for the shares being purchased should be registered and the name and address to be shown on the Corporation's stock records should be as follows: -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- D. I represent and agree that the shares as to which I am hereby exercising an option are being purchased for investment and not with a view to the distribution or resale thereof, and the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in the Stock Option Agreement or as may be imposed by law. Sincerely yours, ------------------------------ Jeremy Zela AMENDMENT TO STOCK OPTION AGREEMENT THIS AMENDMENT TO STOCK OPTION AGREEMENT, dated as of the 9th day of July, 1998, by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"), and the undersigned holder (the "Holder"). WITNESSETH: WHEREAS, the Company and Holder entered into a Stock Option Agreement dated as of March 15, 1998 (the "Option Agreement") whereby the Company granted to Optionee an option (the "Option") to purchase shares of the Company's common stock, par value $.001 per share ("Common Stock") at the purchase price of $12.00 per share (the "Exercise Price"); and WHEREAS, the Company is this day effecting a split of its Common Stock of 1.545 to 1 so that each stockholder shall receive an additional six (6) shares of Common Stock for each eleven (11) shares presently held; and WHEREAS, in connection with the aforementioned stock split, the Company and Holder desire to memorialize the adjustment in the Exercise Price and the number of shares of Common Stock which may be purchased by Holder pursuant to the Option Agreement as set forth in Paragraph 7 thereof. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The Option Agreement is hereby amended as follows: (a) Pursuant to Paragraph 7 of the Option Agreement, as a result of the stock split, the number of Option Shares which may be purchased pursuant to the Option is hereby adjusted so that the maximum number of shares of Common Stock which may be purchased by Holder pursuant to the Option Agreement (as set forth in paragraph 1 of the Option Agreement) shall be adjusted by a multiple of 1.545, provided that any fractional share thereby created shall be eliminated by rounding such fraction to the next whole number (the "Adjusted Option Share Amount"). (b) Pursuant to and consistent with Paragraph 7 of the Option Agreement, as a result of the stock split, the Exercise Price is hereby adjusted by a multiple of .6471. Therefore, Section 3(a) of the Option Agreement is hereby deleted in its entirety and the following substituted in lieu therefor: "(a) OPTION PRICE. The price per share with respect to the Option shall be Seven and 77/100 Dollars ($7.77) (the "Option Price")." 2. Except as modified hereby, the Option Agreement remains in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written. Signed, Sealed, and Delivered in the Presence of: AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. - ------------------------- ----------------------------- Raymond Findley, Jr. Its President - ------------------------- HOLDER: - ------------------------- ----------------------------- Jeremy Zela Name: Adjusted Option Share Amount: 77,250 - ------------------------- ------- EX-10.9-7-3 24 EXHIBIT 10.9.7.3 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT made as of the 4th day of August, 1998 by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation, with a business office at 1355 Terrell Mill Road, Suite 200, Marietta, Georgia 30067 (hereinafter called the "Corporation"), and PHYLLIS BURKE (hereinafter called the "Optionee"). The Corporation has adopted a 1996 Stock Option Plan (the "Plan") to be used to award options to purchase shares of its common stock to certain employees, consultants, and other persons who perform substantial services for the Corporation or any of its subsidiaries or affiliates, as determined by the Board of Directors of the Corporation (the "Board") or a special committee of the Board (the "Committee"). The Board or Committee has authorized the awarding of an option under the Plan to the Optionee. The options issued under the Plan may in some cases be entitled to favorable tax treatment afforded to "incentive stock options" under Sections 421 and 422 of the Internal Revenue Code (such an option being hereinafter sometimes referred to as an "Incentive Stock Option"). Wherever the context so requires, the "Corporation" shall be deemed to refer to any or all of the Corporation's subsidiaries or affiliates. NOW, THEREFORE, in consideration of the premises contained herein, it is hereby agreed as follows: 1. The Corporation hereby grants to the Optionee as of the date of this Agreement the right and option to purchase (hereinafter called the "Option") all or any part of an aggregate of 1,545 shares of the Corporation's common stock, with a par value of $.001 per share (hereinafter called the "Common Stock"), on the terms and conditions herein set forth. 2. The Option granted herein shall constitute an Incentive Stock Option. 3. The Optionee's right to exercise the Option shall be subject to the following terms and conditions: (a) OPTION PRICE. The price per share with respect to the Option shall be Eleven and 00/100 Dollars ($11.00). (b) EXERCISE OF OPTION. The Option shall be exercisable only as follows: (i) At any time after the date hereof, the Option may be exercised to the extent of one-fourth of the aggregate number of shares of Common Stock. (ii) At any time after the expiration of the next three successive anniversaries of the date hereof, the first such date being August 4, 1999, the Option may be exercised to the extent of an additional one-fourth of the aggregate number of shares originally covered by the Option, and the Option may also be exercised to the extent to which the right to exercise shall theretofore have accrued and not been exercised. (iii) No portion of the Option shall be exercisable after the tenth anniversary of the date of its grant, and after that date the Option shall lapse with respect to any shares of Common Stock not theretofore purchased. (iv) The Option may not be exercised for less than one hundred (100) shares of Common Stock at any one time, unless fewer than one hundred (100) shares of Common Stock remain covered by the Option, in which event the Option must be exercised for all such shares. (c) NOTICE OF EXERCISE; PAYMENT; SHAREHOLDERS' RIGHTS. The Optionee shall exercise the Option by giving a written notice of exercise, in the form attached to this Agreement as EXHIBIT A, to the President of the Corporation, indicating the number of shares of Common Stock to be purchased, and tendering payment in full (i) by cash or certified or bank check, (ii) by delivery of shares of Common Stock then owned by the Optionee with a fair market value at the time of exercise equal to the Option Price, or (iii) by a combination of (i) and (ii). No shares shall be issued or delivered until full payment therefor has been made. The Optionee shall have none of the rights of a shareholder, in respect of the Common Stock, except with respect to shares actually issued to the Optionee. (d) NON-TRANSFERABILITY OF OPTION. The Option shall not be transferable other than by will or by the laws of descent and distribution. During the Optionee's lifetime, only the Optionee may exercise the Option. (e) TERMINATION OF EMPLOYMENT. If the Optionee's employment shall be terminated by the Corporation or by the Optionee, with or without cause, for whatever reason other than by death, the Optionee shall have the right within three months after such termination to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of such a termination of employment, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said three months shall lapse. (f) DEATH OF OPTIONEE. (i) If the Optionee shall die, the Option shall lapse and neither the Optionee nor the Optionee's heirs or legal representatives shall have any further rights under this Agreement relating to any Option with respect to which the right to exercise shall not have accrued prior to the date of the Optionee's death. (ii) If the Optionee shall die while employed by the Corporation, or within the three-month period specified in Section 3(e) hereof, the executor or administrator of the estate of the Optionee, or the person or persons to whom the Option shall have been validly transferred by the executor or administrator pursuant to will or the laws of descent and distribution, shall have the right within one year from the date of the Optionee's death to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of death, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said one-year period shall lapse. 4. Shares of Common Stock issued upon the exercise of any portion of the Option granted under this Agreement shall be subject to the following terms and conditions: (a) TRANSFERABILITY. The Common Stock shall be transferable only in compliance with this Section 4 and only pursuant to an effective registration or exemption from registration under the Securities Act of 1933, as amended. All transfers, whether or not permitted by this section, shall be subject 2 to all of the provisions of this Agreement. Stock certificates representing shares of Common Stock shall bear a legend in substantially the following form: The shares of the Corporation's common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred except pursuant to an effective registration, or exemption from registration, under said Act. In addition, such shares are subject to a right of repurchase by the Corporation. (b) REPURCHASE OF COMMON STOCK BY THE CORPORATION FOLLOWING TERMINATION OF EMPLOYMENT OR BY EXERCISE OF RIGHT OF FIRST REFUSAL. The Corporation shall have a right to repurchase, at the buy-back price set forth below, any or all of the Common Stock issued upon the exercise of the Option. Such right shall arise if the Optionee ceases to be employed by the Corporation for any reason, at the time of the Optionee's death, or if the Optionee elects to dispose of any such shares of Common Stock by sale, transfer or other disposition. (i) REPURCHASE ON DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT. In the event the Optionee dies or ceases to be employed by the Corporation for any reason, the Corporation shall, within thirty days immediately following the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (1) stating that the Corporation has the first right to purchase the Common Stock; (2) designating the number of shares of the Common Stock that the Optionee or the Optionee's legal representative must sell to the Corporation; (3) naming the buy-back price per share in cash at which the Optionee or the Optionee's legal representative is obligated to sell such shares, as determined herein; and (4) stating whether the Corporation elects to exercise its right to repurchase the Common Stock. (ii) REPURCHASE ON ATTEMPTED TRANSFER. In the event the Optionee elects to dispose of any of the Common Stock, the Optionee shall give to the President of the Corporation a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Corporation's principal office: (1) designating the number of shares of the Common Stock to be disposed of; (2) stating the specific manner in which the Optionee proposes to dispose of such shares if they are not purchased by the Corporation pursuant to this Agreement; (3) specifying the names and addresses of the persons to whom the Optionee desires to dispose of such shares to the extent not so purchased by the Corporation; (4) offering to sell such shares to the Corporation; (5) naming the price per share in cash at which the Optionee is willing to sell such shares to the Corporation, which price shall not be greater than the buy-back price as determined herein; and (6) designating the Optionee's mailing address. The Corporation shall have a period of thirty days after the receipt of the notice within which to accept the Optionee's offer as contained in the Optionee's notice. Acceptance shall be by notice in writing to that effect hand delivered or mailed to the Optionee prior to the expiration date of said thirty-day period to the mailing address designated in the Optionee's notice. If the Corporation declines to accept such offer, the Optionee shall have a period of forty-five (45) days within which to dispose of such shares of Common Stock. Such forty-five (45) day period shall commence on the date of receipt of the Corporation's written rejection of such offer or, if the Corporation does not reject such offer in writing, on the expiration of the thirty-day period within which the Corporation may accept such offer. 3 (iii) BUY-BACK. The buy-back price per share for purposes of this Section 4(b) shall be: (1) the price per share offered in a bona fide offer to purchase, or (2) in the absence of a bona fide offer to purchase, the fair market value per share as determined by the Board or the Committee, which amount shall not be less than the price per share at which shares of Common Stock were last sold by the Corporation other than pursuant to the Plan. (c) PROCEDURE FOR REPURCHASE. If any shares of the Common Stock are subject to repurchase as provided in Section 4(b) hereof, and the Corporation shall have exercised its right to repurchase, the Optionee or the Optionee's legal representative shall immediately deliver to the Corporation the certificates for the shares. The certificates shall be voided, and the shares of the Common Stock represented by the certificates shall be thereafter treated on the books of the Corporation as treasury shares. A person required to deliver a certificate for the Common Stock under this section shall be deemed irrevocably to have authorized the voiding of such certificate and the treatment of such Common Stock as treasury shares (regardless whether the certificates are in fact delivered) and irrevocably to have authorized the Board to terminate his status as a shareholder in respect of such shares. (d) PAYMENT FOR SHARES OF COMMON STOCK. The Corporation shall have the right to pay the purchase price for any shares purchased pursuant to this Section 4 over a one year period, in equal quarterly installments without interest, or, in the case of a bona fide offer to purchase, in the manner and over such period of time as provided for in such offer. (e) PRICE ADJUSTMENT. In all cases the buy-back price per share shall be adjusted to reflect previous capital changes, if any, as described in Section 8 hereof. No offer to purchase shall be deemed "bona fide" unless made by a third party unrelated to the Corporation or its shareholders with the intention that such purchase be an investment in the Corporation and not with a view to distribution or resale, nor shall any offer to purchase be deemed "bona fide" if made by a competitor of the Corporation regardless of the offeror's intention. 