-----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, DncIznN0YEBHs5teRvJom+/88pOa1fEU2CKf40pLzximwGC03SGkes9ssfNHO87e VRT2wfLoS0dW8NpB/qyMgg== 0000950117-01-500337.txt : 20010516 0000950117-01-500337.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950117-01-500337 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHIPCARDS INC CENTRAL INDEX KEY: 0001140221 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943191805 STATE OF INCORPORATION: CA FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-60896 FILM NUMBER: 1634228 BUSINESS ADDRESS: STREET 1: CITICORP CENTER STREET 2: ONE SANSONE STREET 19TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4159511078 SB-2 1 a29645.txt CHIPCARDS, INC. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY , 2001 REGISTRATION NO. 333- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 CHIPCARDS, INC. (Exact name of Small Business Issuer as specified in its Charter) ------------------------------------------------ CALIFORNIA 3612 94-3191805 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Classification Identification No.) incorporation or Code Number) organization)
------------------------------------------------ CITICORP CENTER ONE SANSOME STREET, 19TH FLOOR SAN FRANCISCO, CALIFORNIA 94104 (415) 951-1078 (Address, including zip code, and telephone number, including area code, of Principal Executive Offices) ------------------------------------------------ Allen Yue Chipcards, Inc. Citicorp Center, One Sansome Street, 19th Floor San Francisco, California 94104 (415) 951-1078 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Scott A. Ziegler, Esq. Ziegler, Ziegler & Altman, LLP 1330 Avenue of the Americas, Eleventh Floor New York, New York 10019 (212) 319-7600 Michael D. DiGiovanna, Esq. Parker Duryee Rosoff & Haft 529 Fifth Avenue New York, New York 10017 (212) 599-0500 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) 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 ======================================================================================================= Title of each class Amount Proposed maximum Proposed maximum Amount of of securities to be to be offered price per aggregate offering registration registered registered share price (1) fee ======================================================================================================= Units, each consisting of: 1,150,000(2) $8.10 $9,315,000 $2,328.85 (i) one share of common stock, no par Par value, and (ii) one warrant to purchase one share of common stock Common stock, no par value, issuable upon exercise of the warrants 1,150,000(3) $8.40 $9,660,000 $2,415.00 Underwriter's warrants 100,000(4) $.01 $1,000.00 $0 Units issuable upon exercise of underwriter's warrants, each consisting of: 100,000 $9.72 $972,000 $243.00 (i) one share of common stock, no par value per share, and (ii) one warrant to purchase one share of common stock Common stock, no par value, issuable upon exercise of the warrants underlying the underwriter's warrants 100,000(3) $8.40 $840,000 $210.00 ======================================================================================================= Total: $5,196.85 =======================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 promulgated under the Securities Act of 1933, as amended. (2) Includes 150,000 units which the underwriter may purchase to cover over-allotments, if any. (3) Pursuant to Rule 416, there are also being registered such additional securities as may become issuable pursuant to the anti-dilution provisions contained in the warrants. (4) Represents warrants to be issued to the underwriter, consisting of warrants to purchase 100,000 units. No registration fee is required pursuant to Rule 457 of the Securities Act of 1933, as amended. 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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED __________, 2000 PROSPECTUS 1,000,000 UNITS CONSISTING OF 1,000,000 SHARES OF COMMON STOCK AND 1,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS CHIPCARDS, Inc. This is an initial public offering of 1,000,000 units, each consisting of one share of common stock of Chipcards, Inc. and one redeemable common stock purchase warrant. The common stock and the warrants are being sold in units and will be separately tradeable immediately upon issuance. Each warrant entitles the registered holder to purchase one share of our common stock at a price of $8.40 per share during the five year period commencing on the date of this prospectus. There is currently no public market for our common stock, the warrants or the units. ----- We have applied for quotation of the common stock and warrants on the Nasdaq SmallCap Market and Boston Stock Exchange under the symbol "__________" and __________. We currently estimated that the initial public offering price per unit will be $8.10. -----
PER UNIT TOTAL --------- ---------- Initial public offering price.......................................... $8.10 $8,100,000 Underwriting discounts and commissions................................. $0.648 $ 648,000 Proceeds to Chipcards, Inc. before expenses............................ $7.452 $7,452,000
----- Chipcards, Inc. has granted the underwriters an option for a period of 45 days to purchase up to 150,000 additional units. These securities are being offered on a "firm commitment" basis by The Thornwater Company, L.P. as representative of the underwriters. The Thornwater Company, L.P. expects to deliver the shares against payment on or about , 2001. ----- These securities are speculative. Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 4. ----- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ----- THE THORNWATER COMPANY L.P. TABLE OF CONTENTS
Page Prospectus Summary Risk Factors Cautionary Note Regarding Forward Looking Statements Use of Proceeds Dividend Policy Dilution. Capitalization Management's Discussion and Analysis of Financial Condition and Results of Operations Description of Business Management Compensation of Directors and Officers Principal Stockholders Certain Relationships and Related Party Transactions Description of Securities Shares Eligible for Future Sale Transfer Agent and Registrar Underwriting Legal Matters Experts Where You Can Find Additional Information Indemnification for Securities Act Liabilities Index to Financial Statements
You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information provided by this prospectus is accurate as of any date other than the date on the front page of this prospectus. Dealer Prospectus Delivery Obligation Until , 2001, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all the information important to you. It does not contain all the information that is or may be important to you. To understand this offering fully, you should read the entire prospectus carefully, including "Risk Factors" and the consolidated financial statements and related notes. Except as otherwise indicated, all information in this prospectus assumes that the underwriter does not exercise the option granted by us to purchase additional units in this offering. As used in this prospectus, unless the context otherwise indicates, the terms "Chipcards," "we," "us," or "our" refer to Chipcards, Inc., the term "common stock" refers to our common stock, no par value, and the terms "units" refers to the units offered by this prospectus. In addition, we refer to prospective investors as "you" or the "investors." Our fiscal year ends on December 31 of each year. Where this document refers to a particular year, this means the fiscal year unless otherwise indicated. CHIPCARDS, INC. Since 1997 we have been engaged in the installation of production lines for the manufacture of smart cards. We provide our customers with the technology, equipment, supplies, installation, training and support for a turnkey smart card operation. To date all of our sales of production lines have been to customers located in China. We have filed three Provisional Patent Applications for inventions relating to smart card production technology, and we intend to file corresponding non-provisional patent applications in order to continue pursuing patent protection for these inventions. We have also marketed finished smart cards since 1998. We have made arrangements with the purchasers of our production lines giving us the right to purchase a portion of their production in order to secure a supply of smart cards for marketing. In addition, we have developed, and intend to market, ancillary products for use in smart card systems. We plan to utilize the proceeds of this offering to increase our capacity to install production lines, commence our own production of smart cards, market newly developed products and expand our geographical markets. Our ultimate aim is to become an integrated global smart card competitor combining technology, production and marketing of smart cards as well as the continuation of our installation business. We believe our technology, supply sources, expertise and contacts will position us favorably in connection with this strategy. Our production lines consist of six separate pieces of equipment that we integrate into a fully automated turnkey factory capable of performing all of the operations needed to manufacture smart cards. We have developed proprietary designs and processes through which we assemble and customize various components into the precision machinery required to make smart cards. We use a contract manufacturer to perform most of the assembly and construction work based on our specifications and under our supervision. Our equipment focuses on the production of "contactless" cards, which represent the most recent development in smart card technology. Contactless cards have an antenna embedded inside the card, which is attached to a computer chip. The chip and antenna together provide wireless communication between the card and a read/write device integrated into a mechanism such as an ATM, kiosk, vending machine, door lock or subway turnstile. Contactless smart cards can be read at a short distance from the read/write device, making them well adapted to small and rapid handshake transactions. Because 1 transactions are conducted without physical contact between the card and the reader/writer, smart card systems undergo minimal mechanical wear, require little maintenance, and can be virtually vandal-proof. Prior to entering the smart card capital equipment business in 1997, we designed equipment for the manufacture of electromagnetic components. This background enabled us to develop the advanced machinery needed to produce contactless smart cards. Due to the projected growth in demand for smart cards, in 1998 we began to market finished smart cards. We have been certified as an approved smart card supplier by Siemens, Philips Semiconductors, Motorola and other leading companies. We have entered into arrangements giving us the right to buy finished cards from parties which have purchased our production lines. In most cases we must source components and other raw materials for the card manufacturer at a set price as a condition to our receipt of product. At the completion of this offering, we intend to install an in-house smart card production line in order to stabilize our supply of cards and reduce our reliance on third party vendors. Our ancillary products include a read/write device designed for use in keyless entry security systems, a card handling system that tests and initializes the computer chips embedded in finished smart cards, and a chip testing system that checks the quality of the smart card integrated chip before the start of manufacturing. We have only begun limited marketing of these products, but intend to significantly expand our efforts after the completion of this offering. Since the usage of smart cards has experienced strong acceptance and growth overseas, our sales of both capital equipment and finished smart cards have been concentrated in foreign markets. We have therefore established overseas sales offices in China and South Korea. We also have an independent sales force that currently covers the United Kingdom, France, Italy, Germany and Argentina. A smart card is a wallet-sized plastic card that contains an embedded computer chip. This chip carries accessible data that can be retrieved upon demand by a "read/write" device or "reader/writer" that processes the information. Smart cards are capable of integrating a variety of everyday functions with security features. They are used in numerous applications including: o access to restricted areas (replacing keys and identification cards); o public transportation fare collection (replacing tokens and tickets); o point of sale purchases (replacing cash or credit cards at cafeterias, newsstands and other point of sale locations where speed of purchase is important); o vending machines; o public telephones; o industrial applications such as quality control, warehousing, inventory control, distribution and warranty; o health care (replacing patients' paper files in hospitals and HMOs); and o cellular phones. We were incorporated in California in November 1993 under the name American Pacific Technologies, Inc. and changed our name to Chipcards, Inc. in August, 2000. Our executive offices are located at Citicorp Center at One Sansome Street, 19th Floor, San Francisco, California. Our telephone number is (415) 951-1078 and our fax number is (415) 951-1046. 2 THE OFFERING Securities offered: 1,000,000 units, each consisting of one share of common stock and one common stock purchase warrant which entitles the holder to purchase one share of common stock at an exercise price of $8.40 per share. Upon the closing of this offering, the shares of common stock and the warrants included in the units will be separately traded. Common stock outstanding prior to the offering: 10,641,250 (1) Common stock outstanding after the offering: 11,641,250 (2) Use of Proceeds: We expect to have net proceeds of approximately $6,764,000 after payment and deduction of the expenses of the offering. We intend to use the net proceeds from the offering to fund the following: - purchase of capital equipment; - project finance; - construction of an additional production facility; - increased sales and marketing expenditures; - potential future acquisitions; - employee recruitment; and - working capital and other general corporate purposes. See "Use of Proceeds" for more detailed information. Proposed Nasdaq SmallCap Symbol: CHIP Proposed Boston Stock Exchange Symbol: CHP Risk Factors and Dilution: You should carefully consider the risks of investing in the securities discussed in the "Risk Factors" and the matters discussed in the "Dilution" section before you decide to purchase units. Dividend Policy: We do not intend to pay cash dividends on our common stock in the foreseeable future. "Dividend Policy" for more information.
(1) Based on shares outstanding as of December 31, 2000. Does not include 1,015,000 shares of common stock issuable upon the exercise of outstanding options issued in May 2001 and 10,000 shares of 3 common stock issuable upon the vesting of contingent stock grants to a sales representative. (2) Does not include units issuable upon exercise of the underwriter's overallotment option, shares of common stock issuable upon the exercise of the warrants included in the units being offered, or units issuable upon exercise of the underwriter's warrants. SUMMARY FINANCIAL INFORMATION You should read the following summary financial information in conjunction with our financial statements and related notes, together with "Management's Discussion and Analysis of Financial Condition and Results of Operations". The selected financial data for the years ended December 31, 2000 and December 31, 1999 are derived from our audited financial statements. All of this financial information is presented elsewhere in this prospectus. The results of operations during periods presented are not necessarily indicative of our future operations. For all of the periods covered by the summary financial information we have leased our San Diego facility from Ampac Technology LLC, a limited liability company owned by two of our principal shareholders. From a financial reporting standpoint, the accounts of Ampac Technology, LLC have been consolidated with those of Chipcards, based on the joint control and economic interdependence between these two entities during the relevant periods. Accordingly, the San Diego property is included as an asset in the balance sheet data notwithstanding the fact that title is not held by Chipcards. We have agreed to purchase the San Diego property from Ampac Technology LLC upon the completion of this offering, at a price of $150,000 plus assumption of existing liabilities. See "Description of Business - Properties and Equipment."
2000 1999 Revenues $6,453,739 $4,340,156 Loss before Extraordinary Item (325,437) (830,264) Basic and diluted net loss before extraordinary item per common share (0.03) (0.13) Net Loss (325,437) (571,307) Basic and diluted net loss per common share (0.03) (0.09) Total assets 2,920,881 3,463,589 Long-term debt (excluding current portion) 1,101,163 1,082,473
RISK FACTORS An investment in our securities involves a high degree of risk. In addition to the other information contained elsewhere in this prospectus, you should carefully consider the following risk factors when evaluating an investment in our securities. Furthermore, our securities should only be considered for purchase if you can afford the risk of losing your entire investment. RISKS RELATED TO OUR BUSINESS We have a history of operating losses and we may not be profitable in the future. Our business is capital intensive. We have incurred, and expect that we will continue to incur, substantial costs to manufacture our production line equipment and develop our products and services. We may not achieve profitability and, if we do achieve profitability, we may not be able to maintain profitability. We incurred operating losses of $822,293 for the year ended December 31, 1999 and $345,227 for the year ended December 31, 2000, and net losses of $325,437 and $521,307 for the years ended December 31, 2000 and 1999. The planned expansion of our business may require additional capital, and we may not be able to obtain the necessary funds to operate. 4 We will need the proceeds of this offering in order to implement our business plan, including the planned expansion of our sales and manufacturing capabilities. In addition, even if this offering is successful, we may need to obtain additional funding in order to support our future operating requirements. We intend to obtain any required funding by increasing our lines of credit or by raising additional funding from the public or private capital markets. Such additional funding may not be available on terms acceptable to us, or at all. Failure to raise additional funding when needed could jeopardize our plans for growth and our ability to operate our business. If additional funds are raised through the issuance of equity securities, the ownership percentages of our stockholders would be reduced. Furthermore, such equity securities might have rights, preferences or privileges senior to those of our common stock. Need for Improved Operating Controls. To improve our results, we must continue to implement and improve our financial, accounting and management information systems and to hire, train, motivate and manage new employees. Our failure to improve management controls would have a material adverse effect on our business and on our ability to execute our business strategy successfully. We are subject to risks of doing business in foreign markets. Although we conduct most of our design, technology and product development operations in the United States, to date all of our production line sales and a majority of our smart card sales have been to foreign customers. We have established overseas offices to support our sales activities, and we intend to expand our international operations. We expect that international sales will continue to account for a significant percentage of our net revenue into the foreseeable future. Accordingly, we are subject to a variety of potential risks, including: o political and economic instability; o the impact of possible recessions in economies outside the U.S.; o difficulties and costs of staffing and managing foreign operations; o lack of complete business experience in foreign markets; o difficulty in enforcing intellectual property rights outside the U.S.; o tariffs, export controls and other trade barriers; o potentially adverse tax consequences; and o language and cultural barriers. There can be no assurance that we will be able to sustain or increase international revenues, or that the foregoing factors will not have a material adverse affect on our future international revenues and, consequently, on our business. Although a stronger market exists abroad, there is no assurance that the acceptance of smart card systems in other countries will be sustained. We face the risk that smart card technologies generally will not be chosen to replace existing technologies or will not otherwise achieve market acceptance. There is a risk that our operations could be disrupted and any remedies limited because we do business in China 5 We anticipate that for the foreseeable future, sales to the Chinese market will continue to account for a significant percentage of our production line business and Chinese manufacturers will continue to be a primary source of finished product for our smart card sales business. As a result, our business is subject to significant political, economic, taxation, legal and other uncertainties associated with selling products in China. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity, greater economic decentralization and the opening of markets to foreign businesses. However, changes in the political environment or government policies could result in revisions to laws, regulations or the interpretation and enforcement thereof, increased taxation, restrictions on imports, import duties or currency revaluations. In addition, any destabilization of relations between China and the United States could result in restrictions or prohibitions on the sale of products in China, which would substantially impair our profitability and market position and could jeopardize our ability to continue our operations. The legal system of China relating to foreign trade is relatively new and continues to evolve. There can be no certainty as to the application of its laws and regulations in particular instances. Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent. Moreover, there is a high degree of fragmentation among regulatory authorities resulting in uncertainties as to which authorities have jurisdiction over particular parties or transactions. Even where adequate law exists in China, it may not be possible to obtain swift and equitable enforcement of that law. Our production line installation contracts are generally governed by Chinese law. Therefore, if we should fail to receive full payment from a Chinese customer, we may not have any legal recourse within the United States. Even if we are able to obtain a judgement in the U.S., it may not be collectible in this country if substantially all of the defaulting party's assets are located overseas. In such event, we would be required to seek redress within China. This would entail the various risks inherent in the Chinese legal system, and any litigation could involve substantial costs. Additionally, any judgments we may seek or obtain against foreign governments or governmental authorities may be unattainable or unenforceable due to sovereign immunity. The inability to obtain a substantial payment or payments could have a material adverse effect on our business. We have limited experience in selling our production lines in markets other than China. To date, our production line sales have been limited to customers located in the People's Republic of China. We intend to expand sales of our equipment in other territories. However, our lack of experience outside of China may make it difficult for us to penetrate other markets and diversify our customer base, which could limit our growth potential and cause us to remain vulnerable to the risks of doing business in China. Because the market for smart card products is not well developed in the United States and may not grow, we may be dependent on foreign markets. Demand for smart card products in the United States at present is limited. Current participants in the smart card business rely upon anticipated growth in demand, which may not occur to the extent projected, or at all. The expansion of the smart card market in the United States may depend on the ability of market participants to convince potential customers to adopt a smart card system in lieu of existing or alternative systems such as magnetic stripe card and paper-based systems. Smart card-based systems may not prove economically feasible for some potential customers. Moreover, to an extent sales of smart card 6 products will depend upon emerging communications and commerce networks, such as the Internet. If growth in the domestic market does not occur, this will limit our opportunities for growth and will require us to continue to rely on, and be subject to the inherent risks of, foreign sales. Our revenues from smart card production lines are restricted due to our limited manufacturing capacity. We currently derive a substantial part of our revenue from the construction of smart card production lines. Since a large part of the assembly work is done through a subcontractor, we rely on the subcontractor's manufacturing capacity. At present we can only undertake approximately six installations at any one time. Each production line takes from four to nine months to complete. Until we can add internal capacity with the proceeds of this offering, our capital equipment business will remain dependent on a small number of customers at any given time. We rely on contract manufacturers to build our production lines; we have recently retained a new contract manufacturer. We rely on a single contract manufacturer to perform most of the assembly and construction work for our smart card production lines. Although we intend to add in-house manufacturing capacity with the proceeds of this offering, this will not eliminate the need to outsource a significant amount of work. Our success is therefore dependent on the reliability and skill of our manufacturer. To reduce operating risks, we recently replaced our previous contractor with a new company which we believe will provide comparable or better service than our prior contractor. However, the new manufacturer has only recently begun limited production work for us on a trial basis, and therefore we do not yet have a sufficient basis for fully evaluating its performance or its ability to meet our production needs and quality standards. If this manufacturer fails to perform to our satisfaction, we may not be able to find another manufacturer in time to meet our delivery schedules, or at all, which could result in lost sales. Even if our new manufacturer meets all of our requirements, there is no assurance that we will be able to maintain this arrangement for any specified period of time. If such arrangement should terminate for any reason, we would be required to find alternate manufacturers. Any failure to maintain our manufacturing arrangement on satisfactory terms may have an adverse effect on our business. We do not maintain insurance against the failure or inability of manufacturers to supply product. Even if our current manufacturing arrangement can be successfully maintained, our reliance on a third party manufacturer involves several production related risks, including lack of flexibility in controlling levels of output and limited control over product reliability, safety and quality. If this manufacturer is unable to meet all future demand and we fail to secure additional capacity, we could lose sales. Moreover, we may not have the ability or resources to adequately monitor quality control and safety procedures of our manufacturer. Failure of our current manufacturer, or any future manufacturer, to adhere to our product designs and specifications and quality standards could have a material adverse effect on sales of our products and could increase the risk of litigation, either of which could have a material adverse affect on our business. Because we have a relatively small number of smart card customers, the loss of a customer could significantly reduce or revenues. 7 We expect that we will continue to depend upon a relatively small number of customers for a majority of our revenues from the sale of smart cards. During the year ended December 31, 2000, our five largest customers accounted for approximately 85 percent or revenues from the sale of smart cards. Our customers generally do not enter into long term smart card purchase commitments with us, and most of our arrangements with our large customers do not provide us with guarantees that purchases will be maintained at any level. In addition, our customers could reduce or cease their use of our products as a result of: o manufacture of products similar to ours by competitors; or o efforts by our customers to develop their own products. The loss of a major customer, or significant reductions in sales of smart cards to any of our largest customers could substantially reduce our revenues. We are dependent on third party vendors to provide components for our production lines. We are dependent on a large number of third-party vendors to supply the bulk of the materials and equipment that form the components of our production lines. We also rely on third parties to supply finished smart cards for our direct card sales business. In addition, we outsource a substantial portion of our post-processing and peripheral services, including printing, magnetic striping and personalization. Our reliance upon third party vendors is expected to continue and involves several risks, including limited control over the availability of components and/or product, delivery schedules, pricing and product quality. Should we lose a significant number of vendors, any delays, expenses and lost sales incurred in locating and qualifying alternative suppliers could have a material adverse effect on our business. We are subject to risks associated with obligations under our capital equipment contracts. We are required to provide two of our recent production line customers with all of the components and raw materials needed for their manufacture of smart cards. We have agreed to provide such materials at a fixed price per finished unit. The price is determined based on the quantity of materials needed to make one card. We may not be able to obtain all of the raw materials we are contractually obligated to supply, particularly in view of a continuing shortage of the leading type of smart card microprocessor. Moreover, if our cost of sourcing smart card raw materials exceeds the fixed price at which we have agreed to sell them to our customers, we will incur a loss. Our ability to purchase smart cards is limited by our reliance on limited sources of supply. 8 At present, we do not have any in-house capability to manufacture smart cards. Therefore, we must rely on third party suppliers to meet our requirements for cards. Currently, our sole sources of supply are two customers to which we have sold production lines. We have entered into agreements under which we have the right to buy smart cards from these customers at agreed prices for a period of three years. Quantities will be based on our forecasted requirements. These arrangements are expected to give us a stable source of supply, and we believe that the prices we have negotiated are competitive under current market conditions. We may not be able to continue these arrangements beyond the three-year period during which they will be in effect. In addition, there is no assurance that the manufacturers will comply with their obligations to sell us cards on the agreed-upon terms, or at all. Since the manufacturers are both located in China, any efforts to enforce our rights could be very costly and would be subject to the risks of litigation or arbitration in a foreign jurisdiction. The loss of any supplier could materially affect our ability to maintain an adequate inventory of finished cards and to sell smart card products at competitive prices. Because of a worldwide shortage of microprocessors, we have experienced, and may continue to experience, a shortage in supply of smart cards. Since the third quarter of 1999, there has been a worldwide shortage in the supply of Mifare microprocessors, which is the predominant type of microprocessor for smart card systems. This has had a material impact on our smart card sales. We presently depend on our production line customers as our sole source of finished cards. We are obligated to provide these customers with the components needed to manufacture cards, including microprocessors. Because of the Mifare shortage, we have been unable to obtain adequate microprocessors for our customers, which in turn has restricted our supply of cards and exposes us to claims for damages. As a result, we have been forced to substantially curtail fulfillment of orders beginning in January 2000. This has caused cancelled orders and impeded our ability to expand smart card sales. Approximately $80,000 of card orders were cancelled during the year ended December 31, 1999 and approximately $443,000 of orders were cancelled during the year ended December 31, 2000. We incurred losses from the sale of smart cards of $163,000 and $126,000 in 2000 and 1999. We are seeking to address the microprocessor shortage and currently have non-binding written commitments from Philips and non-binding verbal commitments from Infineon Technologies to sell us substantial quantities of Mifare microprocessors for 2001. However, we have no assurance that these commitments will be fulfilled for the maximum quantity, or at all. Even if these commitments are fulfilled, we will not have sufficient units to meet the requirements of our manufacturers, and we may not be successful in securing additional sources of microprocessors. Although alternatives to the Mifare platform are now available, this will not materially alleviate our shortage of supply, since over 90 percent of our customers still use smart card systems that require Mifare platform cards. Our future success depends on our ability to keep pace with technological changes. The smart card industry is subject to rapid technological change. The emerging markets for our products and services is characterized by rapid technological developments and evolving industry standards. These factors will require us to continually improve the performance features of our products and services and to introduce new and enhanced products and services at competitive prices and as quickly as possible, particularly in response to offerings from our competitors. As a result, we will be required to expend substantial funds for, and commit significant resources to, continuing product development. We may not be successful in developing and marketing new products and services that respond to competitive and technological developments and changing customer needs. Any failure by us to anticipate or respond adequately to technological developments, customer requirements, or new design and production 9 techniques, or any significant delays in product development or introduction, could have a material adverse impact on our business. We operate in highly competitive markets. For both our production line and smart card sales businesses, the markets in which we operate are intensely competitive and characterized by rapidly changing technology. We cannot assure you that our business will respond successfully to competitive pressures. Many of our current and potential competitors in both the capital equipment and direct card sales sectors include well-established companies, many of which have longer operating histories in the smart card industry and significantly greater financial, technical, sales, customer support, marketing, research and development and other resources, as well as greater name recognition and a larger installed base of their products and technologies than us. Additionally, there can be no assurance that new competitors will not enter our business segments. Competition has resulted in price reductions, and increased competition would likely result in additional price reductions, reduced margins and loss of market share, any of which would have a material adverse effect on our business. We experience competition from a number of companies across our range of businesses. Our technology is not patented and we may not be able to adequately protect our proprietary rights. We have filed three Provisional Patent Applications in the United States with respect to certain designs and processes used in the manufacture of our production lines. We intend to file corresponding non-provisional patent applications in order to continue pursuing patent protection for these inventions. There is no assurance, however, that we will be successful in obtaining patents for any of the inventions claimed in these applications. We currently do not have any issued patents. Furthermore, we do not have any registered trademarks for any of our products nor any registered copyrights for any of the computer programs we have developed. We seek to establish and protect the proprietary aspects of our products by relying on applicable patent, copyright, and trade secret laws and on confidentiality and other contractual arrangements, all of which may afford only limited protection. Notwithstanding our efforts to protect our proprietary rights, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or obtain and use technology that we regard as proprietary. In addition, the laws of certain countries in which we sell our products do not protect our proprietary rights to the same extent as do the laws of the U.S. Accordingly, there can be no assurance that we will be able to protect our proprietary technology against unauthorized copying or use, which could adversely affect our competitive position. Our products and technologies incorporate subject matter that we believe is in the public domain or is otherwise within our right to use, such as products and technologies designed and provided by third parties. There can be no assurance, however, that third parties will not assert patent or other intellectual property infringement claims against us with respect to their products and technologies. Regardless of its merit, any such claim can be time-consuming, result in costly litigation and require us to enter into royalty and licensing agreements. Such royalty or licensing agreements may not be offered or be available on terms acceptable to us. If a successful claim is made against us and we fail to timely develop or license a substitute technology, our business could be materially adversely affected. 10 We are dependent on current management and key personnel. We anticipate that significant and rapid expansion of our operations will be required to address potential growth in our customer base and market opportunities. This is expected to place a significant strain on our management, operational and financial resources. Currently, we have nineteen employees in the U.S. and abroad, including six officers and/or significant employees. We are substantially dependent on the continued services and performance of these employees, and will remain so dependent in the foreseeable future. The loss of services of any such key employee or the inability of any of them to devote sufficient time to their duties could have a material adverse effect on our business. We have entered into three-year employment agreements with our President and our Executive Vice President. See section entitled "Management - Employees." However, there is no assurance that these officers or any other key personnel will remain with us for any specified period of time. Our future success may also depend on our ability to identify, attract, hire, train, and retain other highly skilled technical, sales and marketing personnel. Competition for such personnel is intense, and there can be no assurance that we will be able to successfully attract and retain sufficiently qualified personnel. The failure to hire and retain the necessary personnel could have a material adverse effect on our business. Product defects. Our production line products contain complex machinery that may contain undetected defects in design or in components we purchase from third parties, including software errors or hardware defects that could be difficult to detect and correct when first introduced or as new versions are released. There is no assurance that, despite testing by us and customers, errors will not be found in new or enhanced products after commencement of commercial shipments. Moreover, there can be no assurance that once detected, such errors can be corrected in a timely manner, if at all. Software errors may take several days to correct, if they can be corrected at all, and hardware defects may take even longer to rectify. The occurrence of any such software, hardware or other errors, as well as any delay in correcting them, could result in delays in shipment of products, loss of market acceptance of our products, additional warranty expense, diversion of engineering and other resources from our product development efforts or the loss of credibility with our customers, any of which could have a material adverse effect on our business. In addition, we could face potential litigation if any malfunction or defect in our equipment is claimed to cause injury to persons or property. In addition to purchasing components for our production lines, we are currently required to source components for two card manufacturers. Defects can also occur in the microprocessors and other 11 components we purchase for these manufacturers, and there is no assurance that we will be able to detect potential problems before providing the components to our customers. Litigation risks. We may be subject to litigation risks arising out of our two initial capital equipment contracts entered into in 1998 and 1999. Under these contracts, we agreed to buy smart cards from, and to source raw materials for, the manufacturer after installation was completed. Because of a worldwide shortage of microprocessors, we have been unable to obtain the required raw materials for these customers One of these customers brought an arbitration proceeding in China seeking damages for breach of contract. Although this action was dismissed, this party could attempt to bring additional claims against us in the future. In addition, our other initial customer could seek to claim that we are obligated to resume supplying raw materials, or that it is entitled to damages for our failure to perform our contractual obligations. If any such claims are successful, we may ultimately become obligated to pay damages, or to provide raw materials to, and purchase cards from, these customers. We may also be subject to similar claims by our new capital equipment customers if we are unable to provide them with raw materials once their production lines are installed and operational. Any potential litigation, whether or not ultimately found to be meritorious, could consume significant resources and affect our ability to carry on normal operations. The expansion of our business could strain our capacity. The proposed expansion of our sales and manufacturing operations will require the implementation of enhanced operational and financial systems and will require additional management, operational, financial and personnel resources. Failure to implement these systems and add these resources could have a material adverse effect on our operations. Given our limited number of employees and lean infrastructure, there is no assurance that we will be able to manage our expanding operations effectively or that we will be able to maintain or accelerate our growth. We may not be able to attract and hire persons with the appropriate talents, skills and experience needed to grow our business, particularly if we do not strengthen our financial position. In addition, there can be no assurance of the viability of our products in new geographic regions or particular local markets. Our expansion plans include the addition of in-house capacity to assemble production lines. Due to our historical reliance on contract manufacturers, we have limited experience in performing assembly work. The anticipated efficiencies of creating internal capability may not be achieved if we fail to successfully implement our future manufacturing operations. We may experience fluctuations in our quarterly operating results. We expect to experience significant fluctuations in our future quarterly operating results due to a variety of factors, many of which are outside our control. Our production line installation contracts generally require us to incur substantial costs in advance of payment. Thus quarterly results can fluctuate based on the timing and amount of such expenditures and payments. Furthermore, we defer recognition of profits on our installation contracts until we are assured of cash payment. We also defer recognition of a portion of our revenues on equipment sales if we own a joint venture interest in the customer or if we are obligated to purchase the customer's finished smart cards. These accounting practices can result in further fluctuations in our quarterly results. 12 Additional factors that may adversely affect our quarterly operating results include: (i) our ability to retain and attract customers; (ii) the level of competition in the smart card industry; (iii) our ability to upgrade and develop our products and technology and attract new personnel in a timely and effective manner; (iv) the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure; (v) the emerging nature of the markets in which we compete; and (vi) general economic conditions and economic conditions specific to the smart card industry. RISKS RELATED TO THIS OFFERING No public market; the market price of our common stock may fluctuate significantly; immediate and substantial dilution. There is no public market for our common stock and there can be no assurance that an active public market for our common stock will develop or be sustained after this offering. The stock market in general and the market for shares of technology companies in particular have recently experienced extreme price fluctuations, which have often been unrelated to the operating performance of the affected companies. We believe that the principal factors that may cause price fluctuations are: o fluctuations in our financial results; o general conditions or developments in the technology and smart card products industries and the worldwide economy; o sales of our common stock into the marketplace; o the number of market makers for our common stock; o announcements of technological innovations or new or enhanced products by us or our competitors or customers; o announcements of major contracts by us or our competitors; o a shortfall in revenue, gross margin, earnings or other financial results from operations; and o developments in our relationships with our customers and suppliers. We cannot be certain that the market price of our common stock will not experience significant fluctuations in the future, including fluctuations that are adverse and unrelated to our performance. To the extent that the trading volume of our securities is low, this may increase the risk that the market price will be affected by factors such as those described above, among others. All of the currently outstanding shares of common stock were issued at prices substantially lower than the price of the shares included in the units offered hereby. Purchasers of units offered hereby will experience immediate and substantial dilution in net tangible book value with respect to the shares included in such units and may incur additional dilution upon the exercise of outstanding stock options. See Section entitled "Dilution." Control by principal shareholders, officers and directors. Prior to and upon completion of this offering, a significant percentage of the outstanding common stock will be beneficially owned by our directors, officers and principal stockholders and affiliates. As a result, upon completion of this offering, you may not be able to (i) elect, or defeat the 13 election of, the directors, (ii) amend or prevent amendment of the Articles of Incorporation or Bylaws, or (iii) effect or prevent a merger, sale of assets or other corporate transaction. You will not be able to control the outcome of these or any other matters submitted to a vote of the stockholders unless you and other investors can exercise more than 50% of the outstanding voting power. A limited exception exists in the election of directors, since shareholders are entitled to a number of votes equal to the total amount of shares owned by the holder multiplied by the number of directors to be elected. Such cumulated number of votes can be cast for any one or more directors. This generally makes it easier for a minority group of shareholders to elect a director of their choosing. However, in any given election, voting may still be controlled by the officers, directors and principal stockholders notwithstanding the existence of cumulative voting rights. Accordingly, you should not purchase units offered herein unless you are willing to entrust all aspects of the affairs of our company to our current management. Future sales of our common stock by our existing stockholders could have adverse effects on the market price of our common stock. As of May 18, 2001, all of the 10,641,250 shares of our common stock currently issued and outstanding will be eligible for sale under Rule 144 promulgated under the Securities Act of 1933, provided the conditions thereof are met, and subject to the volume limitations imposed thereunder. This does not include the shares of common stock that may be sold under this prospectus. Any sale of the shares being registered or any sales under Rule 144 could cause the market price of our common stock to drop significantly, even if our business is doing well. All of our current shareholders will be subject to "lock-up" agreements pursuant to which these persons will agree not to sell or otherwise transfer any shares for a period of twelve months after the date of this prospectus except with the prior written consent of the underwriter. Determination of the offering price The offering price of the units was determined in negotiations between us and the underwriter based upon such factors as our financial needs, estimates of our business potential, the stage of development of our business and the general condition of the securities market. The offering price should not, however, be considered an indication of the actual value of our company or our securities. The offering price does not bear any relationship to the assets, net worth, results of operations, other objective criteria of value applicable to our company. Moreover, the offering price should not be viewed as an indication of the future value of the shares or the warrants included in the units. Accordingly, there can be no assurance that the shares or the warrants included in the units offered hereby can be resold at the offering price, if at all. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains statements about future events and expectations which are characterized as forward-looking statements. Forward-looking statements are based on our management's beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to them. Because of this, you should not rely too extensively on such forward-looking statements contained in this prospectus. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, levels of activity, performance or achievements, or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Some 14 of these forward-looking statements can be identified by the use of forward-looking terminology including "believes," "expects," "may," "will," "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategies that involve risks and uncertainties. You should read statements that contain these words carefully because they: o discuss our future expectations; o contain projections of our future operating results or of our future financial condition; or o state other "forward-looking" information. We believe it is important to communicate our expectations to you, but events may occur in the future over which we have no control and which we are not accurately able to predict. We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ from those anticipated in these forward-looking statements, even if new information becomes available in the future. USE OF PROCEEDS Our net proceeds from the sale of the units being offered in this offering at an assumed public offering price of $8.10 per unit are estimated to be $6,764,000, after deducting the 8% underwriting discount, the two and one-half percent non-accountable expense allowance payable to the underwriter, $120,000 payable to the underwriter for services under a consulting agreement, and an additional $365,500 in estimated offering expenses payable by us. This assumes that the underwriter's over allotment option is not exercised. If the underwriter's over allotment option is exercised in full, our net proceeds are estimated to be $7,851,425. We intend to use the net proceeds as described in the following table:
Approximate Dollar Approximate Amount of Net Proceeds Percentage ---------------------- ----------- Capital Equipment (1) $2,600,000 38.4% Project Financing (2) 2,000,000 29.6% Machinery & Equipment (3) 500,000 7.4% Additional Facilities(4) 350,000 5.2% Product Development 250,000 3.7% Advertising & Marketing 200,000 3.0% Purchase of Real Property (5) 150,000 2.2% General working capital 714,000 10.5% ---------- ------ Total $6,764,000 100% ========== ======
(1) Installation of a smart card production line at our San Diego facility. This equipment will be designed to produce 2,000 contactless cards per hour, with complete magnetic striping and printing capabilities. (2) Represents cash requirements associated with the manufacture of production lines for sale to current customers. 15 (3) Expansion of in-house capabilities for manufacture of capital equipment. (4) Includes costs of opening and publicizing new Sales/Representative offices. (5) Represents the cost of purchasing the San Diego facility from two of our principal shareholders. This facility and related debt are included in the consolidated financial statements for the year ended December 31, 2000. The working capital amounts will be dedicated to general corporate purposes, including salaries and general and administrative expenses. Our management will have broad discretion concerning the allocation and use of a significant portion of the net proceeds of this offering. In the event the representative of the underwriters exercises the over-allotment option, we intend to utilize such additional proceeds for working capital and general corporate purposes. We reserve the right to reallocate proceeds to different uses, including ways which differ from the specific proposed uses described in this prospectus if management determines the needs of the business so require. In addition, a large portion of the proceeds is allocated to discretionary purposes. Investors may not agree with the allocation or reallocation. Based on our operating plan, we believe that the net proceeds of this offering, together with available funds on hand and cash flow from future operations, will be sufficient to satisfy our working capital requirements for at least 12 months following this offering. Our belief is based upon assumptions, including assumptions about our contemplated operations and economic and industry conditions. In addition, contingencies may arise that may require us to obtain additional capital. We cannot be sure that we will be able to obtain additional capital on favorable terms or at all. Until the net proceeds of this offering are used, we intend to invest the net proceeds in short-term, interest-bearing, investment grade securities or similar quality investments. DIVIDEND POLICY On April 18, 2000, we declared a stock dividend for each holder of record of shares of common stock as of March 18, 2000 (the "Record Date") in the amount of 2.65 shares of fully paid and nonassessable common stock for each share of common stock held by such holder as of the Record Date. We have not paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Our dividend policy is to retain earnings, if any, to support the expansion of our operations. If we were to change this policy, any future cash dividends would depend upon factors which our board of directors deems relevant, including, without limitation, future earnings and our estimated capital requirements. DILUTION Investors purchasing common stock in this offering will incur an immediate and substantial dilution in net tangible book value per share. Accordingly, investors will bear a disproportionate part of the financial risk associated with our business while effective control will remain with existing stockholders. Assuming the maximum number of units are sold (excluding the overallotment option), investors in this offering will collectively own 1,000,000 shares of our common stock or approximately 8.6% of the outstanding shares, for which they will have paid $8,000,000 or $8.00 per share, and warrants to purchase 1,000,000 shares of common stock, for which they will have paid $0.10 per warrant (assuming that $0.10 is attributed to each warrant included in the units offered hereby and no exercise of the underwriter's warrants). At December 31, 2000, we had a negative net tangible book value of $1,747,294 and a negative net tangible book value per share of $0.16. "Net tangible book value per share" represents our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding 16 or issuable upon the exercise of outstanding warrants, options and contingent rights. Our San Diego facility is included as an asset for purposes of determining total tangible assets, despite that fact that title is formally held by two of our principal shareholders, because this property is consolidated for financial statement purposes. (See "Management's Discussion and Analysis of Financial Condition" for further explanation.) After giving effect only to the sale of 1,000,000 shares (which are part of the units) offered hereby, the reduction of the underwriter's commission and associated estimated offering expenses associated with the entire offering, and the use of the proceeds of the offering described in the "Use of Proceeds", our pro forma net tangible book value at December 31, 2000 would have been approximately $5,016,706 or $0.43 per share. This represents an immediate increase in net tangible book value per share of $0.59 to existing stockholders and an immediate dilution of $7.57 per share to the investors purchasing shares of common stock at the initial public offering price. The following table illustrates this dilution in net tangible book value to new investors: Initial public offering price per share of common stock $ 8.00 Net tangible book value per share before offering $ (0.16) Increase per share attributable to new investors $ 0.59 ------- Pro forma tangible book value per share after offering $ 0.43 ------- Dilution to new investors $ 7.57 =======
The following table sets forth, as of December 31, 2000, the number of shares of common stock purchased from us, the effective cash contribution made, and the average price per share paid by existing stockholders and by new investors purchasing shares sold by us in the offering at an assumed initial offering price of $8.10/unit and $0.10 per warrant.