5. In the event the Optionee dies or ceases to be employed by the Corporation and the Optionee has accrued but not exercised rights to purchase shares of Common Stock, the following terms and conditions shall apply. (a) REPURCHASE ON TERMINATION OF EMPLOYMENT OR DEATH WITH RESPECT TO OPTIONS ACCRUED BUT NOT EXERCISED. Upon termination of the Optionee's employment, or upon the Optionee's death giving the Optionee, or the Optionee's legal representative, rights to exercise the Option under either Section 3(e) or 3(f)(ii) hereof, the Corporation shall, within thirty days immediately following the date on which the Corporation learns of the Optionee's death or the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (i) stating that the Corporation has the first right to purchase the Common Stock subject to the Option; (ii) designating the number of shares of the Common Stock which the Optionee or the Optionee's legal representative has a right to purchase under the Option and the option price per share under this 4 Agreement; (iii) naming the buy-back price per share in cash which the Optionee or the Optionee's legal representative is obligated to sell the shares subject to the Option, as determined herein; and (iv) stating whether the Corporation will exercise its right to repurchase the Common Stock if the Optionee or the Optionee's legal representative exercised the Option. (b) SIMULTANEOUS EXERCISE OF OPTION AND REPURCHASE OF COMMON STOCK. The Optionee or the Optionee's legal representative may exercise the Option within the time period provided in Section 3(e) or Section 3(f)(ii) hereof, as the case may be, by giving the Corporation notice of exercise of the Option under Section 3(c) hereof. However, such notice need not be accompanied by tender of payment if the Corporation has elected to exercise its right to repurchase. Upon receipt of the notice of exercise from the Optionee or the Optionee's legal representative within the applicable time period, the Corporation shall pay the Optionee or the Optionee's legal representative for each share an amount equal to the buy-back price per share less the option price per share. If the Corporation does not exercise its right to repurchase under Section 5(a) hereof, then this Section 5(b) shall be of no effect, and the provisions for exercising the Option under Section 3(c) shall apply. (c) COMBINING NOTICES. If the Optionee, or the Optionee's legal representative, has both shares of Common Stock and a right to exercise the Option as to additional shares of Common Stock, then the Corporation may deliver one notice to the Optionee or the Optionee's legal representative to satisfy the provisions of Section 4(b)(i) hereof and Section 5(a) hereof provided the information required to be contained in each notice under such sections are contained in the single notice. 6. Failure by the Corporation to exercise its rights to repurchase the Common Stock upon the termination of employment of the Optionee shall not be a waiver of the Corporation's right to repurchase on a subsequent sale, transfer or other disposition of Common Stock. 7. The Optionee acknowledges that the exercise by the Corporation of the repurchase rights set forth in Sections 4 or 5 hereof may, if such repurchase is effected within two (2) years after the date of grant of the Option or one (1) year after the date of issuance of such shares of Common Stock, result in disqualifying the Option from eligibility for the favorable tax treatment accorded Incentive Stock Options under Section 421 of the Internal Revenue Code. The Optionee further acknowledges that other special rules must be complied with in order to ensure that the Option remains eligible for such favorable tax treatment, and that the Optionee, in addition to conferring with appropriate representatives of the Corporation, may wish to consult with his or her personal tax adviser. 8. In the event that a dividend shall be declared upon the shares of Common Stock payable in shares of Common Stock, the number of shares of Common Stock then subject to this Option shall be adjusted by adding to each of such shares the number of shares which would be distributable thereon if such shares had been outstanding on the date fixed for determining the stockholders entitled to receive such stock dividend. In the event that the outstanding shares of Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger, or consolidation, then there shall be substituted for each share of Common Stock subject to this Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged; PROVIDED, HOWEVER, that in the event that such change or exchange results from a merger or consolidation, and in the judgment of the Committee such substitution cannot be effected or would be inappropriate, or if the Corporation shall 5 sell all or substantially all of its assets, the Corporation shall use reasonable efforts to effect some other adjustment of this Option which the Committee, in its sole discretion, shall deem equitable. In the event that there shall be any change, other than as specified above in this Section 8, in the number or kind of outstanding shares of Common Stock or of any stock or other securities into which such shares of Common Stock shall have been changed or for which they shall have been exchanged, then, if the Committee shall determine that such change equitably requires an adjustment in the number or kind of shares then subject to this Option, such adjustment shall be made by the Committee and shall be effective and binding for all purposes of this Option. In the case of any such substitution or adjustment as provided for in this paragraph, the Option Price in this Option for each share covered hereby prior to such substitution or adjustment will be the total option price for all shares of stock or other securities which shall have been substituted for each such share or to which such share shall have been adjusted pursuant to this Section 8. No adjustment or substitution provided for in this Section 8 shall require the Corporation to sell a fractional share; and the total substitution or adjustment with respect to this Option shall be limited accordingly. Any of the foregoing adjustments or substitutions in the shares subject to the Option shall not limit applicability of the restrictions hereunder and such restrictions shall automatically apply to all Common Stock or other securities issued by the Corporation and at any time held by the Optionee by virtue of having exercised the Option. 9. Subject to the restrictions of this Agreement, the Optionee shall have all the rights of a shareholder in respect of the Common Stock issued hereunder, beginning with the date of issuance of the Common Stock. The Common Stock shall be fully paid and non-assessable. 10. The Optionee represents and agrees to represent and agree at the time of the exercise of the Option that any and all Common Stock purchased pursuant to the exercise of the Option will be purchased for investment and not with a view to the distribution or resale thereof, and that the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in this Agreement or as may be imposed by law. 11. The Corporation shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. 12. If the Corporation registers any of its shares of common stock under the Securities Act of 1933, as amended (the "Act"), the provisions of Section 4 and Section 5 hereof shall terminate on the day the registration statement becomes effective. The Common Stock issued upon exercise of the Option shall thereupon be free of any restriction imposed hereby, except for the restriction requiring transfer pursuant to the Act if such registration does not include the Common Stock, and neither the Corporation nor the Optionee shall have any further rights or obligations under Section 4 or Section 5 hereof, except the Corporation's obligation to complete payments, under Section 4(b) hereof, for the Common Stock previously repurchased. 13. This Agreement shall be interpreted according to the laws of the State of Georgia. 14. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered may be entered in any Court having jurisdiction thereof. 6 15. This Agreement and the Plan which is hereby incorporated by reference herein contain the entire agreement of the parties with respect to the Common Stock. All prior agreements and understandings are merged herein. No amendment or modification hereof shall be binding unless in writing and signed by the party against whom enforcement is sought. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year as first above written. Seal AMERICAN CARD TECHNOLOGY, INC. By: ------------------------------ Raymond Findley, Jr. Its President Attest: - ------------------------------ ---------------------------------- Secretary Phyllis Burke 7 EXHIBIT A ---------------------------------------------- Address of Person Exercising Option ------------------------- Date American Card Technology, Inc. 1355 Terrell Mill Road - Suite 200 Marietta, Georgia 30067 Attention: President Dear Sirs: I hereby elect to exercise the Option to purchase shares of Common Stock of the Corporation awarded to me on August 4, 1998. A. The number of shares being purchased: ________ shares at $11.00 per share for a total purchase price equal to $__________________ (the "Purchase Price"). B. I desire to follow Procedures 1, 2, or 3 as indicated below: [CHECK EITHER PROCEDURE 1, 2, OR 3 AND FILL IN BLANKS UNDER THAT PROCEDURE ONLY]. ______ PROCEDURE 1: A certified or bank cashier's check payable to the order of the Corporation in the amount of $_______________ [insert the full purchase price of the shares being purchased] is attached. The certificate or certificates should be mailed or delivered to: --------------------------------------------- --------------------------------------------- --------------------------------------------- ______ PROCEDURE 2: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of __________ shares of Common Stock surrendered herewith. The balance of the Purchase Price shall be paid with the certified or bank cashier's check payable to the order of the Corporation in the amount of $_______________. The (i) certificate(s) for such shares of Common Stock, (ii) a stock power conveying such shares of Common Stock to the Corporation, and (iii) the certified or bank cashier's check for the balance of the Purchase Price are attached hereto. ______ PROCEDURE 3: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of that number of such shares which is an amount equal to the Purchase Price. For example, if the fair market value of the shares being purchased is $22.00 per share, then 50% of the shares being so purchased shall be retained by the Corporation as payment for the other 50% of the shares. This method of exercise is only available to the extent that it is consistent with the Plan and is permissible for incentive stock options under Sections 421 and 422 of the Internal Revenue Code. C. The certificate or certificates for the shares being purchased should be registered and the name and address to be shown on the Corporation's stock records should be as follows: --------------------------------------------- --------------------------------------------- --------------------------------------------- D. I represent and agree that the shares as to which I am hereby exercising an option are being purchased for investment and not with a view to the distribution or resale thereof, and the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in the Stock Option Agreement or as may be imposed by law. Sincerely yours, ------------------------------ Phyllis Burke 2 EX-10.9-8 25 EXHIBIT 10.9.8 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT made as of the 4th day of August, 1998 by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation, with a business office at 1355 Terrell Mill Road, Suite 200, Marietta, Georgia 30067 (hereinafter called the "Corporation"), and ROBERT CARTAGINE (hereinafter called the "Optionee"). The Corporation has adopted a 1996 Stock Option Plan (the "Plan") to be used to award options to purchase shares of its common stock to certain employees, consultants, and other persons who perform substantial services for the Corporation or any of its subsidiaries or affiliates, as determined by the Board of Directors of the Corporation (the "Board") or a special committee of the Board (the "Committee"). The Board or Committee has authorized the awarding of an option under the Plan to the Optionee. The options issued under the Plan may in some cases be entitled to favorable tax treatment afforded to "incentive stock options" under Sections 421 and 422 of the Internal Revenue Code (such an option being hereinafter sometimes referred to as an "Incentive Stock Option"). Wherever the context so requires, the "Corporation" shall be deemed to refer to any or all of the Corporation's subsidiaries or affiliates. NOW, THEREFORE, in consideration of the premises contained herein, it is hereby agreed as follows: 1. The Corporation hereby grants to the Optionee as of the date of this Agreement the right and option to purchase (hereinafter called the "Option") all or any part of an aggregate of 15,450 shares of the Corporation's common stock, with a par value of $.001 per share (hereinafter called the "Common Stock"), on the terms and conditions herein set forth. 2. The Option granted herein shall constitute an Incentive Stock Option. 3. The Optionee's right to exercise the Option shall be subject to the following terms and conditions: (a) OPTION PRICE. The price per share with respect to the Option shall be Eleven and 00/100 Dollars ($11.00). (b) EXERCISE OF OPTION. The Option shall be exercisable only as follows: (i) At any time after the date hereof, the Option may be exercised to the extent of one-fourth of the aggregate number of shares of Common Stock. (ii) At any time after the expiration of the next three successive anniversaries of the date hereof, the first such date being August 4, 1999, the Option may be exercised to the extent of an additional one-fourth of the aggregate number of shares originally covered by the Option, and the Option may also be exercised to the extent to which the right to exercise shall theretofore have accrued and not been exercised. (iii) No portion of the Option shall be exercisable after the tenth anniversary of the date of its grant, and after that date the Option shall lapse with respect to any shares of Common Stock not theretofore purchased. (iv) The Option may not be exercised for less than one hundred (100) shares of Common Stock at any one time, unless fewer than one hundred (100) shares of Common Stock remain covered by the Option, in which event the Option must be exercised for all such shares. (c) NOTICE OF EXERCISE; PAYMENT; SHAREHOLDERS' RIGHTS. The Optionee shall exercise the Option by giving a written notice of exercise, in the form attached to this Agreement as EXHIBIT A, to the President of the Corporation, indicating the number of shares of Common Stock to be purchased, and tendering payment in full (i) by cash or certified or bank check, (ii) by delivery of shares of Common Stock then owned by the Optionee with a fair market value at the time of exercise equal to the Option Price, or (iii) by a combination of (i) and (ii). No shares shall be issued or delivered until full payment therefor has been made. The Optionee shall have none of the rights of a shareholder, in respect of the Common Stock, except with respect to shares actually issued to the Optionee. (d) NON-TRANSFERABILITY OF OPTION. The Option shall not be transferable other than by will or by the laws of descent and distribution. During the Optionee's lifetime, only the Optionee may exercise the Option. (e) TERMINATION OF EMPLOYMENT. If the Optionee's employment shall be terminated by the Corporation or by the Optionee, with or without cause, for whatever reason other than by death, the Optionee shall have the right within three months after such termination to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of such a termination of employment, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said three months shall lapse. (f) DEATH OF OPTIONEE. (i) If the Optionee shall die, the Option shall lapse and neither the Optionee nor the Optionee's heirs or legal representatives shall have any further rights under this Agreement relating to any Option with respect to which the right to exercise shall not have accrued prior to the date of the Optionee's death. (ii) If the Optionee shall die while employed by the Corporation, or within the three-month period specified in Section 3(e) hereof, the executor or administrator of the estate of the Optionee, or the person or persons to whom the Option shall have been validly transferred by the executor or administrator pursuant to will or the laws of descent and distribution, shall have the right within one year from the date of the Optionee's death to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of death, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said one-year period shall lapse. 4. Shares of Common Stock issued upon the exercise of any portion of the Option granted under this Agreement shall be subject to the following terms and conditions: (a) TRANSFERABILITY. The Common Stock shall be transferable only in compliance with this Section 4 and only pursuant to an effective registration or exemption from registration under the Securities Act of 1933, as amended. All transfers, whether or not permitted by this section, shall be subject to all of the provisions of this Agreement. Stock certificates representing shares of Common Stock shall bear a legend in substantially the following form: The shares of the Corporation's common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred except pursuant to an effective registration, or exemption from registration, under said Act. In addition, such shares are subject to a right of repurchase by the Corporation. (b) REPURCHASE OF COMMON STOCK BY THE CORPORATION FOLLOWING TERMINATION OF EMPLOYMENT OR BY EXERCISE OF RIGHT OF FIRST REFUSAL. The Corporation shall have a right to repurchase, at the buy-back price set forth below, any or all of the Common Stock issued upon the exercise of the Option. Such right shall arise if the Optionee ceases to be employed by the Corporation for any reason, at the time of the Optionee's death, or if the Optionee elects to dispose of any such shares of Common Stock by sale, transfer or other disposition. 2 (i) REPURCHASE ON DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT. In the event the Optionee dies or ceases to be employed by the Corporation for any reason, the Corporation shall, within thirty days immediately following the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (1) stating that the Corporation has the first right to purchase the Common Stock; (2) designating the number of shares of the Common Stock that the Optionee or the Optionee's legal representative must sell to the Corporation; (3) naming the buy-back price per share in cash at which the Optionee or the Optionee's legal representative is obligated to sell such shares, as determined herein; and (4) stating whether the Corporation elects to exercise its right to repurchase the Common Stock. (ii) REPURCHASE ON ATTEMPTED TRANSFER. In the event the Optionee elects to dispose of any of the Common Stock, the Optionee shall give to the President of the Corporation a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Corporation's principal office: (1) designating the number of shares of the Common Stock to be disposed of; (2) stating the specific manner in which the Optionee proposes to dispose of such shares if they are not purchased by the Corporation pursuant to this Agreement; (3) specifying the names and addresses of the persons to whom the Optionee desires to dispose of such shares to the extent not so purchased by the Corporation; (4) offering to sell such shares to the Corporation; (5) naming the price per share in cash at which the Optionee is willing to sell such shares to the Corporation, which price shall not be greater than the buy-back price as determined herein; and (6) designating the Optionee's mailing address. The Corporation shall have a period of thirty days after the receipt of the notice within which to accept the Optionee's offer as contained in the Optionee's notice. Acceptance shall be by notice in writing to that effect hand delivered or mailed to the Optionee prior to the expiration date of said thirty-day period to the mailing address designated in the Optionee's notice. If the Corporation declines to accept such offer, the Optionee shall have a period of forty-five (45) days within which to dispose of such shares of Common Stock. Such forty-five (45) day period shall commence on the date of receipt of the Corporation's written rejection of such offer or, if the Corporation does not reject such offer in writing, on the expiration of the thirty-day period within which the Corporation may accept such offer. (iii) BUY-BACK. The buy-back price per share for purposes of this Section 4(b) shall be: (1) the price per share offered in a bona fide offer to purchase, or (2) in the absence of a bona fide offer to purchase, the fair market value per share as determined by the Board or the Committee, which amount shall not be less than the price per share at which shares of Common Stock were last sold by the Corporation other than pursuant to the Plan. (c) PROCEDURE FOR REPURCHASE. If any shares of the Common Stock are subject to repurchase as provided in Section 4(b) hereof, and the Corporation shall have exercised its right to repurchase, the Optionee or the Optionee's legal representative shall immediately deliver to the Corporation the certificates for the shares. The certificates shall be voided, and the shares of the Common Stock represented by the certificates shall be thereafter treated on the books of the Corporation as treasury shares. A person required to deliver a certificate for the Common Stock under this section shall be deemed irrevocably to have authorized the voiding of such certificate and the treatment of such Common Stock as treasury shares (regardless whether the certificates are in fact delivered) and irrevocably to have authorized the Board to terminate his status as a shareholder in respect of such shares. (d) PAYMENT FOR SHARES OF COMMON STOCK. The Corporation shall have the right to pay the purchase price for any shares purchased pursuant to this Section 4 over a one year period, in equal quarterly installments without interest, or, in the case of a bona fide offer to purchase, in the manner and over such period of time as provided for in such offer. 3 (e) PRICE ADJUSTMENT. In all cases the buy-back price per share shall be adjusted to reflect previous capital changes, if any, as described in Section 8 hereof. No offer to purchase shall be deemed "bona fide" unless made by a third party unrelated to the Corporation or its shareholders with the intention that such purchase be an investment in the Corporation and not with a view to distribution or resale, nor shall any offer to purchase be deemed "bona fide" if made by a competitor of the Corporation regardless of the offeror's intention. 5. In the event the Optionee dies or ceases to be employed by the Corporation and the Optionee has accrued but not exercised rights to purchase shares of Common Stock, the following terms and conditions shall apply. (a) REPURCHASE ON TERMINATION OF EMPLOYMENT OR DEATH WITH RESPECT TO OPTIONS ACCRUED BUT NOT EXERCISED. Upon termination of the Optionee's employment, or upon the Optionee's death giving the Optionee, or the Optionee's legal representative, rights to exercise the Option under either Section 3(e) or 3(f)(ii) hereof, the Corporation shall, within thirty days immediately following the date on which the Corporation learns of the Optionee's death or the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (i) stating that the Corporation has the first right to purchase the Common Stock subject to the Option; (ii) designating the number of shares of the Common Stock which the Optionee or the Optionee's legal representative has a right to purchase under the Option and the option price per share under this Agreement; (iii) naming the buy-back price per share in cash which the Optionee or the Optionee's legal representative is obligated to sell the shares subject to the Option, as determined herein; and (iv) stating whether the Corporation will exercise its right to repurchase the Common Stock if the Optionee or the Optionee's legal representative exercised the Option. (b) SIMULTANEOUS EXERCISE OF OPTION AND REPURCHASE OF COMMON STOCK. The Optionee or the Optionee's legal representative may exercise the Option within the time period provided in Section 3(e) or Section 3(f)(ii) hereof, as the case may be, by giving the Corporation notice of exercise of the Option under Section 3(c) hereof. However, such notice need not be accompanied by tender of payment if the Corporation has elected to exercise its right to repurchase. Upon receipt of the notice of exercise from the Optionee or the Optionee's legal representative within the applicable time period, the Corporation shall pay the Optionee or the Optionee's legal representative for each share an amount equal to the buy-back price per share less the option price per share. If the Corporation does not exercise its right to repurchase under Section 5(a) hereof, then this Section 5(b) shall be of no effect, and the provisions for exercising the Option under Section 3(c) shall apply. (c) COMBINING NOTICES. If the Optionee, or the Optionee's legal representative, has both shares of Common Stock and a right to exercise the Option as to additional shares of Common Stock, then the Corporation may deliver one notice to the Optionee or the Optionee's legal representative to satisfy the provisions of Section 4(b)(i) hereof and Section 5(a) hereof provided the information required to be contained in each notice under such sections are contained in the single notice. 6. Failure by the Corporation to exercise its rights to repurchase the Common Stock upon the termination of employment of the Optionee shall not be a waiver of the Corporation's right to repurchase on a subsequent sale, transfer or other disposition of Common Stock. 7. The Optionee acknowledges that the exercise by the Corporation of the repurchase rights set forth in Sections 4 or 5 hereof may, if such repurchase is effected within two (2) years after the date of grant of the Option or one (1) year after the date of issuance of such shares of Common Stock, result in disqualifying the Option from eligibility for the favorable tax treatment accorded Incentive Stock Options under Section 421 of the Internal Revenue Code. The Optionee further acknowledges that other special rules must be complied with in order to ensure that the Option remains eligible for such favorable tax treatment, and that the Optionee, in addition to conferring with appropriate representatives of the Corporation, may wish to consult with his or her personal tax adviser. 4 8. In the event that a dividend shall be declared upon the shares of Common Stock payable in shares of Common Stock, the number of shares of Common Stock then subject to this Option shall be adjusted by adding to each of such shares the number of shares which would be distributable thereon if such shares had been outstanding on the date fixed for determining the stockholders entitled to receive such stock dividend. In the event that the outstanding shares of Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger, or consolidation, then there shall be substituted for each share of Common Stock subject to this Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged; PROVIDED, HOWEVER, that in the event that such change or exchange results from a merger or consolidation, and in the judgment of the Committee such substitution cannot be effected or would be inappropriate, or if the Corporation shall sell all or substantially all of its assets, the Corporation shall use reasonable efforts to effect some other adjustment of this Option which the Committee, in its sole discretion, shall deem equitable. In the event that there shall be any change, other than as specified above in this Section 8, in the number or kind of outstanding shares of Common Stock or of any stock or other securities into which such shares of Common Stock shall have been changed or for which they shall have been exchanged, then, if the Committee shall determine that such change equitably requires an adjustment in the number or kind of shares then subject to this Option, such adjustment shall be made by the Committee and shall be effective and binding for all purposes of this Option. In the case of any such substitution or adjustment as provided for in this paragraph, the Option Price in this Option for each share covered hereby prior to such substitution or adjustment will be the total option price for all shares of stock or other securities which shall have been substituted for each such share or to which such share shall have been adjusted pursuant to this Section 8. No adjustment or substitution provided for in this Section 8 shall require the Corporation to sell a fractional share; and the total substitution or adjustment with respect to this Option shall be limited accordingly. Any of the foregoing adjustments or substitutions in the shares subject to the Option shall not limit applicability of the restrictions hereunder and such restrictions shall automatically apply to all Common Stock or other securities issued by the Corporation and at any time held by the Optionee by virtue of having exercised the Option. 