Shares Purchased Total Consideration Average Price Per Number Percent Amount Percent Share ------ ------- ------ ------- ----- Existing stockholders 10,641,250 91.4% $581,600 6.7% $0.05 New investors 1,000,000 8.6% $8,100,000 93.3% $8.10 --------- ----- ---------- ----- ------ Total 11,641,250 100% $8,681,600 100% $0.75 ========== ===== ========== ===== ======
17 CAPITALIZATION The following table sets forth the current portion of long-term debt and other short-term debt obligations and the consolidated capitalization as of December 31, 2000, on an historical basis and on a pro forma basis, adjusted to reflect the sale of the units offered in this registration statement and the application of the estimated net proceeds as described in "Use of Proceeds". This table should be read in conjunction with the consolidated financial statements and related notes, and the notes to the financial statements included elsewhere in this prospectus.
AS OF DECEMBER 31, 2000 ACTUAL AS ADJUSTED DEBT: Long-Term Debt (including current maturities)...... $ 1,129,233 $ 1,129,233 Short Term Advances ............................... 14,500 14,500 ---------- ---------- Total debt.................................... $ 1,143,733 $ 1,143,733 STOCKHOLDERS' EQUITY: Common Stock, no par value, 25,000,000 shares authorized; 10,641,250 shares issued and outstanding and 11,641,250 shares pro forma as adjusted(1)............... $ 685,100 $ 7,349,100 Accumulated Deficit................................ (2,432,394) (2,332,394) ----------- ----------- Total stockholders' equity (deficit).......... $(1,747,294) $ 5,016,706 ----------- ----------- Total capitalization.......................... $ (603,561) $ 6,160,439 =========== ===========
(1) Pro forma share amount does not give effect to: (i) any exercise of the underwriter's overallotment option (ii) any exercise of the warrants purchased in this offering, (ii) any exercise of the underwriter's warrants, or (iii) any exercise of currently outstanding warrants, options or other contingent rights. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION The following discussion and analysis should be read in conjunction with the consolidated financial statements, including the notes thereto, appearing elsewhere in this prospectus. The following discussion and analysis contains certain "forward-looking statements" (as defined in Section 27A of the Securities Act of 1933), which are generally identified by the words "anticipates," "believes," "expects," "plans," "intends," and similar expressions. Such statements are subject to certain risks, uncertainties and contingencies, including, but not limited to, those set forth under the heading "Risk Factors" and elsewhere in this prospectus, which could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements. See "Special Note Regarding Forward-Looking Statements." NOTWITHSTANDING THE FOREGOING, THE SAFE HARBOR PROVISIONS OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 DO NOT APPLY TO THIS REGISTRATION STATEMENT. Background Our revenues have historically been derived principally from the sale of smart card production lines and, to a lesser extent, the direct sale and marketing of smart cards. We have also developed certain ancillary smart card products, including a reader/writer for use in security systems, a card testing and initialization system, and a smart card chip testing system. However, we have only begun limited marketing activities and have not produced significant revenues from these products. In addition, while we have historically generated revenues from the sale of smart card raw materials to purchasers of our capital equipment, we do not consider this to be a part of our core business. In general, we engage in the sale of raw materials only at our customers' request. In 1997 we first applied our expertise in factory automation to the design and assembly of smart card production lines. We began generating revenues from production line sales in 1998. Our capital equipment revenues are a function of our ability to secure contracts for the sale of production lines and produce equipment that meets our customers' requirements on a timely basis. Installation contracts generally provide for payment to be made in the final stages of a project. Our revenue stream is therefore subject to periods of fluctuation based on the timing of project commencement and the length of production. Seasonal factors generally do not have a material effect on our operations. To date, all of our capital equipment revenues have come from international sales. Our past and current customers are all based in China, a market in which we had earlier conducted business as a manufacturer of electromagnetic components. Our future revenues will be affected in part by our ability to penetrate other geographic markets and diversify our customer base. Our ability to generate production line revenues is limited by our capacity and the capacity of our contract manufacturer. Each smart card production line takes between four to nine months to complete, and at present, we can only undertake approximately six installation projects at any one time. We plan to expand our capacity and decrease our dependence on contract manufacturers by hiring additional qualified engineering and technical personnel and installing additional in-house adding testing equipment and other machinery used in the production process. 19 We recognize revenues from long-term installation contracts on the percentage-of-completion method. This means that, at any given date, revenues are measured by the percentage of actual costs incurred to date relative to then-current estimated total costs to be incurred on the contract. Due to historical renegotiation of contract terms with our Chinese customers, the actual profit from a contract cannot be reasonably estimated until payment is received. Therefore, profit is estimated to be zero until we can be assured of collection of profit based on cash receipts. If a loss under a contract is estimated it is recorded in the first period known. Accordingly, equal amounts of revenue and costs are recognized until final payment is received. Further, we defer revenue on equipment sales to customers in which we receive a joint venture equity interest in the entity acquiring the equipment. The deferral amount is the percentage of our equity interest multiplied by total gross profit. The deferral is then amortized to revenue over the term of the joint venture. We defer revenue on equipment sales in a similar fashion when we are obligated to purchase a customer's finished smart card output. In our smart card sales sector, we began receiving revenues during the 1999 fiscal year. This revenue stream has been adversely affected by a shortage of cards. Our sole sources of smart cards from1999 through the end of 2000 were two manufacturers in China which had previously purchased capital equipment from us. We were responsible for procuring raw materials for these manufacturers. A critical component was the Mifare platform microprocessor, which is the most widely used integrated chip for smart card applications. Beginning in the third quarter of 1999, we were unable to obtain adequate quantities of these microprocessors because of a worldwide shortage in supply. As a result, we had to curtail fulfillment of orders, and customers began to cancel orders. Approximately $80,000 of card orders were cancelled during the year ended December 31, 1999 and approximately $443,000 of orders were cancelled during the year ended December 31, 2000. We incurred losses from the sale of smart cards of $163,000 and $126,000 in 2000 and 1999. We believe that, with the recent installation of three production facilities for two new customers, we will be able to partially address our shortage of smart cards. The purchasers of these facilities have given us the right to buy smart cards at a fixed price per card over a period of three years, based on our forecasted requirements. We are still obligated to source raw materials (including integrated chips) for these plants as requested by the customer at fixed prices. However, various alternatives to the Mifare microprocessor are now available, and our equipment has the capability to accommodate these new platforms as well as the Mifare platform. We believe that as non-Mifare platforms gain acceptance by operators of smart card systems, the risk of microprocessor shortages will be alleviated by allowing us to seek alternate sources of supply. However, this will not materially alleviate our shortage of supply in the short term, since over 90 percent of our customers still use smart card systems that require Mifare cards. We have secured non-binding written commitments from Philips to sell us approximately 1.7 million Mifare microprocessors by June 30, 2001, of which approximately 450,000 units have been delivered to date. We also have a non-binding verbal commitment from Infineon Technologies to sell us 500,000 Mifare microprocessors per month from June through August of 2001 and 1 million per month from September through December of 2001. If we receive these microprocessors, we believe we will have sufficient units to meet outstanding orders. However, there is no assurance that this quantity will be provided. If we receive fewer units than anticipated from Philips and Infineon, we will need to secure other sources. Any inability to do so could result in a loss of customers and our ability to generate revenues from smart card sales could be materially affected. In addition, we could face claims for damages resulting from our failure to meet orders. Our plans for growth include expanding our international sales force, increasing our capital equipment production capacity and creating in-house capacity for smart card production. We plan to 20 expand our customer base for smart card sales by acting as a supplier of cards for the chip manufacturers who are promoting new smart card platforms. We also intend to actively market our ancillary smart card products, including a keyless home security system based on our reader/writer technology. In addition, we plan to develop and promote new technologies including cards that can be used in GSM (Global System for Mobile Communications) chip-based cellular telephone systems. Key developments during fiscal year 2000 include entering into contracts providing for the installation of three new production lines. All of these lines have been installed and successfully tested, and the customers have begun card production. In 2001 we entered into a contract providing for the installation of two new production lines. We expect that these lines will be delivered by year end 2001. During 2000, we also completed the development of our read/write device designed from use in security systems or as a developer's kit, and we developed a prototype card handling system for testing and initializing the computer chips used in smart cards. We also developed a smart card chip testing system used to inspect integrated chips before the start of manufacturing. For all of the periods covered by the financial statements included in this prospectus, we have leased our San Diego facility from Ampac Technology LLC, a limited liability company owned by two of our principal shareholders. From a financial reporting standpoint, the accounts of Ampac Technology, LLC have been consolidated with those of Chipcards, based on the joint control and economic interdependence between these two entities during the relevant periods. Accordingly, the San Diego property is included as an asset, and related bank debt is included as a liability on the consolidated balance sheets notwithstanding the fact that title is not held by Chipcards. We have agreed to purchase the San Diego property from Ampac Technology LLC upon the completion of this offering, at a price of $150,000 plus assumption of existing liabilities of approximately $1.1 million. See "Description of Business - Properties and Equipment." Results of Operations Comparison of Years Ended December 31, 2000 and December 31, 1999 Total revenues for the year ended December 31, 2000 were approximately $6.5 million, an increase of 49 percent from $4.3 million in 1999. This included approximately $5.4 million of revenue from production line sales in 2000 compared to $1.5 million in 1999. In connection with our production line sales, we recorded revenue of approximately $138,000 from the sale of raw materials in 2000 and $1.5 million in the prior year. We also received approximately $960,000 of revenue from finished smart card sales in 2000 compared to $1.3 million in 1999. Production line sales increased substantially as we improved our competitive position through more favorable pricing. We also believe that we benefitted from having implemented improvements to our manufacturing processes during 1998 and 1999, which resulted in increased efficiency, flexibility and quality in our production machinery. Smart card sales declined primarily as a result of a worldwide shortage in smart card microprocessors using the Mifare platform (which is the most widely used platform for smart card applications). To date we have bought cards only from our production line customers, and we are required to provide these customers with requested quantities of the raw materials needed to manufacture cards. The microprocessor shortage has limited our ability to supply our manufacturers, which in turn has curtailed our supply of finished cards. For the year ended December 31, 2000, this resulted in the cancellation of approximately $443,000 of smart card orders from customers who required Mifare cards. Cancelled orders in 1999 totaled approximately $80,000. 21 Our cost of sales for the year ended December 31, 2000 was approximately $5.0 million, an increase of 54 percent from $3.2 million in the prior year. This included production line cost of sales of approximately $3.8 million in 2000 compared to $550,000 in 1999, and smart card cost of sales of approximately $1.1 million in 2000 compared to $1.4 million in 1999. Overall, the increased cost of sales reflects the fact that we commenced work on three new production line orders in 2000. In addition, we performed work on additional production line orders for which work had commenced in 1999. However, smart card cost of sales declined primarily due to the fact that in 1999 we focused on, and dedicated resources to, developing the sales and marketing of cards in order to establish this as a core business. Our gross profit for the year ended December 31, 2000 was approximately $1.5 million, representing an increase of 32% from a gross profit of $1.1 million for the prior year. This is due primarily to increased profits from our production line business. Our gross margin was 23 percent for the year ended December 31, 2000, compared to a gross margin of 26 percent for the prior year. Broken down by product offerings, we had gross margins of 29 percent on production line sales and negative 17 percent on smart card sales in the year ended December 31, 2000, and we had gross margins of 64 percent on production line sales and negative 10 percent on smart card sales in the year ended December 31, 1999. Margins on production line sales decreased because we decided to offer more favorable pricing on our installation contracts in order to improve our competitive position and generate increased sales. Further, we recognized a portion of the deferred profit on production line contracts completed in late 1998 and early 1999, with no associated costs. The deferral resulted from our contractual requirement to purchase the finished smart card output from these customers. Margins on smart card sales also declined because of a decision to offer competitive pricing in order to maintain market share. General and administrative expenses for 2000 were approximately $1.7 million, compared to approximately $1.1 million for the prior year. This resulted primarily from the strengthening of our support functions. Selling expenses for 2000 were approximately $120,000, compared to $760,000 in the prior year. This decline was due primarily to a restructuring of our compensation structure resulting in the significant reduction of commissions to employees. We did not incur any direct research and development costs in fiscal 2000. All of our research and development activities during this period were conducted in connection with specific installation work, and employee time allocated to these activities was included in cost of sales. Research and development expenses for the year ended December 31, 1999 were approximately $99,000, reflecting our focus on enhancing our production equipment. Other income includes approximately $181,000 in recovery of previously written-off accounts receivable. Income taxes represent United States Federal and State income taxes on taxable income. Taxable income includes gross revenue on percentage of completion contracts which is partially deferred for book purposes resulting in deferred tax assets. We have set up an allowance against the deferred tax assets. 22 Liquidity and Capital Resources We rely on a combination of equity capital, short-term bank financing and internationally-generated cash flows from sales of equipment and smart cards to fund our ongoing operations. In fiscal 2000 we raised aggregate gross proceeds of approximately $575,000 from a private placement of our common stock. This cash was used primarily to pay operating costs including expenses associated with building production lines, and to establish working capital for ongoing requirements. As of December 31, 2000, we had outstanding short-term indebtedness pursuant to various line of credit agreements in the amount of $14,500. We currently have no material outstanding indebtedness other than purchase property mortgages on our San Diego property in the amount of approximately $1.12 million. At present, our primary commitments for capital expenditures are the costs of production line assembly. The timing of our capital equipment costs and revenues is linked to the completion of projects. We typically receive the bulk of our payment for installation contracts upon delivery and acceptance of equipment. Therefore, during the assembly stage, we may incur substantial expenditures without corresponding cash receipts, creating potential cash flow shortages. We currently have commitments to complete two installation projects over the next nine months, which will require estimated capital expenditures of $2.0 million in the aggregate. In order to meet our liquidity requirements for current projects, we have secured a line of credit with Trans Pacific National Bank, backed by a guarantee from the Export-Import Bank of the United States. The line of credit allows us to borrow up to $1.95 million for working capital purposes. Advances are available to finance installation projects secured by our receipt of standby letters of credit from equipment purchasers. Borrowings cannot exceed 90% of the value of all outstanding letters of credit. We will seek to increase this line of credit to reflect our increased capital equipment business, as we expect that letters of credit having an aggregate value of over $12 million will be issued over the course of the next 12 months in connection with current projects. We believe that we will be able to meet our present commitments through a combination of increasing our credit line and allocating a portion of the proceeds from this offering. Operating cashflows were a net use of cash in 1999 of approximately $1.8 million and a source of cash in 2000 of approximately $170,000. The difference represents the timing of inventory build-up in 1999 using cash of approximately $1.1 million and ultimate sale in 2000 resulting in sources of cash of approximately $150,000. We expect that our requirements for working capital and liquidity will increase as a result of our undertaking to provide raw materials to two companies which recently purchased production lines from us. We have agreed to obtain raw materials for these customers over a three-year period at a fixed price per card. These parties have purchased a total of three production lines which, at full capacity, could manufacture a total of 18 million cards per year. Thus we could be required to supply substantial quantities of microprocessors and other components for these factories. One of the manufacturers has the right to offset all or a portion of its payment obligation for the purchase of raw materials against the price of finished cards to be sold to us in the future. This will further impact our liquidity by extending the time between purchasing raw materials and receiving payment. In either case, we will need substantial capital in order to obtain the required components. The manufacturers must issue letters of credit to secure their purchase obligations. We believe that these letters of credit will enable us to obtain financing sufficient to fund a substantial portion of our raw materials costs. 23 Our requirements for working capital and liquidity will also increase upon implementation of our growth strategy. This includes the installation of our own smart card production line in our San Diego facility at an estimated cost of $2.6 million, as well as the expansion of our in-house manufacturing capability and the diversification of our capital equipment product line to the GSM technology and other markets, which is projected to cost approximately $350,000. We have also agreed to purchase the San Diego property currently being leased from Ampac Technology LLC (an entity controlled by two of our principal stockholders) at a price of $150,000 plus the assumption of the existing mortgages with an outstanding balance of approximately $1.1 million. We intend to use proceeds from this offering for this purchase. We anticipate that we will be able to draw on bank and other facilities which, together with anticipated working capital, including the proceeds of this offering, and internally generated cash flow, we believe will be sufficient to fund such commitments. However, if any of these resources are not available or generate less capital than projected, we would need to obtain a major source or sources of financing. Any resulting debt could substantially impact liquidity. Impact of Inflation Although our operations are influenced by general economic trends, we do not believe that inflation had a material impact on our operations for the periods presented. New Accounting Pronouncement In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged assets or liability that are attributable to the hedged risk, or (ii) the earnings' effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain and loss is recognized in income in the period of change. SFAS No. 133, amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the adoption of the new standard on January 1, 2001 had no effect on the Company's financial statements. 24 DESCRIPTION OF BUSINESS Introduction Chipcards, Inc. (formerly known as American Pacific Technologies, Inc.), was incorporated under the laws of the State of California on November 3, 1993. Since 1997 we have been engaged in the installation of production lines for the manufacture of smart cards. To date all of our sales of production lines have been to customers located in China. We have also marketed finished smart cards since 1998. In addition, we have developed, and intend to market, ancillary products for use in smart card systems. Prior to entering the smart card capital equipment business, we designed equipment for the production of electromagnetic components. Our installation of production lines encompasses providing the customer with the technology, equipment, supplies, installation, training and support for a turnkey operation. We have filed three Provisional Patent Applications relating to our smart card production technology, and we intend to file corresponding non-provisional patent applications in order to continue pursuing patent protection for these inventions. We have made arrangements with the purchasers of our production lines to sell us all or a portion of their production in order to secure a supply of smart cards for marketing. We plan to utilize the proceeds of this offering to increase our capacity to install production lines, commence our own production of smart cards, market newly developed products and expand our geographical markets. Our ultimate aim is to become an integrated global smart card competitor combining technology, production and marketing of smart cards as well as the continuation of our installation business. We believe our technology, supply sources, expertise and contacts will position us favorably in connection with this strategy. Strategy We intend to establish a stronger market position in both the smart card sales and smart card capital equipment areas through a comprehensive plan that includes: o expanding our international distribution network; o promoting new applications for our capital equipment such as smart labels; o diversifying our range of smart card products by developing dual-interface cards, cards that are compatible with new operating platforms, and cards that can be used in the GSM market; o replacing vendors with internal equipment-making capability, thus reducing delivery time to customers and costs borne by us; o bringing our own factory automation to market by creating in-house capacity to manufacture smart cards; and o marketing and promoting our ancillary smart card products. We are presently focusing our efforts on increasing our international sales activities, specifically in Europe and Asia, through our network of independent sales representatives and our employees abroad. We are planning to hire our German sales representative as a full-time employee to open a new sales office in Munich, and we are in active discussions with persons who could potentially serve as new sales representatives in the Middle East. In the area of new equipment applications, we have developed designs for manufacturing smart labels with our existing production machinery. We do not anticipate marketing this product until 25 after the completion of this offering. We have also developed designs and/or processes for manufacturing all of the new smart card products described above. Although we are in active negotiations with a potential customer for dual-interface cards, we have not otherwise commenced marketing efforts for any of these products. In addition, we have completed development of three ancillary products, a reader/writer for security systems, a card handling system and a chip testing system, but marketing has not commenced. We have not begun the process of expanding our equipment-making capacity or creating in-house card production capacity, as we will require the proceeds of this offering to implement these plans. In general, we intend to use the proceeds of this offering to implement a substantial part of the plans described above. If we do not sell all of the units being offered, we may be required to scale back or modify our plans. Even if we complete the full offering, there is no assurance that we will be successful in implementing any of these plans. Smart Card Technology A smart card is similar in appearance to a traditional credit card, but stores information on an integrated circuit chip embedded within the card rather than on a magnetic stripe on the surface. While a typical magnetic stripe card stores approximately 212 bytes of information, (generally consisting of a user's name, account, and personal identification number) a smart card can store approximately 64 kilobytes or more of information, which is 300 times the capacity of a typical magnetic stripe card. Smart cards are more secure than magnetic stripe cards, which carry information on the outside of the card and can therefore be more easily damaged, copied, or accidentally erased. In addition, because the integrated circuit chip can also process data for encryption, smart cards offer greater protection against loss or theft of information. Smart card systems include a read/write device which performs applications by processing the data stored on the chip. Smart cards are used in a variety of applications, including: o access to restricted areas (replacing keys and identification cards); o public transportation fare collection (replacing tokens and tickets); o point of sale purchases (replacing cash or credit cards at cafeterias, newsstands and other point of sale locations where speed of purchase is important);vending machines; o public telephones; o industrial applications such as quality control, warehousing, inventory control, distribution and warranty; o health care (replacing patients' paper files in hospitals and HMOs); and o cellular phones. Smart cards are further classified as contact, contactless, dual-interface or hybrid. A contact card must be inserted into a reader or writer in order to process data. A contactless smart card receives information and power through an embedded antenna, and therefore needs not physically contact a reader/writer in order for the embedded chip to perform applications. This electronic transfer of information utilizes inductive coupling (commonly known as "radio frequency" radiation). Contactless cards can be read at a short distance from the reader/writer, making them uniquely well-adapted to small and rapid handshake transactions. Because transactions are conducted without physical contact between the card and the reader/writer, contactless smart card systems undergo minimal mechanical wear, require 26 little maintenance, and can be virtually vandal-proof. A dual interface smart card utilizes a single chip that can function in either a contact or contactless environment, and a hybrid card utilizes two chips that enable it to function in a contact or contactless environment. The chips used in smart cards are similar to those used in computers, but have significantly smaller memory. A variety of chips can be used depending on the complexity of the application the smart card is designed to perform. In recent years, technological advances in the design of smart card chips have occurred at a rapid rate, resulting in substantially enhanced storage and processing capabilities. At the same time, the costs of chip production are declining. The manufacture of smart cards involves the integration of chip modules into plastic cards. In the case of contactless cards, the module (which is the encasing of the chip) is integrated into a plastic sheet, and a wire antenna is ultrasonically implanted into the sheet around the chip module. Then an interconnect is formed between the wire leads of the antenna and the chip module by thermal compression welding. In the case of contact cards, a cavity is milled into a finished plastic card, and the chip module is glued into the cavity. Both contact and contactless cards may also incorporate magnetic stripes to be compatible with an existing stripe card infrastructure. Overview of the Smart Card Industry The total number of smart cards in use world wide was approximately 1.6 billion in 1999, and by 2001 it is projected that 3.4 billion smart cards will be in use (Source: Frost & Sullivan). By financial worth, the smart card market is projected to rise from $2.1 billion in year 2000, to more than $6.5 billion in 2005. (Source: SJB Research). To date, smart card usage has gained acceptance primarily outside the U.S. The leading markets for smart card sales at present are Europe, Asia and South America. The smart card industry is an expanding market with new applications being developed at a rapid pace. The major areas where smart cards are in use today are mass transit, toll collection, electronic purse, access control, banking, medical, and Internet commerce. Although the U.S. market has been slow to develop, we believe that awareness and acceptance of smart cards in this country is on the rise. For example, American Express has recently released their new Blue card, which features an embedded contact chip with an Online Wallet application. On e-commerce web sites that support the Online Wallet, a reader/writer attached to a user's computer verifies the user's personal code against a value stored on the chip, creating a high level of security. VISA is also promoting the use of smart cards because they are believed to reduce fraud and theft. We believe that smart cards will play a pivotal role in the future of secure electronic commerce, and that consumers will prefer to make purchases on web sites that support the added level of security that smart cards can provide. The accessibility of the Internet, coupled with the security of the smart card, will also present other opportunities. In e-purse applications, such as transportation cards, individuals can add dollar value via a secure Internet connection from home without having to use an inconvenient public kiosk. In banking and medical applications, users can view their records and make updates with a level of security not present in today's systems. Computers are currently available with an integrated smart card interface. We believe that the increase in computer networks and the emergence of the Internet as the means of both electronic communication and commerce will create an increase in the growth of the smart card market. Smart cards linked to an individual's computer are capable of storing large amounts of personalized user information, and can be used to access corporate networks, store the user's preferences, and conduct 27 financial transactions over the Internet with a high level of security. These applications would make a smart card a direct, secure extension of a PC network. In fact, Microsoft has already integrated smart card support directly into their Windows 2000 environment. Products and Services Our production line business offers a complete array of equipment and services that enables us to provide our customers with a turnkey smart card operation. This includes the technology, equipment, supplies, installation, training, and support required for full-scale production. Our equipment designs focus on the contactless platform. We believe that our designs are more advanced than those offered by many of our competitors because we use fully-automated technology that allows for minimal operator intervention by the card manufacturer. Our robotic-based systems provide a high degree of precision in the card manufacturing process, resulting in faster lead times and higher yields. In contrast, systems designed by our competitors generally have fewer computer-guided operations and require more manual labor in the manufacturing process. We have specialized in factory automation since 1994, when we began to design equipment that produces electromagnetic components. This background in electromagnetism enabled us to develop extremely precise machinery that we later applied to the manufacture of smart cards. For example, we designed equipment for the production of surface mount inductors, which are miniature devices used to regulate the flow of radio frequencies. The same basic technology is used to regulate the radio signals through which a smart card communicates with the reader/writer. We also designed equipment for the production of components used in cellular phones. This technology involved a miniature coil winding process for wrapping copper wire around a ceramic core. The same process is used for winding wire around the periphery of a smart card. Having developed these technologies, we became aware of the potential to transition into the smart card industry. In addition, as a result of doing business in foreign markets, we became cognizant of a growing worldwide demand for smart cards. Therefore, beginning in 1997, we decided to discontinue our electronic components business and began to develop and design equipment for the production of smart cards, which we believed to be a higher-margin business with a far greater potential for growth. In 1999 we began our direct smart card sales activities by purchasing finished cards from our equipment manufactures for re-sale to end users. Also in 1999, we began the development of certain ancillary smart card products, including a reader/writer device for keyless entry security systems, a product for testing and initializing the chips contained in smart cards, and a smart card ship testing system for inspecting and qualifying integrated chips. We also provide post-processing and peripheral services including printing, embossing, magnetic striping and personalization of finished smart cards. The principal customers for these services are companies involved in smart card systems integration. Smart Card Production Lines Our smart card capital equipment consists of various components acquired from third parties that we integrate into an automated production line based on our designs and processes. We have three Provisional Patent Applications pending with respect to these technologies, for which we intend to file corresponding non-provisional patent applications. Our equipment utilizes robotic workcell technology to 28 create a fully automated production line. Full automation makes the equipment especially well suited for countries where labor costs are of concern or highly trained personnel are scarce. Unlike many of our competitors, we do not produce factories dedicated to a specific type of chip, antenna or card. These fixed systems limit flexibility, since the machinery cannot readily accommodate alternate designs. Many of these fixed systems also rely on expensive premanufactured sub-assemblies, such as etched antenna sheets. We believe that our factories are better able to adapt to changes in antenna design and smart card design. Our machines employ software based formats that can be easily changed to serve our customers' needs. The software enables the manufacturer to change specifications and other design parameters in order to produce different types of smart card products. Thus, while we principally design contactless card systems, our production lines can be modified to produce several other types of smart cards, including contact, dual interface and hybrid cards, as well as labels, key fobs and coins. Our contactless smart card production lines require only the most basic raw materials: plastic sheets, chips and copper wire. This enables our customers to reduce their manufacturing costs by eliminating the need to buy more expensive pre-manufactured parts. In addition, flexibility is built into the production machinery, allowing owners to easily adapt to advances made in smart card technology. These rapid advances in the industry have already been demonstrated by a 75% reduction in the chip size over the last three years. Our turnkey factory lines are also designed for rapid startup, typically enabling customers to manufacture product within approximately four to nine months after making the initial downpayment. Under our capital equipment installation agreements, we will generally supply raw materials, temporary factory management, training and transfer of knowledge to accelerate the start-up process. We have developed new designs for the production of equipment that can manufacture "smart labels." This is a thin piece of paper (rather than a plastic card) that has an embedded chip and can be used in place of a magnetic stripe or barcode. Although this is a very recent development in contactless technology, we believe commercial opportunities are rapidly developing. UPS and Federal Express have recently announced the replacement of their bar-coded labels with the smart label. We have successfully tested a prototype for producing smart labels and intend to market this equipment in the future as a new product line. We believe this product will expand the types of applications for which our technologies can be used. Recently we completed a total of three production line installations for two customers in China. All lines have been tested and accepted by the customer and full-scale production has commenced. Currently we have a contract to install two new production lines for another customer based in China. During 1997 and 1998 we developed the designs and processes that form the core of our capital equipment technology. Between 1998 and 1999 we installed our first two production lines for customers in China, after which we focused on implementing various enhancements and upgrades to our production machinery. We believe these improvements put us in a strong competitive position and helped us secure the capital equipment contracts that are now in place. The payment structure on these contracts is based on a percentage of completion method whereby we receive an initial cash deposit, with the balance payable based on the completion of the project. Our turnkey factories consist of six separate pieces of equipment (otherwise known as workcells) that are assembled into a fully automated production line: 29 Hole Punching Workcell. This workcell is used to punch precisely measured cavities into plastic sheets in order to accommodate the chip module that is inserted into the cavity at a later stage in the assembly process. Module Pick and Place Workcell. This system is designed to install the modules containing a microprocessor onto a specified sheet matrix. Antenna Embedding Workcell. This system is designed to embed the wire into the plastic sheet through the use of ultrasonic power. We believe that ultrasonic embedding is superior to other existing processes, such as etching, as it results in a much more stable card. Bonding Workcell. This system is used to form the bond between the module and the wire antenna, using thermo-compression techniques. Dual Mode Lamination Workcell. This system laminates the plastic sheets and can load up to 12 sheets at each opening. Card Cutting Workcell. This workcell is used to punch laminated inlays into precise card bodies in accordance with precise specifications. The antenna embedding, module pick and place and bonding workcells are considered core components. We have developed proprietary designs and processes for the assembly and integration of these machines. Approximately 50% of this assembly work is done through a contract manufacturer, based on our requirements and under the supervision of our engineers. The dual mode lamination, hole punching and card cutting machines are considered off the shelf components and are purchased as-is through outside vendors. After assembly is completed by our subcontractor, all finished components are shipped to our San Diego facility to be assembled and inspected by us and our customers, and are then packaged and shipped to the customer. Our personnel are sent to the customer's location to supervise final installation and testing. Our capital equipment products are all designed according to customer specifications and sold as complete production lines. Smart Cards Although we intend to install a smart card production line in our San Diego facility, at present we do not have any in-house capability to manufacture cards. Therefore, we have entered into agreements giving us the right to buy finished product at a fixed price from certain companies that purchase our capital equipment. We also have agreements with other capital equipment customers under which we are obligated to buy specified quantities of cards at a fixed price. These arrangements are expected to give us a stable source of supply, and we believe that the prices we have negotiated are competitive under current market conditions. We also believe that sourcing cards from our equipment customers will ensure high quality product, since our machinery undergoes stringent inspection and testing before customers begin production. We have been designated as an approved smart card supplier by several leading companies, including Philips, Siemens, Motorola and NEC. We also offer post-processing and peripheral services in order to customize cards for end-users. These services include printing, embossing, magnetic striping and personalization of finished cards. 30 We use third-party vendors for most of the post-processing services, except for personalization, which we conduct in-house. In the past, we obtained finished smart cards from two manufacturers in China who purchased production lines from us. These manufacturers no longer supply us with cards, as we have been unable to meet our obligation to source computer chips for them due to a worldwide shortage of smart card microprocessors. However, we have recently installed three new production lines for two customers from which we will have the ability to purchase finished cards. Upon the completion of our current installation projects, we will be entitled to purchase a substantial portion of the output from as many as six more production lines. These arrangements will continue for a period of three years after our customers have commenced production. These lines are all designed to produce technologically advanced high frequency smart cards. With these direct strategic alliances, we believe we will be able to offer high frequency cards at a lower price than the leading competitors. We conduct extensive testing of smart cards upon receipt from the manufacturer. Card functionality is tested through our card handling system, which our own engineers have designed. We also conduct a torsion test and a pull test to check the strength of both the card and the bond between the antenna and the chip module. All testing is done by randomly selecting cards from each shipment we receive. We believe that the card industry recognizes high frequency contactless smart cards as the best platform in terms of business and technology. We further believe that with our advanced production lines, we will be in a strong position to deliver cards that compete in nearly the same price range as the low frequency cards. Assuming the successful completion of this offering, we intend to install an in-house production line in our San Diego facility. This will position us to offer new smart card products, including dual-interface cards, cards utilizing alternate smart card platforms, and cards for use in GSM cellular phones. o Dual-Interface Cards. Also known as "combi" cards, they contain one chip with both a contact interface and a contactless interface. These two interfaces allow for greater compatibility with older contact-only systems. There is a strong market for this product in Korea for use in banking applications. We are currently negotiating a potential sale of these cards to a leading Korean systems integrator. We anticipate that the need for dual-interface cards will expand to other markets as demand for secure applications increases. o Alternate Smart Card Platforms. We believe there is also a growing market for smart cards compatible with various new operating platforms that are now available. The ongoing microprocessor shortage has prompted a number of chip manufacturers to develop and actively market alternatives to the Mifare platform. We intend to promote our capability to supply cards to the developing market for non-Mifare smart cards. These platforms have now been standardized to encourage and accelerate development. o GSM Cellular Phones. The Global System for Mobile Communications is a chip-based cellular telephone system. GSM cellular phones utilize a miniature smart card for account verification in place of an electronic identification number assigned to each unique 31 cellphone. This allows for greater convenience because the card is detachable and interchangeable with other GSM phones. This technology is widely used in Europe and Asia, and we believe that it is gaining acceptance in the U.S. We believe we are in a favorable position to take advantage of this expected growth market, as our machinery is well-suited to produce the precision components required for GSM use. Our overall goal is to create in-house manufacturing capacity in order to take advantage of opportunities that are expected to arise in dual-interface cards, alternate-platform cards and GSM cards. Although we could rely on our outside vendors to supply these products, using our own on-site equipment will increase our margins, give us greater control over quality and delivery time, and give use greater flexibility to respond to movements in demand. Ancillary Smart Card Products We have designed a smart card reader/writer for use in keyless entry security systems. This device is available either as a stand-alone product, or as an OEM circuit board, which is the basic unit that a manufacturer can modify for its own specialized applications. As a stand-alone unit, the reader/writer board has been enhanced with switching devices that actuate electronic locks and alarm systems without additional interface boards. In contrast, the typical security system requires two interface boards, one which reads the card and one which powers the locks. We believe our product is more cost effective for customers because it uses less power and does not require the addition of a second board. We intend to market the stand-alone product primarily to homeowners as an alternative to traditional locks and alarm systems. We anticipate that reader/writers will be manufactured by a contract manufacturer based on our designs. The OEM circuit board or developer's kit can be used to design smart card systems on any platform. The target market for the developer's kit is engineering personnel. Our development kit includes the reader/writer, platform-independent software and sample cards. This kit allows developers to integrate our technology into their networks and systems. This method of introduction is well known and accepted in the electronics industry. In addition to direct sales, our goal is to act as a supplier for smart card systems integrators in order to accelerate the growth of our contactless smart card business. While we have not yet commenced sales of our smart card peripheral products, we believe the door access and secured electronic access markets have the potential to offer a high volume of business for both reader/writers and the high frequency cards used in security systems. High frequency cards offer several advantages over other entry devices, including low frequency cards: high frequency cards are more streamlined and therefore easier to handle; price differentials between high and low frequency cards have decreased; and high frequency cards are capable of more extensive cryptology than low frequency cards, making them better suited for high security applications. We have recently developed a card handling system that automatically tests and initializes the computer chip embedded in each card. This desktop unit is designed to meet the trend towards programming cards at the end user's site. Several of our installation projects include this unit as a component of the production system. We also intend to market this unit as a stand-alone product to existing card manufacturers who desire to add testing and initialization capability to their production 32 systems. We have also developed a smart card chip testing system that automatically tests smart card integrated chips before manufacturing begins. This unit is designed to enhance production quality control. Several of our installation projects include this unit as a component of the production system. We also intend to market this unit as a stand-alone product to existing card manufacturers who desire to add a greater degree of quality control to their production systems. Production Line Contracts In order to secure installation contracts in China we generally engage the services of general agents and sub-agents. It is customary practice in the Chinese business community to use these agents in significant transactions. The total fees payable to a general agent and sub-agents in connection with an installation contract typically range from 10% to 25% of the total contract price. We also use general agents and sub-agents to introduce us to potential smart card customers in China. The fees payable to agents with respect to smart card sales are generally between 6% to 13% of the total sale price. Similar business practices exist in connection with the sale of equipment and smart cards in Korea, Japan, Taiwan and Europe, all of which are markets in which we intend to be active. From 1998 to 1999 we completed one production line for China Tianjin Global Magnetic Card Co., Ltd. and one line for Beijing Aerospace Gold Card Co., each of which is located in China. Under our contracts with these parties, we agreed to provide each of them with raw materials for the manufacture of cards. We also have the exclusive right to buy the finished smart cards produced by these manufacturers. However, because of a shortage in the supply of Mifare microprocessors, we have been unable to provide the necessary raw materials, and there is a risk that such parties may bring claims seeking to impose continuing obligations upon us. (See "Risk Factors - We are Subject to Risks Associated with Obligations Under our Capital Equipment Contracts."). In late 2000 and early 2001 we completed the installation of three production lines for two customers based in China. In addition, we have entered into an agreement with another customer located in China covering the installation of a double production line. We expect that the project will be completed by the end of 2001. Under each of our production line contracts, installation, testing, technical services and training are included in the cost of the facilities. All of these contracts are governed under Chinese law and provide for the arbitration of disputes in China. The following summarizes the specific provisions of our current capital equipment contracts: China Card In October 2000, we delivered and installed two production lines for the Shandong Huang Tai Industrial Group in China. The equipment has been tested and accepted by the customer and full-scale card production has begun. The equipment was purchased by a joint venture company, China Card I.C. (Shanghai) Co., Ltd., which is owned on a 50-50 basis by us and The Shandong Huang Tai Industrial Group. Our capital contribution to the joint venture was in the form of equipment; accordingly, a portion of the equipment sold to the joint venture was deemed to be our capital contribution, and a proportionate deduction was made from the cash amount payable to us under the equipment installation contract. No revenue was recognized by us and no investment asset was recognized on that portion of the equipment deemed to be capital contribution. 