9. Subject to the restrictions of this Agreement, the Optionee shall have all the rights of a shareholder in respect of the Common Stock issued hereunder, beginning with the date of issuance of the Common Stock. The Common Stock shall be fully paid and non-assessable. 10. The Optionee represents and agrees to represent and agree at the time of the exercise of the Option that any and all Common Stock purchased pursuant to the exercise of the Option will be purchased for investment and not with a view to the distribution or resale thereof, and that the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in this Agreement or as may be imposed by law. 11. The Corporation shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. 12. If the Corporation registers any of its shares of common stock under the Securities Act of 1933, as amended (the "Act"), the provisions of Section 4 and Section 5 hereof shall terminate on the day the registration statement becomes effective. The Common Stock issued upon exercise of the Option shall thereupon be free of any restriction imposed hereby, except for the restriction requiring transfer pursuant to the Act if such registration does not include the Common Stock, and neither the Corporation nor the Optionee shall have any further rights or obligations under Section 4 or Section 5 hereof, except the Corporation's obligation to complete payments, under Section 4(b) hereof, for the Common Stock previously repurchased. 13. This Agreement shall be interpreted according to the laws of the State of Georgia. 14. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered may be entered in any Court having jurisdiction thereof. 5 15. This Agreement and the Plan which is hereby incorporated by reference herein contain the entire agreement of the parties with respect to the Common Stock. All prior agreements and understandings are merged herein. No amendment or modification hereof shall be binding unless in writing and signed by the party against whom enforcement is sought. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year as first above written. Seal AMERICAN CARD TECHNOLOGY, INC. By: ----------------------------- Raymond Findley, Jr. Its President Attest: - ---------------------------- ---------------------------------- Secretary Robert Cartagine 6 EXHIBIT A ______________________________________________________ Address of Person Exercising Option _____________________ Date American Card Technology, Inc. 1355 Terrell Mill Road - Suite 200 Marietta, Georgia 30067 Attention: President Dear Sirs: I hereby elect to exercise the Option to purchase shares of Common Stock of the Corporation awarded to me on August 4, 1998. A. The number of shares being purchased: ________ shares at $11.00 per share for a total purchase price equal to $__________________ (the "Purchase Price"). B. I desire to follow Procedures 1, 2, or 3 as indicated below: [CHECK EITHER PROCEDURE 1, 2, OR 3 AND FILL IN BLANKS UNDER THAT PROCEDURE ONLY]. _____ PROCEDURE 1: A certified or bank cashier's check payable to the order of the Corporation in the amount of $_______________ [insert the full purchase price of the shares being purchased] is attached. The certificate or certificates should be mailed or delivered to: _____________________________________________ _____________________________________________ _____________________________________________ _____ PROCEDURE 2: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of __________ shares of Common Stock surrendered herewith. The balance of the Purchase Price shall be paid with the certified or bank cashier's check payable to the order of the Corporation in the amount of $_______________. The (i) certificate(s) for such shares of Common Stock, (ii) a stock power conveying such shares of Common Stock to the Corporation, and (iii) the certified or bank cashier's check for the balance of the Purchase Price are attached hereto. _____ PROCEDURE 3: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of that number of such shares which is an amount equal to the Purchase Price. For example, if the fair market value of the shares being purchased is $22.00 per share, then 50% of the shares being so purchased shall be retained by the Corporation as payment for the other 50% of the shares. This method of exercise is only available to the extent that it is consistent with the Plan and is permissible for incentive stock options under Sections 421 and 422 of the Internal Revenue Code. C. The certificate or certificates for the shares being purchased should be registered and the name and address to be shown on the Corporation's stock records should be as follows: _____________________________________________ _____________________________________________ _____________________________________________ D. I represent and agree that the shares as to which I am hereby exercising an option are being purchased for investment and not with a view to the distribution or resale thereof, and the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in the Stock Option Agreement or as may be imposed by law. Sincerely yours, ----------------------------------- Robert Cartagine EX-10.9-9 26 EXHIBIT 10.9.9 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT made as of the 4th day of August, 1998 by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation, with a business office at 1355 Terrell Mill Road, Suite 200, Marietta, Georgia 30067 (hereinafter called the "Corporation"), and FRANK S. FUINO, JR. (hereinafter called the "Optionee"). The Corporation has adopted a 1996 Stock Option Plan (the "Plan") to be used to award options to purchase shares of its common stock to certain employees, consultants, and other persons who perform substantial services for the Corporation or any of its subsidiaries or affiliates, as determined by the Board of Directors of the Corporation (the "Board") or a special committee of the Board (the "Committee"). The Board or Committee has authorized the awarding of an option under the Plan to the Optionee. The options issued under the Plan may in some cases be entitled to favorable tax treatment afforded to "incentive stock options" under Sections 421 and 422 of the Internal Revenue Code (such an option being hereinafter sometimes referred to as an "Incentive Stock Option"). Wherever the context so requires, the "Corporation" shall be deemed to refer to any or all of the Corporation's subsidiaries or affiliates. NOW, THEREFORE, in consideration of the premises contained herein, it is hereby agreed as follows: 1. The Corporation hereby grants to the Optionee as of the date of this Agreement the right and option to purchase (hereinafter called the "Option") all or any part of an aggregate of 92,700 shares of the Corporation's common stock, with a par value of $.001 per share (hereinafter called the "Common Stock"), on the terms and conditions herein set forth. 2. The Option granted herein shall constitute an Incentive Stock Option. 3. The Optionee's right to exercise the Option shall be subject to the following terms and conditions: (a) OPTION PRICE. The price per share with respect to the Option shall be Eleven and 00/100 Dollars ($11.00). (b) EXERCISE OF OPTION. The Option shall be exercisable only as follows: (i) At any time after the date hereof, the Option may be exercised to the extent of one-fourth of the aggregate number of shares of Common Stock. (ii) At any time after the expiration of the next three successive anniversaries of the date hereof, the first such date being August 4, 1999, the Option may be exercised to the extent of an additional one-fourth of the aggregate number of shares originally covered by the Option, and the Option may also be exercised to the extent to which the right to exercise shall theretofore have accrued and not been exercised. (iii) No portion of the Option shall be exercisable after the tenth anniversary of the date of its grant, and after that date the Option shall lapse with respect to any shares of Common Stock not theretofore purchased. (iv) The Option may not be exercised for less than one hundred (100) shares of Common Stock at any one time, unless fewer than one hundred (100) shares of Common Stock remain covered by the Option, in which event the Option must be exercised for all such shares. (c) NOTICE OF EXERCISE; PAYMENT; SHAREHOLDERS' RIGHTS. The Optionee shall exercise the Option by giving a written notice of exercise, in the form attached to this Agreement as EXHIBIT A, to the President of the Corporation, indicating the number of shares of Common Stock to be purchased, and tendering payment in full (i) by cash or certified or bank check, (ii) by delivery of shares of Common Stock then owned by the Optionee with a fair market value at the time of exercise equal to the Option Price, or (iii) by a combination of (i) and (ii). No shares shall be issued or delivered until full payment therefor has been made. The Optionee shall have none of the rights of a shareholder, in respect of the Common Stock, except with respect to shares actually issued to the Optionee. (d) NON-TRANSFERABILITY OF OPTION. The Option shall not be transferable other than by will or by the laws of descent and distribution. During the Optionee's lifetime, only the Optionee may exercise the Option. (e) TERMINATION OF EMPLOYMENT. If the Optionee's employment shall be terminated by the Corporation or by the Optionee, with or without cause, for whatever reason other than by death, the Optionee shall have the right within three months after such termination to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of such a termination of employment, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said three months shall lapse. (f) DEATH OF OPTIONEE. (i) If the Optionee shall die, the Option shall lapse and neither the Optionee nor the Optionee's heirs or legal representatives shall have any further rights under this Agreement relating to any Option with respect to which the right to exercise shall not have accrued prior to the date of the Optionee's death. (ii) If the Optionee shall die while employed by the Corporation, or within the three-month period specified in Section 3(e) hereof, the executor or administrator of the estate of the Optionee, or the person or persons to whom the Option shall have been validly transferred by the executor or administrator pursuant to will or the laws of descent and distribution, shall have the right within one year from the date of the Optionee's death to exercise the Option to the extent the right to exercise the Option shall have accrued at the date of death, except to the extent the Option shall have been exercised or shall have expired. Any portion of the Option not exercised within said one-year period shall lapse. 4. Shares of Common Stock issued upon the exercise of any portion of the Option granted under this Agreement shall be subject to the following terms and conditions: (a) TRANSFERABILITY. The Common Stock shall be transferable only in compliance with this Section 4 and only pursuant to an effective registration or exemption from registration under the Securities Act of 1933, as amended. All transfers, whether or not permitted by this section, shall be subject to all of the provisions of this Agreement. Stock certificates representing shares of Common Stock shall bear a legend in substantially the following form: The shares of the Corporation's common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred except pursuant to an effective registration, or exemption from registration, under said Act. In addition, such shares are subject to a right of repurchase by the Corporation. (b) REPURCHASE OF COMMON STOCK BY THE CORPORATION FOLLOWING TERMINATION OF EMPLOYMENT OR BY EXERCISE OF RIGHT OF FIRST REFUSAL. The Corporation shall have a right to repurchase, at the buy-back price set forth below, any or all of the Common Stock issued upon the exercise of the Option. Such right shall arise if the Optionee ceases to be employed by the Corporation for any reason, at the time of the Optionee's death, or if the Optionee elects to dispose of any such shares of Common Stock by sale, transfer or other disposition. (i) REPURCHASE ON DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT. In the event the Optionee dies or ceases to be employed by the Corporation for any reason, the Corporation shall, within 2 thirty days immediately following the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (1) stating that the Corporation has the first right to purchase the Common Stock; (2) designating the number of shares of the Common Stock that the Optionee or the Optionee's legal representative must sell to the Corporation; (3) naming the buy-back price per share in cash at which the Optionee or the Optionee's legal representative is obligated to sell such shares, as determined herein; and (4) stating whether the Corporation elects to exercise its right to repurchase the Common Stock. (ii) REPURCHASE ON ATTEMPTED TRANSFER. In the event the Optionee elects to dispose of any of the Common Stock, the Optionee shall give to the President of the Corporation a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Corporation's principal office: (1) designating the number of shares of the Common Stock to be disposed of; (2) stating the specific manner in which the Optionee proposes to dispose of such shares if they are not purchased by the Corporation pursuant to this Agreement; (3) specifying the names and addresses of the persons to whom the Optionee desires to dispose of such shares to the extent not so purchased by the Corporation; (4) offering to sell such shares to the Corporation; (5) naming the price per share in cash at which the Optionee is willing to sell such shares to the Corporation, which price shall not be greater than the buy-back price as determined herein; and (6) designating the Optionee's mailing address. The Corporation shall have a period of thirty days after the receipt of the notice within which to accept the Optionee's offer as contained in the Optionee's notice. Acceptance shall be by notice in writing to that effect hand delivered or mailed to the Optionee prior to the expiration date of said thirty-day period to the mailing address designated in the Optionee's notice. If the Corporation declines to accept such offer, the Optionee shall have a period of forty-five (45) days within which to dispose of such shares of Common Stock. Such forty-five (45) day period shall commence on the date of receipt of the Corporation's written rejection of such offer or, if the Corporation does not reject such offer in writing, on the expiration of the thirty-day period within which the Corporation may accept such offer. (iii) BUY-BACK. The buy-back price per share for purposes of this Section 4(b) shall be: (1) the price per share offered in a bona fide offer to purchase, or (2) in the absence of a bona fide offer to purchase, the fair market value per share as determined by the Board or the Committee, which amount shall not be less than the price per share at which shares of Common Stock were last sold by the Corporation other than pursuant to the Plan. (c) PROCEDURE FOR REPURCHASE. If any shares of the Common Stock are subject to repurchase as provided in Section 4(b) hereof, and the Corporation shall have exercised its right to repurchase, the Optionee or the Optionee's legal representative shall immediately deliver to the Corporation the certificates for the shares. The certificates shall be voided, and the shares of the Common Stock represented by the certificates shall be thereafter treated on the books of the Corporation as treasury shares. A person required to deliver a certificate for the Common Stock under this section shall be deemed irrevocably to have authorized the voiding of such certificate and the treatment of such Common Stock as treasury shares (regardless whether the certificates are in fact delivered) and irrevocably to have authorized the Board to terminate his status as a shareholder in respect of such shares. (d) PAYMENT FOR SHARES OF COMMON STOCK. The Corporation shall have the right to pay the purchase price for any shares purchased pursuant to this Section 4 over a one year period, in equal quarterly installments without interest, or, in the case of a bona fide offer to purchase, in the manner and over such period of time as provided for in such offer. (e) PRICE ADJUSTMENT. In all cases the buy-back price per share shall be adjusted to reflect previous capital changes, if any, as described in Section 8 hereof. No offer to purchase shall be deemed "bona fide" 3 unless made by a third party unrelated to the Corporation or its shareholders with the intention that such purchase be an investment in the Corporation and not with a view to distribution or resale, nor shall any offer to purchase be deemed "bona fide" if made by a competitor of the Corporation regardless of the offeror's intention. 5. In the event the Optionee dies or ceases to be employed by the Corporation and the Optionee has accrued but not exercised rights to purchase shares of Common Stock, the following terms and conditions shall apply. (a) REPURCHASE ON TERMINATION OF EMPLOYMENT OR DEATH WITH RESPECT TO OPTIONS ACCRUED BUT NOT EXERCISED. Upon termination of the Optionee's employment, or upon the Optionee's death giving the Optionee, or the Optionee's legal representative, rights to exercise the Option under either Section 3(e) or 3(f)(ii) hereof, the Corporation shall, within thirty days immediately following the date on which the Corporation learns of the Optionee's death or the date on which the Optionee's employment terminates, give to the Optionee or the Optionee's legal representative, as the case may be, a signed notice in writing, either delivered by hand, or mailed by registered or certified mail, to the Optionee's last known address: (i) stating that the Corporation has the first right to purchase the Common Stock subject to the Option; (ii) designating the number of shares of the Common Stock which the Optionee or the Optionee's legal representative has a right to purchase under the Option and the option price per share under this Agreement; (iii) naming the buy-back price per share in cash which the Optionee or the Optionee's legal representative is obligated to sell the shares subject to the Option, as determined herein; and (iv) stating whether the Corporation will exercise its right to repurchase the Common Stock if the Optionee or the Optionee's legal representative exercised the Option. (b) SIMULTANEOUS EXERCISE OF OPTION AND REPURCHASE OF COMMON STOCK. The Optionee or the Optionee's legal representative may exercise the Option within the time period provided in Section 3(e) or Section 3(f)(ii) hereof, as the case may be, by giving the Corporation notice of exercise of the Option under Section 3(c) hereof. However, such notice need not be accompanied by tender of payment if the Corporation has elected to exercise its right to repurchase. Upon receipt of the notice of exercise from the Optionee or the Optionee's legal representative within the applicable time period, the Corporation shall pay the Optionee or the Optionee's legal representative for each share an amount equal to the buy-back price per share less the option price per share. If the Corporation does not exercise its right to repurchase under Section 5(a) hereof, then this Section 5(b) shall be of no effect, and the provisions for exercising the Option under Section 3(c) shall apply. (c) COMBINING NOTICES. If the Optionee, or the Optionee's legal representative, has both shares of Common Stock and a right to exercise the Option as to additional shares of Common Stock, then the Corporation may deliver one notice to the Optionee or the Optionee's legal representative to satisfy the provisions of Section 4(b)(i) hereof and Section 5(a) hereof provided the information required to be contained in each notice under such sections are contained in the single notice. 6. Failure by the Corporation to exercise its rights to repurchase the Common Stock upon the termination of employment of the Optionee shall not be a waiver of the Corporation's right to repurchase on a subsequent sale, transfer or other disposition of Common Stock. 7. The Optionee acknowledges that the exercise by the Corporation of the repurchase rights set forth in Sections 4 or 5 hereof may, if such repurchase is effected within two (2) years after the date of grant of the Option or one (1) year after the date of issuance of such shares of Common Stock, result in disqualifying the Option from eligibility for the favorable tax treatment accorded Incentive Stock Options under Section 421 of the Internal Revenue Code. The Optionee further acknowledges that other special rules must be complied with in order to ensure that the Option remains eligible for such favorable tax treatment, and that the Optionee, in addition to conferring with appropriate representatives of the Corporation, may wish to consult with his or her personal tax adviser. 8. In the event that a dividend shall be declared upon the shares of Common Stock payable in shares of Common Stock, the number of shares of Common Stock then subject to this Option shall be adjusted by adding to each of such shares the number of shares which would be distributable thereon if such shares had been outstanding 4 on the date fixed for determining the stockholders entitled to receive such stock dividend. In the event that the outstanding shares of Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger, or consolidation, then there shall be substituted for each share of Common Stock subject to this Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged; PROVIDED, HOWEVER, that in the event that such change or exchange results from a merger or consolidation, and in the judgment of the Committee such substitution cannot be effected or would be inappropriate, or if the Corporation shall sell all or substantially all of its assets, the Corporation shall use reasonable efforts to effect some other adjustment of this Option which the Committee, in its sole discretion, shall deem equitable. In the event that there shall be any change, other than as specified above in this Section 8, in the number or kind of outstanding shares of Common Stock or of any stock or other securities into which such shares of Common Stock shall have been changed or for which they shall have been exchanged, then, if the Committee shall determine that such change equitably requires an adjustment in the number or kind of shares then subject to this Option, such adjustment shall be made by the Committee and shall be effective and binding for all purposes of this Option. In the case of any such substitution or adjustment as provided for in this paragraph, the Option Price in this Option for each share covered hereby prior to such substitution or adjustment will be the total option price for all shares of stock or other securities which shall have been substituted for each such share or to which such share shall have been adjusted pursuant to this Section 8. No adjustment or substitution provided for in this Section 8 shall require the Corporation to sell a fractional share; and the total substitution or adjustment with respect to this Option shall be limited accordingly. Any of the foregoing adjustments or substitutions in the shares subject to the Option shall not limit applicability of the restrictions hereunder and such restrictions shall automatically apply to all Common Stock or other securities issued by the Corporation and at any time held by the Optionee by virtue of having exercised the Option. 9. Subject to the restrictions of this Agreement, the Optionee shall have all the rights of a shareholder in respect of the Common Stock issued hereunder, beginning with the date of issuance of the Common Stock. The Common Stock shall be fully paid and non-assessable. 10. The Optionee represents and agrees to represent and agree at the time of the exercise of the Option that any and all Common Stock purchased pursuant to the exercise of the Option will be purchased for investment and not with a view to the distribution or resale thereof, and that the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in this Agreement or as may be imposed by law. 11. The Corporation shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. 12. If the Corporation registers any of its shares of common stock under the Securities Act of 1933, as amended (the "Act"), the provisions of Section 4 and Section 5 hereof shall terminate on the day the registration statement becomes effective. The Common Stock issued upon exercise of the Option shall thereupon be free of any restriction imposed hereby, except for the restriction requiring transfer pursuant to the Act if such registration does not include the Common Stock, and neither the Corporation nor the Optionee shall have any further rights or obligations under Section 4 or Section 5 hereof, except the Corporation's obligation to complete payments, under Section 4(b) hereof, for the Common Stock previously repurchased. 13. This Agreement shall be interpreted according to the laws of the State of Georgia. 14. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered may be entered in any Court having jurisdiction thereof. 15. This Agreement and the Plan which is hereby incorporated by reference herein contain the entire agreement of the parties with respect to the Common Stock. All prior agreements and understandings are merged 5 herein. No amendment or modification hereof shall be binding unless in writing and signed by the party against whom enforcement is sought. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year as first above written. Seal AMERICAN CARD TECHNOLOGY, INC. By: ---------------------------------- Raymond Findley, Jr. Its President Attest: - ----------------------------- --------------------------------------- Secretary Frank S. Fuino, Jr. 6 EXHIBIT A ______________________________________________________ Address of Person Exercising Option _____________________ Date American Card Technology, Inc. 1355 Terrell Mill Road - Suite 200 Marietta, Georgia 30067 Attention: President Dear Sirs: I hereby elect to exercise the Option to purchase shares of Common Stock of the Corporation awarded to me on August 4, 1998. A. The number of shares being purchased: ________ shares at $11.00 per share for a total purchase price equal to $__________________ (the "Purchase Price"). B. I desire to follow Procedures 1, 2, or 3 as indicated below: [CHECK EITHER PROCEDURE 1, 2, OR 3 AND FILL IN BLANKS UNDER THAT PROCEDURE ONLY]. _____ PROCEDURE 1: A certified or bank cashier's check payable to the order of the Corporation in the amount of $_______________ [insert the full purchase price of the shares being purchased] is attached. The certificate or certificates should be mailed or delivered to: _____________________________________________ _____________________________________________ _____________________________________________ _____ PROCEDURE 2: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of __________ shares of Common Stock surrendered herewith. The balance of the Purchase Price shall be paid with the certified or bank cashier's check payable to the order of the Corporation in the amount of $_______________. The (i) certificate(s) for such shares of Common Stock, (ii) a stock power conveying such shares of Common Stock to the Corporation, and (iii) the certified or bank cashier's check for the balance of the Purchase Price are attached hereto. _____ PROCEDURE 3: The Purchase Price of the shares being purchased which is payable to the Corporation pursuant to this notice shall be offset against the fair market value of that number of such shares which is an amount equal to the Purchase Price. For example, if the fair market value of the shares being purchased is $22.00 per share, then 50% of the shares being so purchased shall be retained by the Corporation as payment for the other 50% of the shares. This method of exercise is only available to the extent that it is consistent with the Plan and is permissible for incentive stock options under Sections 421 and 422 of the Internal Revenue Code. C. The certificate or certificates for the shares being purchased should be registered and the name and address to be shown on the Corporation's stock records should be as follows: _____________________________________________ _____________________________________________ _____________________________________________ D. I represent and agree that the shares as to which I am hereby exercising an option are being purchased for investment and not with a view to the distribution or resale thereof, and the Common Stock will not be sold except in accordance with the restrictions or limitations set forth in the Stock Option Agreement or as may be imposed by law. Sincerely yours, ---------------------------------- Frank S. Fuino, Jr. EX-23.1-1 27 EXHIBIT 23.1.