33 Under an equipment purchase agreement, we guarantee a manufacturing capacity of 6 million cards per year and a reject rate of less than three percent for each production line sold to China Card I.C. (Shanghai) Co., Ltd. We also entered into a license agreement under which we provided technical information and support services needed to operate the production lines. Under a raw materials and product sale agreement, we have the right to buy contactless cards from China Card over a three-year period at a fixed price per card. Quantities are based on our forecasted requirements, and we must post letters of credit to secure our purchases. In addition, this agreement requires us to provide China Card with raw materials on an as-ordered basis over a three-year period at a fixed price per card, subject to the issuance of letters of credit securing China Card's payment obligation. We have agreed, however, that, should we decide to buy finished cards, China Card will not pay us cash for raw materials, but rather will deduct the appropriate amount from the price at which they sell finished cards to us. Shandong Huaguan In February 2001, we delivered and installed one complete production line for Shandong Huaguan Group General Company in China. The equipment has been tested and accepted by the customer and full-scale card production has begun. Under an equipment purchase agreement, we guarantee a manufacturing capacity of 6 million cards per year and a reject rate of less than 3 percent. We also entered into a license agreement under which we provided technical information and support services needed to operate the production lines. Under a raw materials and product sale agreement, we have the right to purchase contactless smart cards over a three-year period at a fixed price per card. Quantities are based on our forecasted requirements, and we must post letters of credit to secure our purchases. In addition, this agreement requires us to provide raw materials over a three year period at a fixed price per card, subject to the issuance of a letter of credit securing Shandong Huaguan's payment obligation. Hainan Pacific We have entered into an equipment purchase agreement with Hainan Pacific New High Tech Co, Ltd., a Chinese company, covering the sale of a double production line. Under this agreement, we guarantee a manufacturing capacity of 1,500 cards per hour. Payments are to be made based on the progress of the project. We also entered into a license agreement under which we provided technical information and support services needed to operate the production lines. Research and Development We conduct an ongoing analysis of available manufacturing technologies and advancements in the automation industry, which we believe has enabled us to procure modern, low-maintenance and cost-effective equipment. In 1999 we completed modifications to our factory equipment that significantly 34 improved the efficiency and adaptability of our production lines. These modifications included improving the mechanics and electronics of our coil winding, process making the winding equipment more efficient and resulting in higher output. We also enhanced the flexibility of our implanting machinery, which can now implant the antenna into a variety of materials, including the paper used in smart labels and new types of plastics. Our process for welding the module to the antenna has been improved, resulting in an increase of approximately 11% to 20% in the average stress that the card can withstand. From 1998 through 1999, we spent approximately $267,000 on both personnel and equipment in connection with research and development. During the 2000 fiscal year, we continued to evaluate new card and chip technologies in order to ensure that our equipment fully utilizes these new developments. By utilizing advances in materials and technology, we were able to improve the efficiency of our processes, resulting in reduced raw material cost, improved mechanical and electrical performance, and a higher quality product. With rapid advances continually taking place in the plastics and semiconductor industries, we view our research in this area as essential to establishing a prominent role in the smart card market. In contrast to prior years, during 2000 research and development was conducted in the course of producing equipment for customers, and not as a separate activity. Therefore, our research and development costs for the year are not reflected as a separate line item in our financial statements. In response to the demonstrated needs of the market, we are developing smart card systems solution software, including toll collection, door access, and general communication applications for use by developers of custom software during evaluation. This product is in the very early stages of development. We anticipate that during the 2001 fiscal year, we will continue to focus on improvements that can be implemented as part of our ongoing installation work. We also intend, to a lesser extent, to allocate resources to independent research and development projects, primarily for the further development of new products. We believe that the ability to continue making enhancements and improvements will be critical in positioning us to benefit from the projected expansion of the smart card market. Market Analysis Market The smart card markets in Europe, Asia and South America are well established and have grown at a rapid rate. The smart card market is projected to rise from $1.8 billion in worldwide sales in year 2000 to more than $6.5 billion by 2005 (Source: SJB Research). Our internal estimates place the size of the worldwide smart card capital equipment market at approximately $500 million for the 2001 fiscal year based on our assessment of current market activity including contracts up for bid or being fulfilled. In the U.S., the market for both smart cards and smart card capital equipment remains relatively small. However, we believe that the U.S. is currently undergoing a technological shift from magnetic stripe cards to smart cards, and is at the onset of expansive growth in the smart card industry. It is projected that the U.S. will account for up to 50 percent of worldwide growth in smart card sales (source: Dataquest). Market data also suggest an increase in capital equipment sales. The U.S. market for radio-frequency identification equipment (which includes smart card reader/writers, contactless smart cards, contact smart cards and smart labels) is projected to grow to $782 million by the end of 2000, representing 35 a five-fold increase from 1994 (source: Frost & Sullivan). We believe that this will also stimulate growth in the capital equipment market, as machinery will be needed to meet the demand for these products. Contactless smart cards are well suited for applications such as mass transit or access control. In the U.S., we believe that applications such as large corporate network access, public transportation, toll collection, government ID cards, health cards, parking meters, gas stations, e-commerce and keyless entry will all be viable applications. Contactless smart cards can also be used with applications that make use of the SSL and SET protocols, which are methods of insuring secure financial transactions over open networks like the Internet. Overall, we anticipate that demand for capital equipment and smart cards will expand as a result of: o The growth and diversity of smart card applications; o The need for higher security in Internet e-commerce; o The consumer desire for more convenient financial and personal transactions; o The progression of radio frequency applications to higher frequencies; and o The projected growth of the smart card market in South America and, in the longer term, North America. Our smart card equipment business has historically focused on the Asian markets, particularly China. As a result of its economic growth over the last decade, China has invested heavily in modernizing its electronics industry. Initially, we took advantage of this modernization in the field of electromagnetic products. Having transitioned into the smart card business, we believe that our prior experience will allow us to continue competing effectively in the Chinese market and other similar markets. Additionally, in our smart card sales sector, we believe that our knowledge of the manufacturing process provides a basis for understanding and meeting the needs of our smart card customers. Overall, we believe that our company is well positioned to compete in the smart card industry in China as a result of our knowledge of the local market, our long-term experience in electromagnetic technologies, and the quality of the equipment that we have produced and sold to customers in China. We intend to use this as a basis for broadening our customer bases in Asia and expanding into the North American, European and South American markets, supported by an expansion of our sales force and the launch of an advertising and promotional campaign. Customer Profile Our target market for smart card sales includes industrial concerns wishing to expand into the field of smart cards and established card manufacturer wishing to meet new market demand by offering contactless smart cards. A partial list of our current smart card customers includes: o KD Electronics (South Korea) o Motorola (USA) o Korea Information & Communications Company (South Korea) o Electronic Silicon Solutions (UK) 36 Our current capital equipment customers are describe in this prospectus under the heading "Business - Current Capital Equipment Contracts." Competition In the smart card capital equipment market, our competitors include production line suppliers such as Mulhbauer (Germany), Melzer (Germany), Meinen Ziegel & Co. (Germany), Ruhlamat (Germany), Essec (Switzerland), Sempac (Switzerland), Sokymat (Switzerland) and Advanced Interconnection Technology (United States). Our competitors in the smart card sales market include Aktiengesellschaft fur Chipkarten und Informationssysteme ("ACG") (Germany), Giesecke & Devrient (Germany), Oberthur (France), Gemplus (France), Schlumberger (France), and Amatech (Germany). Key factors that have contributed to our competitive position in the capital equipment industry include short lead times, technical know-how and strong business relationships developed and maintained at the local level. In addition, to our knowledge few competitors can match our ability to automate every function within the production line. In the area of smart card sales, we believe that we offer a competitive product in terms of both price and quality. We have contracted with our capital equipment customers to purchase cards at prices that we believe are very favorable. Since our suppliers will be using equipment that we designed and manufactured, we are confident that we will receive high quality product. Our products are specifically engineered to meet the individual requirements of our customers. In the case of smart card capital equipment, every component built is fully tested and inspected before shipment to the customer. We believe that this commitment to quality results in state of the art product and high yield for our customers. In the case of smart card sales, the product we purchase from manufacturers is extensively tested in order to ensure that our customers receive high quality cards. Marketing and Advertising Our marketing strategy is to enhance, promote, and support the fact that our products meet customers' stringent specifications, yet are priced competitively. We intend to create a strategic marketing campaign delivering this message along with the announcement of new sales offices and new products, including our reader/writer for security systems and smart cards designed to accommodate the new operating platforms that are now available. This marketing campaign will include a public relations rollout, an advertising campaign in trade publications, and direct mailings. We also intend to expand our web site, URL:http://www.chipcards.com, to reflect our growing product line and include e-commerce as a means of distributing our products. Our overall advertising and promotional objectives are to position our company as a recognized expert in the design of smart card manufacturing facilities, and in the sale of contactless smart cards and related products and services. Although we have not yet commenced any promotional activities, we have budgeted $300,000 in fiscal 2001 for advertising and promotion (a portion of which is expected to be funded from the proceeds of this offering). The budget for advertising will be continuously updated to comprise approximately 3% of total sales. For 2001, we intend to focus on press releases, sponsorship programs and the Internet as publicity strategies. We appear at select trade shows throughout the year and has co-sponsored industry events in China. 37 Distribution We currently have sales offices located in Beijing, China and South Korea. Currently, our Beijing office consists of four employees including one sales employee and two engineers, and our South Korea office consists of four employees including three sales employees. The Beijing office engages in the sale of both capital equipment and smart cards. The South Korea office engages primarily in the sale of smart cards but has begun to solicit potential production line customers as well. In addition, we have six independent sales representatives covering the United Kingdom, France, Italy, Japan, Germany and Argentina. All of our sales representatives are dedicated solely to smart card sales. They are not restricted from representing other parties, but have agreed not to sell any products competitive with ours. In order to establish a greater share of the international smart card market, we intend to expand the size of our office in Beijing. We intend to hire our German sales representative as an employee to open and manage a new sales office in Munich, Germany. In addition, we are currently in negotiations to add independent sales representatives in the Middle East. In the market for contactless smart cards there exist only a few companies with worldwide sales offices. We are determining, on a region by region basis, if it will be more beneficial to compete head-to-head at the retail level with these large distributors, or to become a wholesaler to them. We are currently negotiating with several contactless smart card distributors to explore the best strategy for each market. At present, one of our principal smart card customers is a retailer which purchases from us on a wholesale basis. Our web site has been instrumental as a promotional tool, and a means of providing contact information. We also intend to add e-commerce capabilities to enable the purchase of smart card products directly from our website. Intellectual Property We regard our factory automation designs and processes as proprietary and will rely primarily on a combination of patent, copyright, trade secret and confidential information laws, employee and third-party non-disclosure agreements and other methods to protect such proprietary rights. The aspects of our technology which we consider to be unique in the industry include the use of robotics to achieve full automation, the integration of software based formats in order to maximize flexibility, and the use of modular designs that enable each workcell to function as a stand-alone unit. There can be no assurance that these protections will be adequate to protect against infringement or misappropriation of our recipes or formulations. We have filed three Provisional Patent Applications with respect to certain designs and processes used in the manufacture of our production lines. We intend to file corresponding non-provisional patent applications in order to continue pursuing patent protection for these inventions. There is no assurance, however, that we will be successful in obtaining patents for any of the inventions claimed in these applications. We currently do not have any issued patents, copyrights or trademarks. We intend to enter into non-disclosure agreements with certain of our employees and non-disclosure and assignment of invention agreements with certain of our employees, consultants and subcontractors. However, there is no assurance that such measures will be adequate to prevent competitors from developing similar or superior products. Legal Proceedings 38 From time to time, we may be involved in litigation relating to claims arising out of our operations in the ordinary course of business. We are not currently engaged in litigation or arbitration, the result of which would have a material effect on our financial condition, results of operations or future prospects. Employees We currently have eleven employees in the United States, four employees in China and four employees in South Korea. All employees are full time except for our Chief Financial Officer, who is serving on an as-needed basis. After the completion of this offering, we intend either to secure the full-time services of our current CFO or identify and hire another qualified candidate as a full-time CFO. In the area of sales, we use a combination of full time employee sales personnel and independent sales representatives to optimize market potential and geographic coverage. We have three employees directly engaged in the sale and distribution of our technology products in the United States, one sales employee in China and three sales employees in South Korea. After the completion of this offering, we plan to expand both our employee and contract sales forces in the U.S. and abroad to capitalize on the forecast demand for smart card products. Our future performance depends in significant part upon the continued service of our key technical and management personnel, and our continuing ability to attract and retain highly qualified and motivated personnel in all areas of our operations. Competition for qualified personnel is intense. We provide no assurance that we can retain key managerial and technical employees or that we can attract, assimilate or retain other highly qualified personnel in the future. Our employees are not represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be good. Properties and Equipment Our headquarters are located in Citicorp Center at One Sansome Street, 19th Floor, San Francisco, California. We have entered into a one-year lease with a term ending on June 30, 2001. The term will be automatically extended for successive one-year periods unless either party elects not to renew at least 90 days prior to the expiration of the initial term or any renewal term. A 7% rent increase will apply to each renewal term. The current rent is $4,638.00 per month. Our San Diego office is currently leased from Ampac Technology, LLC a limited liability company owned by two of the principal stockholders of our company. The property is located at 6827 Nancy Ridge Drive, San Diego, California. The lease is for a term of twenty years ending on March 19, 2019, at a base rent of $7,000.00 per month. Ampac has entered into an agreement to transfer title to the San Diego property to us upon the completion of this offering at a purchase price of $150,000 plus the assumption of the existing mortgages with an outstanding balance of approximately $1,121,640. Our China office is located at Huatong Building, A-19, West Chegongzhuang Road, Beijing, China. We have entered into a one-year lease with a term expiring April 30, 2002. The current base rent is approximately US $1,198 per month. 39 Our South Korea office is located at Samwon Building, 81-1, Karak-Dong, Songpa-Ku, Seoul, South Korea. We share office space with Chunwoo Ind. Co. Ltd., a company controlled by one of our employees in South Korea, on a rent-free basis. MANAGEMENT The Directors, Executive Officers and significant employees of our company are as follows:
Name Age Position Allen Yue(1) 43 President, Director Eric Gravell(2) 41 Executive Vice President, Assistant Chief Financial Officer, Director Paul Amadeo 33 Chief Information Officer, Director* Timothy Norman 33 Chief Technology Officer Michael Recca 50 Chief Financial Officer Fillian Lei 32 Controller Ross Mandell 44 Director* Scott A. Ziegler 40 Director*
(1) Member of Compensation Committee (2) Member of Audit Committee * Nominated as a director to serve upon the completion of this offering Each of the above-listed directors will serve until the next annual meeting of the shareholders and until his or her successor is elected and qualified, or until his or her death, resignation or removal. Vacancies on the Board of Directors are filled by a majority of the remaining directors. Each of the above-listed officers and employees will serve until the next annual meeting of the Board of Directors and until his or her successor is elected and qualified, or until his or her death, resignation or removal, subject to the employment agreements between our company and each such officer. The board of directors is currently comprised of seven seats. At present Allen Yue and Eric Gravell are serving as directors, and the remaining five seats are vacant. Upon the completion of this 40 offering, Ross Mandell, Scott Ziegler and Paul Amadeo have been nominated to serve on the board, and they have agreed to do so subject to our obtaining acceptable directors and officers liability insurance. We intend to fill the remaining two vacancies after the completion of this offering. Business Experience Allen Yue co-founded Chipcards in November 1993 and has served as its President since then. Mr. Yue is directly responsible for the sales of all Chipcards' machinery in Asia, and supervises its offices in Beijing and Seoul. Prior to founding Chipcards, Mr. Yue co-founded Discount Air Brokers International in 1988, and ran the Shanghai office of American Pacific Development and Investment, a Boeing distributor, between 1991 and 1994. Mr. Yue went to college at Beijing University and San Francisco State University. Eric Gravell co-founded Chipcards in November 1993 and has served as its Executive Vice President since then. He has also served as Assistant Chief Financial Officer since January 2001. Prior to founding Chipcards, Mr. Gravell was a Director at American Pacific Development and Investment, a Boeing distributorship with offices in Hong Kong and Shanghai. In 1985, Mr. Gravell co-founded Transoceanic Travel, the first agency in the United States to promote international and around-the-world travel at wholesale prices. Mr. Gravell is currently serving as an officer of TicketPlanet.com, Inc., an online supplier of travel services. Mr. Gravell attended the University of Montreal and San Francisco State University. Paul Amadeo joined Chipcards in 1998 and serves as Chief Information Officer. Prior to joining Chipcards, Mr. Amadeo conducted research and development in Optical and RF components, managed a medium-scale LAN/WAN network, and served as a project engineer/manager for RF components. Mr. Amadeo earned a B.S. in Applied Physics from the California Institute of Technology, and a M.S. in Electrical Engineering/Applied Physics from the University of California, San Diego. Timothy Norman joined Chipcards in 1997 to develop Chipcards' smart card division. He currently serves as our Chief Technology Officer and has served as a Director from October 1999 through January 2001. Prior to joining Chipcards, Mr. Norman was involved with the research and development of superconducting and composite materials. He served as a program manager for composite material characterization on the F-22 project, and designed experiments for the characterization of advanced plastic materials used in commercial aircraft. Mr. Norman earned a B.S. in Physics from the University of Nebraska. Michael Recca was appointed Chief Financial Officer of Chipcards in May 2001. Mr. Recca serves in this capacity on an as-needed basis. Mr. Recca currently serves as Chairman of the Board of Directors of Harvey Electronics, Inc., a retailer of audio, video and home theater equipment. Since 1996, Mr. Recca has served as the manager of Harvey Acquisition Company, LLC. From August 1995 through December 31, 1998, Mr. Recca was an employee of Taglich Brothers, D'Amadeo, Wagner & Co., Inc., a NASD registered broker-dealer. Fillian Lei joined Chipcards in 1994. She served as its Chief Financial Officer between 1996 and 1998, and is now Controller. Prior to joining Chipcards, Ms. Lei worked for American Savings Bank as a Senior Financial Service Representative for seven years. Ms. Lei earned a B.S. degree in accounting at San Francisco State University in 1994. 41 Scott A. Ziegler has been the Senior Managing Partner at Ziegler, Ziegler & Altman LLP in New York City since 1991, and has been a practicing attorney since 1986. Mr. Ziegler specializes in international and domestic corporate, securities, licensing and venture capital matters. Mr. Ziegler attended Brown University (B.A., 1982) and the University of California School of Law (J.D., 1985). Ross H. Mandell is and has been a consultant to Chipcards since March 2000. Mr. Mandell is also the President and Chief Executive Officer of Sky Capital Ltd., a financial consulting and advisory company. He has been a stockbroker since 1984. Mr. Mandell was employed by a number of stock brokerage firms since that time, including E.F. Hutton and Oppenheimer & Co. In 1995, Mr. Mandell founded (with two other individuals) Roan Capital Partners, L.P., a New York-based broker-dealer and investment banking firm. Mr. Mandell sold his interests in Roan Capital in April 1997, and joined The Thornwater Company, L.P., another New York-based brokerage firm, where he served as Senior Vice President. Mr. Mandell resigned from Thornwater in January 2001, but continues to serve that firm as a consultant pursuant to three-year consulting agreement. Mr. Mandell is also a consultant to TicketPlanet.com Inc, a California based online travel firm. Mr. Mandell attained a Bachelor of Arts degree from the University of Maryland in 1978. In 1999, Mr. Mandell was named in an arbitration proceeding brought against Roan Capital. Mr. Mandell paid $75,000 in connection with the settlement of that arbitration. In February 1995, Mr. Mandell settled disciplinary charges brought by the New York Stock Exchange ("NYSE"). He was suspended from the securities business for six weeks pursuant to that settlement. Employment Agreements Eric Gravell has entered into a three-year employment agreement dated January 1, 2001, which is renewable at our option. Mr. Gravell receives a salary of $175,000 per year and is entitled to a discretionary bonus to be determined by the board of directors. Allen Yue has entered into a three-year employment agreement dated January 1, 2001, which is renewable at our option. Mr. Yue receives a salary of $175,000 per year and is entitled to a discretionary bonus to be determined by the board of directors. Each of Paul Amadeo, Timothy Norman and Fillian Lei has entered into a three-year employment agreement dated November 1, 2000 providing for a salary of $100,000 per year. Jose Flores has entered into a three-year employment agreement dated November 1, 2000 providing for a salary of $70,000 per year and an incentive bonus equal to ten percent of the gross profits from any sales directly attributable to him. COMPENSATION OF DIRECTORS AND OFFICERS 42 The following table sets forth the aggregate annual remuneration of our President and the four most highly paid executive officers other than the President who served as executive officers as of December 31, 2000: Summary Compensation Table
--------------------------------------------------------------- ANNUAL COMPENSATION - -------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) - -------------------------------------------------------------------------------------------------------- Other Annual Name & Principal Position Year Salary ($) Bonus ($) Compensation($) - -------------------------------------------------------------------------------------------------------- Allen Yue, President 2000 $125,000 -0- $20,000(1) - -------------------------------------------------------------------------------------------------------- 1999 $90,000 -0- $60,000(2) - -------------------------------------------------------------------------------------------------------- 1998 $57,600 $50,000 -0- - -------------------------------------------------------------------------------------------------------- Eric Gravell, Executive Vice President 2000 $62,500 -0- -0- - -------------------------------------------------------------------------------------------------------- 1999 $78,750 -0- -0- - -------------------------------------------------------------------------------------------------------- 1998 $57,600 $100,000 -0- - -------------------------------------------------------------------------------------------------------- Timothy Norman, Chief Technology Officer 2000 $66,667 $50,000 -0- - -------------------------------------------------------------------------------------------------------- 1999 $57,000 -0- -0- - -------------------------------------------------------------------------------------------------------- 1998 $40,092 $22,500 -0- - -------------------------------------------------------------------------------------------------------- Paul Amadeo, Chief Information Officer 2000 $73,333 $40,000 -0- - -------------------------------------------------------------------------------------------------------- 1999 $68,000 -0- -0- - -------------------------------------------------------------------------------------------------------- Fillian Lei, Controller 2000 $67,705 $50,000 -0- - -------------------------------------------------------------------------------------------------------- 1999 $35,750 -0- -0- - -------------------------------------------------------------------------------------------------------- 1998 $42,000 $22,500 -0- - --------------------------------------------------------------------------------------------------------
(1) Represents cash commission paid in connection with the sale of equipment. (2) Represents accrued commission in connection with the sale of equipment that Mr. Yue elected to defer. This amount was paid during 2001. 43 Stock Compensation In November 1999 we issued stock awards to the employees named in the following table in connection with services provided to our company. All share amounts have been retroactively restated to reflect a 2.65-for-one stock dividend declared in May 2000. These shares had a nominal fair market value at the time of issuance.
Name of Employee Amount of Award - ---------------- --------------- Fillian Lei 182,500 shares - ---------------------------------------------------------------------------- Timothy Norman 182,500 shares - ---------------------------------------------------------------------------- Paul Amadeo 182,500 shares - ---------------------------------------------------------------------------- Jose Flores (engineer) 91,250 shares - ---------------------------------------------------------------------------- Mo Jia (head of Beijing office) 182,500 shares - ----------------------------------------------------------------------------
Stock Options For the benefit of our employees, directors and consultants, we have adopted the Chipcards, Inc. 2000 Equity Incentive Plan. The plan provides for the issuance of options intended to qualify as incentive stock options for federal income tax purposes to our employees and non-employees, including employees who also serve as our directors. Qualification of the grant of options under the plan as incentive stock options for federal income tax purposes is not a condition of the grant and failure to so qualify does not affect the exercisability of the stock options. The number of shares of common stock authorized and reserved for issuance under the Plan is 2,500,000. In May 2001 we issued 240,000 options to Michael Recca and 120,000 options to each of Allen Yue, Eric Gravell, Paul Amadeo, Timothy Norman, Fillian Lei and Jose Flores. These options vest ratably over a period of three years. In May 2000 we also issued 90,000 options to Ziegler, Ziegler & Altman LLP, and an employee of such firm. Ziegler, Ziegler & Altman LLP is a law firm which we have retained and will continue to retain in connection with certain legal matters and which has given an opinion on the validity of the securities being offered. These options were fully vested upon issuance. Scott Ziegler, who has been nominated to serve as a director upon the completion of this offering, is a partner of Ziegler, Ziegler & Altman, LLP. Mr. Ziegler has disclaimed any interest in such 90,000 options. All of the 1,050,000 options described above are exercisable at the lower of $8.00 per share or the initial public offering price of the shares of common stock included in the units, provided that if an initial public offering is not consummated prior to January 1, 2002, the option exercise price will be adjusted to $5.00 per share. Upon the closing of this offering, we also intend to issue 35,000 options to each director who is not an officer or employee of our company. We anticipate that these options will be fully-vested upon issuance and will be exercisable at the initial public offering price of the shares of common stock included in the units. 44 Our board of directors administers and interprets the plan (unless delegated to a committee) and has authority to grant options to all eligible participants and determine the types of options granted, the terms, restrictions and conditions of the options at the time of grant. The exercise price of options may not be less than 85% of the fair market value of our common stock on the date of grant of the option and to qualify as an incentive stock options may not be less than the fair market value of common stock on the date of the grant of the incentive stock options. Upon the exercise of an option, the exercise price must be paid in full, in cash, in our common stock (at the fair market value thereof) or a combination thereof. Optionees are entitled to exercise for at least thirty days after the optionee ceases to be an employee, a director, or non-employee service provider. However, in the event of death or disability of the optionee, the options shall be exercisable for at least six months following death or disability. In any event options may not be exercised beyond the expiration date of the options, which may not be more than one hundred twenty months from the date it is granted. Options may be granted to our key management employees, directors, key professional employees or key professional non-employee service providers, although options granted non-employee directors do not qualify as incentive stock options. No option may be granted after December 31, 2009. Options are not transferable except by will or by the laws of descent and distribution. All outstanding options granted under the Plan will become fully vested and immediately exercisable if (i) within any 12-month period, we sell an amount of common stock that exceeds 50% of the number of shares of common stock outstanding immediately before the 12-month period or (ii) a "change of control" occurs. For purposes of the plan, a "change of control" is defined as the acquisition in a transaction or series of transactions by any person, entity or group (two or more persons acting as a partnership, limited partnership, syndicate or other group for the purpose of acquiring our securities) of beneficial ownership, of 50% or more (or less than 50% as determined by a majority of our directors) of either the then outstanding shares of our common stock or the combined voting power of our then outstanding voting securities. PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of our common stock as of December 31, 2000, as adjusted to reflect the sale of the units offered by this prospectus, by: o each person who is known by us to beneficially own more than 5% of our common stock o each of the named executive officers and each of our directors; and o all of our officers and directors as a group. 45 Unless otherwise indicated below, each stockholder named in the table has sole or shared voting and investment power with respect to all shares beneficially owned, subject to applicable community property laws.
Number of Shares Percentage Ownership Name and Address of of Common Stock Before After Beneficial Owner Beneficially Owned Offering(1) Offering(1) - ------------------- ------------------ -------- -------- Eric Gravell 3,000,000 28.2% 25.8% c/o Chipcards, Inc. Citicorp Center One Sansome Street, 19th Floor San Francisco, California 94104 Xiao Qin Jiang 2,800,000 26.3% 24.1% 2885 Churchill Drive Hillsborough, California 94010 Ross Mandell 2,495,000(2)(3) 23.4% 21.4% 110 Wall Street, Suite 15C New York, New York 10005 Scott Ziegler [ ](3) [ ]% [ ]% c/o Ziegler, Ziegler & Altman, LLP 1330 Avenue of the Americas New York, New York 10019 Allen Yue 500,000 4.7% 4.3% c/o Chipcards, Inc. Citicorp Center One Sansome Street, 19th Floor San Francisco, California 94104 Timothy Norman 182,500 1.7% 1.6% c/o Chipcards, Inc. 6827 Nancy Ridge Dr. San Diego, California Paul Amadeo 182,500 1.7% 1.6% c/o Chipcards, Inc. 6827 Nancy Ridge Dr. San Diego, California
46
Number of Shares Percentage Ownership Name and Address of of Common Stock Before After Beneficial Owner Beneficially Owned Offering(1) Offering(1) - ------------------- ------------------ -------- -------- Fillian Lei 182,500 1.7% 1.6% c/o Chipcards, Inc. Citicorp Center One Sansome Street, 19th Floor San Francisco, California 94104 All officers and directors as a group (7 persons) [ ] [ %] [ %] - --------------
(1) Percentage of ownership is based on 10,641,250 shares outstanding as of December 31, 2000, and 11,641,250 outstanding after this offering, assuming no exercise of the underwriters' over-allotment option. Shares issuable upon exercise of warrants issued in the offering, or upon exercise of outstanding options and contingent vesting rights, are not included in the number of shares outstanding. (2) Includes shares owned by Sky Capital Ltd., an entity controlled by Mr. Mandell (3) Includes options to purchase 35,000 shares of common stock anticipated to be issued at the closing of this offering. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS On March 20, 2000, we entered into a three year Consulting Agreement with Ross Mandell. Mr. Mandell is a principal stockholder of our company and has been nominated to serve as a director upon the completion of this offering. Mr. Mandell provides consulting and advisory services in connection with general management consulting and financial advisory consulting. His compensation included 3,000,000 shares of our common stock and a cash fee of $3,000 per month for a period of 15 months or until such time as we consummate a public offering or have raised at least $4,000,000 in net proceeds from a private offering of our common stock. At such time as we have raised at least $4,000,000 in net proceeds from a private or public offering, the cash fee will be increased to $10,000 per month for a period of 24 months. Mr. Mandell sub-contracted a portion of his consulting duties under this agreement to St. James Holdings, LLC and has transferred 500,000 of his shares of common stock to St. James Holdings LLC in payment for its services. The President of the Managing Member of St. James Holdings, LLC is an Executive Vice President of The Thornwater Company, L.P., the underwriter for this offering. Mr. Mandell was formerly registered as a broker with the underwriter. On March 20, 2000, we entered into a three year Consulting Agreement with Scott Ziegler, whereby Mr. Ziegler provides consulting and advisory services in connection with general management consulting and financial advisory consulting in exchange for [ ] shares of our common stock. Mr. Ziegler is a partner of Ziegler, Ziegler & Altman, LLP, a law firm which we have retained and will continue to retain in connection with certain legal matters and which has given an opinion on the validity of the securities being offered. Some of the shares issued to Mr. Ziegler may be transferred to partners and/or employees of Ziegler, Ziegler & Altman, LLP. Our San Diego office is currently leased from Ampac Technology, LLC. The members of Ampac Technology, LLC are Xiao Qin Jiang and Eric Gravell, each of whom owns 50% of the membership interests. Xiao Qin Jiang is one of the principal stockholders of our company. Eric Gravell is our Executive Vice President and also a principal stockholder. Ampac Technology, LLC has entered into 47 an agreement to transfer title to the San Diego property to us upon the completion of this offering, at a consideration of $150,000 plus an assumption of the outstanding indebtedness on the property. We believe that this price represents the fair market value of the property, and that the terms of this sale are no less favorable to us than could otherwise have been obtained from an unaffiliated third party. Eric Gravell, a principal stockholder, officer and director of our company, periodically provided loans to us in between December 1997 and November 1999, in the aggregate principal amount of $60,000. All of these loans were non-interest bearing and were repaid in full as of December 31, 2000. In April 1999, Xiao Qin Jiang, a principal stockholder of our company, provided us an interest-free loan in the amount of $110,876. This loan was repaid in full as of December 31, 2000. In January 2001, Xiao Qin Jiang was paid $90,000 representing an accrued commission relating to her referral of business to us in 1999. In August 1999, we entered into a settlement relating to an outstanding loan that had been provided by us to TicketPlanet.com, Inc., a corporation in which Eric Gravell is a principal stockholder, officer and director. At such time, the amount of $75,000 remained unpaid under the loan. We accepted a payment of $57,000 in full satisfaction of this debt. DESCRIPTION OF SECURITIES Common Stock All shares of common stock have equal voting rights and, when validly issued and outstanding, are entitled to one vote per share in all matters to be voted on by shareholders, except that cumulative voting applies to the election of directors. Cumulative voting permits each stockholder to vote the number of shares owned by him or her multiplied by the number of directors to be elected, and such cumulative number of votes may be cast for any one or more directors. Holders of the common stock are entitled to share pro rata in dividends and distributions with respect to the common stock, in such amounts and at such times as may be declared by the Board of Directors out of funds legally available. The shares of common stock have no preemptive, subscription or conversion rights. In the event of a liquidation, each shareholder is entitled to receive a proportionate share of our assets available for distribution to shareholders after the payment of liabilities and after distribution in full of preferential amounts, if any. All of the outstanding shares of common stock are, and all of the shares of common stock to be issued in connection with this offering will be, validly issued, fully paid and non-assessable. Our Articles of Incorporation authorizes us to issue up to 25,000,000 shares of common stock, no par value. As of December 31, 2000, there were 10,641,250 shares of common stock issued and outstanding and 21 holders of record of the common stock. Upon completion of this offering, assuming all of the units being offered are sold (but not including any exercise of the underwriter's overallotment 48 option), there will be 11,641,250 shares of common stock issued and outstanding and 1,000,000 common stock purchase warrants outstanding. Public Warrants Each public warrant entitles the holder to purchase one share of our common stock at an exercise price per share of 105% of the initial public offering price of the shares included in the units. The exercise price is subject to adjustment upon the occurrence of certain events as provided in the public warrant certificate and summarized below. Our public warrants may be exercised at any time during the period commencing 30 days after this offering and ending on the fifth anniversary date of the closing of this offering, which is the expiration date. Those of our public warrants which have not previously been exercised will expire on the expiration date. A public warrant holder will not be deemed to be a holder of the underlying common stock for any purpose until the public warrant has been properly exercised. Our common stock and public warrants will be offered as a unit and will trade separately upon the closing of this offering. Accordingly, purchasers of units in this offering receive separate certificates for the common stock and public warrants included in the units. We have the right to redeem the public warrants issued in this offering at a redemption price of $0.10 per public warrant, after providing 30 days prior written notice to the public warrant holders, if an appropriate registration statement is then effective, and if the last reported sale price of our common stock (if traded on a national securities exchange or on the Nasdaq National Market or SmallCap Market) or the average of the last reported bid and asked prices of our common stock (if traded on the over-the-counter market) has been at least $9.60 for twenty trading days immediately preceding the date of the notice. A public warrant holder may exercise our public warrants only if an appropriate registration statement is then in effect with the Securities and Exchange Commission and if the shares of common stock underlying our public warrants are qualified for sale under the securities laws of the state in which the holder resides. Our public warrants may be exercised by delivering to our transfer agent the applicable public warrant certificate on or prior to the expiration date or the redemption date, as applicable, with the form on the reverse side of the certificate executed as indicated, accompanied by payment of the full exercise price for the whole number of public warrants being exercised. The exercise price of the public warrants is subject to adjustment if we declare any stock dividend to stockholders or effect any split or reverse split with respect to our common stock. Therefore, if we effect any stock split or reverse split with respect to our common stock, the exercise price in effect immediately prior to such stock split or reverse split will be proportionately reduced or increased, respectively. Any adjustment of the exercise price will also result in an adjustment of the number of shares purchasable upon exercise of a public warrant or, if we elect, an adjustment of the number of public warrants outstanding. SHARES ELIGIBLE FOR FUTURE SALE If our stockholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could fall. Upon completion of this offering, we will have outstanding 11,641,250 shares of common stock, or 11,791,250 shares if the 49 underwriter's over-allotment option is exercised in full, not including the exercise of warrants issued in this offering or the exercise of any outstanding options or contingent vesting rights. Of these shares, up to 1,000,000 shares sold in this offering, or 1,150,000 shares if the underwriter's option is exercised in full, will be freely tradeable without restriction or further registration under the Securities Act; provided, however, that if any of the shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act, their sales of shares would be subject to certain limitations and restrictions under Rule 144, as described below. The remaining 10,641,250 shares of common stock held by our existing stockholders were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. These shares may not be resold except pursuant to a registration statement effective under the Securities Act or pursuant to an exemption from registration, including the exemption provided by Rule 144. On the effective date of this offering, all of these 10,641,250 shares will be subject to "lock-up" agreements with the underwriter providing that they will not offer or sell, pledge, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any of our securities for a period of twelve months from the date of this prospectus without the prior written consent of the underwriter. Of the 10,641,250 shares held by our existing shareholders, 10,526,250 are currently eligible for resale pursuant to Rule 144, and the remaining 115,000 shares will be eligible for resale pursuant to Rule 144 as of May 18, 2001, in each case subject to the lock-up agreement. In general, under Rule 144, beginning 90 days after the completion of this offering, a person or persons, including an affiliate, whose shares are aggregated and who has satisfied a one year holding period including the period of any prior owner who is not an affiliate of ours, may sell, within any three month period, a number of shares which does not exceed the greater of: o 1% of the then outstanding shares of our common stock; or o the average weekly trading volume during the four calendar weeks preceding the sale Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and to the availability of current public information about us. Rule 144(k) also permits the sale of shares, without any volume limitations or manner of sale or public information requirements, by a person who is not an affiliate of ours and who has not been an affiliate of ours for at least the three months preceding the sale, and who has satisfied a two year holding period. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our shares of common stock will be Continental Stock Transfer & Trust Company. Its address is 2 Broadway, New York, New York 10004 and its telephone number is (212) 509-4000. 50 UNDERWRITING We have entered into an underwriting agreement with the underwriters named below. Thornwater Company, L.P., or Thornwater, is acting as the representative of the underwriters. The underwriting agreement provides for the purchase of a specific number of units each of the underwriters. The underwriters' obligations are several, which means that each underwriter is required to purchase a specified number of units, but is not responsible for the commitment of any other underwriter to purchase units. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of units set forth opposite its name below:
UNDERWRITER NUMBER OF UNITS ----------- --------------- The Thornwater Company, L.P.............. __________________________________........ __________________________________........ TOTAL 1,000,000 --------------------
This is a firm commitment underwriting. This means that the underwriters have agreed to purchase all of the units offered by this prospectus (other than those covered by the over-allotment option described below) if any units are purchased. Under the underwriting agreement, if an underwriter defaults in its commitment to purchase units, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances. The representative has advised us that the underwriters propose to offer the units directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the representatives may offer some of the units to certain securities dealers at such price less a concession of $0.648 per unit. The underwriters may also allow, and such dealers may reallow, a concession not in excess of $__________ per unit to certain other dealers. After the units are released for sale to the public, the representatives may change the offering price and other selling terms at various times. We have granted the representatives an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the representatives to purchase a maximum of 150,000 additional units from us to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase units covered by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to the public will be $__________, the total proceeds to us will be $__________. The following table provides information regarding the amount of the discount to be received by the underwriters.
TOTAL WITHOUT EXERCISE OF TOTAL WITH FULL EXERCISE OF PER UNIT OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION - ------------- --------------------------- ------------------------------- $0.648 $ $
We will pay all of the total expenses of the offering, which we estimate will be approximately $__________ ($__________ if the over-allotment is exercised). In addition, 51 we will reimburse Thornwater $202,500 for its expenses ($232,875 if the over-allotment is exercised). We and Thornwater will enter into a financial consulting agreement providing for Thornwater to act as financial consultant to us for a 36 month period for a fee of of $3,333 per month, with the total fee of $120,000 payable in advance at the closing of this offering. We have also entered into a consulting agreement with Ross Mandell, one of our principal shareholders. Mr. Mandell is also a consultant to Thornwater. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act. Our shareholders have agreed that they will not, without the prior written consent of Thornwater, directly or indirectly sell any of our common stock owned by them during the first year following the closing of this offering; During this period and for an additional period of two years, any public sale of our securities by these stockholders will be effected through the facilities of Thornwater. We and our principal stockholders, officers and directors will grant to Thornwater a three year right of first refusal to have Thornwater sell securities under future public and private offerings of any non bank debt or equity securities of us or our subsidiaries, by us, our subsidiaries, our affiliates, and/or principal stockholders, officers and directors, except for issuances or sales to employees pursuant to our stock option plan. We have granted Thornwater for a period ending on the third anniversary of the closing of this offering, the right to have Thornwater's designee present at meetings of the Board and each of its committees subject to our right to exclude such designee under certain circumstances. The designee will be entitled to the same notices and communications sent by us as we gave to our directors and will attend directors' and committees' meetings, but will not be entitled to vote thereat. Such designee will also be entitled to receive the same compensation payable to directors as members of the Board and its committees and all reasonable expenses in attending such meetings. As of the date of this prospectus no designee has been selected. In connection with this offering, we have agreed to sell to Thornwater, for nominal consideration, warrants to purchase up to an aggregate of 100,000 units exercisable initially at $9.72 per unit for a period of four years beginning one year from the date hereof. These warrants contain antidilution provisions providing for adjustment of the exercise price upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction. In addition, the warrants grant to the holders rights commencing one year from the date of this prospectus to have common stock issued upon exercise of the warrants registered under the Securities Act. These rights include the right to require us to register these shares for a four year period and the right to include these shares underlying the units for a six year period in a registration statement filed by us. Rules of the Commission may limit the ability of the underwriters to bid for or purchase shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the following rules: - Stabilizing transactions -- The representatives may make bids or purchases for the purpose of pegging, fixing or maintaining the price of shares, so long as stabilizing bids do not exceed a specified maximum. - Over-allotments and syndicate covering transactions -- The underwriters may create a short position in the shares by selling more shares than are set forth on the cover page of this prospectus. If a short position is created in connection with the offering, the representatives may engage in syndicate covering transactions by purchasing shares in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option. 52 LEGAL MATTERS The validity of the issuance of the securities offered hereby will be passed upon for us by Ziegler, Ziegler & Altman LLP, 1330 Avenue of the Americas, New York, New York 10019. Members of Ziegler, Ziegler & Altman, LLP collectively own [ ] shares of our common stock. In addition, Ziegler, Ziegler & Altman LLP and one of its employees have been granted options to purchase 90,000 shares of common stock. Scott Ziegler, a partner of Ziegler, Ziegler & Altman LLP, has disclaimed any ownership interest on these 90,000 options. Upon the closing of this offering, to the extent Scott Ziegler becomes a director, he will be issued 35,000 options. Ziegler, Ziegler & Altman LLP regularly represents the underwriter in regulatory and other matters, although not for purposes of this offering. Particular legal matters that arise in connection with the offering will be passed upon for the Underwriter by its counsel, Parker Duryee Rosoff & Haft. EXPERTS The financial statements included in this prospectus and in the registration statement have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the periods set forth in their reports appearing elsewhere herein and in the registration statement, and are included in reliance upon such reports given upon the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We intend to furnish our stockholders annual reports, which will include financial statements audited by independent accountants, and all other periodic reports as we may determine to furnish or as may be required by law, including Sections 13(a) and 15(d) of the Exchange Act. We have filed with the SEC a registration statement on Form SB-2 under the Securities Act with respect to the securities offered by this prospectus. This prospectus does not contain all the information set forth in the registration statement and the accompanying exhibits, as permitted by the rules and regulations of the SEC. For further information, please see the registration statement and accompanying exhibits. Statements contained in this 53 prospectus regarding any contract or other document which has been filed as an exhibit to the registration statement are qualified in their entirety by reference to these exhibits for a complete statement of their terms and conditions. The registration statement and the accompanying exhibits may be inspected without charge at the offices of the SEC and copies may be obtained from the SEC's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 or at either of its regional offices, located at 7 World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment of the fees prescribed by the SEC. Electronic reports and other information filed through the Electronic Data Gathering, Analysis, and Retrieval System, known as EDGAR, are publicly available on the SEC's website, http://www.sec.gov. INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Our underwriting agreement requires us to indemnify Thornwater against any costs or liability incurred by it by reason of misstatement or omissions to state material facts in connection with the offering. To the extent the provisions of our underwriting agreement with Thornwater purports to provide exculpation from possible liabilities arising from the federal securities laws, in the opinion of the Securities and Exchange Commission, these indemnification provisions are contrary to public policy and therefore unenforceable. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised 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. 54 INDEX TO FINANCIAL STATEMENTS
Page Financial Statements filed as a part of this Annual Report (i) Report of Independent Certified Public Accountants F-2 (ii) Consolidated Balance Sheet as at F-3 December 31, 2000 (iii) Consolidated Statements of Operations F-5 for the years ended December 31, 2000 and December 31, 2000 (iv) Consolidated Statements of Stockholders' Deficit F-6 (v) Consolidated Statements of Cash Flows F-7 for the years ended December 31, 2000 and December 31, 1999 (vi) Summary of Accounting Policies F-8 (vii) Notes to Financial Statements F-12
F-1 Report of Independent Certified Public Accountants To the Board of Directors Chipcards, Inc. fka: American Pacific Technology Corporation San Francisco, California We have audited the accompanying consolidated balance sheet of Chipcards, Inc., fka: American Pacific Technology Corporation as of December 31, 2000, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years ended December 31, 2000 and 1999. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chipcards, Inc., fka: American Pacific Technology Corporation at December 31, 2000, and the results of its operations and its cash flows for the years ended December 31, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 12, the Company restated its accumulated deficit balance as of January 1, 1999. /s/ BDO Seidman, LLP San Francisco, California February 9, 2001, except for Note 13 which is as of May 11, 2001 F-2
=========================================================================================== December 31, 2000 - ------------------------------------------------------------------------------------------- Assets (Note 3) Current Cash and cash equivalents $ 294,806 Trade receivables 28,461 Inventory 286,634 Costs and estimated earnings on uncompleted contracts in excess of billings (Note 1) 1,011,977 Prepaid expenses and other current assets 56,021 - ------------------------------------------------------------------------------------------- Total Current Assets 1,677,899 - ------------------------------------------------------------------------------------------- Property and Equipment: Buildings and improvements (Note 4) 1,215,816 Office equipment 137,423 - ------------------------------------------------------------------------------------------- 1,353,239 Less accumulated depreciation 110,257 - ------------------------------------------------------------------------------------------- Net property and equipment 1,242,982 - ------------------------------------------------------------------------------------------- $2,920,881 ===========================================================================================
F-3 Chipcards, Inc. fka: American Pacific Technology Corporation Consolidated Balance Sheet
=========================================================================================== December 31, 2000 - ------------------------------------------------------------------------------------------- Liabilities and Stockholders' Deficit Current Checks issued against future deposits $ 74,356 Short-term borrowings (Note 3) 14,500 Accounts payable 1,484,308 Current portion of long-term debt (Note 4) 28,070 Accrued compensation and commissions (Note 2) 288,910 Income taxes payable (Note 5) 66,000 Other accrued liabilities 64,903 Billings in excess of costs and estimated earnings on uncompleted contracts (Note 1) 30,621 Deferred profit on production line contracts 1,515,344 - ------------------------------------------------------------------------------------------ Total Current Liabilities 3,567,012 Long-term debt, less current portion (Note 4) 1,101,163 - ------------------------------------------------------------------------------------------ Total Liabilities 4,668,175 - ------------------------------------------------------------------------------------------ Commitments and Contingencies (Note 7) Stockholders' Deficit (Note 6) Common stock, no par; 25,000,000 shares authorized; 10,641,250 shares issued and outstanding 685,100 Accumulated deficit (2,432,394) - ------------------------------------------------------------------------------------------ Total Stockholders' Deficit (1,747,294) - ------------------------------------------------------------------------------------------ $ 2,920,881 ==========================================================================================
See accompanying summary of accounting policies and notes to financial statements. F-4 Chipcards, Inc. fka: American Pacific Technology Corporation Consolidated Statements of Operations
===================================================================================================== Years ended December 31, 2000 1999 - ----------------------------------------------------------------------------------------------------- Revenues Production line sales $5,359,063 $ 1,520,108 Finished smart card sales 956,851 1,293,096 Smart card component and other sales 137,825 1,526,952 - ----------------------------------------------------------------------------------------------------- Total Revenue 6,453,739 4,340,156 - ----------------------------------------------------------------------------------------------------- Cost of Sales Production line costs 3,779,619 546,700 Finished smart cards costs 1,119,979 1,419,279 Smart card component and other costs 88,160 1,264,875 - ----------------------------------------------------------------------------------------------------- Total Costs of Sales 4,987,758 3,230,854 - ----------------------------------------------------------------------------------------------------- Gross Profit 1,465,981 1,109,302 Selling Expenses 122,946 759,352 General and Administrative Expenses 1,688,262 1,072,919 Research and Development - 99,324 - ----------------------------------------------------------------------------------------------------- Operating Loss (345,227) (822,293) - ----------------------------------------------------------------------------------------------------- Other Income (Expense) Other income (including $181,000 on recovery of previously written-off accounts receivable) 256,489 75,890 Other expense (9,054) (114,188) Interest expense, net (160,045) (139,473) - ----------------------------------------------------------------------------------------------------- Total Other Income (Expense) 87,390 (177,771) - ----------------------------------------------------------------------------------------------------- Loss Before Income Taxes and Extraordinary Gain (257,827) (1,000,064) Income tax expense (benefit) (Note 5) 67,600 (169,800) - ----------------------------------------------------------------------------------------------------- Net Loss Before Extraordinary Gain (325,437) (830,264) Extraordinary gain, net of $171,400 tax expense (Note 9) - 258,957 - ----------------------------------------------------------------------------------------------------- Net Loss $ (325,437) $ (571,307) ===================================================================================================== Basic and Diluted Net Loss Before Extraordinary Gain Per Common Share $ (0.03) $ (0.13) Extraordinary Gain Net of Tax, per common share - 0.04 - ----------------------------------------------------------------------------------------------------- Basic and Diluted Net Loss, per common share $ (0.03) $ (0.09) - ----------------------------------------------------------------------------------------------------- Shares Used in Per Common Share Calculations, Basic and Diluted 9,710,000 6,037,000 =====================================================================================================
See accompanying summary of accounting policies and notes to financial statements. F-5 Chipcards, Inc. fka: American Pacific Technology Corporation Consolidated Statements of Stockholders' Deficit
============================================================================================================ Common Stock --------------------------- Accumulated Shares Amount Deficit Total - ------------------------------------------------------------------------------------------------------------ Balance, January 1, 1999, (Note 12) 5,840,000 $ 100 $ (1,535,650) $ (1,535,550) Stock-based compensation (Note 6) 1,186,250 6,500 - 6,500 Net loss - - (571,307) (571,307) - ------------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 7,026,250 6,600 (2,106,957) (2,100,357) Issuance of common stock for consulting services (Note 6) 3,500,000 103,500 - 103,500 Sale of common stock 115,000 575,000 - 575,000 Net loss - - (325,437) (325,437) - ------------------------------------------------------------------------------------------------------------ Balance, December 31, 2000 10,641,250 $685,100 $ (2,432,394) $(1,747,294) ============================================================================================================
See accompanying summary of accounting policies and notes to financial statements. F-6 Chipcards, Inc. fka: American Pacific Technology Corporation Consolidated Statements of Cash Flows
=========================================================================================================== December 31, 2000 1999 - ----------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net loss $ (325,437) $ (571,307) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Extraordinary gain - (258,957) Loss on investment in Chinese businesses - 420,000 Depreciation 52,040 51,581 Stock-based compensation 103,500 6,500 Loss on disposal of property and equipment 19,550 6,792 Changes in operating assets and liabilities: Trade receivables 37,727 228,276 Inventory 695,952 (764,584) Related party receivable 71,887 113,116 Receivable from insurance provider 430,357 - Prepaid expenses and other current assets (45,291) 10,551 Costs and estimated earnings on uncompleted contracts in excess of billings (538,020) (299,917) Accounts payable and accrued expenses (12,949) (93,102) Accrued compensation and commissions (19,433) 294,600 Income taxes payable 66,000 (291,400) Billings in excess of costs and estimated earnings on uncompleted contracts 30,621 - Deferred revenue (397,707) (639,566) - ----------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Operating Activities 168,797 (1,787,417) - ----------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Partial refund of investment in Chinese businesses - 230,000 Acquisitions of property and equipment (28,822) (1,221,857) - ----------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (28,822) (991,857) - ----------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Checks issued in excess of future deposits (8,339) 82,695 Net proceeds from the sale of common stock 575,000 - Net borrowings (repayments) under bank credit agreements and line of credit (520,163) 515,663 Proceeds from notes payable 506,339 650,000 Proceeds from shareholder loans 9,700 591,797 Principal payments on shareholder loans (525,324) (76,173) Principal payments on long-term debt (24,516) (2,590) - ----------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 12,697 1,761,392 - ----------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 152,672 (1,017,882) Cash and Cash Equivalents, beginning of year 142,134 1,160,016 - ----------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, end of year $ 294,806 $ 142,134 =========================================================================================================== Supplemental disclosures of cash flow information Cash paid for interest $ 98,922 $ 78,674 Cash paid for income taxes 1,600 112,927 ===========================================================================================================
See accompanying summary of accounting policies and notes to financial statements. F-7 Chipcards, Inc. fka: American Pacific Technology Corporation Summary of Accounting Policies ================================================================================ Nature of Business Chipcards, Inc. fka: American Pacific Technology Corporation ("the Company") is a California corporation, established in 1993 and primarily engaged in the construction and installation of turnkey factories in China that produce contactless smart cards. Smart cards are plastic cards that can store encrypted data that can be integrated with a variety of systems including automated bank teller machines, subway turnstiles, and security systems. The Company also sells the raw materials used to produce smart cards to the organizations that acquire the factories constructed by the Company. Furthermore, the Company may purchase finished smart cards from these organizations for resale to end-use customers. The Company is currently headquartered in San Francisco, California. The consolidated financial statements include the accounts of the Company and Ampac Technology, LLC ("Ampac"). In 1999, the Company's principal shareholders formed Ampac to acquire an engineering facility in San Diego, California. The facility is leased to the Company. All intercompany accounts and transactions have been eliminated. The Company and Ampac have entered into an agreement whereby the Company will buy the building from those shareholders for $150,000 plus the assumption of outstanding borrowings of approximately $1.1 million. Cash and Cash Cash and cash equivalents include cash on hand and in Equivalents banks, and all highly liquid investments with a maturity of three months or less at the time of purchase. Revenue and Cost Revenues from long-term contracts for the construction Recognition of smart card production lines are recognized on the percentage-of-completion method, measured by the percentage of actual costs incurred to date to current estimated total costs to be incurred on each contract. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is accrued. In certain contracts, the Company received ownership interests in Chinese joint venture entities in lieu of cash consideration. The Chinese joint venture entities are the entities formally acquiring the equipment. These joint venture equity interests are not recorded on the financial statements as the Company is unable to reasonably estimate fair market value. Because the cash payment of the entire amount of the contract is uncertain, the Company uses a zero estimate of gross profit until the actual payment is received. Therefore, equal amounts of revenue
F-8 Chipcards, Inc. fka: American Pacific Technology Corporation Summary of Accounting Policies ================================================================================ and costs are recognized until contract revenue can be estimated more precisely. Changes from a zero estimate of profit to a more precise estimate are accounted for as changes in accounting estimates. Gross profit on sales of equipment to entities in which the Company has an equity interest are deferred to the extent of the Company's equity interest. This amount is amortized to revenue over the term of the joint venture. Some contracts contain provisions requiring the Company to purchase substantially all of the finished smart cards manufactured by the purchaser of the production line over a three-year period. For these contracts, risk of ownership in the production line is not deemed to have transferred to the purchaser until the purchase commitment terminates. Accordingly, gross profit resulting from the sale of these production lines is deferred and recognized ratably over the three-year commitment period. Contract costs include all direct labor, material and subcontractor costs and those indirect costs related to contract performance, such as indirect labor, supervision, supplies, tools, repairs and maintenance. General and administrative costs are charged to expense as incurred. Revenues from the sale of smart card raw materials and finished smart cards are recognized when shipped to customers. Inventory Inventory, consisting of smart card components, is valued at the lower of cost (first in, first out) or market. Property, Equipment Property and equipment are stated at cost. Major and Depreciation additions and improvements are capitalized; maintenance and repairs are charged to operations as incurred. Upon the retirement or disposal of assets, the cost and related accumulated depreciation are removed from the accounts and gain or loss, if any, is reflected in operations in the year of retirement or disposal. Depreciation of property and equipment is generally computed using the straight-line method over the following estimated useful lives: -------------------------------------------------------
F-9 Chipcards, Inc. fka: American Pacific Technology Corporation Summary of Accounting Policies ================================================================================ Buildings and improvements 39 years Office furniture and equipment 3 to 7 years ------------------------------------------------------- Research and The Company expenses the costs associated with the Development research and development of new products as incurred. Income Taxes Income taxes are calculated using the asset and liability method specified by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, and consist of taxes currently payable plus the change in deferred income taxes resulting from timing differences between the tax basis of certain assets and liabilities and the basis used for financial reporting purposes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used in preparing these financial statements include those assumed in computing profit percentages under the percentage-of-completion revenue recognition method, and those used in recording receivables for outstanding construction claims. Due to a certain degree of uncertainty involved with estimating these amounts, it is at least reasonably possible that the significant estimates used will change within the next year. New Accounting In June 1998, the FASB issued Statement of Financial Pronouncement Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged assets or liability that are attributable to the hedged risk, or (ii) the earnings' effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain and loss is recognized in income in the period of change. SFAS No. 133, amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after
F-10 Chipcards, Inc. fka: American Pacific Technology Corporation Summary of Accounting Policies ================================================================================ June 15, 2000. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the adoption of the new standard on January 1, 2001 had no effect on the Company's financial statements. Net Loss Per Share The Company has adopted the provisions of SFAS No. 128, Earnings Per Share. SFAS No.128 provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. Reclassification Certain prior year amounts have been reclassified to conform to the current year presentation.
F-11 Chipcards, Inc. fka: American Pacific Technology Corporation Notes to Consolidated Financial Statements ================================================================================ 1. Costs and Details of costs and estimated earnings on uncompleted Estimated contracts are summarized as follows: Earnings on Uncompleted December 31, 2000 Contracts ----------------------------------------------------------------- Gross Expected Billings on Uncompleted Contracts $4,990,000 ================================================================= Costs incurred on uncompleted contracts $1,831,356 Estimated earnings recognized - ----------------------------------------------------------------- Revenues earned to date 1,831,356 Less billings to date 850,000 ----------------------------------------------------------------- $ 981,356 ================================================================= Costs and estimated earnings on uncompleted contracts in excess of billings $1,011,977 Billings in excess of costs and estimated earnings on uncompleted contracts (30,621) ----------------------------------------------------------------- $ 981,356 ================================================================= 2. Related Party During 2000 and 1999, the Company's principal stockholders Transactions loaned the Company $9,700 and $591,797 and the Company made payments of $525,324 and $76,173 on these loans. These loans did not bear any interest, were due on demand and fully repaid by December 31, 2000. The Company provides in the normal course of business, sales commission on new business in the range of 10% to 25%. At December 31, 2000 and 1999 approximately $90,000 and $237,000 in commissions were directly or indirectly payable to an officer and certain shareholders of the Company. 3. Short-Term The Company has a $1,950,000 credit facility, bearing Borrowings interest at prime rate plus 1.5% (11% at December 31, 2000), and maturing in September 2001. The credit facility is guaranteed by the primary stockholders of the Company and is collateralized by substantially all assets. Borrowings cannot exceed 90% of the value of letters of credits posted by customers to secure payment to the Company. The facility was unused at December 31, 2000.
F-12 Chipcards, Inc. fka: American Pacific Technology Corporation Notes to Consolidated Financial Statements ================================================================================ The Company obtains short-term advances from its bank to enable the Company to post letters of credit which are drawn upon by its smart card suppliers. During the year ended December 31, 2000, the Company received various short-term advances ranging from $14,500 to $130,500 all bearing interest of 11.5%. At December 31, 2000, outstanding short term advances total $14,500 which were paid in full in January 2001. The Company has a revolving line of credit of $150,000 for purchase order financing. It bears interest at prime rate plus 2% (11.5% at December 31, 2000) and matures in January 2001. The line is guaranteed by primary stockholders of the Company and collateralized by substantially all assets. At December 31, 2000, the line of credit was unused. The Company also has an unsecured revolving line-of-credit agreement with a bank guaranteed by a principal stockholder allowing maximum borrowings of $100,000 at December 31, 2000. Interest on such advances is calculated at the bank's reference rate plus 3.625% (or 13.125% at December 31, 2000) and expires in February 2001 and was subsequently renewed under the same terms. The Company also has an unsecured $25,000 line of credit bearing interest at prime plus 1.75% (11.25% at December 31, 2000) that matures in September 2001 and a $15,000 unsecured line of credit bearing interest at prime plus 3% that matures in November 2001. Both lines of credit were unused at December 31, 2000. 4. Long-Term Debt Long-term debt consists of: December 31, 2000 ----------------------------------------------------------------- Note payable, secured by real property, guaranteed by two of the Company's principal stockholders, principal and interest due in monthly installments of $4,910 with a balloon payment due upon maturity in August 2014. The note bears interest at the weekly average yield on U.S. Treasury Securities plus 2.46% (8.06% at December 31, 2000). $ 639,229 Note payable, secured by real property, guaranteed by the Company's principal stockholders, bearing interest at 8.12%,
F-13 Chipcards, Inc. fka: American Pacific Technology Corporation Notes to Consolidated Financial Statements ================================================================================ December 31, 2000 ----------------------------------------------------------------- principal and interest due in monthly installments of approximately $4,500 through May 2020. 482,411 Other 7,593 ----------------------------------------------------------------- 1,129,233 Less current portion 28,070 ----------------------------------------------------------------- $1,101,163 ================================================================= Future minimum principal payments under the long-term debt agreements are as follows: Year ending December 31, Amount ----------------------------------------------------------------- 2001 $ 28,070 2002 22,164 2003 23,991 2004 25,968 2005 28,108 Thereafter 1,000,932 ----------------------------------------------------------------- $ 1,129,233 ================================================================= 5. Taxes on Income The significant components of income tax expense (benefit) are as follows: December 31, 2000 1999 --------------------------------------------------------------------------- Current Federal $ 33,000 $ - State 34,600 1,600 - --------------------------------------------------------------------------- $ 67,600 $ 1,600 =========================================================================== Income tax (benefit) from continuing operations $ 67,600 $ (169,800) Income tax from extraordinary items - 171,400 --------------------------------------------------------------------------- - Total $ 67,600 $ 1,600 =========================================================================== Deferred tax assets are comprised of the following: December 31, 2000 ---------------------------------------------------------------------------
F-14 Chipcards, Inc. fka: American Pacific Technology Corporation Notes to Consolidated Financial Statements ================================================================================ Deferred revenue on construction contracts $ 1,145,000 Accrued commission 74,000 Inventory reserve 34,000 Organization costs 17,000 Other 13,000 ----------------------------------------------------------------- 1,283,000 Less valuation allowance (1,283,000) ----------------------------------------------------------------- Total $ - ================================================================= At December 31, 2000 and 1999, the Company established a 100% valuation allowance for its gross deferred tax assets as it could not determine that it was more likely than not that the deferred tax asset could be realized. Following increases in deferred tax assets, the valuation allowance was increased by $107,000 and $22,000 during 2000 and 1999. The following is a reconciliation of income taxes determined by applying statutory rates to income taxes reported: Years ended December 31, 2000 1999 ----------------------------------------------------------------- Federal taxes 34% 34% State taxes, net of federal tax benefit 6 6 Change in valuation allowance and other (66) (40) ----------------------------------------------------------------- Total (26)% - ================================================================= 6. Stockholders' On February 25, 1999, the stockholders approved and the Equity Company effected a 1,600 for 1 stock split of the Company's outstanding common stock. On May 19, 2000 the Board of Directors declared a 265% stock dividend to effect a 3.65-for-1 stock split of the Company's outstanding common stock. All common share amounts have been restated to reflect the stock split and distribution in all periods presented. In October 1999, the Company entered into an agreement with an employee to grant him 25,000 shares of the Company's common stock upon completion of two years of service. The Company also granted this individual warrants to purchase 25,000 shares of Company stock at a price of $2 per share. 12,500
F-15 Chipcards, Inc. fka: American Pacific Technology Corporation Notes to Consolidated Financial Statements ================================================================================ warrants are exercisable upon completion of two years of service and 12,500 warrants are exercisable upon completion of three years of service. Expense associated with these awards was insignificant. As this employee was terminated in 2001, these awards were effectively canceled. In November 1999, the Company issued 325,000 shares (1,186,250 post-split) of common stock valued at $0.02 per share as a bonus to employees. In May 2000, the Company issued 3,500,000 shares of common stock valued at approximately $103,500 by an independent appraiser to two of its consultants in exchange for on-going financial advisory services. In June 2000, the Company entered into an agreement with an employee to grant him 10,000 shares of the Company's common stock upon completion of 18 months of service. 7. Commitments Production Line Contracts and Contingencies In connection with its sale of two smart card production lines, the Company entered into commitments with the production line purchaser (Party A). First, the Company promises to sell raw materials needed for the production of smart cards at a fixed price per unit. Second, Party A promises to sell, and the Company is required to buy, an agreed-upon amount of finished smart cards to the Company at a fixed price per unit. The Company is also required to post a letter of credit in favor of Party A for the entire purchase price of finished smart cards. In the event, the price of smart card raw materials exceeds the fixed purchase price or the Company is unable to resell the finished smart cards it is obligated to purchase, these commitments would have a material adverse impact on the Company's financial position or results of operations. Subsequent to year-end, as a result of an arbitration, commitments for material purchases and sales were eliminated for one of the contracts. At December 31, 2000, the Company had entered into a letter of credit agreement amounting to $163,500 to guarantee its commitments to purchase finished smart cards. The letter of credit was amended in January 2001 to increase this amount to $193,500.
F-16 Chipcards, Inc. fka: American Pacific Technology Corporation Notes to Consolidated Financial Statements ================================================================================ 8. Concentration of The Company derives substantially all of its revenue Risk from the construction of smart card production lines in China. While the Company requires customers to post letters of credit as collateral for construction contracts, enforcing payment on contracted amounts is not assured given the Chinese economic infrastructure. The Company uses a single supplier to manufacture smart card producing equipment. Therefore, the company's ability to supply equipment is substantially dependent on the availability and quality of this supplier. The loss of this supplier could have material adverse effect on the Company's results of operations and financial position. Since the third quarter of 1999, there has been a worldwide shortage in the supply of Mifare microprocessors, which is the predominant type of microprocessor for smart card systems. This has had a material impact on the Company's sole source of finished cards. The Company is obligated to provide these customers with the components needed to manufacture cards, including microprocessors. Because of the Mifare shortage, the Company has been unable to obtain adequate microprocessors for its customers, which in turn has restricted our supply of cards and exposes the Company to claims for damages. As a result, the Company has been forced to substantially curtail fulfillment of orders beginning in January 2000. This has caused cancelled orders and impaired the Company's ability to expand smart card sales. Approximately $80,000 of card orders were cancelled during the year ended December 31, 1999 and approximately $443,000 of orders were cancelled during the year ended December 31, 2000. 9. Extraordinary In 1999, uncertainty regarding the proceeds to be Item recovered by the Company from the warehouse's insurer was resolved and settled. The claim was the result of a fire in the Company's warehouse in 1998. As a result, the Company recorded an extraordinary gain of $258,957 net of tax expense of $171,400. The full amount was received in 2000. 10. Loss Per Warrants to purchase 25,000 shares of the Company's Share common stock and 35,000 contingently issuable shares of common stock were outstanding at December 31, 2000 and 1999. Because their effect would be anti-dilutive, they were not included in the computation of diluted net loss per common share. 11. Segment The Company, from its headquarters in San Francisco and Reporting engineering facility in Southern California, is engaged primarily in the construction and sale of smart card production lines to customers in China. Therefore, the Company has only one business segment. Substantially all of the Company's revenue is derived from foreign customers. Revenue from customers exceeding 10% of total revenue: December 31, 2000 1999 -------------------------------------------------------------------- Customer A $ 2,554,000 $ - Customer B 1,211,000 - Customer C - 1,864,000 Customer D - 839,000 Customer E - 474,000 ====================================================================
F-17 Chipcards, Inc. fka: American Pacific Technology Corporation Notes to Consolidated Financial Statements ================================================================================ 12. Restatement The Company restated gross profit recognized in 1998 in connection with production line contracts containing performance conditions under which the Company retained risk of loss. The restatement resulted in a reduction in gross margin and net income of approximately $2.4 million which amount was adjusted through the Company's beginning accumulated deficit and deferred profit balances as of January 1, 1999. In May 2001, the Company's stockholders approved its stock option plan. 2,500,000 shares of the Company's common stock are reserved for issuance under the plan. 13. Subsequent In May 2001, the Company granted 1,015,000 stock Event options to employees and consultants at a price to be determined.
F-18 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SECURITIES ONLY IN THOSE JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR SECURITIES. UNTIL , 2001 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THE OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,000,000 UNITS EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE COMMON STOCK PURCHASE WARRANT OF CHIPCARDS, INC. ---------------------- PROSPECTUS ---------------------- THE THORNWATER COMPANY, L.P. 99 Wall Street New York, New York 10005 , 2001 PART II INDEMNIFICATION OF OFFICERS AND DIRECTORS Director and Officer Liability and Indemnification California law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the corporation or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation or its shareholders, (vi) for unlawful distributions of assets, unlawful payments of dividends or unlawful stock repurchases or redemptions, (vii)for any act or omission occurring prior to the date when the provision becomes effective, and (viii) for any act or omission as an officer, notwithstanding that the officer is also a director or that his or her actions, if negligent or improper, have been ratified by the directors. Such limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our Bylaws authorize us to indemnify any director or officer who is a party, or is threatened to be made a party, to any proceeding (including a derivative lawsuit by or in the right of our corporation) by reason of the fact that such person served as a director or officer of our company, or served as an officer, director or other agent for any other company or enterprise at our request, against expenses (including without limitation attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner reasonably believed to be in the best interests of our corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful. However, in the case of a derivative lawsuit, no indemnification will be provided for the following: (i) any claim as to which the officer or director is adjudged to be liable to our corporation in the performance of his or her duty to the corporation and its shareholders (except to the extent that the court otherwise determines that the person is fairly and reasonably entitled to indemnity for expenses), (ii) any amounts paid in settling or otherwise disposing of a pending action without court approval, or (iii) any expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. If an officer or director is successful on the merits in defending any action, such person shall be indemnified against all expenses actually and reasonably incurred in connection with such action. Otherwise, indemnification will be provided only if authorized in accordance with California law based on a determination that the officer or director has met the applicable standard of conduct. II-1 Expenses incurred by an officer or director in defending any action will be advanced prior to the final disposition of the action upon receipt of an undertaking to repay the amount advanced if such person is ultimately determined not to be entitled to indemnification. We believe that these provisions are necessary to attract and retain qualified persons as directors and executive officers. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of our company pursuant to the provisions of our charter documents or California law, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. We intend to purchase and maintain insurance on behalf of our officers and directors for any liability arising out of their actions in such capacities. It is expected that such insurance will cover all potential liabilities, whether or not we would be authorized to provide indemnification under our Bylaws or California law. II-2 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following sets forth the estimated expenses in connection with the issuance and distribution of the securities offered hereby: Registration Fees - $ 5,197 NASD Listing Fee $ 5,000 Boston Stock Exchange Listing Fee $ 15,250 Printing and Engraving - (estimated) $ 50,000 Legal - (estimated) $150,000 Accounting - (estimated) $250,000 Blue Sky fees and expenses - (estimated) $ 25,000 Financial advisory fee $120,000 Miscellaneous Expenses - (estimated) $ 10,000 -------- Total $630,447 ========
RECENT SALES OF UNREGISTERED SECURITIES Since inception, we have sold the following securities without registering such securities under the Securities Act:
Title and Amount Person or Class Total Offering Price of Date of Securities of Persons Type of Consideration ---- ------------- ---------- --------------------- 12/5/93 500 shares of Eric Gravell $50 Common Stock 12/5/93 500 shares of Alan Yue $50 Common Stock 10/29/99 50,000 shares of Fillian Lei Services rendered Common Stock 10/29/99 50,000 shares of Timothy Norman Services rendered Common Stock 10/29/99 50,000 shares of Paul Amadeo Services rendered Common Stock 10/29/99 50,000 shares of Mo Jia Services rendered Common Stock 10/29/99 25,000 shares of Jose Flores Services rendered Common Stock
II-3
Title and Amount Person or Class Total Offering Price of Date of Securities of Persons Type of Consideration ---- ------------- ---------- --------------------- 10/30/99 100,000 shares of Allen Yue Services rendered Common Stock 3/20/00 3,000,000 shares of Ross Mandell Consulting services Common Stock 3/20/00 500,000 shares of Scott Ziegler Consulting services Common Stock 5/18/00 115,000 shares of Private placement $575,000 Common Stock investors
All of the foregoing securities were sold in transactions not involving a public offering in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act of 1933. II-4 INDEX TO EXHIBITS Exhibits filed as part of this Registration Statement
- -------------------------------------------------------------------------------- Exhibit Exhibit Number - -------------------------------------------------------------------------------- 1.0 Form of Underwriting Agreement - -------------------------------------------------------------------------------- 3.1 Articles of Incorporation of the Registrant as filed on November 3, 1993 with the Secretary of State of the State of California - -------------------------------------------------------------------------------- 3.2 Amendment to the Articles of Incorporation of the Registrant as filed on August 31, 1998 with the Secretary of State of the State of California - -------------------------------------------------------------------------------- 3.3 Amendment to the Articles of Incorporation of the Registrant as filed on April 1, 1999 with the Secretary of State of the State of California - -------------------------------------------------------------------------------- 3.4 Amendment to the Articles of Incorporation of the Registrant as filed on April 27, 2000 with the Secretary of State of the State of California - -------------------------------------------------------------------------------- 3.5 Amendment to the Articles of Incorporation of the Registrant as filed on August 7, 2000 with the Secretary of State of the State of California - -------------------------------------------------------------------------------- 3.6 Amended and Restated By-laws of the Registrant - -------------------------------------------------------------------------------- 4.1* Form of warrant for the purchase of one share of Common Stock of the Registrant - -------------------------------------------------------------------------------- 4.2* Form of Underwriter's Warrant to be issued by the Registrant to The Thornwater Company, L.P. - -------------------------------------------------------------------------------- 5.1* Opinion of Ziegler, Ziegler & Altman LLP regarding the legality of the securities covered by this Registration Statement - -------------------------------------------------------------------------------- 10.1 Employment Agreement, dated as of January 1, 2001, between the Registrant and Eric Gravell - -------------------------------------------------------------------------------- 10.2 Employment Agreement, dated as of January 1, 2001, between the Registrant and Allen Yue - -------------------------------------------------------------------------------- 10.3* Employment Agreement, dated as of November 1, 2000, between the Registrant and Fillian Lei - -------------------------------------------------------------------------------- 10.4* Employment Agreement, dated as of November 1, 2000, between the Registrant and Paul Amadeo - -------------------------------------------------------------------------------- 10.5* Employment Agreement, dated as of November 1, 2000, between the Registrant and Timothy Norman - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Exhibit Exhibit Number - -------------------------------------------------------------------------------- 10.6 2000 Equity Incentive Plan - -------------------------------------------------------------------------------- 10.7 Lease of Space, dated March 18, 1999, between the Registrant and AMPAC Technology LLC - -------------------------------------------------------------------------------- 10.8 Office Service Agreement, dated April 10, 2000 between the Registrant and Vantas Corporate Centers - -------------------------------------------------------------------------------- 10.9* Sino Foreign Joint Venture Agreement, dated February 18, 2000, between the Registrant and Shandong Huang Tai Industrial Group - -------------------------------------------------------------------------------- 10.10* Agreement for Extending the Deadline of Foreign Investment Contribution, dated August 12, 2000 between the Registrant and Shandong Huang Tai Industrial Group of China. - -------------------------------------------------------------------------------- 10.11* Agreement of Purchase of Equipment, dated February 18, 2000, between the Registrant and China Card I.C. (Shanghai) Co., Ltd. - -------------------------------------------------------------------------------- 10.12* Supplemental Agreement amending the Agreement of Purchase of Equipment, the Agreement of Raw Materials and Sales and the Technical Services and Patent Technology Licensing Agreement, between the Registrant and China Card I.C. (Shanghai) Co., Ltd. - -------------------------------------------------------------------------------- 10.13* Addendum to the Agreement for Purchase of Equipment, between the Registrant and China Card, I.C. (Shanghai) Co., Ltd. - -------------------------------------------------------------------------------- 10.14* Addendum to the Agreement for Purchase of Equipment, dated November 10, 2000, between the Registrant and China Card, I.C. (Shanghai) Co., Ltd. - -------------------------------------------------------------------------------- 10.15* Agreement of Raw Materials and Sales, dated February 18, 2000, between the Registrant and China Card, I.C. (Shanghai) Co., Ltd. - -------------------------------------------------------------------------------- 10.16* Technical Support Agreement, dated February 18, 2000 between the Registrant and China Card I.C. (Shanghai) Co., Ltd. - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Exhibit Exhibit Number - -------------------------------------------------------------------------------- 10.17* Technical Services and Patent Technology Licensing Agreement, dated February 18, 2000, between the Registrant and China Card I.C. (Shanghai) Co. Ltd. - -------------------------------------------------------------------------------- 10.18* Materials Processing Agreement between the Registrant and China Card I.C. (Shanghai) Co. Ltd. - -------------------------------------------------------------------------------- 10.19* Agreement of Purchase of Equipment, dated April 1, 2000, between the Registrant and Shandong Huaguan Group General Company. - -------------------------------------------------------------------------------- 10.20* Agreement for Purchase of Raw Materials, dated April 1, 2000, between the Registrant and Shandong Huaguan Group General Company - -------------------------------------------------------------------------------- 10.21* Technical Services and Licensing Agreement dated April 1, 2000 between the Registrant and Shandong Huaguan Group General Company. - -------------------------------------------------------------------------------- 10.22* Supplemental Agreement amending the Agreement of Purchase of Equipment, the Agreement for Purchase of Raw Materials and Sales and the Technical Services and Patent Technology Licensing Agreement, between the Registrant and Shandong Huaguan Group General Company - -------------------------------------------------------------------------------- 10.23* Agreement for Purchase of Equipment dated May 8, 2001, between Hainan Pacific New High Tech Company and the Registrant - -------------------------------------------------------------------------------- 10.24* Technical Services and Licensing Agreement dated May 8, 2001, between Hainan Pacific New High Tech Company and the Registrant - -------------------------------------------------------------------------------- 10.25* Letter of the President of the Registrant, dated May , 2001, representing that Exhibits 10.9 through 10.24 are fairly and accurately translated - -------------------------------------------------------------------------------- 10.26* Consulting Agreement dated March 20, 2000, between Ross Mandell and the Registrant - -------------------------------------------------------------------------------- 10.27* Consulting Agreement dated March 20, 2000 between Scott Ziegler and the Registrants - -------------------------------------------------------------------------------- 23.1* Consent of Ziegler, Ziegler & Altman LLP (to be included in Exhibit 5.1) - -------------------------------------------------------------------------------- 23.2 Consent of BDO Seidman, LLP - --------------------------------------------------------------------------------
UNDERTAKINGS -------------------------------------------------------------------- (A) RULE 415 OFFERING. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement; and (iii) Include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information. (2) For determining liability under the Securities Act, treat each 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 end of the offering. (d) EQUITY OFFERINGS OF NONREPORTING SMALL BUSINESS ISSUERS. The Registrant will provide to the underwriter at the closing specified in the underwriting agreement the certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. -------------------------------------------------------------------- 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 the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the city of San Francisco, California, on May 11, 2001. By: /s/ Allen Yue -------------------------------------- Name: Allen Yue Title: President In accordance with the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates stated.