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS American Card Technology, Inc. We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report (which contains an explanatory paragraph regarding uncertainties about the Company continuing as a going concern) dated March 10, 1998, relating to the financial statements of American Card Technology, Inc., which is contained in that Prospectus. We also consent to the reference to us under the captions "Experts" and "Selected Financial Data" in the Prospectus. /s/ BDO Seidman -------------------------------- BDO Seidman, LLP New York, New York August 20, 1998 EX-23.2-1 28 EXHIBIT 23.2.1 CONSENT OF LEGAL COUNSEL We hereby consent to the filing of this opinion of counsel, dated August 21, 1998, with the Securities and Exchange Commission as an exhibit to the Offering Statement. /s/ Bartz & Bartz -------------------------- BARTZ & BARTZ Edina, MN. August 21, 1998 EX-23.3-1 29 EXHIBIT 23.3.1 UNDERWRITERS CONSENT AND CERTIFICATION The sales of this offering will be through Regulation S-B, Form SB-2. The Underwriter (Rockcrest Securities, LLC.) will receive ten percent commission from the sales of this offering. This offering will only be sold by the following: ROCKCREST SECURITIES, LLC. 3811 TURTLE CREEK BOULEVARD, SUITE 520 DALLAS, TX. 75219 CONSENT AND CERTIFICATION BY UNDERWRITER 1. The undersigned hereby consents to being named as underwriter in an offering statement filed with the Securities and Exchange Commission and the following States; Illinois, Texas, Massachusetts, Colorado, California, Florida, Louisiana, Kansas, Nevada, Oklahoma, Oregon, Idaho, Washington, Connecticut and the Georgia Securities Division by [AMERICAN CARD TECHNOLOGY, INC.] pursuant to Regulation S-B, in connection with a proposed offering of [COMMON STOCK] to the public. 2. The undersigned hereby certifies that it furnished the statements and information set forth in the offering statement with respect to the undersigned, its directors and officers or partners, that such statements and information are accurate, complete and fully responsive to the requirements of Disclosure Document and Exhibits of the Offering Statement thereto, and do not omit any information required to be stated therein with respect of any such persons, or necessary to make the statements and information therein with respect to any of them not misleading. 3. If Preliminary Offering Circulars are distributed, the undersigned hereby undertakes to keep an accurate and complete record of the name and address of each person furnished a Preliminary Offering Circular and, if such Preliminary Offering Circular is inaccurate or inadequate in any material respect, to furnish a revised Preliminary Offering Circular or a Final Offering Circular to all persons to whom the securities are to be sold at least 48 hours prior to the mailing of any confirmation of sale to such persons, or to send such a circular to such persons under circumstances that it would normally be received by them 48 hours prior to their receipt of confirmation of the sale. Rockcrest Securities, LLC. - ------------------------------------ (Underwriter) By: /s/ James S. Harris Date: 8 \ 21\ 98 -------------------------- ----------------- President (d) All written consents shall be dated and signed manually signed. IN WITNESS WHEREOF I have hereunto set my hand and official seal /s/ Michael Kosloske ------------------------------- Notary Public My Commission Expires: 1/31/2000 ------------------ EX-27.0 30 EXHIBIT 27.0
5 YEAR 6-MOS DEC-31-1997 DEC-31-1998 JAN-01-1997 JAN-01-1998 DEC-31-1997 JUN-30-1998 27,203 85,764 0 0 6,730 81,201 0 0 3,918 44,491 77,736 289,253 161,097 173,389 (69,692) (88,060) 594,536 1,161,430 4,144,316 2,344,929 0 1,400,000 0 0 0 0 4,056 3,901 (3,553,836) (4,717,356) 594,536 1,161,430 76,912 93,292 76,912 93,292 86,995 117,879 1,436,885 1,289,888 0 0 0 0 1,065,240 749,432 (2,512,208) (2,063,907) 0 0 (2,512,208) (2,063,907) 0 0 0 0 0 0 (2,512,208) (2,063,907) (.62) (.53) (.62) (.53)
EX-99.2 31 EXHIBIT 99.2 American Card Technology, Inc. April 15, 1998 Page 1 HAROLD ROTHSTEIN 650 BOCA MARINA COURT BOCA RATON, FLORIDA 33487 - ------------------------------------------------------------------------- April 30, 1998 American Card Technology, Inc. 2470 Windy Hill Road, Suite 300 Marietta, Georgia 30067 Re: Bank Loans to American Card Technology, Inc. Ladies and Gentlemen: I refer to (i) a Line of Credit to American Card Technology, Inc. (the "Company") from Fleet National Bank ("Fleet") in the maximum principal amount of One Hundred Fifty Thousand and 00/100 Dollars ($150,000.00), as evidenced by a promissory note in said amount dated June 28, 1996 (the "Fleet Loan"), and (ii) a Business Installment Loan in the amount of One Hundred Thousand and 00/100 Dollars ($100,000.00) to the Company from The Chase Manhattan Bank ("Chase," and together with Fleet, sometimes collectively referred to herein as the "Banks"), as evidenced by a promissory note in said amount dated October 28, 1996 (the "Chase Loan," and together with the Fleet Loan, sometimes collectively referred to herein as the "Loans"). I hereby represent to the Company that, as of the date hereof, I have a net worth in excess of One Million and 00/100 Dollars ($1,000,000.00). For good and valuable consideration, I hereby agree to do either of the following, at my option, if demand is made on the Company by Fleet and/or Chase with respect to the Fleet Loan and/or the Chase Loan prior to the earlier of (i) the net proceeds disbursed pursuant to the Company's initial public offering (the "IPO") equal or exceed $5,100,000.00 or (ii) the closing of a subsequent debt financing negotiated by Lilly Beter Capital Group ("LBCG"). 1. Secure replacement financing to pay off the demanded Loan from another lender on the same terms and conditions as the demanded Loan(s) was originally made, except that such new loan shall not be due and payable until the earlier of (i) the net proceeds disbursed pursuant to the IPO equal or exceed $5,100,000.00, or (ii) the closing of a subsequent debt financing negotiated by LBCG, or (iii) March 3, 2001; or 2. Satisfy the demanded Loan in full, either through the collateral security I have previously pledged to the Bank with respect to the demanded Loan or through some other means satisfactory to the Banks. American Card Technology, Inc. April 15, 1998 Page 2 In the event that I personally provide satisfaction of a Loan, the Company hereby agrees and acknowledges that I shall be subrogated to all rights of the Bank with respect to that Loan, so that I shall be treated in the same manner as the Bank would have been treated had the Loan not been satisfied, including, without limitation, repayment of all amounts I paid to the Bank on behalf of the Company with respect to the Loan, on the earlier of (i) the net proceeds disbursed pursuant to the IPO equal or exceed $5,100,000.00, or (ii) the closing of a subsequent debt financing negotiated by LBCG, or (iii) March 3, 2001. If the Company is in agreement with the foregoing, please so indicate by countersigning below. Sincerely yours, /s/ Harold Rothstein ---------------------------------- Harold Rothstein ACCEPTED AND AGREED TO AS OF THE 30TH DAY OF APRIL, 1998: AMERICAN CARD TECHNOLOGY, INC. By: /s/ Lawrence 0. Perl ----------------------------------- Its Chief Executive Officer EX-99.3 32 EXHIBIT 99.3 DATABASE SERVICES AGREEMENT DBPR CONTRACT NO. 98-00011-00 ----------- AGREEMENT dated as of the 11TH day of JUNE, 1998, by and between AMERICAN CARD TECHNOLOGY, INC., a Delaware corporation (the "Company"), and FLORIDA DEPARTMENT OF BUSINESS AND PROFESSIONAL REGULATION, DIVISION OF PARI-MUTUEL WAGERING, a government agency of the State of Florida (the "Department"). WITNESSETH: WHEREAS, the Company is in the business of developing, marketing, and supplying card-based identification systems using proprietary computer chip technology (collectively, "Smart Cards"), in part comprised of related Smart Card user verification, identifier, and other technology included within the Company's Smart Card-based identification system (the "Smart Card Technology") and computer hardware and software which incorporates the Smart Card Technology, including all improvements and enhancements thereto (collectively, the "Products"); and WHEREAS, the Department has requested that the Company design, develop, and maintain for the Department Smart Card Technology and Products which have applications to the pari-mutuel licensing and regulatory industry, including a database system of licensing and ruling information accessible to the Department through the Internet (the "Smart-Net System") as more specifically described in the proposal set forth in EXHIBITS A, B, AND C and made a part hereof, based upon the single-server configuration set forth therein (the "Proposal"); and WHEREAS, the Company has a Database System Agreement in place with the North American Pari-Mutuel Regulators Association, a Kansas non-profit corporation ("NAPRA"), of which the Department is a member, to collect licensing information, rulings, orders, and disciplinary actions taken against licensees of all NAPRA member jurisdictions; and WHEREAS, the Company will link the Department's database to the NAPRA database in order to transmit licensing information, rulings, orders, and disciplinary actions taken against licensees; and WHEREAS, the Company is willing to so develop and maintain the Smart-Net System, subject to the terms set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1 DEVELOPMENT OF THE SMART-NET SYSTEM. The Smart-Net System will be developed by the Company pursuant to the specifications set forth in EXHIBITS A, B, AND C attached hereto and made a part hereof (the "Specifications"). The Department will have input with respect to the desired end product, but the Company will have ultimate responsibility for and authority with respect to the Smart-Net System development. The Company and the Department shall cooperate to modify, improve, and/or alter the Smart-Net System to reasonably accommodate the applications set forth in the Proposal and the Specifications. As a condition of the Smart-Net System development by the Company, the Department agrees that it will in no way modify, improve, or otherwise alter the Smart-Net System except as set forth in this paragraph 1. 2 OWNERSHIP. All software developed to provide access to and output from the database shall remain the property of the Company subject to the Department's non-exclusive irrevocable right in perpetuity to use such software solely as part of the Smart-Net system, which right may not be assigned except pursuant to this agreement. Data stored in the database, and other such hard data provided to the company is the sole property of the Department. Any smart card-related software and/or processes, patents, copyrights or any other intellectual property of the company shall remain the sole and exclusive property of the company. 3 OBLIGATIONS OF THE DEPARTMENT. (a) The Department shall meet with the Company and technical personnel who will participate in the development of the Smart-Net System. (b) The Department shall work with the Company to design and develop the Smart-Net System and to cooperate with the Company in the development, operation, management, and maintenance of the Smart-Net System, including recommending modifications to the Smart-Net System with respect to the use of the Smart-Net System by the Department. (c) The Department shall pay for development and design of the database not to exceed Forty-Seven Thousand Five Hundred dollars ($47,500.00), and Company shall invoice the Department in four (4) equal payments of $11,875.00 at end of each quarter that the work is completed, and shall make monthly payments of $4,750 in payment of the Database Services Fee as set forth in the Proposal on the first of each and every month during the term hereof commencing with the installation of the Smart-Net System. (d) The Department shall pay the Company $400.00 for each separate physical location in which the Company installs the Smart-Net System for the Department and provides up to eight (8) hours of on-site training. (e) The Department shall reimburse the Company for travel in accordance with Section 112.061, Florida Statutes. (f) In the event that the Department requests changes or enhancements to the Smart-Net System not set forth in the Specifications, the Company shall evaluate such requests as made for cost and feasibility. If the parties agree to make such changes, the Department shall pay the Company an amount not to exceed $100.00 per hour for such additional programming of the Smart-Net System. 4 OBLIGATIONS OF THE COMPANY. (a) The Company shall develop the Smart-Net System to meet the objectives set forth in the Specifications, including. (b) The Company shall provide 54 Smart Card readers at a per-unit price of $75.00, two (2) Smart Card printers (including chip card encoders) at a price of $19,000.00, and 27 digital image capturing equipment systems ("Cheeze") at a per-Cheeze price of $600.00. The Company shall supply additional items of the foregoing hardware items as requested by the Department at the prices set forth in the Proposal, subject to adjustment based upon changes in the costs of production or packaging of such hardware items. (c) The Company shall supply 19,000 one (1) kilobit chip cards and 6,000 three (3) kilobyte Smart Cards for creating badges (collectively, the "Cards") at a price per Card as set forth in the Proposal. (d) The Company shall provide up to two (2) days of initial training of up to fifteen (15) of Department personnel at a single centralized location with respect to the use of the Smart-Net System as set forth in the Proposal. (e) The Company shall convert existing data on Department licensees for use on the Smart-Net System. (f) The Company shall operate and maintain the database included in the Smart-Net System, including, without limitation, manipulation, and compilation of data and communication with the Department, and to endeavor to modify the format or other aspects of the Smart-Net System as recommended by the Department pursuant to paragraph 4(h) hereof. (g) The Company shall ship the Cards and Products F.O.B. Marietta, GA to the Department at the Division of Pari-Mutuel Wagering, Bureau of Operations, 1940 North Monroe Street, Northwood Centre, Tallahassee, Florida 32399-1038 (or such other location that the Department may select). Such shipment shall be freight collect by a carrier selected by the Department. (h) The Company agrees to provide to the Department during the term of this Agreement (i) telephone customer support, available twenty-four (24) hours a day, seven (7) days a week, with a maximum response time of four (4) hours, for the hardware and software furnished by the Company in connection with the Smart-Net System and for problems arising from Internet connectivity with respect to the Smart-Net System, and (ii) up to ten (10) hours, after the Department grants final approval that the database system is fully functional, monthly to make minor enhancements and modifications to the Smart-Net System. Additional support and services shall be provided to the Department at an amount not to exceed $100.00 per hour. (i) The Company shall install the Smart-Net System in 27 physical facilities, provide on-site training of personnel at each such facility for up to eight (8) hours, and maintain the database included in the Smart-Net System, including, without limitation, manipulation, and compilation of data and communication with the Department at the rates set forth in the Proposal under "Option 1 - Single Server Configuration." (j) In the event that the Department requests a dual server configuration as provided for in the Proposal, the Company shall provide such service at the prices set forth in the Proposal under "Option 2 - Dual Server Configuration." (k) In the event that the Department requests additional training for personnel beyond that provided by the Company pursuant to paragraph 4(d) hereof, the Company shall provide such training at a rate of $1,500.00 for each one (1) day training session or part thereof. 5 REPRESENTATIONS AND WARRANTIES. (a) The Company hereby represents and warrants to the Department that the Company is duly organized and validly existing under the laws of the State of Delaware and has the capacity to enter into this Agreement, and execution and delivery of this Agreement has been duly authorized by the Company. The Company further warrants the goods and services to be merchantable and fit for the particular purposes intended subject to the limitation set forth elsewhere herein. (b) The Department hereby represents and warrants to the Company as follows: (i) The Department has the capacity to enter into this Agreement, and execution and delivery of this Agreement has been duly authorized by the Department and the State of Florida. (ii) At all times during the term of this Agreement, the Department shall purchase Cards and Products only from the Company. 6 TERM OF AGREEMENT; OPTION TO RENEW AGREEMENT; TERMINATION. (a) Unless otherwise terminated or cancelled as provided herein, the term of this agreement from July 1, 1998, and shall terminate on June 30, 1999. This contract may be renewed on a yearly basis for a period of up to two (2) years after the initial contract term or for a period no longer than the term of the original contract, whichever period is longer. Renewals are contingent upon receipt of sole source approval and satisfactory performance as determined by the DEPARTMENT, and are subject to the availability of funds. To renew the contract, the parties must execute a written renewal agreement prior to the end of the expiring contract term. Renewals shall be upon the same terms and conditions. (b) Either party may terminate this Agreement during the Initial Term or any Renewal Term immediately upon the material breach of, or the failure to comply in any material respect with, any term or provision of this Agreement by the other party, and the failure of the breaching party to cure any such breach or failure to comply within thirty (30) days after written notice from the non-breaching party. (c) Any termination of this Agreement whatsoever shall not affect any accrued rights or liabilities of either party nor shall it affect the coming into force or the continuance in force of any provision of this Agreement which is expressly or by implication intended to come into force or continue in force on or after that termination. 7 ASSIGNMENT. The Company may not assign or transfer its interests and obligations in this Agreement to any affiliated entity or to any purchaser of substantially all of the assets of the Company. The Department may not assign or transfer its interests and obligations hereunder without the prior written consent of the Company, which consent may be withheld for any reason. 8 INDEMNIFICATIONS. (a) The Company agrees to indemnify and hold harmless the Department from any and all costs, debts, claims, demands, damages, losses, liabilities, actions or causes of action, including legal fees, arising out of the breach of this Agreement by the Company. 9 LIMITED WARRANTY AND LIMITATION OF LIABILITY. The Company shall provide such limited warranties for the Products and the Cards as the Company receives from the manufacturer of the Products and Cards. The Company shall not be liable for any special, incidental, or consequential damages of any kind arising in connection with the Smart-Net System, the Smart Cards, the Products, this Agreement or the transactions contemplated hereunder. 10 CONFIDENTIALITY. (a) The Department shall treat as confidential all information concerning the Smart-Net System and the proprietary technology of the Company which may be disclosed to it. (b) The Department shall take all reasonable steps to ensure that its employees, agents, and representatives shall maintain the confidentiality of the matters referred to in this paragraph 10. (c) Neither party shall, without the prior written consent of the other, make or authorize any advertisement, public announcement, or press release referring or relating to the subject matter of this Agreement or any other confidential information which may have come to the knowledge of that party in the course of the negotiation or subsistence of this Agreement. (d) The foregoing obligations as to confidentiality shall remain in full force and effect notwithstanding any termination of this Agreement. (e) The Department acknowledges that any breach of the covenants or agreements contained herein will cause the Company substantial, continuing, and irreparable damages. The Department agrees that in addition to any other rights and remedies available to the Company following a breach of any covenant or agreement contained in this paragraph 10 (including, without limitation, payment of damages), the Company shall be entitled to an injunction to be issued by any court of competent jurisdiction enjoining such breach. 11 MARKETING LIMITATIONS. (a) The Department shall not disclose any information with respect to the Smart-Net System, Smart Cards, Products, or Smart Card Technology other than as necessary to market and promote the Smart-Net System, Smart Cards, and Products to Protected Customers. (b) The Department will keep possession of and control over any Products and Smart Cards which may come into its possession and shall effect and maintain such security measures as are reasonably necessary to safeguard the Smart-Net System, Products, and Smart Card Technology from access or use by any unauthorized persons. (c) Neither the Department, its employees, agents, nor sub-contractors shall decompile, disassemble, or reverse engineer the object or source code of the Smart-Net System, Products, or Smart Cards nor attempt to do any of these things. (d) Neither the Department, its employees, agents, nor sub-contractors shall alter, obscure, remove, interfere with or add to any of the trademarks, trade names, markings, or notices affixed to or contained in the Smart-Net System, Smart Cards, or Products. 12 WAIVERS. A waiver (whether express or implied) by one of the parties of any of the provisions of this Agreement or of any breach of or default by the other party in performing any of those provisions shall not constitute a continuing waiver and that waiver shall not prevent the waiving party from subsequently enforcing any of the provisions of this Agreement not waived or from acting on any subsequent breach of or default by the other party under any of the provisions of this Agreement. Payment or acceptance of any sum shall not constitute a waiver. 13 SEVERABILITY. The invalidity, illegality, or unenforceability of any of the provisions of this Agreement shall not affect the validity, legality, and enforceability of the remaining provisions of this Agreement. 14 NOTICES. All notices required to be given pursuant to this Agreement shall be deemed given when actually delivered, if delivered in person, or three (3) days after being deposited in the United States Postal Service, postage prepaid, and addressed to the receiving party as follows: For the Company: 1355 Terrell Mill Road Building 1462 - Suite 200 Marietta, Georgia 30067 Attention: President Facsimile: (770) 951-9221 WITH A COPY TO: Cohn & Birnbaum P.C. 100 Pearl Street, 14th Floor Hartford, Connecticut 06103-4500 Attention: Richard J. Shea, Jr., Esq. Facsimile: (860) 727-0361 For the Department: 1940 North Monroe Street Tallahassee, Florida 32399-1035 Attention: Ms. Deborah Miller, Director Facsimile: (850) 488-0550 15 GOVERNING LAW. This Agreement shall be interpreted in its entirety in accordance with the laws of the State of Florida. 16 INDEPENDENT STATUS. Nothing in this Agreement shall be construed to constitute the Department as a partner, employee, joint venturer, franchisee, or agent of the Company. 17 FORCE MAJEURE. Neither party shall incur any liability for delay in performance or non-performance, except payment obligations, arising from circumstances beyond the reasonable control of the party affected, including delays due to accident, fire, flood, government regulation, strike, insurrection, war and acts of God. 18 ENTIRE AGREEMENT. This Agreement and the exhibits attached hereto comprise the entire agreement between the parties relating to the subject matter hereof and supersedes all prior agreements, proposals, letters of intent, representations, and commitments. This Agreement may be amended only by an instrument executed by the authorized representatives of both parties. 19 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. AMERICAN CARD TECHNOLOGY, INC. By: /s/ Raymond Findley, Jr. ----------------------------------- - ---------------------------------------- Its President FLORIDA DEPARTMENT OF BUSINESS AND PROFESSIONAL LICENSING, DIVISION OF PARI-MUTUEL WAGERING By: /s/ Lulane Anderson ----------------------------------- Its WITH THEIR SIGNATURES, the parties agree to all the provisions in this addendum, in duplication original, as of the day and year above. Florida law governs this contract. STATE OF FLORIDA /s/ Lulane Anderson /s/ Raymond Findley, Jr. - --------------------------------- ----------------------------------- For RICHARD T. FARRELL AMERICAN CARD TECHNOLOGY, INC. SECRETARY RAYMOND FINDLEY, JR., PRESIDENT DEPARTMENT OF BUSINESS AND PROFESSIONAL 1355 TERRELL MILL ROAD REGULATION BLDG. 1462, SUITE 200 1940 NORTH MONROE STREET MARIETTA, GEORGIA 30067 TALLAHASSEE, FLORIDA 32399-0750 6-11-98 June 8, 1998 Date - --------------------------------- ----------------------------- DATE (SIGNED BY BPR SIGNED AUTHORITY) (SIGNED BY CONTRACTOR) PHONE NUMBER: (770) 951-2284 -------------------------- APPROVED AS TO FORM AND LEGALITY. /s/ Lynda L. Goodgame 06-1403123 - --------------------------------- ----------------------------------- Lynda L. Goodgame FEDERAL EMPLOYER I. D. NUMBER OF GENERAL COUNSEL SOCIAL SECURITY NUMBER F97000001066 - --------------------------------- FLORIDA CORPORATION REGISTRATION NUMBER APPROVED AS TO FORM AND SUBSTANCE. /s/ John W. Johnson ----------------------------------- JOHN W. JOHNSON CONTRACT MANAGER /s/ Carol Carr ----------------------------------- CONTRACT ADMINISTRATOR ADDENDUM TO CONTRACT NUMBER 98-00011-00 THIS ADDENDUM is made and entered into this 11 day of JUNE , 1998 by and between the Department of Business and Professional Regulation, hereinafter called the DEPARTMENT, and American Card Technology, Inc. hereinafter referred to as the CONTRACTOR. Contractual services as modified by this Addendum may begin on July 1, 1998, or upon full execution of this Addendum, whichever is the later date; and contractual services shall end on June 30, 1999. Total consideration for contractual services shall not exceed One Hundred Fifteen Thousand Three Hundred Dollars ($115,300.00) exclusive of travel and expenses. Invoices for development and design shall not exceed Forty-Seven Thousand Five Hundred Dollars ($47,500.00), and shall be submitted upon completion of the work. Invoices in the amount of Four Thousand Seven Hundred Fifty Dollars ($4,750.00) for database services shall be submitted monthly during the term of the contract commencing with the installation of the Smart-Net System and shall not exceed Fifty-Seven Thousand Dollars ($57,000.00). Invoices in the amount of Four Hundred Dollars ($400.00) per site for installation and training shall be submitted monthly for work completed and shall not exceed Ten Thousand Eight Hundred Dollars ($10,800.00). WHEREAS, the DEPARTMENT enters into the attached contract with CONTRACTOR for development and design of a licensing database, database services, installation, and training of licensing personnel, which attachment is identified as DATABASE SERVICES AGREEMENT; and WHEREAS, the parties to this agreement recognize that the attached contract provided by CONTRACTOR contains provisions that conflict with requirements which must be observed by agencies of the State of Florida, or fails to contain certain provisions which must under Florida law be included in contracts entered into by state agencies; and WHEREAS, the parties agree that the provisions of this Addendum are incorporated into and made a part of the agreement between the parties and that whenever the following provisions conflict with any of the provisions of the contract to which this Addendum is attached, the following provisions shall prevail; NOW, THEREFORE, the DEPARTMENT and the CONTRACTOR agree to modify the original contract as follows: SPECIAL PROVISIONS 1. ADVERTISING: The CONTRACTOR agrees to permanently refrain from using or mentioning his/her association with the DEPARTMENT in advertisements, letterhead, business cards, etc.; however, the CONTRACTOR'S services to the DEPARTMENT may be generally stated and described in the CONTRACTOR'S professional resume' only upon prior written approval or consent of the DEPARTMENT. Furthermore, the CONTRACTOR may not give the impression in any event or manner that the DEPARTMENT recommends or endorses the CONTRACTOR. 2. SERVICES: The CONTRACTOR shall perform and render as an independent contractor and not as an agent, representative, or employee of the DEPARTMENT, all the services described herein in a proper and satisfactory manner as determined by the DEPARTMENT in its sole discretion. GENERAL PROVISIONS 1. APPROPRIATION: In accordance with Sections 216.311 and 287.0582, Florida Statutes, the DEPARTMENT'S performance and obligation to pay under this contract is contingent upon an annual appropriation by the Florida Legislature. 2. AUDIT: All invoices shall be submitted by the CONTRACTOR to the DEPARTMENT with sufficient detail for a proper pre-audit or post-audit. 