SIGNATURE NAME AND TITLE DATE /s/ Allen Yue Allen Yue, May 11, 2001 - ---------------------------- President and Director /s/ Eric Gravell Eric Gravell, May 11, 2001 - ---------------------------- Executive Vice President and Director /s/ Michael Recca Michael Recca, May 11, 2001 - ---------------------------- Chief Financial Officer /s/ Fillian Lei Fillian Lei, May 11, 2001 - ---------------------------- Controller
EX-1 2 ex1-0.txt EXHIBIT 1.0 Exhibit 1.0 Chipcard, Inc. 1,000,000 Units Each Unit Consisting of One Share of Common Stock and One Redeemable Common Stock Purchase Warrant UNDERWRITING AGREEMENT May __, 2001 The Thornwater Company, L.P. As Representative of the Underwriters named in Schedule I hereto 99 Wall Street New York, New York 10005 Dear Sirs: Chipcard, Inc., a Delaware corporation (the "Company"), hereby confirms its agreement with The Thornwater Company, L.P. (being referred to herein variously as "you" or the "Representative") and the other underwriters named in Schedule I hereto (the "Representative" and the other underwriters being collectively called the "Underwriters") as follows: 1. Introductory. The Company proposes to issue and sell, severally and not jointly, to the Underwriters 1,000,000 units (the "Firm Units"), each Firm Unit consisting of one share of Common Stock, $0.01 par value, of the Company (the "Common Stock") and one Redeemable Common Stock Purchase Warrant of the Company (the "Redeemable Warrants"). Subsequent to the sale and issuance of the Firm Units in accordance with the terms of this Agreement, the shares of Common Stock and the Redeemable Warrants will be immediately separately transferable. A Redeemable Warrant entitles the holder of such warrant to exercise the Redeemable Warrants for one (1) share of Common Stock at an initial exercise price of $8.40 per share commencing on the Effective Date (as hereinafter defined) and ending at 5:00 p.m., New York time, on ________ __, 2001 (five (5) years after the Effective Date). In addition, solely for the purpose of covering over-allotments, the Company proposes to grant to the Representative an option to purchase from it up to an additional 150,000 units (the "Additional Units" and collectively with the Firm Units, the "Units"), each Additional Unit consisting of one share of Common Stock (the "Additional Stock") and one Redeemable Warrant (the "Additional Warrants"). The Common Stock to be sold by the Company, excluding the Additional Stock, is herein called the "Stock". The Units and the components thereof are more fully described in the Prospectus referred to below. 2. Representations and Warranties of the Company. The Company represents and warrants to the Underwriters: (a) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, and amendments thereto, on Form SB-2 (File No. ________), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Units, the Stock, the Redeemable Warrants, the Additional Stock and the Additional Redeemable Warrants under the Securities Act of 1933, as amended (the "Act"). The Company will not, before the registration statement becomes effective (the "Effective Date"), file any other amendment to said registration statement to which you shall reasonably object in writing after being furnished with a copy thereof. Copies of such registration statement and all amendments thereto, and all forms of the related Preliminary Prospectus contained therein, previously filed by the Company with the Commission, have heretofore been delivered to you. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, exhibits and all other documents filed as a part thereof and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430A of the General Rules and Regulations of the Commission under the Act (the "Regulations")) is herein called the "Registration Statement". The prospectus in the form filed with the Commission pursuant to Rule 424(b) of the Regulations is herein called the "Prospectus". (b) The Company has not received from the Commission or any "Blue Sky" or securities authority of any jurisdiction an order preventing or suspending the use of any Preliminary Prospectus relating to the proposed offering of the Units and Additional Units or has the Commission or any "Blue Sky" or securities authority, to the Company's knowledge, instituted proceedings for that purpose. Each Preliminary Prospectus, at the time of filing thereof, contained all material statements which are required to be stated therein in accordance with the Act and the Regulations, and conformed in all material respects with the requirements of the Act and the Regulations and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representation and warranty in this clause (b) does not apply to the section of the Prospectus captioned "Underwriting" nor to any statements or omissions in the Registration Statement or Prospectus based upon and made in conformity with written information furnished to the Company by the Representative for inclusion therein. The Registration Statement at the time it becomes effective and the Prospectus at the time it is filed with the Commission pursuant to Rule 424(b) and on the Closing Date (and the Additional Closing Date, if any, determined as hereinafter provided in Section 3) will contain all material statements which are required to be stated therein 2 in accordance with the Act and the Regulations, and will in all material respects conform to the requirements of the Act and the Regulations, and the Registration Statement and the Prospectus will not, on such dates, include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representations or warranties are made with respect to statements or omissions made in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by or on behalf of such Underwriters expressly for use in the Registration Statement or Prospectus or any amendment or supplement thereto. (c) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California. The Company has no subsidiaries. The Company is duly qualified and in good standing as foreign corporations in all jurisdictions where the character or location of their properties (owned or leased) or the nature of their business makes such qualification necessary, except where the failure so to qualify would not have a material adverse effect on the business, properties, results of operations, condition (financial or otherwise), affairs or prospects (a "Material Adverse Effect") of the Company. The Company has all requisite corporate power and authority, and all necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies, to own their respective properties and conduct their respective businesses as described in the Prospectus, and the Company has all such power, authority, authorizations, approvals, orders, licenses, certificates and permits to enter into this Agreement and to carry out the provisions and conditions hereof. The Company own, or possess adequate rights to use, all patents, trademarks, service marks and other rights necessary for the conduct of their business as described in the Prospectus and neither the Company, nor any officer or director of the Company has received any notice of conflict with the asserted rights of others in any respect which would have a Material Adverse Effect upon the Company and none knows any basis therefor. The Company has no subsidiaries. (d) The Company has or will have good and marketable title in fee simple to, or valid and enforceable leasehold estates in, all items of real property and personal property which are stated in the Prospectus to be owned or leased by them, in each case free and clear of all liens, encumbrances, claims, security interests, subleases and defects, other than those referred to in the Prospectus and those which do not have a Material Adverse Effect upon the Company. The Company has the right to operate all of its facilities in their present locations and the operation of such facilities does not violate in any material respect the provisions of any lease with respect thereto which the Company or any third party is a party. (e) There is no litigation or governmental proceeding pending or, to the knowledge of the Company threatened against, or involving the properties or business of, the Company, nor are there any actions, suits or proceedings related to environmental matters or 3 related to discrimination on the basis of age, sex, religion or race and no labor disturbance by the employees of the Company which could have a Material Adverse Effect upon the Company. (f) To the Company's reasonable knowledge, there is no document or contract of a character required to be described in the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. (g) The financial statements together with the related notes of the Company included in the Registration Statement and Prospectus present fairly the financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply; and such financial statements have been prepared in conformity with generally accepted accounting principles, consistently applied throughout the periods involved. The consolidated capitalization of the Company, as set forth under the caption "Capitalization" in the Prospectus, was as so described on the date of which it is set forth therein. (h) B.D.O. Seidman, LLP, whose reports are filed with the Commission as a part of the Registration Statement, are independent accountants with respect to the Company as required by the Act and the Regulations. (i) Except as described in the Prospectus, the Company, does not own, directly or indirectly, any shares of stock or any other securities of any corporation nor does the Company have any equity interest in any firm, partnership, joint venture, association or other entity. (j) Subsequent to the respective dates as of which information is set forth in the Registration Statement and the Prospectus, there has been no material adverse change in the business, properties, results of operations, condition (financial or otherwise), affairs or prospects of the Company in; and the outstanding debt, the property and the business of the Company form in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. (k) No default exists, and no event has occurred which with notice or lapse of time, or both, would constitute a default, in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, note, bank loan or credit agreement or any other agreement or instrument to which the Company or the Subsidiary is a party or by which either of them or any of their property may be bound or affected, which default would have a Material Adverse Effect upon the Company or the Subsidiary. (l) The Company nor the Subsidiary is not in breach of any term or provision of its Certificate of Incorporation, by-laws or other charter documents and, to the best of the Company's knowledge, in violation of any franchise, license, permit, judgment, decree, order, statute, rule or regulation, which violation is a Material Adverse Effect upon the Company. The 4 Company, to the best of the Company's knowledge, is not in violation of any laws, ordinances, governmental rules or regulations to which either of them is subject, which violation is a Material Adverse Effect upon the Company, taken as a whole. The Company has not failed to obtain any licenses, permits, franchises or other governmental authorizations materially necessary to the ownership of its property or to the conduct of its business, where the failure to do so is a Material Adverse Effect upon the Company. (m) Neither the execution and delivery of this Agreement, the Redeemable Warrant Agreement, the Representative's Warrant Agreement (as defined in Section 3(h) hereof) [and the Financial Consulting Agreement, as defined in Section 3,] and the consummation of the transactions herein or therein contemplated, nor compliance with the terms and provisions hereof or thereof will conflict with, or result in a breach of any of the terms, provisions or conditions of the Certificate of Incorporation, by-laws or other charter documents of the Company. The execution and delivery of this Agreement, the Redeemable Warrant Agreement, the Representative's Warrant Agreement and the Financial Consulting Agreement, the consummation of the transactions herein or therein contemplated, and compliance with the terms and provisions hereof or thereof will not conflict with, or result in a breach of, or constitute a default under any of the terms, provisions or conditions of any agreement or instrument to which the Company is a party or by which either of them or any of their properties is bound, except where such conflict, breach or default would not have a Material Adverse Effect upon the Company, or violate any franchise, license, permit, judgment, decree, order, statute, rule or regulation of any government, governmental authority or court having jurisdiction over the Company, except where such violation would not have a Material Adverse Effect upon the Company. (n) The Company has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement, the Redeemable Warrant Agreement, the Representative's Warrant Agreement and the Financial Consulting Agreement, and this Agreement, the Redeemable Warrant Agreement, the Representative's Warrant Agreement, [and the Financial Consulting Agreement,] have been duly authorized, executed and delivered by the Company and constitute legal, valid and binding agreements of the Company and are enforceable against the Company in accordance with their respective terms except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally, and except insofar as the enforceability of the indemnification and contribution terms may be limited by applicable law or public policy. (o) All of the issued shares of Common Stock are duly and validly issued and outstanding, fully paid and nonassessable; the Stock and the Additional Stock, when issued and delivered in accordance with this Agreement, will be duly and validly issued and outstanding, fully paid and nonassessable and free of preemptive rights. The Company's capital stock conforms in all material respects to all statements in relation thereto contained in the Registration Statement and Prospectus. 5 (p) The Redeemable Warrants, the Additional Redeemable Warrants and the warrants that will be issued pursuant to the terms of the Representative's Warrant Agreement (the "Representative's Warrants") have been duly and validly authorized by the Company and upon delivery to you against payment therefore and otherwise in accordance with this Agreement, the Redeemable Warrant Agreement and the Representative's Warrant Agreement, as the case may be, will be duly issued and legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally. (q) The Common Stock underlying the Redeemable Warrants (the "Redeemable Warrant Stock"), the Additional Redeemable Warrants (the "Additional Redeemable Warrant Stock") and the Representative's Warrants (the "Representative's Warrant Stock") has been duly authorized and reserved for issuance upon the representative's exercise of the Redeemable Warrants, the Additional Redeemable Warrants and the Representative's Warrants, and, when issued upon payment of the exercise price therefor, will be validly issued, fully paid and nonassessable shares of Common Stock. (r) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as may otherwise be indicated or contemplated herein or therein, the Company has (i) issued any securities except securities issued under the Company's employee benefit plans and as provided herein or in the Registration Statement, or incurred any liability or obligation, direct or contingent, for borrowed money, (ii) entered into any material transaction not in the ordinary course of business, (iii) entered into any transaction with an affiliate of the Company, or (iv) declared or paid any dividend on its shares of Common Stock. (s) The Company has obtained from the written agreement of its stockholders that for a period of one year from the date of the Prospectus, they will not, without your prior written consent, sell, contract to sell, or grant any option for the sale of or otherwise dispose of, directly or indirectly, any shares of Common Stock of the Company owned by them. 6 (t) No consent, authorization or approval is required to be obtained by the Company from any Federal, state or local governmental agency or body in order to consummate the transactions contemplated herein or in the Registration Statement, except such additional steps as may be necessary to qualify the Units and the components of the Units under "Blue Sky" or securities laws of any jurisdiction. (u) Except as provided in the Registration Statement, no person holds a right to require or participate in the registration under the Act of any securities of the Company to be effected by the Registration Statement, which right has not been duly waived by the holder thereof as of the date hereof. The Company does not have outstanding, and at the Closing Date and the Additional Closing Date, if any, will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its Common Stock or any such warrants, convertible securities or obligations, except as referred to in the Prospectus. (v) The Company has timely filed all Federal, state, and local tax returns which are required to be filed and has paid all taxes shown on such returns and all assessments received by it to the extent that the same have become due. (w) To the knowledge and belief of the Company's officers and directors, neither the Company, nor any officer, director or employee of the Company has made any payment of funds of the Company or purchased any property with Company funds in a manner prohibited by law, and no funds of the Company or property purchased with Company funds have been set aside to be used for any payment prohibited by law. (x) Except as set forth in the Registration Statement and Prospectus, the Company does not know of any claims for services in the nature of a finders fee, brokerage fee or otherwise with respect to this offering for which the Company may be responsible. (y) The Company has obtained from ________________________________ (the "Key Employees") new or modified employment agreements upon terms agreeable to the Company and the Representative, including, without limitation, the term, compensation, arrangement and restrictive covenants. Prior to the one-year anniversary of the Closing, the Company will obtain key man life insurance upon the life of Allen Yue in a face amount mutually agreeable to the Company and the Representative. (z) Application for quotation of the Common Stock on the Nasdaq SmallCap Market has been approved, subject to notice of issuance. 3. Purchase, Sale and Delivery of the Stock and Additional Stock. 7 (a) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell, severally and not jointly, to the Underwriters, and the Underwriters, severally and not jointly, agree to purchase from the Company, at a purchase price of $7.452 per Unit, the number of Firm Units set forth opposite their respective names in Schedule I totalling not less than 1,000,000 units. (b) Payment for the Firm Units shall be made by wire transfer of same funds payable to the order of the Company at the offices of The Thornwater Company, L.P., 99 Wall Street, New York, New York 10005 or such other place as shall be agreed upon between us. Such delivery and payment shall be made at 10:00 A.M., New York time, on not later than the third business day following the Effective Date; provided, however, that such date may be extended for not more than an additional three business days by the Representative or in accordance with the provisions of Section 9(c) hereof. The hour and date of such delivery and payment are herein called the "Closing Date". (c) Certificates evidencing the Stock and Redeemable Warrants representing the Firm Units shall be registered in such name or names and in such authorized denominations as you may request in writing at least two full business days prior to the Closing Date. The Company will permit you to examine and package said certificates at least one full business day prior to the Closing Date. (d) In addition, on the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to you the option to purchase all or a portion of the Additional Units as may be necessary to cover over-allotments at the same purchase price per Unit to be paid by the Underwriters to the Company for the Firm Units as determined in this Section 3. This option may be exercised only to cover over-allotments in the sale of Additional Units by the Underwriters. This option may be exercised at any time on or before the forty-fifth day following the effective date of the Registration Statement by written notice by the Representative to the Company. Such notice shall set forth the aggregate number of Additional Units as to which the option is being exercised, the name or names in which the shares of Additional Stock and Additional Redeemable Warrants representing the Additional Units are to be registered, the denominations in which the Additional Stock and Additional Redeemable Warrants representing the Additional Units are to be issued, and the date and time, as reasonably determined by you, when the Additional Stock and Additional Redeemable Warrants representing the Additional Units are to be delivered (such date and time being herein sometimes referred to as the "Additional Closing Date"); provided, however, that the Additional Closing Date shall not be earlier than the Closing Date nor earlier than the second business day after the date on which the option shall have been exercised nor later than the eighth business day after the day on which the option shall have been exercised. (e) Payment for the Additional Units shall be made by wire transfer of same funds payable to the order of the Company at the offices of The Thornwater Company, LP, 99 Wall Street, New York, New York 10005 or such other place as shall be agreed upon between us. 8 (f) Certificates evidencing the Additional Stock and Additional Redeemable Warrants representing the Additional Units shall be registered in such name or names and in such authorized denominations as you may request in writing at least two full business days prior to the Additional Closing Date. The Company will permit you to examine and package said certificates for delivery at least one full business day prior to the Additional Closing Date. (g) The Company shall not be obligated to sell or deliver any shares of Stock, Redeemable Warrants, Additional Stock or Additional Redeemable Warrants, except upon tender of payment by the Representative for all the Firm Units or Additional Units, as the case may be, agreed to be purchased from it hereunder. (h) On the Closing Date, the Company shall issue and sell to the Representative, at a purchase price of $0.01 per Warrant, the Representative's Warrants. The Representative's Warrants shall be exercisable for a period of four (4) years commencing one (1) year from the Effective Date at an initial exercise price equal to one hundred and twenty percent (120%) of the initial public offering price of the Units. The Representative's Warrants shall be issued pursuant to the terms and provisions of the Representative's Warrant Agreement substantially in the form of the Representative's Warrant Agreement filed as Exhibit ___ to the Registration Statement (the "Representative's Warrant Agreement"). 4. Public Offering. The several Underwriters agree, subject to the terms and provisions of this Agreement, to offer the Units to the public as soon as practicable after the Effective Date, at the initial offering price of $8.00 per Unit and upon the terms described in the Prospectus. The Representative may, from time to time, decrease the public offering price, after the initial public offering, to such extent as the Representative may determine, however, such decreases will not affect the price payable to the Company hereunder. 5. Covenants of the Company. The Company covenants that it will: (a) Use its best efforts to cause the Registration Statement to become effective and will notify you immediately, and confirm the notice in writing, (i) when the Registration Statement, or any post-effective amendment thereto, shall have become effective, (ii) of the issuance by the Commission of any stop order or of the initiation or the threatening of any proceedings for that purpose, and (iii) of the receipt of any comments by the Commission. The Company will prepare and timely file with the Commission under Rule 424(b) of the Regulations a Prospectus containing information previously omitted on the Effective Date in reliance of Rule 430A of the Regulations. The Company will use its best efforts to prevent the issuance of any stop order or any order preventing or suspending the use of the Registration Statement or Prospectus and, if such order is issued, to obtain the lifting thereof as promptly as possible. 9 (b) During the time when a prospectus is required to be delivered under the Act, comply so far as it is able with all requirements imposed upon it by the Act, as now and hereafter amended, and by the Regulations, as from time to time in force, so far as necessary to permit the continuance of sales or of dealings in the Stock, the Redeemable Warrants, the Additional Stock and the Additional Redeemable Warrants in accordance with the provisions hereof and the Prospectus. If at any time when a prospectus relating to the Stock, the Redeemable Warrants, the Additional Stock or the Additional Redeemable Warrants is required to be delivered under the Act any event shall have occurred as a result of which, in the reasonable opinion of counsel for the Company or your counsel, the Registration Statement or Prospectus as then amended or supplemented includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or it is necessary at any time to amend or supplement the Registration Statement or Prospectus to comply with the Act, the Company will notify you promptly and prepare and file with the Commission an appropriate amendment or supplement (in form reasonably satisfactory to you). (c) Deliver to you such number of copies of each Preliminary Prospectus as you may reasonably request and, deliver to you two signed copies of the Registration Statement, including exhibits, and all post-effective amendments thereto and such number of copies of the Prospectus, the Registration Statement and amendments and supplements thereto, if any, without exhibits, as you may reasonably request for the purposes contemplated by the Act. (d) Endeavor in good faith, in cooperation with you, at or prior to the time the Registration Statement becomes effective, to qualify the Units, the Stock, the Redeemable Warrants, the Additional Stock and the Additional Redeemable Warrants for offering or sale of the Units and the Additional Units of such jurisdictions as you may reasonably designate; provided that no such qualification shall be required in any jurisdiction where, as a result thereof, the Company would be subject to service of general process or would be required to become qualified to do business as a foreign corporation doing business in such jurisdiction. In each jurisdiction where the qualification of the Units, the Stock, the Redeemable Warrants, the Additional Stock and the Additional Redeemable Warrants shall be effected, the Company will, unless you agree that such action is not at the time necessary or advisable, file and make such statements or reports at such times as are or may be reasonably required by the laws of such jurisdiction. (e) The Company will make generally available to its security holders and to the Representative as soon as practicable, but not later than 45 days after the end of the 12-month period beginning at the end of the fiscal quarter of the Company during which the Effective Date occurs (or 90 days, if such 12-month period coincides with the Company's fiscal year), an earnings statement of the Company, which will be in reasonable detail, but need not be audited, and will cover a period of twelve months commencing after the Effective Date. Such earnings statement shall comply with the requirement of Section 11(a) of the Act and Rule 158 of the Rules 10 and Regulations. During the period of five years commencing on the Effective Date, the Company will furnish to its stockholders (A) within 75 days after the end of the first three fiscal quarters of each fiscal year, quarterly reports containing unaudited financial information and (B) within 120 days after the end of each fiscal year, an annual report containing audited financial information. (f) For a period of 90 days after the date of the Prospectus, not issue, sell, contract to sell, grant an option for the sale of or otherwise dispose of, directly or indirectly, any shares of Common Stock of the Company (or any shares of securities convertible into or exercisable for such Common Stock) other than the Units being sold by the Company and securities issued pursuant to the Company's employee benefit plans or as otherwise referred to in the Prospectus, without your prior written consent. (g) For a period of five years from the effective date of the Registration Statement, furnish you the following: (i) as soon as practicable after they have been filed with the Commission, two copies of each annual, quarterly and current report on Form 10-K, Form 10-Q or Form 8-K (to the extent the Company shall be required to file such reports pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (collectively the "Exchange Act") and, as soon as practicable after they have been sent by the Company to its security holders, two copies of any communications sent by it to its public security holders generally; (ii) as soon as practicable, two copies of every press release and every material news items and article in respect of the Company or its affairs which was released by the Company; and (iii) such additional non-confidential documents and information with respect to the Company and its affairs as you may from time to time reasonably request. (h) Apply the net proceeds from the offering received by the Company in the manner set forth under "Use of Proceeds" in the Prospectus, including that the net proceeds will only be used in connection with the business as described in the Prospectus, and comply with Rule 463 under the Act. (i) Furnish to you as early as practicable prior to the Closing Date and Additional Closing Date, as the case may be, but no later than two full business days prior thereto, a copy of the latest available unaudited interim financial statements of the Company, if any, which 11 have been reviewed by the Company's independent auditors, as stated in their letters to be furnished pursuant to Section 7(f) hereof. (j) Not file any amendment or supplement to the Registration Statement or Prospectus after the effective date of the Registration Statement to which you shall reasonably object in writing after being furnished a copy thereof. (k) If any action or proceeding shall be brought by you in order to enforce any right or remedy under this Agreement, the Company hereby consents to, and agrees that it will submit to, the jurisdiction of the courts of the State of New York and of any Federal court sitting in the United States District Court for the Southern District of New York. The Company agrees that process in any such action or proceeding may be served in that manner provided by New York law for service on foreign corporations. (l) Comply with all registration, filing and reporting requirements of the Exchange Act which may from time to time be applicable to the Company. (m) Make all filings required, including registration under the Exchange Act, to obtain and keep the listing of its Common Stock in The Nasdaq SmallCap Market, and effect and maintain such listing for the Common Stock for at least five (5) years from the date of this Agreement. (n) Use its best efforts to be included in Standard & Poors Corporations Manual as soon as possible following the Closing Date and to continue to be included in both of such Manuals for at least five (5) years from the effective date of the Registration Statement. (o) Not later than three months following the date of this Agreement, cause to be delivered to you and to your counsel, Parker Duryee Rosoff & Haft, four (4) bound volumes containing therein all filings, including exhibits, and correspondence to and from the Commission, the National Association of Securities Dealers, Inc, ("NASD") and all states or other jurisdictions concerning the offering of the Stock, underwriting documents and closing documents, plus any other relevant material. (p) Unless waived by you, you shall have the right to designate a non-voting advisor acceptable to the Company to the Board for a period of three years after the Closing Date. Said designee, shall attend meetings of the Board and shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings, including but not limited to, food, lodging and transportation. 12 (q) For a period of three (3) years from the Closing Date, there will be no less than four (4) formal, "in person" or "telephonic" meetings, of the Company's Board of Directors in each such year at which meetings the Advisor shall be permitted to attend or participate, as the case may be in accordance with the provisions of Section 5(p); said meetings shall be held quarterly each year and ten (10) days' advance notice of such meetings shall be given to the Advisor. The Advisor shall receive notice of special meetings of the Board of Directors at the same time and manner as the members of the Board. (r) Indemnify and hold the Representative and the Advisor harmless, to the full extent allowed by applicable laws, against any and all claims, actions, awards and judgments arising solely out of the attendance and participation of the Advisor at any meeting described in Section 5(p) of this Agreement. In the event the Company maintains a liability insurance policy affording coverage for the acts of its officers and directors, the Company agrees, if possible, to include the Representative and the Advisor as an insured under such policy. (s) Establish and maintain during the period that the Common Stock is listed on The Nasdaq SmallCap or National Markets an independent audit committee and other required committees of the Company's Board of Directors. [(t) On the Closing Date, enter into a three (3) year financial consulting agreement with the Representative (the "Financial Consulting Agreement") pursuant to which the 13 Representative will provide the Company with investment banking and financial consulting services at a fee of $3,333.33 per month over a 36-month period, with the total fee of $120,000 payable in advance on the Closing Date.] 6. Payment of Expenses. (a) The Company hereby agrees to pay, whether or not the transactions contemplated hereunder are consummated, all expenses (other than fees of your counsel, except as provided in (iii) below) in connection with (i) the preparation, printing, filing and mailing of the Registration Statement and the Prospectus, including the cost of all copies thereof and of the Preliminary Prospectus and of the Prospectus and any amendments or supplements thereto supplied to you in quantities as herein above stated, (ii) the issuance, transfer and delivery of the Firm Units and the Additional Units, including any transfer or other taxes payable thereon, but not including the underwriting discounts and commissions thereon, (iii) the qualification of the Units, the Stock, the Redeemable Warrants, the Additional Stock and the Additional Redeemable Warrants, under state or foreign securities or Blue Sky laws, including the costs of printing and mailing the "Blue Sky Survey" and the reasonable fees of counsel to the Underwriters counsel (which amount shall not exceed $25,000 without the consent of the Company and for which counsel will notify the Company as soon as practicable when said fees reach $15,000), of which $10,000 has been paid prior to the date hereof, and disbursements in connection therewith, (iv) filing fees payable to the NASD, 14 (b) The Company further agrees that, in addition to the expenses payable pursuant to subsection (a) of this Section 6, it will pay to the Representative a non-accountable expense allowance equal to two and one half percent (2 1/2 %) of the gross proceeds received by the Company from the sale of the Firm Units and the Additional Units, by certified or bank cashier's check or, at the election of the Representative, by deduction from the proceeds of the offering contemplated herein. 7. Conditions of Your Obligations. The obligation of the several Underwriters hereunder to purchase and pay for the Firm Units and the Additional Units, as provided herein, shall be subject to the continuing accuracy in all material respects of the representations and warranties of the Company as of the date hereof and as of the Closing Date (or the Additional Closing Date, as the case may be), to the performance by the Company in all material respects of its obligations hereunder and to the following conditions: (a) The Registration Statement shall have become effective not later than 5:00 P.M., New York City time, on the date of this Agreement or such later date and time as shall be consented to in writing by you and, at the Closing Date and Additional Closing Date, no stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued or proceeding therefor initiated or threatened by the Commission. (b) At the Closing Date and the Additional Closing Date, as the case may be, you shall have received the favorable opinion of Ziegler Ziegler & Altman, counsel for the Company, dated the Closing Date or the Additional Closing Date, as the case may be, addressed to the Underwriters substantially in the form of Attachment A hereto. (c) On or prior to the Closing Date and the Additional Closing Date, as the case may be, you shall have been furnished such documents, certificates and opinions as you may reasonably require for the purpose of enabling you to review the matters referred to in subsection (b) of this Section 7, and in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained. (d) Prior to the Closing Date and the Additional Closing Date, as the case may be, (i) there shall have been no material adverse change in the business, properties, results of operations, condition (financial or otherwise), affairs or prospects, of the Company from that as of the latest date as of which such condition is set forth in the Registration Statement and Prospectus; (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company from the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus, other than transactions referred 15 to or contemplated therein or to which you have given your written consent; (iii) the Company shall not be in default (nor shall an event have occurred which, with notice, or lapse of time or both would constitute a default or acceleration) under any provision of, any agreement, understanding or instrument relating to any indebtedness; (iv) no material amount of the consolidated assets of the Company shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus; and (v) no action, suit or proceeding, at law or in equity, shall have been pending or, to the knowledge of the Company, threatened against the Company or affecting any of its properties or business before or by any court or federal, state or other jurisdictional commission, board or other administrative agency wherein an unfavorable decision, ruling or finding would materially adversely affect the business, operations, prospects or consolidated financial condition or income of the Company except as set forth in the Registration Statement and Prospectus. (e) At the Closing Date and Additional Closing Date, as the case may be, you shall have received a certificate of the President and the principal financial or accounting officer of the Company, dated the Closing Date and Additional Closing Date, as the case may be, (i) to the effect that the conditions set forth in subsections (a) and (d) above have been satisfied and (ii) as to the accuracy, as of the Closing Date and Additional Closing Date, as the case may be, of the representations and warranties of the Company set forth in Section 2 hereof. (f) At the time this Agreement is executed and at the Closing Date and Additional Closing Date, as the case may be, you shall have received a letter, addressed to you in form and substance satisfactory to you in all respects (including the non-material nature of the changes or decreases, if any, referred in to clause (iii) below), from BDO Seidman LLP, dated as of the date of this Agreement and as of the Closing Date and Additional Closing Date, as the case may be: (i) confirming that they are independent accountants with respect to the Company within the meaning of the Act and the applicable published Regulations; (ii) stating that in their opinion, the financial statements of the Company included in the Registration Statement examined by them comply as to form in all material respects with the applicable accounting requirements of the Act and the published Regulations; (iii) stating that, on the basis of procedures (but not an audit in accordance with generally accepted auditing standards), which included a reading of the latest available unaudited interim financial statements of the Company and its consolidated related party (with an indication of the date of the latest available unaudited interim financial statements), a reading of the latest available minutes of the stockholders and boards of 16 directors of the Company and its consolidated related party and committees of such boards and inquiries to certain officers and other employees of the Company and its consolidated related party responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention that would cause them to believe that (A) the unaudited financial statements of the Company and its consolidated related company included in the Registration Statement (i) do not comply as to form in all material respects with the applicable accounting requirements of the Act and Regulations, or (ii) were not fairly presented in conformity with generally accepted accounting principles on a basis substantially consistent with that of the audited financial statements included in the Registration Statement; (B) at the date of the latest available interim financial statements and at a specified date not more than five business days prior to the date of such letter, there was any change in long-term debt or capital stock of the Company and its consolidated related company as compared with the amounts shown in the [ ] balance sheet of the Company and its consolidated related company included in the Registration Statement and Prospectus, other than as set forth in or contemplated by the Registration Statement and Prospectus, or, if there was any change, setting forth the amount of such change; or (C) during the period from [ ] to a specified date not more than five days prior to the date of such letter, there was any decrease in revenues or any increase in operating loss, net loss or pro forma net loss per share of the Company, as compared with the corresponding period in the preceding year, other than as set forth in or contemplated by the Registration Statement and Prospectus, or, if there was any decrease or increase, respectively, setting forth the amount of such decrease or increase; and (iv) stating that they have compared specific dollar amounts, numbers of shares, percentages of dollar amounts and shares and other information pertaining to the Company set forth in the Prospectus, which have been specified by you prior to the date of this Agreement, to the extent that such amounts, numbers, percentages and other information may be derived from the general accounting records of the Company and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter, and found them to be in agreement. 17 (g) All proceedings taken in connection with the sale of the Firm Units and the Additional Units as herein contemplated shall have been reasonably satisfactory in form and substance to you and your counsel. (h) The Company shall have furnished to the Representative such further certificates and documents confirming the representations and warranties contained herein, the performance of covenants prior to the Closing Date and the Additional Closing Date, as the case may be, and related matters as the Representative may reasonably have requested; and you shall have received from counsel to the Underwriters, a favorable opinion, dated as of the Closing Date and the Additional Closing Date, as the case may be, with respect to such of the matters set forth under subsection (b) of this Section 7, and with respect to such other related matters, as you may reasonable require. (i) There shall have been duly tendered to you certificates representing all the Stock and the Additional Stock, as the case may be, agreed to be sold by the Company on the Closing Date and the Additional Closing Date, as the case may be. (j) No order suspending the sale of the Firm Units or the Additional Units, as the case may be, in any jurisdiction designated by you pursuant to subsection (d) of Section 5 hereof, shall have been issued on the Closing Date or the Additional Closing Date, as the case may be, and no proceedings for that purpose shall have been instituted or to your knowledge or that of the Company shall be contemplated. Any certificate signed by any duly authorized officer of the Company in such capacity and delivered to you or your counsel shall be deemed a representation and warranty by the Company to you as to the statements made therein. If any condition to your obligations hereunder to be fulfilled prior to or at the Closing Date or the Additional Closing Date, as the case may be, is not so fulfilled, you may terminate this Agreement or, if you so elect, waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 8. Indemnification. (a) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each of the Underwriters, each of the officers and directors of the Underwriters and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to any and all expense whatsoever reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever) (collectively, "Damages") arising out of or based upon (i) the inaccuracy or breach of any representation or warranty of the Company or the breach of any covenant made by the Company in this Agreement or (ii) any untrue statement or alleged untrue statement of a material fact contained (x) in any Preliminary Prospectus, the Registration Statement 18 or the Prospectus (as from time to time amended and supplemented) or (y) in any application or other document (in this Section 8, collectively called "Application") executed by or on behalf of the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Stock or the Additional Stock under the "Blue Sky" or securities laws thereof or filed with the Commission or any securities exchange, such as the Nasdaq SmallCap Market, or (iii) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; unless such statement or omission was made in the section of the Prospectus captioned "Underwriting" or was made in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by or on behalf of any Underwriter expressly for use in the Preliminary Prospectus, the Registration Statement or Prospectus, or any amendment or supplement thereof, or in any Application or in any communication to the Commission, as the case may be, or unless the Damages arise from any failure by any of the Underwriters to be registered or to be in good standing as a broker dealer in any jurisdiction in which Units are offered or sold or to comply with the provisions of state and federal securities laws, or any actions taken in connection with the offer or sale of the Units hereunder by any of the Underwriters or its employees or agents not included in the Prospectus. With respect to any Damages arising out of or based upon any untrue statement or alleged untrue statement made in, or omission or alleged omission from, any Preliminary Prospectus, the indemnity agreement contained in this Section 8(a) with respect to such Preliminary Prospectus shall not inure to the benefit of the Underwriters (or the benefit of any person controlling any Underwriter), if the Prospectus (or the Prospectus as amended or supplemented if the Company shall have made any amendments thereof or supplements thereto which shall have been furnished to you prior to the time of confirmation of such sale) does not contain such statement, alleged statement, omission or alleged omission, a sufficient number of copies of such Prospectus were provided to the Underwriters and a copy of such Prospectus shall not have been sent or given to the person asserting such Damages at or prior to the written confirmation of such sale to such person. (b) Subject to the conditions set forth below, each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act for all Damages with respect to statements or omissions, or alleged statements or omissions, if any, made in the section of the Prospectus captioned "Underwriting" or made in any Preliminary Prospectus, Registration Statement or Prospectus or any amendment or supplement thereto or any Application in reliance upon, and in conformity with, written information furnished to the Company with respect to the Underwriters by or on behalf of any Underwriter for use in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereto or in any application, as the case may be, or that arise from any failure by any of the Underwriters to be registered or to be in good standing as a broker dealer in any jurisdiction in which Units are offered or sold or to comply with the provisions of state and federal securities laws, or any actions taken in connection with the offer 19 or sale of the Units hereunder by any of the Underwriters or its employees or agents not included in the Prospectus. (c) If any action is brought against an indemnified party under subsection (a) or (b) above (the "Indemnified Party") in respect of which indemnity may be sought against the indemnifying party under subsection (a) or (b) above (the "Indemnifying Party"), such Indemnifying Party shall promptly notify in writing the party or parties against whom indemnification is to be sought of the institution of such action and the Indemnifying Parties shall assume the defense of such action, including the employment of counsel (reasonably satisfactory to such Indemnified Party) and payment of expenses. Such Indemnified Party shall have the right to employ it or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless the employment of such counsel shall have been authorized in writing by the Indemnifying Parties in connection with the defense of such action or the Indemnifying Parties shall not have employed counsel to have charge of the defense of such action or such Indemnified Party or parties shall have reasonably concluded that there may be defenses available to the Indemnifying Parties which are different or additional to those available to the Indemnifying Parties (in which case the Indemnifying Parties shall not have the right to direct the defense of such action on behalf of the Indemnified Party or Parties), in any of which events such reasonable fees and expenses shall be borne by the Indemnifying Parties. Anything in this paragraph to the contrary notwithstanding, the Indemnifying Party shall not be liable for the reasonable fees and expenses of more than one counsel or for any settlement of any such claim or action effected without its written consent. The Indemnifying Party agrees promptly to notify the Indemnified Party of the commencement of any litigation or proceedings against the Indemnifying Party or any of its officers or directors in connection with the issue and sale of the Stock and the Additional Stock or in connection with such Preliminary Prospectus, Registration Statement or Prospectus, or any amendment or supplement thereto, or any such Application. (d) If the indemnification provided for in this Section 8 is unavailable or insufficient to hold harmless an Indemnified Party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each Indemnifying Party shall contribute to the amount paid or payable to such Indemnified Party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Stock and Additional Stock. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the Indemnified Party failed to give the notice required above in this Section 8, then each Indemnifying Party shall contribute to such amount paid or payable by such Indemnified Party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to 20 be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) the Underwriters shall not be required to contribute any amount in excess of the amount by which the total price at which the Stock and Additional Stock underwritten by the Underwriters and distributed to the public were offered to the public exceeds the amount of any damages which the Underwriters have otherwise been required to pay by reason of such untrue statement or omission and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11 of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9. Default by an Underwriter. (a) If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Units hereunder, then such Firm Units to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder. 21 (b) In the event that the Firm Units to which the default relates is to be purchased by the non-defaulting Underwriters, or is to be purchased by another party or parties as aforesaid, you or the Company shall have the right to postpone the Closing Date for a reasonable period but not in any event exceeding five (5) business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement or the Prospectus which in the opinion of counsel for the Underwriters may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 9 with like effect as if it had originally been a party to this Agreement with respect to such Firm Units. 10. Representations and Agreements to Survive Delivery. Except as the context otherwise requires, all representations, warranties and agreements contained in this Agreement shall be deemed to be representations, warranties and agreements at the Closing Date and the Additional Closing Date, and such representations, warranties and agreements of you and the Company, including the indemnity and contribution agreements contained in Section 8 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of you or any controlling person, or by or on behalf of the Company or any controlling person, and shall survive termination of this Agreement and/or delivery of the Firm Units and the Additional Units to you. 11. Effective Date of This Agreement and Termination Thereof. (a) This Agreement shall become effective at 9:30 A.M., New York Time, on the first full business day following the day on which the Registration Statement becomes effective or at the time of the initial public offering by you of the Units, whichever is earlier. The time of the initial public offering, for the purpose of this Section 11, shall mean the time, after the Registration Statement becomes effective, of the release by you for publication of the first newspaper advertisement which is subsequently published relating to the Units or the time, after the Registration Statement becomes effective, when the Units is first released by you for offering by the Underwriters or dealers by letter or telegram, whichever shall first occur. You or the Company may prevent this Agreement from becoming effective without liability of any party to any other party, except as noted below, by giving the notice indicated below in Section 11(d) before the time this Agreement becomes effective. (b) You shall have the right to terminate this Agreement at any time prior to the Closing Date or the Additional Closing Date, as the case may be, if, after the date of this Agreement, any domestic or international event or act or occurrence has materially disrupted or, in the exercise of your reasonable judgment, will in the immediate future materially disrupt, 22 securities markets in the United States; or trading on the New York Stock Exchange shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the New York Stock Exchange by the New York Stock Exchange or by order of the Commission or any other governmental authority having jurisdiction; or the United States shall have become involved in a war or major hostilities; or a banking moratorium has been declared by a New York or Federal authority; or the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not said loss shall have been insured, will, in your opinion, interfere materially and adversely with the conduct of the business and operations of the Company; or there shall have been such material adverse change in the condition or prospects of the Company or the market for its and similar securities as in your judgment would make it inadvisable to proceed with the offering, sale and delivery of the Firm Units or the Additional Units, as the case may be. (c) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, the Company shall be notified promptly by you by telephone or telegram, confirmed by letter. If the Company elects to prevent this Agreement from becoming effective, you shall be notified promptly by the Company by telephone or telegram, confirmed by letter. (d) Anything in this Agreement to the contrary notwithstanding if this Agreement shall not become effective by reason of an election of the Company pursuant to this Section 11, or if this Agreement shall not be carried out within the time specified herein by reason of any failure on the part of the Company to perform any undertaking or satisfy any condition of this Agreement by it to be performed or satisfied, the sole liability of the Company to you, in addition to the obligations assumed by the Company pursuant to Section 6 hereof, will be to reimburse you for such reasonable out-of-pocket expenses (including the fees and disbursements of your counsel) as shall have been incurred in connection with this Agreement and the proposed purchase of the Firm Units and the Additional Units, and upon demand the Company will pay the full amount thereof to you. If this Agreement shall not become effective by reason of an election by you pursuant to this Section 11 or if this Agreement shall be terminated or otherwise not carried out within the time specified herein for any reason other than the failure on the part of the Company to perform any undertaking or satisfy any condition of this Agreement by it or them to be performed or satisfied, the Company shall have no liability to you other than for obligations assumed by the Company pursuant to Section 6 hereof; provided, however, that you may retain any sums heretofore paid to you by the Company as provided in Section 3 hereof to the extent that such sums are for your accountable out-of-pocket expenses (including the fees and disbursements of your counsel) as shall have been incurred in connection with this Agreement and the proposed purchase of the Firm Units and the Additional Units. Notwithstanding any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 8 shall not be 23 in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 12. Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and, if sent to any Underwriter, shall be mailed, delivered or telegraphed and confirmed to The Thornwater Company, LLP, 99 Wall Street, New York, New York 10005, Att: Robert Grabowski, President, with a copy to Parker Duryee Rosoff & Haft, 529 Fifth Avenue, New York, New York 10017, Att: Michael D. DiGiovanna, Esq.; and if sent to the Company, shall be mailed, delivered or telegraphed and confirmed to Chipcards, Inc., Citicorp Center, One Sansome Street, 19th Floor, San Francisco, California 94104, with a copy to Ziegler Ziegler & Altman LLP 1330 Avenue of the Americas, New York, New York 10019, Att: Scott A. Ziegler, Esq. 13. Parties. This Agreement shall be binding upon, you, the Company, and the controlling persons, directors and officers referred to in Section 8 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. 14. Construction. This Agreement shall be construed in accordance with the laws of the State of New York. If the foregoing correctly sets forth the understanding between you and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, CHIPCARDS, INC. By: ------------------------------ Accepted as of the date first above written: THE THORNWATER COMPANY, LP As Representative of the Underwriters named in Schedule I hereto By: ------------------------------------- 24 SCHEDULE I