3. CANCELLATION: This contract may be terminated by either party with or without cause, by giving thirty (30) days written notice to the other party; said notice shall be sufficient if it is delivered to the party personally or mailed by certified mail to the mailing address as specified herein. In case of cancellation, only the costs actually accrued for services satisfactorily performed prior to the date of cancellation shall be due and payable, and all work in progress shall remain the property of the DEPARTMENT and shall be delivered to the DEPARTMENT. 4. ENTIRE AGREEMENT: This Addendum and attached contract constitute the entire agreement of the parties and no other agreement or modification to this contract, expressed or implied, shall be binding on either party unless same shall be in writing and signed by both parties. This agreement may not be orally modified. Any modification must be in writing, expressly titled a modification, amendment, or addendum to this contract, attached to this contract, and signed by both parties. 5. LIABILITY: Each party hereby assumes any and all risks of personal injury and property damage attributable to the acts or omissions of that party or its officers, employees, or agents. Furthermore, any claim of liability asserted against the DEPARTMENT may be subject to the limitations under Section 768.28, Florida Statutes. 6. PAYMENT: (A) Section 215.422, Florida Statutes, provides that state agencies have five (5) working days to inspect and approve goods and services, unless bid specifications, the contract, or the purchase order specifies otherwise. With the exception of payments to health care providers for hospital, medical, or other health care services, if payment is not available within forty (40) days, measured from the latter of the date the invoice is received, or the goods or services are received, inspected and approved, a separate interest penalty of .02740% will be due and payable in addition to the invoice amount. Payments to health care providers for hospitals, medical or other health care services, shall be made not more than thirty-five (35) days from the date of eligibility for payment is determined. Invoices returned to a vendor due to preparation errors will result in a payment delay. Invoice payment requirements do not start until a properly completed invoice is provided to the agency. A Vendor Ombudsman, whose duties include acting as an advocate for vendors who may be experiencing problems in obtaining timely payment(s) from a state agency, may be contacted at (850) 488-2924, or by calling the State Comptroller's Hotline, 1-800-848-3792. (B) Invoices shall be submitted by the CONTRACTOR to the DEPARTMENT for development, design, installation, and training upon completion of services, and monthly for database services. Payment is due within forty (40) days after receipt of each invoice. No advance payments are authorized by this contract. 7. PRIORITY: CONTRACTOR represents that all services required pursuant to this employment contract shall be given first and immediate priority. 8. PUBLIC DOCUMENTS: Pursuant to Section 287.058, Florida Statutes, CONTRACTOR shall allow access to all documents, papers, letters or other materials subject to Chapter 119, Florida Statutes. If CONTRACTOR refuses access to such documents, the DEPARTMENT may petition any court to compel production of such documents. CONTRACTOR shall then pay all costs and attorney fees pursuant to this action. The DEPARTMENT may unilaterally cancel this contract for refusal by the CONTRACTOR to allow public access to all documents, papers, letters, or other material originated or received by the CONTRACTOR in conjunction with the contract subject to the provisions of Chapter 119, Florida Statutes. 9. TRAVEL AND EXPENSES: (A) Payment for travel shall be in accordance with Section 112.061, Florida Statutes. (B) The CONTRACTOR shall contact the undersigned contract manager prior to incurring any travel or any other expenses. The contract manager may require pre-authorization and pre-approval of any or all travel or expenses on "State of Florida Authorization To Incur Travel Form." In the event pre-authorization is required and CONTRACTOR fails to provide documentation of same, CONTRACTOR shall not be reimbursed for same. (C) Requests for reimbursement are to be submitted on a "State of Florida Voucher for Reimbursement of Traveling Expenses" form. 10. RENEWAL: This contract may be renewed on a yearly basis for a period of up to two (2) years after the initial contract term or for a period no longer than the term of the original contract, whichever period is longer. Renewals are contingent upon receipt of sole source approval and satisfactory performance as determined by the DEPARTMENT, and are subject to the availability of funds. To renew the contract, the parties must execute a written renewal agreement prior to the end of the expiring contract term. Finally, renewals shall be upon the same terms and conditions. 11. ATTORNEY'S FEES: Except as provided in the clause entitled "Public Documents", and as otherwise provided by law, the parties agree to be responsible for their own attorney's fees incurred in connection with disputes arising under the terms of this agreement. 12. DISPUTES: This contract shall be governed by and construed in accordance with the laws of Florida, and the DEPARTMENT is entitled to assert venue for any disputes arising out of this contract in Leon County, Florida. 13. OTHER EMPLOYMENT: CONTRACTOR shall not engage the services of any person or persons now employed by the State of Florida, including any department or subdivision thereof, to provide services relating to this contract without written consent of the employer of such person or persons and of this DEPARTMENT. Also, if CONTRACTOR is employed by the State of Florida during the term of this agreement, CONTRACTOR represents that he or she has complied with all applicable provisions of Section 216.262(1)(d), Florida Statutes, regarding outside or dual employment and compensation. 14. PUBLIC ENTITY CRIME: A person or affiliate who has been placed on the convicted vendor list following a conviction for a public entity crime may not submit a bid on a contract to provide any goods or services to a public entity, may not submit a bid on a contract with a public entity for the construction or repair of a public building or public work, may not submit bids on leases of real property to a public entity, may not be awarded or perform work as a contractor, supplier, subcontractor, or consultant under a contract with any public entity, and may not transact business with any public entity in excess of the threshold amount provided in s. 287.017 for CATEGORY TWO for a period of 36 months from the date of being placed on the convicted vendor list. 15. NOTICE TO CONTRACTOR: The DEPARTMENT shall consider the employment by any contractor of unauthorized aliens a violation of section 274A(e) of the Immigration and Nationalization Act. Such violation shall be cause for unilateral cancellation of this contract. All other terms and conditions of the contract shall remain the same. (THIS SPACE LEFT BLANK.) WITH THEIR SIGNATURES, the parties agree to all the provisions in this addendum, in duplicate original, as of the day and year first above. Florida law governs this contract. STATE OF FLORIDA /s/ Richard T. Farrell - ------------------------------------- Richard T. Farrell Secretary Department of Business and Professional Regulation 1940 North Monroe Street Tallahassee, Florida 32399-0750 6-11-98 - ------------------------------------- Date (Signed by BPR Signing Authority) Approved as to form and legality. /s/ Lynda L. Goodgame - ------------------------------------- Lynda L. Goodgame General Counsel /s/ Raymond Findley, Jr. - ------------------------------------- American Card Technology, Inc. Raymond Findley, Jr., President 1355 Terrell Mill Road Bldg. 1462, Suite 200 Marietta, Georgia 30067 8-11-98 Date - ----------------------------------- (Signed by Contractor) Phone Number: (770) 951-2284 --------------- 06-1403123 Federal Employer I.D. Number or Social Security Number - -------------------------- F97000001066 Florida Corporation Registration Number - ----------------------------------------- Approved as to form and substance. /s/ John W. Johnson - ------------------------------------- John W. Johnson Contract Manager /s/ Carol Carr - ------------------------------------- Carol Carr Contract Administrator EX-99.4 33 EXHIBIT 99.4 FALCETTA, WACHTEL & Eugene H. Falcetta, CPA KNOCHENHAUER, LLC - ------------------- Stuart B. Wachtel CPA Certified Public Accountants Judy S. Knochenhauer CPA 24-C Wintonbury.Mall Bloomfield, CT 06OC2-2412 Telephone: (860) 286-9040 FAX:, (860) 286-8972 July 21, 1998 To the Stockholders American Card Technology, Inc. 13SS Terrell Mill Road Building 1462, Suits 200 Marietta, GA 30067 We have compiled the accompanying statements of forecasted operations of American Card Technology, Inc. for the two years ending September 30, 2000, in accordance with standards established by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of a forecast information that in the representation of management and does not include evaluation of the support for the assumptions underlying the forecast. We have not examined the forecasts and, accordingly, do not express an opinion or any other form of assurance on the accompanying statements or assumptions. Furthermore, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report. Respectfully submitted, Falcetta, Wachtel & Knochenhauer, LLC CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS AMERICAN CARD TECHNOLOGY,INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF FORECASTED OPERATIONS
Year Ending Year Ending September 30,1999 September 30, 2000 Sales $ 1,482,000 $ 5,377,000 Cost of sales 964,564 2,745,173 ----------- ----------- Gross Profit 517,436 2, 631,827 ----------- ----------- 34.9% 48.9% ----- ----- Expense: Research and development 500,450 550,495 Sales, general and Administrative 1,415,186 1,515,186 Interest 425,495 425,495 ------- ------- Total expenses 2,341,131 2,491,176 --------- --------- Operating income (loss) (1,823,695) 140,651 Interest income 84,667 44,440 ----------- ----------- Income (loss) before Income taxes (1,739,028) 185,091 Provision for income taxes (benefit) ( 228,000) 99,000 ----------- ----------- Net income (loss) ($ 1,511,028) $ 86,091 ----------- -----------
See Summary of Significant Forecast Assumptions, Accounting Policies and Accountants' Report. AMERICAN CARD TECHNOLOGY, INC. SUMMARY OF SIGNIFICANT FORECAST ASSUMPTIONS AND ACCOUNTING POLICIES NOTE A: NATURE OP THE FORECASTS These financial forecasts present, to the best of management's knowledge and belief, the Company, a expected results of operations fair the forecast periods. Accordingly, the forecasts reflect its judgement as of July 21, 1998, the date of these forecasts, of the expected conditions and its expected course of action. The assumptions disclosed herein are those that management believes are significant to the forecasts. There will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur expected, and those differences may be material. NOTE B: NATURE OF OPERATIONS DURING THE FORECAST PERIOD The Company intends to: 1. Continue to market and sell its existing products to existing and new customers. 2. Develop new products for Sale to existing and now customers 3. Enter into new teaming and marketing agreements with Strategic Partners. NOTE C: SALES AND COST OF SALES The accompanying forecasts assume that sales are normally made evenly throughout the year but exceptions will occur in the first three months, because the business plan cannot be fully implemented until such time that the Company receives its anticipated financing. The credit terms of the Company's forecasted sales are 30 to 45 days. Because the Company deals mainly with Government entities as well as major private sector industry, there is no provision for bad debts in the forecast. Cost of sales includes card and equipment purchases, direct labor, and amortization of prior software development costs. Gross profit was calculated based an existing sales and management's estimates of anticipated increases in those sales. (Continued) AMERICAN CARD TECHNOLOGY, INC. SUMMARY OF SIGNIFICANT FORECAST ASSUMPTIONS AND ACCOUNTING POLICIES (Continued) NOTE D: INVENTORY The Company keeps a minimum of smart card inventory on hand for the purpose of supplying approximately 60 days of anticipated sales. All other equipment required for sales is readily available and purchased from various suppliers with various negotiated credit terms. NOTES E: EQUIPMENT The Company's equipment includes computers and other office furniture and fixtures. Depreciation is figured over the estimated useful lives of such equipment, using six accelerated method. NOTE F: DEBT The accompanying forecast reflects the interest cost relating to the following debt: 1. Various bank debt of $ 600,000 12 secured equally by the personal assets or personal guarantees of two principals of the Company. interest in paid by the Company monthly on $ 300,000 at 8.5% and the remaining $ 300,000 at 9.0%. The principal is not payable unless the Company raises more than the minimum equity amount. Deferred compensation of $ 500,000 is to be paid only out of proceeds in excess of the minimum raised. There is a 10% interest factor associated with these deferments. Director, a Joan estimated to he $ 1,100,000 as well an Shareholder loans of $ 2,129,955 bear interest at the rate of 10%. All payments are deferred until the earlier of debt financing or January 1, 2001. NOTE G: EXPENSES The following summarizes significant assumptions for forecasted other than interest: 1. Salaries are currently paid to 10 employees, two of whom are the CEO and the President of the Company. They are also primary stockholders of the Company. 2. Salaries will continue at their present levels throughout the forecasted period. (Continued) AMERICAN CARD TECHNOLOGY, INC. SUMMARY OF SIGNIFICANT FORECAST ASSUMPTIONS AND ACCOUNTING POLICIES (Continued) NOTE G: EXPENSES (Continued) 3. Rent will continue at the present level of $ 3,383 per month throughout the forecasted period. 4. Travel expense is predicated on the anticipated number of sales calls and installation trips required in achieving the anticipated sales. 5. Payments to Softchip for the operating system as well as technology maintenance are based an contracted amounts. 6. Costs incurred with related parties or entities will not exceed market rates that would be obtained with unrelated parties. All expenses in the accompanying forecast assume only the minimum amount of equity is raised. -----END PRIVACY-ENHANCED MESSAGE-----