Underwriters Number of Firm Units ------------ -------------------- TOTAL
EX-3 3 ex3-1.txt EXHIBIT 3.1 Exhibit 3.1 ARTICLES OF INCORPORATION I The name of this corporation is American Pacific Aviation and Technology Corporation. II The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III The name and address in the State of California of this corporation's initial agent for service of process is: Name: Eric Gravell Street Address 1 Sansome, Suite 1900 City: San Francisco State: California Zip: 94104 IV This corporation is authorized to issue only one class of shares of stock; and the total number of shares which this corporation is authorized to issue is 1,000. /s/ Eric Gravell ---------------------------- EX-3 4 ex3-2.txt EXHIBIT 3.2 Exhibit 3.2 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF AMERICAN PACIFIC AVIATION AND TECHNOLOGY CORPORATION Eric Gravell and Allen Yue certify that: 1. They are all of the directors of American Pacific Aviation and Technology Corporation, a California corporation. 2. The Board of Directors of American Pacific Aviation and Technology Corporation has approved the following amendment to the Articles of Incorporation: Article I is amended to read in its entirety as follows: "The name of the corporation is American Pacific Technology Corporation." 3. The Amendment was approved by the required vote of the shareholders, in accordance with Corporations Code Section 902. The total number of outstanding shares entitled to vote on this Amendment was 1000. The favorable vote of a simple majority of the shares is required to approve the Amendment. The number of shares voting in favor of the Amendment was 1000, a unanimous vote. 4. This Amendment will become effective upon the date of the filing of this Certificate of Amendment. The undersigned, and each of them, declare under penalty of perjury that the matters set forth in the foregoing Certificate are true and correct of our own knowledge and that this Declaration was executed on August 21st 1998, at San Francisco, California. /s/ Eric Gravell, Director ------------------------------- /s/ Allen Yue, Director ------------------------------- EX-3 5 ex3-3.txt EXHIBIT 3.3 Exhibit 3.3 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF AMERICAN PACIFIC TECHNOLOGY CORPORATION Allen Yue and Eric Gravell certify that: 1. They are all of the sole directors of American Pacific Technology Corporation, a California corporation. 2. The Board of Directors of American Pacific Technology Corporation has approved the following Amendment to the Articles of Incorporation of said corporation: Article IV of the Articles of Incorporation is amended to read in its entirety as follows: "IV. This corporation is authorized to issue only one class of shares of stock; and the total number of shares which this corporation is authorized to issue is 2,000,000." 3. The Amendment was approved by the required vote of the shareholders, in accordance with Corporations Code Section 902. The total number of outstanding shares entitled to vote on this Amendment was 1,000. The favorable vote of a simple majority of the shares is required to approve the Amendment. The number of shares voting in favor of the Amendment was 1,000, a unanimous vote. This Amendment will become effective upon the date of the filing of this Certificate of Amendment. 4. We, the undersigned, and each of us, declare under penalty of perjury that the statements set forth in this Certificate are true and correct of our own knowledge and that this Declaration was executed on March 01, 1999, at San Francisco, California. /s/ Allen Yue -------------------- /s/ Eric Gravell -------------------- EX-3 6 ex3-4.txt EXHIBIT 3.4 Exhibit 3.4 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF AMERICAN PACIFIC TECHNOLOGY CORPORATION Allen Yue and Eric Gravell certify that: 1. They are the officers of American Pacific Technology Corporation, a California corporation. 2. The Board of Director has approved the following Amendment to the Articles of Incorporation of said corporation: Article IV of the Articles of Incorporation is amended to read in its entirety as follows: This corporation is authorized to issue only one class of shares of stock; and the total number of shares which this corporation is authorized to issue is 25,000,000. 3. The Amendment was approved by the required vote of the shareholders, in accordance with Corporations Code Section 902. The total number of outstanding shares entitled to vote on this Amendment was 2,000,000. The favorable vote of a simple majority of the shares is required to approve the Amendment. The number of shares voting in favor of the Amendment was 2,000,000, a unanimous vote. This Amendment will become effective upon the date of the filing of this Certificate of Amendment. 4. We, the undersigned, and each of us, declare under penalty of perjury that the statements set forth in this Certificate are true and correct of our own knowledge. Executed of April 7, 2000, at San Francisco, California. /s/ Allen Yue - President, Secretary ---------------------------------------- /s/ Eric Gravell - Vice President, CFO ---------------------------------------- EX-3 7 ex3-5.txt EXHIBIT 3.5 Exhibit 3.5 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF AMERICAN PACIFIC TECHNOLOGY CORPORATION Allen Yue and Eric Gravell certify that: 1. They are all of the officers of American Pacific Technology Corporation, a California corporation. 2. The Board of American Pacific Technology Corporation has approved the following Amendment to the Articles of Incorporation: ARTICLE I of the Articles of Incorporation is amended to read as follows: I The name of the corporation is Chipcards, Inc. 3. The Amendment was approved by the required vote of the shareholders, in accordance with Corporations Code Section 902. The total number of outstanding shares entitled to vote on this Amendment was 2,000,000. The favorable vote of a simple majority of the shares is required to approve the Amendment. The number of shares voting in favor of the Amendment was 2,000,000, a unanimous vote. 4. This Amendment will become effective upon the date of the filing of this Certificate of Amendment. The undersigned, and each of them, declare under penalty of perjury that the statements set forth in this Certificate are true and correct of their own knowledge. Executed of July 28, 2000, at San Francisco, California. /s/ Allen Yue - Director, President ------------------------------------- /s/ Eric Gravell - Director, CFO ------------------------------------- STATEMENT OF DIFFERENCES ------------------------ The copyright symbol shall be expressed as............................... 'c' The degree symbol shall be expressed as.................................. [d] Characters normally expressed as superscript shall be preceded by........ 'pp' The greater-than-or-equal-to sign shall be expressed as.................. >= EX-3 8 ex3-6.txt EXHIBIT 3.6 Exhibit 3.6 AMENDED AND RESTATED BYLAWS OF CHIPCARDS, INC. TABLE OF CONTENTS
Page ---- ARTICLE I.......................................................................1 OFFICES ..............................................................1 PRINCIPAL OFFICE..............................................1 OTHER OFFICES.................................................1 ARTICLE II......................................................................1 DIRECTORS - MANAGEMENT.................................................1 RESPONSIBILITY OF BOARD OF DIRECTORS..........................1 STANDARD OF CARE..............................................1 EXCEPTION FOR CLOSE CORPORATION...............................2 NUMBER AND QUALIFICATION OF DIRECTORS.........................2 ELECTION AND TERM OF OFFICE OF DIRECTORS......................2 VACANCIES.....................................................2 REMOVAL OF DIRECTORS..........................................3 NOTICE, PLACE, AND MANNER OF MEETINGS.........................3 ORGANIZATION MEETINGS.........................................3 OTHER REGULAR MEETINGS........................................4 SPECIAL MEETINGS - NOTICES - WAIVERS..........................4 DIRECTORS ACTION BY UNANIMOUS WRITTEN CONSENT.................4 QUORUM........................................................5 NOTICE OF ADJOURNMENT.........................................5 COMPENSATION OF DIRECTORS.....................................5 COMMITTEES....................................................5 ADVISORY DIRECTORS............................................5 RESIGNATIONS .................................................5 ARTICLE III.....................................................................6 OFFICERS ..............................................................6 OFFICERS .....................................................6 ELECTION ..............................................................6 SUBORDINATE OFFICERS, ETC.....................................6 REMOVAL AND RESIGNATION OF OFFICERS...........................6 VACANCIES.....................................................6 CHAIRMAN OF THE BOARD.........................................7 PRESIDENT.....................................................7 VICE PRESIDENT................................................7
ii SECRETARY...................................................7 CHIEF FINANCIAL OFFICER.....................................8 ARTICLE IV....................................................................8 SHAREHOLDERS' MEETINGS...............................................8 PLACE OF MEETINGS...........................................8 ANNUAL MEETINGS.............................................8 SPECIAL MEETINGS............................................9 NOTICE OF MEETINGS - REPORTS................................9 WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS......................................10 OTHER ACTIONS WITHOUT A MEETING............................10 QUORUM.....................................................11 VOTING.....................................................11 PROXIES....................................................12 ORGANIZATION...............................................12 INSPECTORS OF ELECTION.....................................12 SHAREHOLDERS' AGREEMENTS...................................12 EFFECT OF SHAREHOLDERS' AGREEMENTS.........................13 ARTICLE V....................................................................13 CERTIFICATES AND TRANSFER OF SHARES.................................13 CERTIFICATES FOR SHARES....................................13 TRANSFER ON THE BOOKS......................................13 LOST OR DESTROYED CERTIFICATES.............................14 TRANSFER AGENTS AND REGISTRARS.............................14 CLOSING STOCK TRANSFER BOOKS - RECORD DATE.................14 LEGEND CONDITION...........................................15 CLOSE CORPORATION CERTIFICATES.............................15 ARTICLE VI...................................................................15 RECORDS - REPORTS - INSPECTION......................................15 RECORDS....................................................15 INSPECTION OF BOOKS AND RECORDS............................15 CERTIFICATION AND INSPECTION OF BYLAWS.....................15 CHECKS, DRAFTS, ETC........................................15 CONTRACTS, ETC. - HOW EXECUTED.............................15 ARTICLE VII..................................................................16 ANNUAL REPORTS......................................................16 REPORT TO SHAREHOLDERS, DUE DATE...........................16 WAIVER.....................................................16
iii ARTICLE VIII.................................................................16 AMENDMENT TO BYLAWS.................................................16 AMENDMENT BY SHAREHOLDERS..................................16 POWERS OF DIRECTORS........................................16 RECORD OF AMENDMENTS.......................................17 ARTICLE IX...................................................................17 INDEMNIFICATION.....................................................17 INDEMNIFICATION............................................17 AUTHORIZATION..............................................18 ADVANCEMENT OF EXPENSES....................................18 INSURANCE..................................................18 GENERAL AGREEMENT TO INDEMNIFY.............................18 AGENT......................................................18 ARTICLE X....................................................................19 CORPORATE SEAL......................................................19 ARTICLE XI...................................................................19 MISCELLANEOUS.......................................................19 REFERENCES TO CODE SECTIONS................................19 REPRESENTATION OF SHARES IN OTHER CORPORATIONS.............19 SUBSIDIARY CORPORATIONS....................................19 ACCOUNTING YEAR............................................19
iv AMENDED AND RESTATED BY-LAWS OF CHIPCARDS, INC. ARTICLE I OFFICES Section 1. PRINCIPAL OFFICE. The principal office for the transaction of business of the Corporation is hereby fixed and located at One Sansome Street, Suite 1900, San Francisco, California. The location may be changed by approval of a majority of the authorized Directors, and additional offices may be established and maintained at such other place or places, either within or without California, as the Board of Directors may from time to time designate. Section 2. OTHER OFFICES. Branch or subordinate offices may at any time be established by the Board of Directors at any place or places where the Corporation is qualified to do business. ARTICLE II DIRECTORS - MANAGEMENT Section 1. RESPONSIBILITY OF BOARD OF DIRECTORS. Subject to the provisions of the General Corporation Law and to any limitations in the Articles of Incorporation of the Corporation relating to action required to be approved by the Shareholders, as that term is defined in Section 153 of the California Corporations Code, or by the outstanding shares, as that term is defined in Section 152 of the Code, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board may delegate the management of the day-to-day operation of the business of the Corporation to a management company or other person, provided that the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Section 2. STANDARD OF CARE. Each Director shall perform the duties of a Director, including the duties as a member of any committee of the Board upon which the Director may serve, in good faith, in a manner such Director believes to be in the best interest of the Corporation, and with such care, including reasonable inquiry, as an ordinary prudent person in a like position would use under similar circumstances. (Sec. 309). 1 Section 3. EXCEPTION FOR CLOSE CORPORATION. Notwithstanding the provisions of Section 1, in the event that this Corporation shall elect to become a close corporation as defined in Section 158, its Shareholders may enter into a Shareholders' Agreement as defined in Section 186. Said agreement may provide for the exercise of corporate powers and the management of the business and affairs of this Corporation by the Shareholders, provided, however, such agreement shall, to the extent and so long as the discretion or the powers of the Board in its management of corporate affairs is controlled by such agreement, impose upon each Shareholder who is a party thereof, liability for managerial acts performed or omitted by such person pursuant thereto otherwise imposed upon Directors as provided in Section 300(d); and the Directors shall be relieved to that extent from such liability. Section 4. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of Directors shall be seven (7) unless this Corporation has two (2) Shareholders in which event the authorized number shall be two (2) or unless the number of Shareholders of this Corporation shall be one (1), in which event the authorized number of Shareholders shall be one (1). Provided, however, the number of Directors may be changed by a duly adopted amendment to the Articles of Incorporation or by an amendment to this Bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote, as provided in Section 152. Section 5. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of the Shareholders to hold office until the next annual meeting. Each Director, including a Director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. Section 6. VACANCIES. Vacancies in the Board of Directors may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, except that a vacancy created by the removal of a Director by the vote or written consent of the Shareholders or by court order may be filled only by the voted of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each Director so elected shall hold office until the next annual meeting of the Shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the Board of Directors shall be deemed to exist in the event of the death, resignation, or removal of any Director, or if the Board of Directors by resolution declares vacant the office of a Director who has been declared of unsound mind by an order of court or convicted of a felony, or if the 2 authorized number of Directors is increased, or if the shareholders fail, at any meeting of shareholders at which any Director or Directors are elected, to elect the number of Directors to be voted for at that meeting. The Shareholders may elect a Director or Directors at any time to fill any vacancy or vacancies not filled by the Directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. Any Director may resign effective on giving written notice to the Chairman of the Board, the President, the Secretary, or the Board of Directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a Director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of Directors shall have the effect of removing any Director before that Director's term of office expires. Section 7. REMOVAL OF DIRECTORS. The entire Board of Directors or any individual Director may be removed from office as provided by Sections 302, 303 and 304 of the Corporations Code of the State of California. In such case, the remaining Board members may elect a successor Director to fill such vacancy for the remaining unexpired term of the Director so removed. Section 8. NOTICE, PLACE, AND MANNER OF MEETINGS. Meetings of the Board of Directors may be called by the Chairman of the Board, or the President, or any Vice President, or the Secretary, or any two (2) Directors and shall be held at the principal executive office of the Corporation, unless some other place is designated in the notice of the meeting. Members of the Board may participate in a meeting through use of a conference telephone or similar communications equipment so long as all members participating in such a meeting can hear one another. Accurate minutes of any meeting of the Board or any committee thereof shall be maintained as required by Section 1500 of the Code by the Secretary or other Officer designated for that purpose. Section 9. ORGANIZATION MEETINGS. The organization meetings of the Board of Directors shall be held immediately following the adjournment of the annual meetings of the Shareholders. 3 Section 10. OTHER REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times and places as the Board may from time to time determine. If said day shall fall upon a holiday, such meetings shall be held on the next succeeding business day thereafter. No notice need be given of such regular meetings. Section 11. SPECIAL MEETINGS - NOTICES - WAIVERS. Special meetings of the Board may be called at any time by the President, Vice President, Chairman of the Board, or Secretary, if he or she is absent or unable or refuses to act, by any Vice President or the Secretary or by any two (2) Directors, or by one (1) Director if only one is provided. At least forty-eight (48) hours notice of the time and place of special meetings shall be delivered personally to the Directors or personally communicated to them by a corporate Officer by telephone or telegraph. If the notice is sent to a Director by letter, it shall be addressed to him or her at his or her address as it is shown upon the records of the Corporation, or if it is not shown on such records or is not readily ascertainable, at the place in which the meetings of the Directors are regularly held. In case such notice is mailed, it shall be deposited in the United States mail, postage prepaid, in the place in which the principal executive office of the Corporation is located at least four (4) days prior to the time of the holding of the meeting. Such mailing, telegraphing, telephoning, or delivery as above provided shall be due, legal and personal notice to such Director. When all of the Directors are present at any Directors' meetings, however called or noticed, and either (i) sign a written consent thereto on the records of such meeting, or, (ii) if a majority of the Directors are present and if those not present sign a waiver of notice of such meeting or a consent to holding the meeting or an approval of the minutes thereof, whether prior to or after the holding of such meeting, which said waiver, consent or approval shall be filed with the Secretary of the Corporation, or, (iii) if a Director attends a meeting without notice but without protesting, prior thereto or at its commencement, the lack of notice, then the transactions thereof are as valid as if had at a meeting regularly called and noticed. Section 12. DIRECTORS ACTION BY UNANIMOUS WRITTEN CONSENT. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting and with the same force and effect as if taken by a unanimous vote of Directors, if authorized by a writing signed individually or collectively by all members of the Board. Such consent shall be filed with the regular minutes of the Board. 4 Section 13. QUORUM. A majority of the number of Directors as fixed by the Articles of Incorporation or By-Laws shall be necessary to constitute a quorum for the transaction of business, and the action of a majority of the Directors present at any meeting at which there is a quorum, when duly assembled, is valid as a corporate act; provided that a minority of the Directors, in the absence of a quorum, may adjourn from time to time, but may not transact any business. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of Directors, if any, action taken is approved by a majority of the required quorum for such meeting. Section 14. NOTICE OF ADJOURNMENT. Notice of the time and place of holding and adjourned meeting need not be given to absent Directors if the time and place be fixed at the meeting adjourned and held within twenty-four (24) hours, but if adjourned more than twenty-four (24) hours, notice shall be given to all Directors not present at the time of adjournment. Section 15. COMPENSATION OF DIRECTORS. Directors, as such, shall not receive any stated salary for their services, but by resolution of the Board a fixed sum and expense of attendance, if any, may be allowed for attendance at each regular and special meeting of the Board; provided that nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity and receiving compensation therefor. Section 16. COMMITTEES. Committees of the Board may be appointed by resolution passed by a majority of the whole Board. Committees shall be composed of two (2) or more members of the Board, and shall have such powers of the Board as may be expressly delegated to it by resolution of the Board of Directors, except those powers expressly made non-delegable by Sec. 311. Section 17. ADVISORY DIRECTORS. The Board of Directors from time to time may elect one or more persons to be Advisory Directors who shall not by such appointment be members of the Board of Directors. Advisory Directors shall be available from time to time to perform special assignments specified by the President, to attend meetings of the Board of Directors upon invitation and to furnish consultation to the Board. The period during which the title shall be held may be prescribed by the Board of Directors. If no period is prescribed, the title shall be held at the pleasure of the Board. Section 18. RESIGNATIONS . Any Director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future 5 time, a successor may be elected to take office when the resignation becomes effective. ARTICLE III OFFICERS Section 1. OFFICERS. The Officers of the Corporation shall be a President, Vice President(s), a Secretary, and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other Officers as may be appointed in accordance with the provisions of Section 3 of this Article III. Any number of offices may be held by the same person. Section 2. ELECTION. The Officers of the Corporation, except such Officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article shall be chosen annually by the Board of Directors, and each shall hold office until he or she shall resign or shall be removed or otherwise disqualified to serve, or a successor shall be elected and qualified. Section 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint such other Officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine. Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an Officer under any contract of employment, any Officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting of the Board, or except in case of an Officer chosen by the Board of Directors, by any Officer upon whom such power of removal may be conferred by the Board of Directors. Any Officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the Officer is a party. Section 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause shall be filled in the manner prescribed in the Bylaws for regular appointments to that office. 6 Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an officer be elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned by the Board of Directors or prescribed by the Bylaws. If there is no President, the Chairman of the Board shall in addition be the Chief Executive Officer of the Corporation and shall have the powers and duties prescribed in Section 7 of this Article III. Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an Officer, the President shall be the Chief Executive Officer of the Corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and Officers of the Corporation. He or she shall preside at all meetings of the Shareholders and in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. The President shall be ex officio a member of all the standing committees, including the Executive Committee, if any, and shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. Section 8. VICE PRESIDENT. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to, all the restrictions upon the President. The Vice President shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the Bylaws. Section 9. SECRETARY. The Secretary shall keep, or cause to be kept, a book of minutes at the principal office or such other place as the Board of Directors may order, of all meetings of Directors and Shareholders with, the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at Directors' meetings, the number of shares present or represented at Shareholders' meetings and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the Corporation's transfer agent, a share register, or duplicate share register, showing the names of the Shareholders and their addresses; the number of classes of shares held by each; the number and date of certificates issued for the 7 same; and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the Shareholders and of the Board of Directors required by the Bylaws, or by law to be given. He or she shall keep the seal of the Corporation in safe custody, and shall have such other power and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. Section 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained in accordance with generally accepted accounting principles, adequate and correct accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, earnings (or surplus) and shares. The books of account shall at all reasonable times be open to inspection by any Director. This Officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositaries as may be designated by the Board of Directors. He or she shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the President and Directors, whenever they request it, an account of all of his or her transactions and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. ARTICLE IV SHAREHOLDERS' MEETINGS Section 1. PLACE OF MEETINGS. All meetings of the Shareholders shall be held at the principal executive office of the Corporation unless some other appropriate and convenient location be designated for that purpose from time to time by the Board of Directors. Section 2. ANNUAL MEETINGS. The annual meetings of the Shareholders shall be held, each year, at such time and place as shall be designated from time to time by the Board of Directors. At the annual meeting, the Shareholders shall elect a Board of Directors, consider reports of the affairs of the Corporation, and transact such other business as may be properly be brought before the meeting. 8 Section 3. SPECIAL MEETINGS. Special meetings of the Shareholders may be called at any time by the Board of Directors, the Chairman of the Board, the President, a Vice President, the Secretary, or by one or more Shareholders holding not less than one-tenth (1/10) of the voting power of the Corporation. Except as next provided, notice shall be given as for the annual meeting. Upon receipt of a written request addressed to the Chairman, President, Vice President, or Secretary, mailed or delivered personally to such Officer by any person (other than the Board) entitled to call a special meeting of Shareholders, such Officer shall cause notice to be given, to the Shareholders entitled to vote, that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after receipt of such request. If such notice is not given within twenty (20) days after receipt of such request, the persons calling the meeting may give notice thereof in the manner provided by these Bylaws or apply to the Superior Court as provided in Section 305(c). Section 4. NOTICE OF MEETINGS - REPORTS. Notice of meetings, annual or special, shall be given in writing not less than ten (10) nor more than sixty (60) days before the date of the meeting to Shareholders entitled to vote thereat. Such notice shall be given by the Secretary or the Assistant Secretary, or if there be no such Officer, or in the case of his or her neglect or refusal, by any Director or Shareholder. Such notices or any reports shall be given personally or by mail or other means of written communication as provided in Section 601 of the Code and shall be sent to the Shareholder's address appearing on the books of the corporation, or supplied by him or her to the Corporation for the purpose of notice, and in the absence thereof, as provided in Section 601 of the Code. Notice of any meeting of Shareholders shall specify the place, the day, and the hour of meeting, and (1) in case of a special meeting, the general nature of the business to be transacted and no other business may be transacted, or (2) in the case of an annual meeting, those matters which the Board at date of mailing, intends to present for action by the Shareholders. At any meetings where Directors are to be elected, notice shall include the names of the nominees, if any, intended at date of notice to be presented by management for election. If a Shareholder supplies no address, notice shall be deemed to have been given if mailed to the place where the principal executive office of the Corporation in California is situated, or published at least once in some newspaper of general circulation in the County of said principal office. 9 Notice shall be deemed given at the time it is delivered personally or deposited in the mail or sent by other means of written communication. When a meeting is adjourned for forty-five (45) days or more, notice of the adjourned meeting shall be given as in case of an original meeting. Save, as aforesaid, it shall not be necessary to give any notice of adjournment or of the business to be transacted at an adjourned meeting other than by announcement at the meeting at which such adjournment is taken. Section 5. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transactions of any meeting of Shareholders, however called and noticed, shall be valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the Shareholders entitled to vote, not present in person or by proxy, sign a written waiver of notice, or a consent to the holding of such meeting or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance shall constitute a waiver of notice, unless objection shall be made as provided in Section 601(e). Section 6. OTHER ACTIONS WITHOUT A MEETING. Unless otherwise provided in the California Corporations Code or the Articles, any action which may be taken at any annual or special meeting of Shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless the consents of all Shareholders entitled to vote have been solicited in writing, (1) Notice of any Shareholder approval pursuant to Sections 310, 317, 1201 or 2007 without a meeting by less than unanimous written consent shall be given at least ten (10) days before the consummation of the action authorized by such approval, and (2) Prompt notice shall be given of the taking of any other corporate action approved by Shareholders without a meeting by less than unanimous written consent, to each of those Shareholders entitled to vote who have not consented in writing. Any Shareholder giving a written consent, or the Shareholder's proxyholders, or a transferee of the shares of a personal representative of the Shareholder or their 10 respective proxyholders, may revoke the consent by a writing received by the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the Corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the Corporation. Section 7. QUORUM. The holders of a majority of the shares entitled to vote thereat, present in person, or represented by proxy, shall constitute a quorum at all meetings of the Shareholders for the transaction of business except as otherwise provided by law, by the Articles of Incorporation, or these Bylaws. If, however, such majority shall not be present or represented at any meeting of the Shareholders, the Shareholders entitled to vote thereat, present in person, or by proxy, shall have the power to adjourn the meeting from time to time, until the requisite amount of voting shares shall be present. At such adjourned meeting at which the requisite amount of voting shares shall be represented, any business may be transacted which might have been transacted at a meeting as originally notified. If a quorum be initially present, the Shareholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough Shareholders to leave less than a quorum, if any action taken is approved by a majority of the Shareholders required to initially constitute a quorum. Section 8. VOTING. Only persons in whose names shares entitled to vote stand on the stock records of the Corporation on the day of any meeting of Shareholders, unless some other day be fixed by the Board of Directors for the determination of Shareholders of records, and then on such other day, shall be entitled to vote at such meeting. Provided the candidate's name has been placed in nomination prior to the voting and one or more Shareholder has given notice to the meeting prior to the voting, of the Shareholder's intent to cumulate the Shareholder's votes, every Shareholder entitled to vote at any election for Directors of any Corporation for profit may cumulate their votes and give one candidate a number of votes equal to the number of Directors to be elected multiplied by the number of votes to which his or her Shares are entitled, or distribute his or her votes on the same principle among as many candidates as he or she thinks fit. If the Corporation becomes a listed Corporation as defined in Section 301.5(a) of the California Corporations Code, the Corporation may, by amendment of its Articles or these Bylaws, eliminate cumulative voting. The candidates receiving the highest number of votes up to the number of Directors to be elected are elected. 11 The Board of Directors may fix a time in the future not exceeding sixty (60) days preceding the date of any meeting of Shareholders or the date fixed for the payment of any dividend or distribution, or for the allotment of rights, or when any change or conversion or exchange of shares shall go into effect, as a record date for the determination of the Shareholders entitled to notice of and to vote at any such meeting, or entitled to receive any such dividend or distribution, or any allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. In such case only Shareholders of record on the date so fixed shall be entitled to notice of and to vote at such meeting, or to receive such dividends, distribution, or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any share on the books of the Corporation after any record date fixed as aforesaid. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of such period. Section 9. PROXIES. Every Shareholder entitled to vote, or to execute consents, may do so, either in person or by written proxy, executed in accordance with the provisions of Sections 604 and 705 of the Code and filed with the Secretary of the Corporation. Section 10. ORGANIZATION. The President, or in the absence of the President, any Vice President, shall call the meeting of the Shareholders to order, and shall act as Chairman of the meeting. In the absence of the President and all of the Vice Presidents, Shareholders shall appoint a Chairman for such meeting. The Secretary of the Corporation shall act as Secretary of all meetings of the Shareholders, but in the absence of the Secretary at any meeting of the Shareholders, the presiding Officer may appoint any person to act as Secretary of the meeting. Section 11. INSPECTORS OF ELECTION. In advance of any meeting of Shareholders the Board of Directors may, if they so elect, appoint inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election be not so appointed, or if any persons so appointed fail to appear or refuse to act, the Chairman of any such meeting may, and on the request of any Shareholder or his or her proxy shall make such appointment at the meeting, in which case the number of inspectors shall be either one (1) or three (3) as determined by a majority of the Shareholders represented at the meeting. Section 12. (A) SHAREHOLDERS' AGREEMENTS. Notwithstanding the above provisions, in the event this Corporation elects to become a close corporation, an agreement between two (2) or more Shareholders thereof, if in writing and signed by the parties thereof, may provide that in exercising any voting rights the shares held by them shall be voted as provided therein in Section 706, 12 and may otherwise modify these provisions as to Shareholders' meetings and actions. (B) EFFECT OF SHAREHOLDERS' AGREEMENTS. Any Shareholders' Agreement authorized by Section 300(b) shall only be effective to modify the terms of these Bylaws if this Corporation elects to become a close corporation with appropriate filing of or amendment to its Articles as required by Section 202 and shall terminate when this Corporation ceases to be a close corporation. Such an agreement cannot waive or alter Sections 158 (defining close corporations), 202 (requirements of Articles of Incorporation), 500 and 501 (relative to distributions), 111 (merger), 1201(e) (reorganization), or Chapters 15 (Records and Reports), 16 (Rights of Inspection), 18 (Involuntary Dissolution), or 22 (Crimes and Penalties). Any other provisions of the Code or these Bylaws may be altered or waived thereby, but to the extent they are not so altered or waived, these Bylaws shall be applicable. ARTICLE V CERTIFICATES AND TRANSFER OF SHARES Section 1. CERTIFICATES FOR SHARES. Certificates for shares shall be of such form and device as the Board of Directors may designate and shall state the name of the record holder of the shares represented thereby; its number; date of issuance; the number of shares for which it is issued; a statement of the rights, privileges, preferences, and restrictions, if any; a statement as to the redemption or conversion; if any; a statement of liens or restrictions upon transfer or voting, if any; if the shares be assessable or, if assessments are collectible by personal action, a plain statement of such facts. All certificates shall be signed in the name of the Corporation by the Chairman of the Board or Vice Chairman of the Board or the President or Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the Shareholder. Any or all of the signatures on the certificate may be facsimile. In case an Officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that Officer, transfer agent, or registrar before that certificate is issued, it may be issued by the Corporation with the same effect as if that person were an Officer, transfer agent, or registrar at the date of issue. Section 2. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or transfer agent of the Corporation of a certificate for shares duly endorsed or 13 accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 3. LOST OR DESTROYED CERTIFICATES. Any person claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact and shall, if the Directors so require, give the Corporation a bond of indemnity, in form and with one or more sureties satisfactory to the Board, in at least double the value of the stock represented by said certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to be lost or destroyed. Section 4. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, which shall be an incorporated bank or trust company, either domestic or foreign, who shall be appointed at such times and places as the requirements of the Corporation may necessitate and the Board of Directors may designate. Section 5. CLOSING STOCK TRANSFER BOOKS - RECORD DATE. In order that the Corporation may determine the Shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days prior to the date of such meeting nor more than sixty (60) days prior to any other action. If no record date is fixed, the record date for determining Shareholders entitled to notice of or to vote at a meeting of Shareholders shall be at the close of business on the business day next preceding the day on which notice is given, or if the notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. The record date for determining Shareholders entitled to give consent to corporate action in writing without a meeting when no prior action by the Board is necessary, shall be the day on which the first written consent is given. The record date for determining Shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. 14 Section 6. LEGEND CONDITION. In the event any shares of this Corporation are issued pursuant to a permit or exemption therefrom requiring the imposition of a legend condition, the person or persons issuing or transferring said shares shall make sure said legend appears on the certificate and on the stub relating thereto in the stock record book and shall not be required to transfer any shares free of such legend unless an amendment to such permit or a new permit be first issued so authorizing such a deletion. Section 7. CLOSE CORPORATION CERTIFICATES. All certificates representing shares of this Corporation, in the event it shall elect to become a close corporation, shall contain the legend required by Section 418 (c). ARTICLE VI RECORDS - REPORTS - INSPECTION Section 1. RECORDS. The Corporation shall maintain, in accordance with generally accepted accounting principles, adequate and correct accounts, books, and records of its business and properties. All of such books, records, and accounts shall be kept at its principal executive office in the State of California, as fixed by the Board of Directors from time to time. Section 2. INSPECTION OF BOOKS AND RECORDS. All books and records provided for in Section 1500 shall be open to inspection of the Directors and Shareholders from time to time and in the manner provided in Sections 1600-1602. Section 3. CERTIFICATION AND INSPECTION OF BYLAWS. The original or a copy of these Bylaws, as amended or otherwise altered to date, certified by the Secretary, shall be kept at the Corporation's principal executive office and shall be open to inspection by the Shareholders of the Corporation at all reasonable times during office hours, as provided in Section 213 of the Corporations Code. Section 4. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as shall be determined from time to time by resolution of the Board of Directors. Section 5. CONTRACTS, ETC. - HOW EXECUTED. The Board of Directors, except as in the Bylaws otherwise provided, may authorize any Officer or Officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation. Such authority may be general or confined to specific instances. Unless so authorized by the Board of Directors, no Officer, 15 agent or employee shall have any power or authority to bind the Corporation by any contract or agreement, or to pledge its credit, or to render it liable for any purpose or to any amount, except as provided in Section 313 of the Corporations Code. ARTICLE VII ANNUAL REPORTS Section 1. REPORT TO SHAREHOLDERS, DUE DATE. The Board of Directors shall cause an annual report to be sent to the Shareholders not later than one hundred twenty (120) days after the close of the fiscal or calendar year adopted by the Corporation. This report shall be sent at least fifteen (15) days before the annual meeting of Shareholders to be held during the next fiscal year and in the manner specified in Section 4 of Article IV of these Bylaws for giving notice to Shareholders of the Corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized Officer of the Corporation that the statements were prepared without audit from the books and records of the Corporation. Section 2. WAIVER. The annual report to Shareholders referred to in Section 1501 of the California General Corporation Law is expressly dispensed with so long as this Corporation shall have less than one hundred (100) Shareholders. However, nothing herein shall be interpreted as prohibiting the Board of Directors from issuing annual or other periodic reports to the Shareholders of the Corporation as they consider appropriate. ARTICLE VIII AMENDMENT TO BYLAWS Section 1. AMENDMENT BY SHAREHOLDERS. New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the Corporation set forth the number of authorized Directors of the Corporation, the authorized number of Directors may be changed only by an amendment of the Articles of Incorporation. Section 2. POWERS OF DIRECTORS. Subject to the right of the Shareholders to adopt, amend, or repeal Bylaws, as provided in Section 1of this Article VIII, and the limitations of Section 204(a)(5) and Section 212, the Board of Directors may adopt, amend, or repeal any of these Bylaws, other than a Bylaw or amendment thereof changing the authorized number of Directors. 16 Section 3. RECORD OF AMENDMENTS. Whenever an amendment or new Bylaw is adopted, it shall be copied in the book of Bylaws with the original Bylaws, in the appropriate place. If any Bylaw is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or written consent was filed shall be stated in said book. ARTICLE IX INDEMNIFICATION Section 1. INDEMNIFICATION. (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (collectively "Proceeding") (other than an action by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that the person is or was an Agent (as defined in Section 6 of this Article IX) of the Corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the Proceeding if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of the Corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that the person is or was an Agent of the Corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be in the best interests of the Corporation and its shareholders; provided, however, that no indemnification shall be made under this paragraph (b) for any of the following: (1) in respect of any claim, issue or matter as to which the person shall have been adjudged to be liable to the Corporation in the performance of that person's duty to the Corporation and its shareholders, unless and only to the extent that the court in which the Proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine; (2) of amounts paid in settling or otherwise disposing of a pending 17 action without court approval; and (3) of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. (c) To the extent that an Agent of the Corporation has been successful on the merits in defense of any Proceeding referred to in paragraphs (a) or (b) of Section 1 of this Article IX or in defense of any claim, issue, or matter therein, the Agent shall be indemnified against expenses actually and reasonably incurred by the Agent in connection therewith. Section 2. AUTHORIZATION. Except as provided in paragraph (c) of Section 1 of this Article IX, any indemnification hereunder shall be made by the Corporation only if authorized in the specific case, upon a determination that indemnification of the Agent is proper in the circumstances because the Agent has met the applicable standard of conduct set forth in paragraph (b) or (c) of Section 1 of this Article IX, by any of the following: (1) A majority vote of a quorum consisting of directors who are not parties to such Proceeding; (2) if such a quorum of directors is not obtainable, by independent legal counsel in a written opinion; and (3) approval of the shareholders, with the shares owned by the person to be indemnified not being entitled to vote thereon; or (4) the court in which the Proceeding is or was pending upon application made by the Corporation or the Agent or the attorney or other person rendering services in connection with the defense, whether or not the application by the Agent, attorney or other person is opposed by the Corporation. Section 3. ADVANCEMENT OF EXPENSES. Expenses incurred in defending any Proceeding may be advanced by the Corporation prior to the final disposition of the Proceeding upon receipt of an undertaking by or on behalf of the Agent to repay that amount if it shall be determined ultimately that the Agent is not entitled to be indemnified as authorized in this Section 3 of this Article IX. Section 4. INSURANCE. The Corporation shall have power to purchase and maintain insurance on behalf of any Agent of the Corporation against any liability asserted against or incurred by the Agent in that capacity or arising out of the Agent's status as such whether or not the Corporation would have the power to indemnify the Agent against that liability under this Section 4 of this Article IX. Section 5. GENERAL AGREEMENT TO INDEMNIFY. The Corporation shall otherwise indemnify the officers and directors of the Corporation to the fullest extent permissible under California law. Section 6. AGENT. Agent means any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another 18 foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of the predecessor corporation. ARTICLE X CORPORATE SEAL The corporate seal shall be circular in form, and shall have inscribed thereon the name of the Corporation, the date of its incorporation, and the word "California". ARTICLE XI MISCELLANEOUS Section 1. REFERENCES TO CODE SECTIONS. "Section" references herein refer to the equivalent Sections of the General Corporation Law effective January 1, 1977, as amended. Section 2. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of other corporations standing in the name of this Corporation may be voted or represented and all incidents thereto may be exercised on behalf of the Corporation by the Chairman of the Board, the President, or any Vice President, and the Secretary or Assistant Secretary. Section 3. SUBSIDIARY CORPORATIONS. Shares of this Corporation owned by a subsidiary shall not be entitled to vote on any matter. A subsidiary for these purposes is defined as a corporation, the shares of which possessing more than 25% of the total combined total voting power of all classes of shares entitled to vote, are owned directly or indirectly through one (1) or more subsidiaries. Section 4. ACCOUNTING YEAR. The accounting year of the Corporation shall be fixed by resolution of the Board of Directors. 19 EX-10 9 ex10-1.txt EXHIBIT 10.1 Exhibit 10.1 EMPLOYMENT AGREEMENT This Employment Agreement, dated as of January 1, 2001, is by and between Chipcards, Inc., a California corporation (the "Company"), and Eric Gravell (the "Executive"). WHEREAS, the Executive is employed as Executive Vice President of the Company; and WHEREAS, the Company desires assurance of the continued association and services of the Executive in order to retain his experience, abilities, and knowledge, and is therefore willing to engage his services on the terms and conditions set forth below, and the Executive desires to accept such employment, all on the terms and conditions hereinafter set forth; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Executive, each intending to be legally bound, agree as follows: 1. Employment. (a) Employment. Subject to all of the terms and conditions of this Agreement, the Company agrees to employ the Executive as its Executive Vice President, and the Executive hereby accepts such employment with the Company. In such capacity, the Executive shall have full power and authority, in association with the President, to manage and conduct the business of the Company, subject to the policies and directives of the Company's Board of Directors. (b) Duties. The Executive will serve the Company faithfully to the best of his ability and shall perform the duties of his office and such other duties of an executive, managerial or administrative nature, all as shall be specified and designated from time to time by the Board of Directors of the Company. Without limiting the generality of the foregoing, the Executive's duties shall include responsibility for overseeing the day-to-day operations of the Company. 2. Compensation. (a) Salary. For all duties and services to be performed by the Executive hereunder, the Company shall pay the Executive an annual salary (the "Base Salary") in the amount of One Hundred Seventy Five Thousand Dollars ($175,000) per annum. Base Salary shall be payable in accordance with the Company's payroll practices, as in effect from time to time. On the first anniversary of this Agreement, the Executive's Base Salary shall be reviewed by the Board or its Compensation Committee, and any increase will be effective as of the date determined appropriate by the Board or its Compensation Committee. (b) Incentive Bonus. In addition to the Base Salary payable under Section 2(a), Executive shall be entitled to receive annual and other bonuses in the discretion of the Board of Directors based upon its good faith determination of the extent to which the Executive's individual performance objectives and the Company's profitability objectives and other financial and nonfinancial objectives are achieved during the applicable bonus period. (c) Reimbursement of Business Expenses. The Company agrees to reimburse the Executive for all reasonable out-of-pocket business expenses incurred by the Executive on behalf of or in connection with the services rendered to the Company, provided that the Executive properly accounts to the Company for all such expenses in accordance with the rules and regulations of the Internal Revenue Service under the Internal Revenue Code of 1986, as amended (the "Code") and in accordance with the standard policies of the Company relating to reimbursement of business expenses. (d) Benefits. The Executive is entitled to participate in all normal and customary employee benefit plans adopted by the Company to the extent that the Executive is eligible to participate by the terms in such benefit plans, subject to the conditions and limitations in such benefit plans. Such employee benefit plans may be amended, modified or terminated in the ordinary course of the Company's business. (e) Vacation. The Executive shall be entitled to four (4) weeks of paid vacation each twelve-month period, which shall accrue on a pro rata basis from the date the Executive's employment commences under this Agreement. In the event that the Executive is unable to take the total amount of vacation time authorized herein during any year, such time shall not be carried over to the following year or any other year. 3. Term and Termination. (a) Term. Subject to earlier termination in accordance with Section 3(b) below, this Agreement will become effective on the date set forth above and will continue for a period of three (3) years (the "Term"). Upon the expiration of the initial three-year Term, the Company shall have the option, at its sole discretion, of continuing the term of this Agreement for an additional one (1) year term. If the Company exercises the aforementioned option, this Agreement shall continue automatically for succeeding terms of one (1) year each unless either party gives written notice to the other at least sixty (60) days prior to the expiration of the one-year option period or any succeeding term of his or its intention not to renew. (b) Termination. Subject to the respective continuing obligations of the Company and the Executive under Sections 4 and 5: 2 (1) The Company may terminate this Agreement immediately on written notice to the Executive for "Cause." For purposes of this Section 3, Cause shall mean: (i) conduct by the Executive which is or could reasonably be expected to be injurious to the Company, its business or reputation, including, but not limited to, embezzlement, fraud, dishonesty, breach of loyalty or other wrongful conduct; (ii) the Executive's willful misconduct or negligence in the performance of his duties hereunder, including the failure or refusal to comply with any legal directives of the Board of Directors; (iii) the commission by the Executive of an act constituting a felony for which the Executive has been convicted or has pleaded nolo contendere; (iv) the commission of a crime by the Executive involving moral turpitude or fraud for which the Executive has been convicted or has pleaded nolo contendere; (v) the failure to substantially perform his duties hereunder after written notice and failure to cure within fifteen (15) days (other than by reason of disability); (vi) the Executive's use of alcohol or any controlled substance to an extent that it interferes with the performance of his duties under this Agreement; or (vii) a breach by the Executive of any of his obligations under this Agreement. (2) This Agreement will terminate upon the Executive's death or upon written notice from the Company in the event of the Executive's "permanent disability." The term "permanent disability" means a physical or mental incapacity or disability which renders the Executive unable to substantially render the services required hereunder for an aggregate of ninety (90) days in any 365-day period, as certified by either the Executive's attending physician or a licensed physician retained by the Company for the purposes of making such determination. In the event of any disagreement between the Executive's attending physician and such physician retained by the Company, the matter shall be resolved by a third licensed physician selected jointly by the Executive's physician and the Company's physician. (3) This Agreement may be terminated by the Company without Cause upon thirty (30) days prior written notice to the Executive. The date this Agreement is terminated is hereinafter referred to as the "Termination Date." (c) Compensation Upon Termination. (1) If the Executive voluntarily terminates this Agreement, or if the Company terminates this Agreement for Cause pursuant to paragraph (1) of Section 3(b), the Company will be obligated to pay the Executive only Base Salary as may be due and owing or otherwise accrued through the Termination Date and all other non-contingent compensation earned and accrued up through the Termination Date. Such Base Salary will be paid in one lump sum within ten (10) business days of the Termination Date. 3 (2) If this Agreement terminates pursuant to paragraph (2) of Section 3(b), the Company will be obligated to pay the Executive: (i) Base Salary as may be due and owing or otherwise accrued through the Termination Date; (ii) an additional amount equal to the Executive's Base Salary for a period of three (3) months following the Termination Date at the rate in effect on the Termination Date, less any life insurance or disability insurance payments made to the Executive or his personal representative pursuant to insurance policies maintained by the Company for the benefit of the Executive; and (iii) all other non-contingent compensation earned and accrued up through the Termination Date. Such Base Salary and non-contingent compensation will be paid in accordance with the Company's payroll practices, as in effect from time to time. (3) If the Company terminates this Agreement pursuant to paragraph (3) of Section 3(b), the Company will be obligated to pay the Executive (i) Base Salary as may be due and owing or otherwise accrued through the Termination Date; (ii) an additional amount equal to the Executive's Base Salary for a period of three (3) months following the Termination Date or, if shorter, the balance of the Term had his employment not been so terminated, at the rate in effect on the Termination Date, as a severance payment (which sum the Executive agrees is fair and reasonable); and (ii) all other non-contingent compensation earned and accrued up through the Termination Date. Such Base Salary and non-contingent compensation will be paid in accordance with the Company's payroll practices, as in effect from time to time. 4. Confidentiality. (a) "Confidential Information" means information or data of the Company concerning its business, financial affairs, sales and marketing plans, customers, suppliers, strategies, products and services, proposed products and services, plans, ideas, drawings, designs, concepts, business methods, inventions, discoveries, improvements, technology, engineering, know-how, trade secrets, prototypes, processes, techniques, computer programs and other proprietary information, but does not include information that: (i) is or becomes part of the public domain through no breach of this Agreement by the Executive; or (ii) is required to be disclosed by order of a governmental agency or by a court of competent jurisdiction. (b) Acceptance and Use of Confidential Information. Except as expressly authorized in writing by this Agreement or otherwise agreed to by the Company in writing, during the term of this Agreement and thereafter, (i) the Executive will not disclose, divulge or make accessible the Confidential Information or any part thereof to any unauthorized person or entity or use it for his own benefit or the benefit of any third party; (ii) the Executive will use all reasonable care to protect the Confidential Information of the Company from unauthorized use, disclosure and publication; and (iii) the Executive will not render any services to any person, firm, corporation, partnership, limited liability company, association or other entity to which any such Confidential 4 Information, in whole or in part, has been disclosed or is threatened to be disclosed by or at the instance of the Executive. The Executive further agrees that he (i) shall use the Confidential Information only for, and in the course of and in connection with providing services to the Company pursuant to the terms of this Agreement, and (ii) shall, immediately upon the earlier of the termination of this Agreement or at the request of the Company, deliver to the Company any and all originals and all copies of the Confidential Information, whether embodied in written, electronic or other form. (c) Confidential Materials. All memoranda, notes, lists, records, customer lists, correspondence, calendars, graphs, data compilations, drawings, designs, charts, tables, pamphlets, recordings, programs, databases, minutes, telefax or telecopy transmissions and other documents, including without limitation any kind of written, typewritten, printed, recorded, computer-generated or graphic material, however produced or reproduced, constituting or containing Confidential Information made or compiled by the Executive or made available to the Executive shall be the Company's property, shall be kept confidential in accordance with the provisions of this Section 4, and shall be delivered to the Company at any time on request and in any event upon the termination of the Executive's employment with the Company for any reason. (d) Injunctive Relief. The parties recognize that a remedy at law for a breach of the provisions of this Section 4 may be inadequate and any breach or threatened breach thereof will cause irreparable injury to the Company. Accordingly, for its complete protection, the Company shall have the right to obtain (without the necessity of posting any bond or other security in connection therewith) injunctive relief, whether mandatory or restraining, to enforce the provisions hereof. Such remedies shall not be exclusive and shall be in addition to any other remedy, at law or in equity, which the Company may have for any breach or threatened breach of this Section 4 by the Executive. The provisions of this Section 4 shall be effective during the Term and thereafter, regardless of the manner or reasons for the termination of employment. 5. Non-Competition Covenant. (a) Other Agreements. The Executive represents and warrants to the Company that he is not currently subject to a non-competition, confidentiality or other such agreement which prohibits the Executive from working for the Company. (b) Non-Compete. The Executive agrees that, during his employment with the Company and for a period of one (1) year after employment with the Company terminates for any reason whatsoever, the Executive will not alone, or in any capacity with another corporation, partnership, firm or other organization, engage in any one or more of the following prohibited activities: (1) to directly or indirectly: (i) engage for his own account in any Competitive Business (as defined below); (ii) render any services in any capacity to any person or entity engaged in a Competitive Business; or (iii) own, manage, control, participate in, consult with, endorse, render services for, lend money to, 5 guarantee the debts or obligations of, or otherwise become economically interested, whether as a partner, shareholder, director, officer, employee, consultant, principal, member, manager, agent, trustee, consultant or in any other relationship or capacity, in any entity or person engaged in a Competitive Business; (2) for a purpose competitive with the Company, to call upon, solicit, influence or interfere with (i) any of the then-existing clients, customers, vendors, suppliers or other persons or entities conducting business with the Company, (ii) any clients, customers, vendors, suppliers or other persons or entities conducting business with the Company that have had a relationship with the Company during the preceding twelve (12) months prior to the Termination Date, or (iii) any potential clients, customers, vendors or suppliers that were actively solicited by the Company during the preceding twelve (12) months prior to the Termination Date; (3) to disrupt, damage, impair, or interfere with the business of the Company whether by way of interfering with or disrupting the Company's relationships with employees, agents, representatives, clients, customers, suppliers, vendors or other persons or entities conducting business with the Company; or (4) to employ or attempt to employ (by soliciting or assisting anyone else in the solicitation of) any of the Company's current employees as of the Executive's Termination Date or former employees of the Company who left the employ of the Company within twelve (12) months prior to the Termination Date on behalf of any other entity, whether or not such entity competes with the Company. For purposes hereof, the term "Competitive Business" shall mean: (i) any business, wherever located, that is or would be competitive with the business conducted by the Company or its affiliates at any time during the period of the Executive's employment with the Company. 6 (c) Personal Investments. Nothing herein contained shall prevent the Executive from being a passive owner of not more than one percent (1%) of the outstanding stock of any class of a corporation which is engaged in a Competitive Business and which is publicly traded, or of a privately held corporation that is not competitive in any manner with the business of the Company, provided the Executive (i) has no other participation in the management, operations or business of such corporation and (ii) is not a controlling person of, or a member of a group which controls, such corporation. (d) No Additional Compensation. In the event that the Executive's employment terminates for any reason, no additional compensation will be paid for this non-competition obligation, it being agreed by the parties that the scope of the restrictions and period of time are reasonable and that the compensation provided herein is adequate consideration for the non-competition obligation. (e) Survival. The obligations of this Section 5 will survive the expiration or termination of this Agreement. (f) Injunctive Relief. The parties recognize that a remedy at law for a breach of the provisions of this Section 5 may be inadequate and any breach or threatened breach thereof will cause irreparable injury to the Company. Accordingly, for its complete protection, the Company shall have the right to obtain (without the necessity of posting any bond or other security in connection therewith) injunctive relief, whether mandatory or restraining, to enforce the provisions hereof. Such remedies shall not be exclusive and shall be in addition to any other remedy, at law or in equity, which the Company may have for any breach or threatened breach of this Section 5 by the Executive. (g) Blue Penciling. If a court of competent jurisdiction determines that any of the provisions of this Section 5, or any part thereof, is unenforceable because of the scope, duration or area of applicability of such provision(s), it is the intention of the parties that the court making such determination shall: (i) modify such scope, duration or area, or all of them, only to the extent required to cause such provision(s) to be deemed enforceable; and (ii) that such provision(s) as so modified shall then be deemed by such court to be applicable and enforceable in such modified form and shall be enforced. 6. Miscellaneous. (a) Legal Fees. In the event that either party institutes a legal action or proceeding against the other to enforce or interpret this Agreement or any of its terms, if a court of competent jurisdiction determines that the Executive has violated this Agreement, the Executive agrees to pay, in addition to all other damages awarded, the reasonable costs and legal fees incurred by the Company in enforcing the Company's rights hereunder. However, if the court determines that the Company has violated this 7 Agreement, the Company shall reimburse the Executive for his reasonable costs and legal fees in connection with such action. (b) No Conflicts. The Executive represents and warrants to the Company that neither the entering into of this Agreement nor the performance of any obligations hereunder will conflict with or constitute a breach under any obligation of the Executive under any agreement or contract to which the Executive is a party or any other obligation by which the Executive is bound. (c) Successors and Assigns. The Company may assign this Agreement in connection with a merger, consolidation, assignment, sale or other disposition of substantially all of its assets or business. This Agreement shall be binding on and inure to the benefit of the Company's successors and assigns. This Agreement shall not be assignable by the Executive, but it shall be binding upon, and shall inure to the benefit of, his heirs, executors, administrators and legal representatives. (d) Modification. This Agreement may be modified or amended only by a writing signed by the Company and the Executive. (e) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. (f) Dispute Resolution. Except for any proceeding brought pursuant to Section 4(d) or 5(f) herein, the parties agree that any and all claims, controversies and disputes of any nature whatsoever arising out of or related in any way to the Executive's employment by the Company, including, without limitation, any and all claims, controversies and disputes related to his hiring, the terms of his employment or the termination of his employment, and any dispute arising out of or relating to this Agreement or the formation, breach, termination or validity thereof (a "Dispute"), will be resolved as follows. If the Dispute cannot be settled through direct discussions, the parties will first try to settle the Dispute in an amicable manner by mediation under the Commercial Mediation Rules of the American Arbitration Association, before resorting to arbitration. Any Dispute that has not been resolved within thirty (30) days of the initiation of the mediation procedure (the "Mediation Deadline") will be settled by binding arbitration by a panel of three arbitrators in accordance with the commercial arbitration rules of the American Arbitration Association. The arbitration and mediation proceedings will be located in either San Francisco, California or New York, New York, at the sole discretion of the Company. Judgment upon any arbitration award may be entered into any court having jurisdiction thereof and the parties' consent to the jurisdiction of the courts the state in which the arbitration occurred for this purpose. (g) Construction. Subject to Section 5(g), if any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall 8 be carried out as if any such invalid or unenforceable provision were not contained herein, unless the invalidity or unenforceability of such provision substantially impairs the benefits of the remaining portions of this Agreement. (h) Waivers. No failure or delay by the Company or the Executive in exercising any right or remedy under this Agreement will waive any provision of this Agreement, nor will any single or partial exercise by either the Company or the Executive of any right or remedy under this Agreement preclude either of them from otherwise or further exercising these rights or remedies, or any other rights or remedies granted by any law or any related document. (i) Entire Agreement. This Agreement supersedes all previous and contemporaneous oral negotiations, commitments, writings and understandings between the parties concerning the matters in this Agreement. (j) Notices. All notices and other communications required or permitted under this Agreement will be in writing and sent by registered first-class mail, return receipt requested, by overnight courier service or by hand delivery and will be effective after five days after mailing to the addresses stated at the beginning of this Agreement or upon delivery to such address if by courier or hand delivery. These addresses may be changed at any time by like notice. A copy of any notice sent to the Company shall be sent to Scott A. Ziegler, Esq., Ziegler, Ziegler & Altman, LLP, 1330 Avenue of the Americas, New York, New York 10019, facsimile number: (212) 407-0606. (k) Advice of Counsel. EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES THAT, IN EXECUTING THIS AGREEMENT, SUCH PARTY HAS HAD THE OPPORTUNITY TO SEEK THE ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS READ AND UNDERSTOOD ALL OF THE TERMS AND PROVISIONS OF THIS AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED AGAINST ANY PARTY BY REASON OF THE DRAFTING OR PREPARATION THEREOF. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first above written. CHIPCARDS, INC. EXECUTIVE By: --------------------------------- -------------------------------- Name: Eric Gravell Title: 9 EX-10 10 ex10-2.txt EXHIBIT 10.2 Exhibit 10.2 EMPLOYMENT AGREEMENT This Employment Agreement, dated as of January 1, 2001, is by and between Chipcards, Inc., a California corporation (the "Company"), and Allen Yue (the "Executive"). WHEREAS, the Executive is employed as President of the Company; and WHEREAS, the Company desires assurance of the continued association and services of the Executive in order to retain his experience, abilities, and knowledge, and is therefore willing to engage his services on the terms and conditions set forth below, and the Executive desires to accept such employment, all on the terms and conditions hereinafter set forth; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Executive, each intending to be legally bound, agree as follows: 1. Employment. (a) Employment. Subject to all of the terms and conditions of this Agreement, the Company agrees to employ the Executive as its President, and the Executive hereby accepts such employment with the Company. In such capacity, the Executive shall have full power and authority, in association with the Executive Vice President, to manage and conduct the business of the Company, subject to the policies and directives of the Company's Board of Directors. (b) Duties. The Executive will serve the Company faithfully to the best of his ability and shall perform the duties of his office and such other duties of an executive, managerial or administrative nature, all as shall be specified and designated from time to time by the Board of Directors of the Company. Without limiting the generality of the foregoing, the Executive's duties shall include responsibility for overseeing the day-to-day operations of the Company. 2. Compensation. (a) Salary. For all duties and services to be performed by the Executive hereunder, the Company shall pay the Executive an annual salary (the "Base Salary") in the amount of One Hundred Seventy Five Thousand Dollars ($175,000) per annum. Base Salary shall be payable in accordance with the Company's payroll practices, as in effect from time to time. On the first anniversary of this Agreement, the Executive's Base Salary shall be reviewed by the Board or its Compensation Committee, and any increase will be effective as of the date determined appropriate by the Board or its Compensation Committee. (b) Incentive Bonus. In addition to the Base Salary payable under Section 2(a), Executive shall be entitled to receive annual and other bonuses in the discretion of the Board of Directors based upon its good faith determination of the extent to which the Executive's individual performance objectives and the Company's profitability objectives and other financial and nonfinancial objectives are achieved during the applicable bonus period. (c) Reimbursement of Business Expenses. The Company agrees to reimburse the Executive for all reasonable out-of-pocket business expenses incurred by the Executive on behalf of or in connection with the services rendered to the Company, provided that the Executive properly accounts to the Company for all such expenses in accordance with the rules and regulations of the Internal Revenue Service under the Internal Revenue Code of 1986, as amended (the "Code") and in accordance with the standard policies of the Company relating to reimbursement of business expenses. (d) Benefits. The Executive is entitled to participate in all normal and customary employee benefit plans adopted by the Company to the extent that the Executive is eligible to participate by the terms in such benefit plans, subject to the conditions and limitations in such benefit plans. Such employee benefit plans may be amended, modified or terminated in the ordinary course of the Company's busines (e) Vacation. The Executive shall be entitled to four (4) weeks of paid vacation each twelve-month period, which shall accrue on a pro rata basis from the date the Executive's employment commences under this Agreement. In the event that the Executive is unable to take the total amount of vacation time authorized herein during any year, such time shall not be carried over to the following year or any other year. 3. Term and Termination. (a) Term. Subject to earlier termination in accordance with Section 3(b) below, this Agreement will become effective on the date set forth above and will continue for a period of three (3) years (the "Term"). Upon the expiration of the initial three-year Term, the Company shall have the option, at its sole discretion, of continuing the term of this Agreement for an additional one (1) year term. If the Company exercises the aforementioned option, this Agreement shall continue automatically for succeeding terms of one (1) year each unless either party gives written notice to the other at least sixty (60) days prior to the expiration of the one-year option period or any succeeding term of his or its intention not to renew. (b) Termination. Subject to the respective continuing obligations of the Company and the Executive under Sections 4 and 5: (1) The Company may terminate this Agreement immediately on written notice to the Executive for "Cause." For purposes of this Section 3, Cause shall mean: (i) conduct by the Executive which is or could reasonably be expected to be injurious to the Company, its business or reputation, including, but not limited to, embezzlement, fraud, dishonesty, breach of loyalty or other wrongful conduct; (ii) the Executive's willful misconduct or negligence in the performance of his duties hereunder, including the failure or refusal to comply with any legal directives of the Board of Directors; (iii) the commission by the Executive of an act constituting a felony for which the Executive has been convicted or has pleaded nolo contendere; (iv) the commission of a crime by the Executive involving moral turpitude or fraud for which the Executive has been convicted or has pleaded nolo contendere; (v) the failure to substantially perform his duties hereunder after written notice and failure to cure within fifteen (15) days (other than by reason of disability); (vi) the Executive's use of alcohol or any controlled substance to an extent that it interferes with the performance of his duties under this Agreement; or (vii) a breach by the Executive of any of his obligations under this Agreement. (2) This Agreement will terminate upon the Executive's death or upon written notice from the Company in the event of the Executive's "permanent disability." The term "permanent disability" means a physical or mental incapacity or disability which renders the Executive unable to substantially render the services required hereunder for an aggregate of ninety (90) days in any 365-day period, as certified by either the Executive's attending physician or a licensed physician retained by the Company for the purposes of making such determination. In the event of any disagreement between the Executive's attending physician and such physician retained by the Company, the matter shall be resolved by a third licensed physician selected jointly by the Executive's physician and the Company's physician. (3) This Agreement may be terminated by the Company without Cause upon thirty (30) days prior written notice to the Executive. The date this Agreement is terminated is hereinafter referred to as the "Termination Date." (c) Compensation Upon Termination. (1) If the Executive voluntarily terminates this Agreement, or if the Company terminates this Agreement for Cause pursuant to paragraph (1) of Section 3(b), the Company will be obligated to pay the Executive only Base Salary as may be due and owing or otherwise accrued through the Termination Date and all other non-contingent compensation earned and accrued up through the Termination Date. Such Base Salary will be paid in one lump sum within ten (10) business days of the Termination Date. 3 (2) If this Agreement terminates pursuant to paragraph (2) of Section 3(b), the Company will be obligated to pay the Executive: (i) Base Salary as may be due and owing or otherwise accrued through the Termination Date; (ii) an additional amount equal to the Executive's Base Salary for a period of three (3) months following the Termination Date at the rate in effect on the Termination Date, less any life insurance or disability insurance payments made to the Executive or his personal representative pursuant to insurance policies maintained by the Company for the benefit of the Executive; and (iii) all other non-contingent compensation earned and accrued up through the Termination Date. Such Base Salary and non-contingent compensation will be paid in accordance with the Company's payroll practices, as in effect from time to time. (3) If the Company terminates this Agreement pursuant to paragraph (3) of Section 3(b), the Company will be obligated to pay the Executive (i) Base Salary as may be due and owing or otherwise accrued through the Termination Date; (ii) an additional amount equal to the Executive's Base Salary for a period of three (3) months following the Termination Date or, if shorter, the balance of the Term had his employment not been so terminated, at the rate in effect on the Termination Date, as a severance payment (which sum the Executive agrees is fair and reasonable); and (ii) all other non-contingent compensation earned and accrued up through the Termination Date. Such Base Salary and non-contingent compensation will be paid in accordance with the Company's payroll practices, as in effect from time to time. 4. Confidentiality. (a) "Confidential Information" means information or data of the Company concerning its business, financial affairs, sales and marketing plans, customers, suppliers, strategies, products and services, proposed products and services, plans, ideas, drawings, designs, concepts, business methods, inventions, discoveries, improvements, technology, engineering, know-how, trade secrets, prototypes, processes, techniques, computer programs and other proprietary information, but does not include information that: (i) is or becomes part of the public domain through no breach of this Agreement by the Executive; or (ii) is required to be disclosed by order of a governmental agency or by a court of competent jurisdiction. (b) Acceptance and Use of Confidential Information. Except as expressly authorized in writing by this Agreement or otherwise agreed to by the Company in writing, during the term of this Agreement and thereafter, (i) the Executive will not disclose, divulge or make accessible the Confidential Information or any part thereof to any unauthorized person or entity or use it for his own benefit or the benefit of any third party; (ii) the Executive will use all reasonable care to protect the Confidential Information of the Company from unauthorized use, disclosure and publication; and (iii) the Executive will not render any services to any person, firm, corporation, partnership, limited liability company, association or other entity to which any such Confidential 4 Information, in whole or in part, has been disclosed or is threatened to be disclosed by or at the instance of the Executive. The Executive further agrees that he (i) shall use the Confidential Information only for, and in the course of and in connection with providing services to the Company pursuant to the terms of this Agreement, and (ii) shall, immediately upon the earlier of the termination of this Agreement or at the request of the Company, deliver to the Company any and all originals and all copies of the Confidential Information, whether embodied in written, electronic or other form. (c) Confidential Materials. All memoranda, notes, lists, records, customer lists, correspondence, calendars, graphs, data compilations, drawings, designs, charts, tables, pamphlets, recordings, programs, databases, minutes, telefax or telecopy transmissions and other documents, including without limitation any kind of written, typewritten, printed, recorded, computer-generated or graphic material, however produced or reproduced, constituting or containing Confidential Information made or compiled by the Executive or made available to the Executive shall be the Company's property, shall be kept confidential in accordance with the provisions of this Section 4, and shall be delivered to the Company at any time on request and in any event upon the termination of the Executive's employment with the Company for any reason. (d) Injunctive Relief. The parties recognize that a remedy at law for a breach of the provisions of this Section 4 may be inadequate and any breach or threatened breach thereof will cause irreparable injury to the Company. Accordingly, for its complete protection, the Company shall have the right to obtain (without the necessity of posting any bond or other security in connection therewith) injunctive relief, whether mandatory or restraining, to enforce the provisions hereof. Such remedies shall not be exclusive and shall be in addition to any other remedy, at law or in equity, which the Company may have for any breach or threatened breach of this Section 4 by the Executive. The provisions of this Section 4 shall be effective during the Term and thereafter, regardless of the manner or reasons for the termination of employment. 5. Non-Competition Covenant. (a) Other Agreements. The Executive represents and warrants to the Company that he is not currently subject to a non-competition, confidentiality or other such agreement which prohibits the Executive from working for the Company. (b) Non-Compete. The Executive agrees that, during his employment with the Company and for a period of one (1) year after employment with the Company terminates for any reason whatsoever, the Executive will not alone, or in any capacity with another corporation, partnership, firm or other organization, engage in any one or more of the following prohibited activities: (1) to directly or indirectly: (i) engage for his own account in any Competitive Business (as defined below); (ii) render any services in any capacity to any person or entity engaged in a Competitive Business; or (iii) own, manage, control, participate in, consult with, endorse, render services for, lend money to, 5 guarantee the debts or obligations of, or otherwise become economically interested, whether as a partner, shareholder, director, officer, employee, consultant, principal, member, manager, agent, trustee, consultant or in any other relationship or capacity, in any entity or person engaged in a Competitive Business; (2) for a purpose competitive with the Company, to call upon, solicit, influence or interfere with (i) any of the then-existing clients, customers, vendors, suppliers or other persons or entities conducting business with the Company, (ii) any clients, customers, vendors, suppliers or other persons or entities conducting business with the Company that have had a relationship with the Company during the preceding twelve (12) months prior to the Termination Date, or (iii) any potential clients, customers, vendors or suppliers that were actively solicited by the Company during the preceding twelve (12) months prior to the Termination Date; (3) to disrupt, damage, impair, or interfere with the business of the Company whether by way of interfering with or disrupting the Company's relationships with employees, agents, representatives, clients, customers, suppliers, vendors or other persons or entities conducting business with the Company; or (4) to employ or attempt to employ (by soliciting or assisting anyone else in the solicitation of) any of the Company's current employees as of the Executive's Termination Date or former employees of the Company who left the employ of the Company within twelve (12) months prior to the Termination Date on behalf of any other entity, whether or not such entity competes with the Company. For purposes hereof, the term "Competitive Business" shall mean: (i) any business, wherever located, that is or would be competitive with the business conducted by the Company or its affiliates at any time during the period of the Executive's employment with the Company. 6 (c) Personal Investments. Nothing herein contained shall prevent the Executive from being a passive owner of not more than one percent (1%) of the outstanding stock of any class of a corporation which is engaged in a Competitive Business and which is publicly traded, or of a privately held corporation that is not competitive in any manner with the business of the Company, provided the Executive (i) has no other participation in the management, operations or business of such corporation and (ii) is not a controlling person of, or a member of a group which controls, such corporation. (d) No Additional Compensation. In the event that the Executive's employment terminates for any reason, no additional compensation will be paid for this non-competition obligation, it being agreed by the parties that the scope of the restrictions and period of time are reasonable and that the compensation provided herein is adequate consideration for the non-competition obligation. (e) Survival. The obligations of this Section 5 will survive the expiration or termination of this Agreement. (f) Injunctive Relief. The parties recognize that a remedy at law for a breach of the provisions of this Section 5 may be inadequate and any breach or threatened breach thereof will cause irreparable injury to the Company. Accordingly, for its complete protection, the Company shall have the right to obtain (without the necessity of posting any bond or other security in connection therewith) injunctive relief, whether mandatory or restraining, to enforce the provisions hereof. Such remedies shall not be exclusive and shall be in addition to any other remedy, at law or in equity, which the Company may have for any breach or threatened breach of this Section 5 by the Executive. (g) Blue Penciling. If a court of competent jurisdiction determines that any of the provisions of this Section 5, or any part thereof, is unenforceable because of the scope, duration or area of applicability of such provision(s), it is the intention of the parties that the court making such determination shall: (i) modify such scope, duration or area, or all of them, only to the extent required to cause such provision(s) to be deemed enforceable; and (ii) that such provision(s) as so modified shall then be deemed by such court to be applicable and enforceable in such modified form and shall be enforced. 6. Miscellaneous. (a) Legal Fees. In the event that either party institutes a legal action or proceeding against the other to enforce or interpret this Agreement or any of its terms, if a court of competent jurisdiction determines that the Executive has violated this Agreement, the Executive agrees to pay, in addition to all other damages awarded, the reasonable costs and legal fees incurred by the Company in enforcing the Company's rights hereunder. However, if the court determines that the Company has violated this Agreement, the Company shall reimburse the Executive for his reasonable costs and legal fees in connection with such action. 7 (b) No Conflicts. The Executive represents and warrants to the Company that neither the entering into of this Agreement nor the performance of any obligations hereunder will conflict with or constitute a breach under any obligation of the Executive under any agreement or contract to which the Executive is a party or any other obligation by which the Executive is bound. (c) Successors and Assigns. The Company may assign this Agreement in connection with a merger, consolidation, assignment, sale or other disposition of substantially all of its assets or business. This Agreement shall be binding on and inure to the benefit of the Company's successors and assigns. This Agreement shall not be assignable by the Executive, but it shall be binding upon, and shall inure to the benefit of, his heirs, executors, administrators and legal representatives. (d) Modification. This Agreement may be modified or amended only by a writing signed by the Company and the Executive. (e) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. (f) Dispute Resolution. Except for any proceeding brought pursuant to Section 4(d) or 5(f) herein, the parties agree that any and all claims, controversies and disputes of any nature whatsoever arising out of or related in any way to the Executive's employment by the Company, including, without limitation, any and all claims, controversies and disputes related to his hiring, the terms of his employment or the termination of his employment, and any dispute arising out of or relating to this Agreement or the formation, breach, termination or validity thereof (a "Dispute"), will be resolved as follows. If the Dispute cannot be settled through direct discussions, the parties will first try to settle the Dispute in an amicable manner by mediation under the Commercial Mediation Rules of the American Arbitration Association, before resorting to arbitration. Any Dispute that has not been resolved within thirty (30) days of the initiation of the mediation procedure (the "Mediation Deadline") will be settled by binding arbitration by a panel of three arbitrators in accordance with the commercial arbitration rules of the American Arbitration Association. The arbitration and mediation proceedings will be located in either San Francisco, California or New York, New York, at the sole discretion of the Company. Judgment upon any arbitration award may be entered into any court having jurisdiction thereof and the parties' consent to the jurisdiction of the courts the state in which the arbitration occurred for this purpose. (g) Construction. Subject to Section 5(g), if any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein, unless the invalidity or unenforceability of such provision substantially impairs the benefits of the remaining portions of this Agreement. 8 (h) Waivers. No failure or delay by the Company or the Executive in exercising any right or remedy under this Agreement will waive any provision of this Agreement, nor will any single or partial exercise by either the Company or the Executive of any right or remedy under this Agreement preclude either of them from otherwise or further exercising these rights or remedies, or any other rights or remedies granted by any law or any related document. (i) Entire Agreement. This Agreement supersedes all previous and contemporaneous oral negotiations, commitments, writings and understandings between the parties concerning the matters in this Agreement. (j) Notices. All notices and other communications required or permitted under this Agreement will be in writing and sent by registered first-class mail, return receipt requested, by overnight courier service or by hand delivery and will be effective after five days after mailing to the addresses stated at the beginning of this Agreement or upon delivery to such address if by courier or hand delivery. These addresses may be changed at any time by like notice. A copy of any notice sent to the Company shall be sent to Scott A. Ziegler, Esq., Ziegler, Ziegler & Altman, LLP, 1330 Avenue of the Americas, New York, New York 10019, facsimile number: (212) 407-0606. (k) Advice of Counsel. EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES THAT, IN EXECUTING THIS AGREEMENT, SUCH PARTY HAS HAD THE OPPORTUNITY TO SEEK THE ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS READ AND UNDERSTOOD ALL OF THE TERMS AND PROVISIONS OF THIS AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED AGAINST ANY PARTY BY REASON OF THE DRAFTING OR PREPARATION THEREOF. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first above written. CHIPCARDS, INC. EXECUTIVE By: ------------------------------ ------------------------------ Name: Allen Yue Title: 9 EX-10 11 ex10-6.txt EXHIBIT 10.6 Exhibit 10.6 Chipcards, Inc. 2000 Equity Incentive Plan SECTION 1 PURPOSE The purpose of the Chipcards, Inc 2000 Equity Incentive Plan is to provide a means whereby Chipcards, Inc., a California corporation (the "Corporation"), may attract able persons to remain in or to enter the employ of the Corporation, a Parent Corporation, or a Subsidiary and to provide a means whereby those employees, directors, officers, and other individuals or entities upon whom the responsibilities of the successful administration, management, planning, and/or organization of the Corporation may rest, and whose present and potential contributions to the welfare of the Corporation, a Parent Corporation or a Subsidiary are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the long-term welfare of the Corporation. A further purpose of the Plan is to provide such employees and individuals or entities with additional incentive and reward opportunities designed to enhance the profitable growth of the Corporation over the long term. Accordingly, the Plan provides for granting Common Stock, Incentive Stock Options, options which do not constitute Incentive Stock Options, or any combination of the foregoing, as is best suited to the circumstances of the particular employees and individuals or entities as provided herein. SECTION 2 DEFINITIONS The following definitions shall be applicable during the term of the Plan unless specifically modified by any paragraph: (a) Award means, individually or collectively, any Option granted pursuant to the Plan. (b) Board means the board of directors of the Corporation. (c) Change of Control Value means the amount determined in Clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to stockholders of the Corporation in any merger, consolidation, sale of assets or dissolution transaction, (ii) the price per share offered to stockholders of the corporation in any tender offer or exchange offer whereby a Corporate Change takes place or (iii) if a Corporate Change occurs other than as described in Clause (i) or Clause (ii), the fair market value per share determined by the Board as of the date determined by the Board to be the date of cancellation and surrender of an Option. If the consideration offered to stockholders of the Corporation in any transaction described in this Paragraph or Paragraphs (d) and (e) of Section 8 consists of anything other than cash, the Board shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash. (d) Code means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any Section of the Code shall be deemed to include any amendments or successor provisions to such Section and any regulations under such Section. (e) Common Stock means the common stock of the Corporation. (f) Corporation means Chipcards, Inc. (g) Corporate Change means one of the following events: (i) the merger, consolidation or other reorganization of the Corporation in which the outstanding Common Stock is converted into or exchanged for a different class of securities of the Corporation, a class of securities of any other issuer (except a Subsidiary or Parent Corporation), cash or other property other than (a) a merger, consolidation or reorganization of the Corporation which would result in the voting stock of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation, at least seventy percent (70%) of the combined voting power of the voting stock of the Corporation or such surviving entity outstanding immediately after such merger, consolidation or reorganization of the Corporation, or (b) merger, consolidation or reorganization of the Corporation effected to implement a recapitalization of the Corporation (or similar transaction) in which no person acquires more than thirty percent (30%) of the combined voting power of the Corporation's then outstanding stock; (ii) the sale, lease or exchange of all or substantially all of the assets of the Corporation to any other corporation or entity (except a Subsidiary or Parent Corporation); (iii) the adoption by the stockholders of the Corporation of a plan of liquidation and dissolution; (iv) the acquisition (other than acquisition pursuant to any other clause of this definition) by any person or entity, including without limitation a "group" as contemplated by Section 13(d)(3) of the Exchange Act, of beneficial ownership, as contemplated by such Section, of more than twenty-five percent (25%) (based on voting power) of the Corporation's outstanding capital stock or acquisition by a person or entity who currently has beneficial ownership which increases such person's or entity's beneficial ownership to thirty percent (30%) or more (based on voting power) of the Corporation's outstanding capital stock; or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Corporation before such election shall cease to constitute a majority of the Board. Notwithstanding the provisions of clause (iv) above, a Corporate Change shall not be considered to have occurred upon the acquisition (other than acquisition pursuant to any other clause of the preceding sentence) by any person or entity, including without limitation a "group" as contemplated by Section 13(d)(3) of the Exchange Act, of beneficial ownership, as contemplated by such Section, of more than twenty-five percent (25%) (based on voting power) of the Corporation's outstanding capital stock or the requisite percentage to increase their ownership to fifty percent (50%) resulting from a public offering of securities of the Corporation under the Securities Act of 1933, as amended. (h) Designated Officer means an officer of the Corporation, such as the President, Executive Vice President, Chief Operating Officer, Chief Executive Officer, Chief Financial Officer, or Corporate Secretary who is given authority by the Board to grant options or make stock grants under the Plan. (i) Exchange Act means the Securities Exchange Act of 1934, as amended. (j) Fair Market Value means, as of any specified date, the closing price of the Common Stock on the NASDAQ (or, if the Common Stock is not listed on such exchange, such other national securities exchange on which the Common Stock is then listed) on that date, or if no prices are reported on that date, on the last preceding date on which such prices of the Common Stock are so reported. If the Common Stock is not then listed on any national securities exchange but is traded over the counter at the time determination of its Fair Market Value is required to be made hereunder, its Fair Market Value shall be deemed to be equal to the average between the reported high and low sales prices of Common Stock on the most recent date on which Common Stock was publicly traded. If the Common Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its Fair Market Value shall be made by the Board in such manner as it deems appropriate (such determination will be made in good-faith as required by Section 422(c)(1) of the Code and may be based on the advice of an independent investment banker or appraiser recognized to be expert in making such valuations). Fair Market Value also shall satisfy the requirements under Section 260.140 of the California Code of Regulations, as necessary to qualify for an exemption from the provisions of Section 25110 of the California Corporations Code. (k) Grant means individually or collectively, any Common Stock granted pursuant to the Plan. (l) Grantee means an employee, director, officer, other individual or entity who has been granted Common Stock pursuant to the Plan. (m) Holder means an individual or entity who has been granted an Award. (n) Incentive Stock Option means an Option within the meaning of Section 422 of the Code. (o) Option means an Award granted under Section 7 of the Plan and includes both Incentive Stock Options to purchase Common Stock and Options which do not constitute Incentive Stock Options to purchase Common Stock. (p) Option Agreement means a written agreement between the Corporation and an employee with respect to an Option. (q) Optionee means an employee, director, officer, entity or individual who has been granted an Option. (r) Parent Corporation shall have the meaning set forth in Section 424(e) of the Code. (s) Plan means the Chipcards, Inc. 2000 Equity Incentive Plan. (t) Rule 16b-3 means Rule 16b-3 of the General Rules and Regulations of the Securities and Exchange Commission under the Exchange Act, as such rule is currently in effect or as hereafter modified or amended. (u) Subsidiary means a company (whether a corporation, partnership, joint venture or other form of entity) in which the Corporation, or a corporation in which the Corporation owns a majority of the shares of capital stock, directly or indirectly, owns an equity interest of fifty percent (50%) or more, except solely with respect to the issuance of Incentive Stock Options the term "Subsidiary" shall have the same meaning as the term "subsidiary corporation" as defined in Section 424(f) of the Code. SECTION 3 EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall be effective as of December 29, 2000, the date of its adoption by the Board, provided that the Plan is approved by the stockholders of the Corporation within twelve (12) months before or thereafter and on or prior to the date of the first annual meeting of stockholders of the Corporation held subsequent to the acquisition of an equity security by a Holder hereunder for which exemption is claimed under Rule 16b-3. Notwithstanding any provision of the Plan or of any Option Agreement, no Option shall be exercisable and no Common Stock may be granted prior to such stockholder approval. The Plan shall be terminated and no further Awards or Common Stock may be granted under the Plan after ten (10) years from the date the Plan is adopted by the Board or the date the Plan is approved by the Corporation's shareholders, whichever is earlier. Subject to the provisions of Section 9, the Plan shall remain in effect until all Options granted under the Plan have been exercised or have expired by reason of lapse of time and all restrictions imposed upon restricted stock awards have lapsed. Any option exercised before shareholder approval is obtained must be rescinded if shareholder approval is not obtained within twelve (12) months before or after the Plan is adopted. Such shares shall not be counted in determining whether such approval is granted. SECTION 4 ADMINISTRATION (a) Administration of Plan by Board. The Plan shall be administered by the Board or, at the discretion of the Board, by a committee (the "Committee") of not less than two (2) members of the Board, in compliance with Rule 16b-3. Members of the Board and the Committee shall abstain from participating in and deciding matters which directly affect their individual ownership interests under the Plan. (b) Powers. Subject to the terms of the Plan, the Board shall elect one or several Designated Officers who shall have sole authority, in their discretion, to determine which employees, officers, directors, individuals or entities shall receive an Award or Grant, the time or times when such Award or Grant shall be made, whether Common Stock, an Incentive Stock Option or nonqualified Option shall be granted and the number of shares of Common Stock which may be issued under each Option. In making such determinations, the Designated Officer may take into account the nature of the services rendered by these individuals, their present and potential contribution to the success of the Corporation, a Parent Corporation or a Subsidiary, and such other factors as the Board in its discretion shall deem relevant. (c) Additional Powers. The Board or Committee shall have such additional powers as are delegated to it by the other provisions of the Plan. Subject to the express provisions of the Plan, the Board or Committee is authorized in its sole discretion, exercised in a nondiscriminatory manner, to construe and interpret the Plan and the respective agreements executed thereunder, to prescribe such rules and regulations relating to the Plan as it may deem advisable to carry out the Plan, and to determine the terms, restrictions and provisions of each Award or Grant, including such terms, restrictions and provisions as shall be requisite in the judgment of the Board or Committee to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the Plan. The Board of Committee shall have the power to determine whether an Optionee may receive a loan for the purpose of exercising options under the Plan. The Board or Committee may correct any defect or supply any omission or reconcile any inconsistency in any agreement relating to an Award or Grant in the manner and to the extent it shall deem expedient to carry it into effect. The determination of the Board or Committee on the matters referred to in this Section 4 shall be conclusive. (d) Compliance With Code Section 162(m). In the event the Corporation, a Parent Corporation or a Subsidiary becomes a "publicly-held corporation" as defined in Section 162(m)(2) of the Code, the Corporation may establish a committee of outside directors meeting the requirements of Code Section 162(m) to (i) approve the grant of Options which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes by the Corporation pursuant to Code Section 162(m) and (ii) administer the Plan. In such event, the powers reserved to the Board in the Plan shall be exercised by such compensation committee. In addition, Options under the Plan shall be granted upon satisfaction of the conditions to such grants provided pursuant to Code Section 162(m) and any Treasury Regulations promulgated thereunder. SECTION 5 GRANT OF OPTIONS AND STOCK SUBJECT TO THE PLAN (a) Award Limits. A Designated Officer may from time to time grant Awards and/or make Grants to one or more employees, directors, officers, individuals or entities determined by him or her to be eligible for participation in the Plan in accordance with the provisions of Section 6 of the Plan. The aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 2,500,000 shares. The aggregate number of shares of Common Stock that may be issued to any Holder and/or granted to any Grantee under the Plan shall not exceed sixty seven percent 67%) of the aggregate number of shares referred to in the preceding sentence. The total number of shares issuable upon exercise of all outstanding Options shall not exceed a number of shares which is equal to thirty percent (30%) of the then outstanding shares of the Corporation. Any of such shares which remain unissued and which are not subject to outstanding Options and/or Grants at the termination of the Plan shall cease to be subject to the Plan but, until termination of the Plan, the Corporation shall at all times reserve a sufficient number of shares to meet the requirements of the Plan. Shares shall be deemed to have been issued under the Plan only to the extent actually issued and delivered pursuant to an Award or Grant. To the extent that an Award or Grant lapses or the rights of its Holder or Grantee terminate, any shares of Common Stock subject to such Award or Grant shall again be available for the grant of an Award or making of a Grant. The aggregate number of shares which may be issued under the Plan shall be subject to adjustment in the same manner as provided in Section 8 of the Plan with respect to shares of Common Stock subject to Options then outstanding. Separate stock certificates shall be issued by the Corporation for those shares acquired pursuant to a Grant, the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option which does not constitute an Incentive Stock Option. (b) Stock Offered. The stock to be offered pursuant to an Award or Grant may be authorized but unissued Common Stock or Common Stock previously issued and outstanding and reacquired by the Corporation. SECTION 6 ELIGIBILITY An Incentive Stock Option Award made pursuant to the Plan may be granted only to an individual who, at the time of grant, is an employee of the Corporation, a Parent Corporation or a Subsidiary. An Award of an Option which is not an Incentive Stock Option or a Grant of Common Stock may be made to an individual who, at the time of Award or Grant, is an employee of the Corporation, a Parent Corporation or a Subsidiary, or to an individual who has been identified by the Board or Committee or Designated Officer to receive an Award or Grant due to their contribution or service to the Corporation, including members of the Board of Directors of the Corporation, a Parent Corporation or a Subsidiary. An Award or Grant made pursuant to the Plan may be made on more than one occasion to the same person, and such Award or Grant may include a Common Stock Grant, an Incentive Stock Option, an Option which is not an Incentive Stock Option, or any combination thereof. Each Award or Grant shall be evidenced by a written instrument duly executed by or on behalf of the Corporation. SECTION 7 STOCK OPTIONS/GRANTS (a) Stock Option Agreement. Each Option shall be evidenced by an Option Agreement between the Corporation and the Optionee which shall contain such terms and conditions as may be approved by the Board or Committee and agreed upon by the Holder. The terms and conditions of the respective Option Agreements need not be identical. Each Option Agreement shall specify the effect of termination of employment, total and permanent disability, retirement or death on the exercisability of the Option. Under each Option Agreement, a Holder shall have the right to appoint any individual or legal entity in writing as his or her beneficiary under the Plan in the event of his death. Such designation may be revoked in writing by the Holder at any time and a new beneficiary may be appointed in writing on the form provided by the Board or Committee for such purpose. In the absence of such appointment, the beneficiary shall be the legal representative of the Holder's estate. (b) Option Period. The term of each Option shall be as specified by the Board or Committee at the date of grant and shall be stated in the Option Agreement; provided, however, that an option may not be exercised more than one hundred twenty (120) months from the date it is granted. (c) Limitations on Exercise of Option. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board or Committee and as shall be permissible under the terms of the Plan, which shall be specified in the Option Agreement evidencing the Option; provided, however, that an option shall be exercisable at the rate of at least twenty percent (20%) per year over five (5) years from the date it is granted. An Option may not be exercised for fractional shares. (d) Special Limitations on Incentive Stock Options. To the extent that the aggregate Fair Market Value (determined at the time the respective Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Corporation (and any Parent Corporation or Subsidiary) exceeds One Hundred Thousand Dollars ($100,000) (within the meaning of Section 422 of the Code), such excess Incentive Stock Options shall be treated as Options which do not constitute Incentive Stock Options. The Board or Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of an Optionee's Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the Optionee of such determination as soon as practicable after such determination. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or of its Parent Corporation or a Subsidiary, within the meaning of Section 422(b)(6) of the Code, unless (i) at the time such Option is granted the Option price is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. (e) Option Price. The purchase price of Common Stock issued under each Option shall be determined by the Board or Committee and shall be stated in the Option Agreement, but such purchase price shall, in the case of Incentive Stock Options, not be less than the Fair Market Value of Common Stock subject to the Option on the date the Option is granted, and, in the case of Options which do not constitute Incentive Stock Options, not be less than eighty-five percent (85%) of the fair value of the stock at the time the option is granted, except that the price shall be one hundred ten percent (110%) of the fair value in the case of any person or entity who owns stock comprising more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or its Parent Corporation or Subsidiary. Fair value in the case of options that do not constitute Incentive Stock Options shall have the same meaning as set forth in Section 260.140.50 of the California Code of Regulations. (f) Options and Rights in Substitution for Stock Options Made by Other Corporations. Options may be granted under the Plan from time to time in substitution for stock options held by employees of corporations who become, or who became prior to the effective date of the Plan, employees of the Corporation, of any Parent Corporation or of any Subsidiary as a result of a merger or consolidation of the employing corporation with the Corporation, such Parent Corporation or such Subsidiary, or the acquisition by the Corporation, a Parent Corporation or a Subsidiary of all or a portion of the assets of the employing corporation, or the acquisition by the Corporation, a Parent Corporation or a Subsidiary of stock of the employing corporation with the result that such employing corporation becomes a Subsidiary. SECTION 8 RECAPITALIZATION OR REORGANIZATION (a) Except as hereinafter otherwise provided, Awards or Grants shall be subject to adjustment by the Board or Committee at its discretion as to the number and price of shares of Common Stock in the event of changes in the outstanding Common Stock by reason of stock dividends, stock splits, reverse stock splits, reclassifications, recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges or other relevant changes in capitalization occurring after the date of the grant of any such Options or Common Stock. (b) The existence of the Plan and the Awards and/or Grants made hereunder shall not affect in any way the right or power of the Board or Committee or the stockholders of the Corporation to make or authorize any adjustment, recapitalization, reorganization or other change in the capital structure of the Corporation, a Parent Corporation or a Subsidiary or their business, any merger or consolidation of the Corporation, a Parent Corporation or a Subsidiary, any issue of debt or equity securities having any priority or preference with respect to or affecting Common Stock or the rights thereof, the dissolution or liquidation of the Corporation, a Parent Corporation or a Subsidiary, or any sale, lease, exchange or other disposition of all or any part of their assets or business or any other corporate act or proceeding. (c) The shares with respect to which Options may be granted are shares of Common Stock as presently constituted but if and whenever, prior to the expiration of an Option theretofore granted, the Corporation shall effect a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend on Common Stock without receipt of consideration by the Corporation, the number of shares of Common Stock with respect to which such Option may thereafter be exercised (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased. (d) If the Corporation recapitalizes or otherwise changes its capital structure, thereafter upon any exercise of an Option theretofore granted, the Optionee shall be entitled to purchase under such Option, in lieu of the number of shares of Common Stock as to which such Option shall then be exercisable, the number and class of shares of stock and securities, and the cash and other property to which the Optionee would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the Optionee had been the holder of such record of the number of shares of Common Stock then covered by such Option. (e) In the event of a Corporate Change, unless otherwise deemed to be impractical by the Board, then no later than (i) two business days prior to any Corporate Change referenced in Clause (i), (ii), (iii), (v) or (vi) of the definition thereof or (ii) ten business days after any Corporate Change referenced in Clause (iv) of the definition thereof, the Board, acting in its sole discretion without the consent or approval of any Optionee or Grantee, shall act to effect the following alternatives with respect to outstanding Options which acts may vary among individual Optionees and, with respect to acts taken pursuant to Clause (i) above, may be contingent upon effectuation of the Corporate Change: (A) in the event of a Corporate Change referenced in Clauses (i), (ii) and (vi) acceleration of exercise for all Options then outstanding so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Board, after which specified date all unexercised Options and all rights of Optionees thereunder shall terminate; (B) in the event of a Corporate Change referenced in Clauses (iii), (iv) and (v) require the mandatory surrender to the Corporation by selected Optionees of some or all of the outstanding Options held by such Optionees (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date (before or after such Corporate Change) specified by the Board, in which event the Board shall thereupon cancel such Options and pay to each Optionee an amount of cash per share equal to the excess, if any, of the Change of Control Value of the shares subject to such Option over the exercise price(s) under such Options for such shares; (C) in the event of a Corporate Change referenced in Clauses (iii), (iv) and (v), make such adjustments to Options then outstanding as the Board deems appropriate to reflect such Corporate Change (provided, however, that the Board may determine in its sole discretion that no adjustment is necessary to Options then outstanding); (D) in the event of a Corporate Change referenced in Clauses (iii), (iv) and (v), provide that thereafter upon any exercise of an Option theretofore granted the Optionee shall be entitled to purchase under such Option, in lieu of the number of shares of Common Stock as to which such Option shall then be exercisable, the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Optionee would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets or plan of liquidation and dissolution if, immediately prior to such merger, consolidation or sale of assets or any distribution in liquidation and dissolution of the Corporation, the Optionee had been the holder of record of the number of shares of Common Stock then covered by such Option; or (E) in the event of a Corporate Change referenced in Clauses (iii), (iv) and (v), cancel the Options granted if the Fair Market Value of the Common Stock underlying the Options is below the Option exercise price. (f) Except as hereinbefore expressly provided, issuance by the Corporation of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Corporation convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock subject to Options theretofore granted, or the purchase price per share of Common Stock subject to Options. SECTION 9 AMENDMENT OR TERMINATION OF THE PLAN The Board in its discretion may terminate the Plan or any Option or Grant or alter or amend the Plan or any part thereof or any Option from time to time; provided that no change in any Award or Grant previously made may be made which would impair the rights of the Holder or Grantee without the consent of the Holder or Grantee, and provided further, that the Board may not, without approval of the stockholders, amend the Plan: (a) to increase the aggregate number of shares which may be issued pursuant to the provisions of the Plan on exercise or surrender of Options or upon Grants; (b) to change the minimum Option exercise price; (c) to change the class of employees eligible to receive Awards and/or Grants or increase materially the benefits accruing to employees under the Plan; (d) to extend the maximum period during which Awards may be granted or Grants may be made under the Plan; (e) to modify materially the requirements as to eligibility for participation in the Plan; or (f) to decrease any authority granted to the Board hereunder in contravention of Rule 16b-3. SECTION 10 OTHER (a) No Right to an Award or Grant. Neither the adoption of the Plan nor any action of the Board or Committee or Designated Officer shall be deemed to give an employee any right to be granted an Option to purchase Common Stock, to receive a Grant or to any other rights hereunder except as may be evidenced by an Option Agreement duly executed on behalf of the Corporation, and then only to the extent of and on the terms and conditions expressly set forth therein. The Plan shall be unfunded. The Corporation shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the payment of any Award or Grant. (b) No Employment Rights Conferred. Nothing contained in the Plan or in any Award or Grant made hereunder shall (i) confer upon any employee any right with respect to continuation of employment with the Corporation or any Parent Corporation or Subsidiary, or (ii) interfere in any way with the right of the Corporation or any Parent Corporation or Subsidiary to terminate his or her employment at any time. (c) Other Laws; Withholding. The Corporation shall not be obligated to issue any Common Stock pursuant to any Award granted or any Grant made under the Plan at any time when the offering of the shares covered by such Award has not been registered (or exempted) under the Securities Act of 1933 and such other state and federal laws, rules or regulations as the Corporation or the Board or Committee deems applicable and, in the opinion of legal counsel for the Corporation, there is no exemption from the registration requirements of such laws, rules or regulations available for the issuance and sale of such shares. No fractional shares of Common Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid. The Corporation shall have the right to deduct in connection with all Awards or Grants any taxes required by law to be withheld and to require any payments necessary to enable it to satisfy its withholding obligations. The Board or Committee may permit the Holder of an Award or Grant to elect to surrender, or authorize the Corporation to withhold shares of Common Stock (valued at their Fair Market Value on the date of surrender or withholding of such shares) in satisfaction of the Corporation's withholding obligation, subject to such restrictions as the Board deems necessary to satisfy the requirements of Rule 16b-3. (d) No Restriction of Corporate Action. Nothing contained in the Plan shall be construed to prevent the Corporation or any Parent Corporation or Subsidiary from taking any corporate action which is deemed by the Corporation or such Parent Corporation or Subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No employee, beneficiary or other person shall have any claim against the Corporation or any Parent Corporation or Subsidiary as a result of such action. (e) Restrictions on Transfer. An Award shall not be transferable otherwise than by will or the laws of descent and distribution and shall be exercisable during the lifetime of the Holder only by such Holder or the Holder's guardian or legal representative. (f) Effect of Death, Disability or Termination of Employment. The Option Agreement or other written instrument evidencing an Award shall specify the effect of the death, disability or termination of employment of the Holder on the Award; provided, however that an Optionee shall be entitled to exercise (i) at least six (6) months from the date of termination of employment with the Corporation if such termination is caused by death or disability or (ii) at least thirty (30) days from the date of termination of employment with the Corporation if such termination is caused by reasons other than death or disability. All outstanding Incentive Stock Options will automatically be converted to a nonqualified stock option if the Optionee does not exercise the Incentive Stock Option (i) within three (3) months of the date of termination caused by reasons other than death or disability; or (ii) within twelve (12) months of the date of termination caused by disability. (g) Information to Employees. Optionees and Grantees under the Plan shall receive financial statements annually regarding the Corporation during the period the options are outstanding. The financial statements provided need not comply with Section 260.613 of the California Code of Regulations. (h) Rule 16b-3. It is intended that the Plan and any grant of an Award made to a person subject to Section 16 of the Exchange Act meet all of the requirements of Rule 16b-3. If any provisions of the Plan or any such Award would disqualify the Plan or such Award hereunder, or would otherwise not comply with Rule 16b-3, such provision or Award shall be construed or deemed amended to conform to Rule 16b-3. (i) Governing Law. The Plan shall by construed in accordance with the laws of the State of California and all applicable federal law. The securities issued hereunder shall be governed by and in accordance with the Corporate Securities Laws of the State of California. EX-10 12 ex10-7.txt EXHIBIT 10.7 Exhibit 10.7 STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease"), dated for reference purposes only ______________, 19__, is made by and between AMPAC Technology LLC ("Lessor") and American Pacific Technology Corporation ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2(a) Premises: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 6827 Nancy Ridge Drive, located in the City of San Diego, County of San Diego, State of California, with zip code 92121, as outlined on Exhibit A attached hereto ("Premises"). The "Building" is that certain building containing the Premises and generally described as (describe briefly the nature of the Building): Second Floor, Warehouse and South Rooms of First Floor. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." (See also Paragraph 2.) 1.2(b) Parking: 10 unreserved vehicle parking spaces ("Unreserved Parking Spaces") and _____ reserved vehicle parking spaces ("Reserved Parking Spaces"). (Also see Paragraph 2.6) 1.3 Term: 20 years and ____ months ("Original Term") commencing March 18, 1999 ("Commencement Date") and ending March 19, 2019 ("Expiration Date"). (Also see Paragraph 3.) 1.4 Early Possession: _________________________ ("Early Possession Date"). (Also see Paragraphs 3.2 and 3.3.) 1.5 Base Rent: $7,000.00 per month ("Base Rent"), payable on the 1st day of each month commencing March 18, 1999 (Also see Paragraph 4.) [ ] If this box is checked, this Lease provides for the Base Rent to be adjusted per Addendum ____, attached hereto. 1.6(a) Base Rent Paid Upon Execution: $______ as Base Rent for the period ____________________________________. 1.6(b) Lessee's Share of Common Area Operating Expenses: ___________ percent ( %) ("Lessee's Share") as determined by [ ] prorata square footage of the Premises as compared to the total square footage of the Building or [ ] other criteria as described on Addendum ____ . 1.7 Security Deposit: $0 ("Security Deposit"). (Also see Paragraph 5.) 1.8 Permitted Use: Any legal use ("Permitted Use") (Also see Paragraph 6.) 1.9 Insuring Party. Lessor is the "Insuring Party." (Also see Paragraph 8.) 1.10(a) Real Estate Brokers. The following real estate broker(s) (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): [ ] None represents Lessor exclusively ("Lessor's Broker"); [ ] ____________ represents Lessee exclusively ("Lessee's Broker"); or [ ] ____________ represents both Lessor and Lessee ("Dual Agency"). (Also see Paragraph 15.) 1.10(b) Payment to Brokers. Upon the execution of this Lease by both Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Broker(s) (or in the event there is no separate written agreement between Lessor and said Broker(s), the sum of $_______) for brokerage services rendered by the Broker(s) in connection with this transaction. 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by __________________________________________________ ("Guarantor"). (Also see Paragraph 37.) 1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda consisting of Paragraphs ____ through ____, and Exhibits ____ through ____, all of which constitute a part of this Lease. 2. Premises, Parking and Common Areas. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental and/or Common Area Operating Expenses, is an approximation which Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, electrical systems, fire sprinkler system, lighting, air conditioning and heating systems and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor warrants that any improvements (other than those constructed by Lessee or at Lessee's direction) on or in the Premises which have been constructed or installed by Lessor or with Lessor's consent or at Lessor direction shall comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Lessor further warrants to Lessee that Lessor has no knowledge of any claim having been made by any governmental agency that a violation or violations of applicable building codes, regulations, or ordinances exist with regard to the Premises as of the Commencement Date. Said warranties shall not apply to any Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranties, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee given within six (6) months following the Commencement Date and setting forth with specificity the nature and extent of such non-compliance, take such action, at Lessor's expense, as may be reasonable or appropriate to rectify the non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable Laws (as defined in Paragraph 2.4). 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Broker(s) to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, "Applicable Laws") and the present and future suitability of the Premises for Lessee's intended use; (b) that Lessee has made such investigation as it deems necessary with reference to such matters, is satisfied with reference thereto, and assumes all responsibility therefore as the same relate to Lessee's occupancy of the Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of Lessor's agents, as made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non- compliance of the Premises with said warranties. Initials: EG --------- 'c' American Industrial Real Estate Association 1993 MULTI-TENANT--GROSS 2.6 Vehicle Parking. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.) (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. (b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Date of this Lease, provide the parking facilities required by Applicable Law. 2.7 Common Areas--Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor. Lessee and other lessees of the Industrial Center and their respective employees. suppliers, shippers. customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 Common Areas--Lessee's Rights. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas--Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.10 Common Areas--Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and Improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If an Early Possession Date is specified in Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the Early Possession Date but prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early occupancy. All other terms of this Lease, however, (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses and to carry the insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay In Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee by the Early Possession Date, if one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement Date. Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Promises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days after the end of said sixty (60) day period, cancel this Lease in which event the parties shall be discharged from all obligations hereunder; provided further however, that it such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the Original Term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to the period during which the Lessee would have otherwise enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated therein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined. during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Common Area Operating Expenses" are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership and operation of the Industrial Center, including, but not limited to, the following: (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following: (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, fences and gates, elevators and roof. (bb) Exterior signs and any tenant directories. (cc) Fire detection and sprinkler systems. (ii) The cost of water, gas, electricity and telephone to service the Common Areas. (iii) Trash disposal, property management and security services and the costs of any environmental inspections. (iv) Reserves set aside for maintenance and repair of Common Areas. (v) Any increase above the Base Real Property Taxes (as defined in Paragraph 10.2(b)) for the Building and the Common Areas. (vi) Any "Insurance Cost Increase" (as defined in Paragraph 8.1). (vii) The cost of insurance carried by Lessor with respect to the Common Areas. (viii) Any deductible portion of an insured loss concerning the Building or the Common Areas. (ix) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense. (b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Building or to any other building in the Industrial Center or to the operation, repair and maintenance thereof, shall be allocated entirely to the Building or to such other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Industrial Center. (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Common Area Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each 12-month period of the Lease term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Common Area Operating Expenses incurred during the preceding year. If Lessee's payments under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as indicated on said statement, Lessor shall be credited the amount of such over- Initials: EG ------------ ------------ MULTI-TENANT--GROSS 'c' American Industrial Real Estate Association 1993 -2- payment against Lessee's Share of Common Area Operating Expenses next becoming due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year were less than Lessee's Share as Indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. 5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined In Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent Increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor as an addition to the Security Deposit so that the total amount of the Security Deposit shall at all times bear the same proportion to the then current Base Rent as the Initial Security Deposit bears to the Initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear Interest or other Increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. 6.1 Permitted Use. (a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8 or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not impair the structural integrity of the improvements on the Premises or in the Building or the mechanical or electrical systems therein, does not conflict with uses by other lessees, is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within live (5) business days after such request give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance chemical material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises; harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor In writing at the time of such agreement. 6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Requirements. 6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees, contractors and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultants in connection therewith to advise Lessor with respect to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the inspection Is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a contract, with copies to Lessor, in customary form and substance for and with a contractor specializing and experienced in the inspection, maintenance and service of the heating, air conditioning and ventilation system for the Promises. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain the contract for the heating, air conditioning and ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof. (c) If Lessee falls to perform Lessee's obligations under this Paragraph 7.1 Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, In which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation). Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection Initials: EG --------- MULTI-TENANT--GROSS --------- 'c' American Industrial Real Estate Association 1993 -3- systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or Interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 Utility Installations, Trade Fixtures, Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protection systems, communications systems, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the root or any existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cumulative cost thereof during the term of this Lease as extended does not exceed $2,500.00. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon; and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may, (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation. (c) Lien Protection. Lessee shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on, or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership, Removal, Surrender, and Restoration. (a) Ownership. Subject to Lessor's right to require their removal and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee-Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the Installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 Payment of Premium Increases. (a) As used herein, the term "Insurance Cost Increase" is defined as any increase in the actual cost of the insurance applicable to the Building and required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a) and 8.3(b), ("Required Insurance"), over and above the Base Premium, as hereinafter defined, calculated on an annual basis. "Insurance Cost Increase" shall include, but not be limited to, requirements of the holder of a mortgage or deed of trust covering the Premises, increased valuation of the Premises, and/or a general premium rate increase. The term "Insurance Cost Increase" shall not, however, include any premium increases resulting from the nature of the occupancy of any other lessee of the Building. If the parties insert a dollar amount in Paragraph 1.9, such amount shall be considered the "Base Premium." If a dollar amount has not been inserted in Paragraph 1.9 and if the Building has been previously occupied during the twelve (12) month period immediately preceding the Commencement Date, the "Base Premium" shall be the annual premium applicable to such twelve (12) month period. If the Building was not fully occupied during such twelve (12) month period, the "Base Premium" shall be the lowest annual premium reasonably obtainable for the Required Insurance as of the Commencement Date, assuming the most nominal use possible of the Building. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $1,000,000 procured under Paragraph 8.2(b). (b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant to Paragraph 4.2. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any Intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "Insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance-Building, Improvement and Rental Value. (a) Building and Improvements. Lessor shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender or included in the Base Premium), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. (b) Rental Value. Lessor shall also obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year (including all Real Property Taxes, Insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the dale of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause. and the amount of coverage shall be adjusted annually to reflect the projected rental income, Real Property Taxes, Insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Common Area Operating Expenses shall include any deductible amount in the event of such loss. (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. Initials: EG _________ MULTI-TENANT-GROSS 'c'American Industrial Real Estate Association 1993 _________ -4- (d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee. its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters. Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises. whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than fifty percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises. other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction Is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building. the cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option of Lessor, be deemed to be Premises Total Destruction. (c) "Insured Loss" shall mean damage or destruction to the Promises, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Premises Partial Damage--Insured Loss. If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and if Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage duo to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage--Uninsured Loss. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect). Lessor may at Lessor's option, either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 9.7. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rant. whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent, Common Area Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not in excess of proceeds from insurance required to be carried under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration. Initials: EG MULTI-TENANT-GROSS ------------ 'c' American Industrial Real Estate Association 1993 ------------ -5- (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000 whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease. Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the excess costs of (a) investigation and remediation of such Hazardous Substance Condition to the extent required by Applicable Requirements, over (b) an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following said commitment by Lessee. In such event this Lease shall continue in full force and affect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.8 Termination--Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lesson's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Promises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2(a), applicable to the Industrial Center, and except as otherwise provided in Paragraph 10.3, any increases in such amounts over the Base Real Property Taxes shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.2 Real Property Tax Definitions. (a) As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein. Imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. (b) As used herein, the term "Base Real Property Taxes" shall be the amount of Real Property Taxes, which are assessed against the Premises, Building or Common Areas in the calendar year during which the Lease is executed. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.3 Additional Improvements. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations. Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 Joint Assessment. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property. Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days alter receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. Lessee shall pay directly for all utilities and services supplied to the Premises, including but not limited to electricity, telephone, security, gas and cleaning of the Premises, together with any taxes thereon. If any such utilities or services are not separately metered to the Promises or separately billed to the Premises. Lessee shall pay to Lessor a reasonable proportion to be determined by Lessor of all such charges jointly metered or billed with other premises in the Building, in the manner and within the time periods set forth in Paragraph 4.2(d). 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The Involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of full execution and delivery of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any Guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessors option, be a Default curable after notice per Paragraph 13.1, or a non-curable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a non-curable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the Premises to the greater of the then fair market rental value of the Premises, as reasonably determined by Lessor, or one hundred ten percent (110%) of the Base Rent then in effect. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value as reasonably determined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition) or one hundred ten percent (110%) of the price previously in effect, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the assignee or sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. Initials: EG --------- MULTI-TENANT--GROSS 'c' American Industrial Real Estate Association 1993 -6- (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be doomed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.2(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased by an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the Security Deposit Increase a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment schedule of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment schedule for property similar to the Premises as then constituted, as determined by Lessor. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of the foregoing provision or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee In the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, wino shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said default. A "Default" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee hereunder as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42. (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee it Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. ' (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty. or (v) a Guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurances of security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease. within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds. insurance policies, or governmental licenses. permits or approvals. The costs and expenses of any such performance by Lessor shall; be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn. Lessor, at its own option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Broach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rant for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such pro- Initials: EG ------------- ------------- MULTI-TENANT-GROSS 'c' American Industrial Real Estate Association 1993 -7- ceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be. given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by Subparagraph 13.1(b),(c) or (d). In such case, the applicable grace period under the unlawful detainer statue shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two (2) such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. Lessor and Lessee agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture In Event of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions" shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor, as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days alter such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises. or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation. Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Brokers' Fees. 15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the procuring cause of this Lease. 15.2 Additional Terms. Unless Lessor and Broker(s) have otherwise agreed in writing. Lessor agrees that: (a) if Lessee exercises any Option (as defined in Paragraph 39.1) granted under this Lease or any Option subsequently granted, or (b) if Lessee acquires any rights to the Premises or other premises in which Lessor has an interest, or (c) if Lessee remains in possession of the Premises with the consent of Lessor after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (e) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then as to any of said transactions, Lessor shall pay said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect at the time of the execution of this Lease. 15.3 Assumption of Obligations. Any buyer or transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be an intended third party beneficiary of the provisions of Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.4 Representations and Warranties. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder other than as named in Paragraph 1.10(a) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Broker(s) is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, and/or attorneys' fees reasonably incurred with respect thereto. 16. Tenancy and Financial Statements. 16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information. confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 Financial Statement. If Lessor desires to finance, refinance, or sell the Premises or the Building, or any part thereof. Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction. shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within ten (10) days following the date on which it was due, shall bear interest from the date due at the prime rate charged by the largest state chartered bank in the state in which the Premises are located plus four percent (4%) per annum, but not exceeding the maximum rate allowed by law, in addition to the potential late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or received by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. Each Broker shall be an intended third party beneficiary of the provisions of this Paragraph 22. Initials: EG ------------ ------------ MULTI-TENANT-GROSS 'c' American Industrial Real Estate Association 1993 -8- 23. Notices. 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to two hundred percent (200%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorneys' Fees. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. Broker(s) shall be intended third party beneficiaries of this Paragraph 31. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the Building, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or Building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred eighty (180) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the exterior of the Premises or the Building, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business so long as such signs are in a location designated by Lessor and comply with Applicable Requirements and the signage criteria established for the Industrial Center by Lessor. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof of the Building, and the right to install advertising signs on the Building, including the roof, which do not unreasonably interfere with the conduct of Lessee's business; Lessor shall be entitled to all revenues from such advertising signs. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lessor estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lessor interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(e), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. Guarantor. 37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this lease, including but not limited to the obligation to provide the Tenancy Statement and information required in Paragraph 16. Initials: EG ------------ ------------ MULTI-TENANT--GROSS 'c' American Industrial Real Estate Association 1993 -9- 37.2 Additional Obligations of Guarantor. It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Definition. As used in this Lease, the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor, (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 Options Personal to Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during the twelve (12) month period immediately preceding the exercise of the Option, whether or not the Defaults are cured. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Rules and Regulations. Lessee agrees that it will abide by, and keep and observe all reasonable rules and regulations ("Rules and Regulations") which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility raceways, dedications, maps and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional insurance company or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Promises are a part 48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. Initials: EG --------- --------- MULTI-TENANT--GROSS 'c' American Industrial Real Estate Association 1993 -10- LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: San Francisco, CA Executed at: San Francisco, CA --------------------------- -------------------------- on: March 18, 1999 on: March 18, 1999 ------------------------------------ ----------------------------------- By LESSOR: By LESSEE: AMPAC Technology LLC American Pacific Technology - --------------------------------------- -------------------------------------- Corporation - --------------------------------------- -------------------------------------- By: By: ------------------------------------ ----------------------------------- Name Printed: Eric Gravell Name Printed: Eric Gravell -------------------------- ------------------------- Title: Title: President --------------------------------- -------------------------------- By: /s/ Eric Gravell By: /s/ Eric Gravell ------------------------------------ ----------------------------------- Name Printed: Name Printed: -------------------------- ------------------------- Title: Title: --------------------------------- -------------------------------- Address: One Sansome Street, 19th Floor Address: 6827 Nancy Ridge Drive ------------------------------- ------------------------------ San Francisco, CA 94104 San Diego, CA 92121 - --------------------------------------- -------------------------------------- Telephone: (415) 951-1078 Telephone: (619) 550-9040 ----------------------------- ---------------------------- Facsimile: (415) 951-1046 Facsimile: (619) 550-9413 ----------------------------- ---------------------------- BROKER: BROKER Executed at: Executed at: --------------------------- -------------------------- on: on: ------------------------------------ ----------------------------------- By: By: ------------------------------------ ----------------------------------- Name Printed: Name Printed: -------------------------- ------------------------- Title: Title: --------------------------------- -------------------------------- Address: Address: ------------------------------- ------------------------------ - --------------------------------------- -------------------------------------- Telephone: ( ) Telephone: ( ) ----------------------------- ---------------------------- Facsimile: ( ) Facsimile: ( ) ----------------------------- ---------------------------- NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071. (213) 687-8777. Initials: EG -------- MULTI-TENANT--GROSS 'c' American Industrial Real Estate Association 1993 -------- -11- EXHIBIT A Rented area shall be comprised of: 1) The entire second floor 2) The warehouse of the first floor 3) All south-edge rooms of the first floor 4) The main lobby 5) The storage area immediately south and east of the stairs End of Exhibit A EX-10 13 ex10-8.txt EXHIBIT 10.8 Exhibit 10.8 [VANTAS LOGO] OFFICE SERVICE AGREEMENT This Agreement is made this 10th day of April, 2000, by and between Vantas Corporate Centers ("Center") having offices known and numbered as Suite 1906-1908,1910 the "Premises" in the building located at Citicorp (the "Building") and American Pacific Aviation ("Client") a(n) (corporation, partnership, individual) with an address of for a term of 12 months, commencing on the 1st day of July, 2000 at 9 a.m. (the "Commencement Date") and ending on the 30th day of June, 2001 at 5 p.m. (the "Initial Term") unless renewed in accordance with Paragraph 3. In consideration of the foregoing, the parties for themselves, their heirs, legal representatives, successors and assigns, agree as follows: 1. Center's Obligations. a. Subject to the terms and conditions of this Agreement, Center hereby agrees to provide Client for the Term (as defined below in Paragraph 3): (a) the exclusive use of office number(s) 1906-1908, 1910 located in the "Premises"; and (b) non-exclusive use of the following services: o Furnished, Reception Area with Professional Receptionist to Greet Clients o Personalized Telephone Answering available during Office Hours as detailed in Schedule B. o 24 hour Voicemail o 24 hours of Conference Room in the Center per month o Corporate Identity on Lobby Directory where available o Receipt of Mail and Packages, in reasonable quantities o Complete Kitchen Facilities with Coffee Service o Utilities and Maintenance o HVAC during Normal Business Hours o Janitorial Services o 8 hours per month courtesy use of other VANTAS conference rooms. Locations subject to current affiliation and availability. b. If, for any reason, Center cannot deliver possession of the Premises to Client on the Commencement Date, this Agreement will remain in full force and effect; however, there will be an abatement of the Monthly Office Charge for the period between the Commencement Date and the date that the Premises are delivered to Client. c. Center agrees to provide and Client agrees to pay for the office space and services as detailed in Schedule A. 2. Use. The Premises will be used by Client solely for general office use and such other normally incident uses and for no other purpose, in strict accordance with the Operating Standards, which are annexed hereto as Schedule A. Client will not offer at the Premises any services which Center provides to its Clients, including, but not limited to those services described in Paragraph 1. Client will not make nor permit to be made any use of the Premises, Facility or Building which would violate any of the terms of this Agreement or which, directly or indirectly, is forbidden by law, rule or regulation, which may be dangerous to life, limb or property or which could in any way impair, interfere with the high quality character, reputation or appearance of the Building or the Facility or with any services performed by Center for Client or for others. The foregoing provisions will also apply to Client's Users (as defined in Paragraph 9). 3. Renewal. Upon expiration of the Initial Term and on any subsequent renewal term (each, a "Renewal Term" and together with the Initial Term, the "Term") of this Agreement, the Agreement automatically will be extended for the same period of time as the Initial Term and upon the same terms and conditions as herein contained except for the amount of the Monthly Office Charge (as defined in Paragraph 4) then in effect, which will be increased by seven percent (7%), unless either party notifies the other in writing within the period hereinafter specified that the Agreement will not be extended or unless the Parties agree in advance in writing to other renewal terms. If Client has less than three offices, such notice will be given at least sixty (60) days prior to the expiration of the Initial Term or the Renewal Term, as the case may be. If Client has three or more offices, such notice will be given at least ninety (90) days prior to the expiration of the Initial Term or the Renewal Term, as the case may be. 4. Monthly Office Charge. a. For and during the Term of this Agreement, Client will pay $4,638.00 to Center, on or before the first day of each month after the Commencement Date, the sum specified in Schedule B as Monthly Office Charge [ILLEGIBLE] - ------------------------- ----------------------- Initials Initials 1 (subject to increase in accordance with Paragraph 3 above). If any payment of Monthly Office Charge or other charge due under this Agreement is not received within five (5) calendar days after its due date, the Client will also pay, in addition to Monthly Office Charge, a late payment charge which will be an amount equal to ten percent (10%) of any amount owed to Center or fifty-dollars ($50.00) whichever is greater. The financial terms of this Agreement are strictly confidential and Client agrees not to knowingly or willfully divulge this information to any other Client or potential Client of Center. b. The Monthly Office Charge is based on the value of the use of the Premises and services to be used by ____ person(s) only. If more than said number of person(s) regularly use the Premises or services, the Monthly Office Charge will be increased in an amount equal to One Hundred Fifty Dollars ($150) for each such additional person. c. If a Client check is returned for any reason, Client will pay an additional charge of One Hundred Dollars ($100.00) per returned check and, for the purpose of considering default and/or late charges, it will be as if the payment represented by the returned check had never been made. d. Client covenants and agrees to pay to center on a monthly basis in addition to, and simultaneous with, any other amounts payable under this Agreement, a sum equal to the aggregate of any municipal, county, state, or federal excise, sales use or transaction privilege taxes now hereafter legally levied or imposed against or on account of any and all amounts payable under this Agreement by Client or the receipts thereof by Center, except any taxes commonly referred to as income, estate or inheritance taxes. 5. Refundable Retainer. a. Client will deposit with Center on file, in good or certified funds, as a non-interest bearing refundable retainer. Center may use the refundable retainer to cure any default of Client under this Agreement, to restore the Premises, including any and all furniture, fixtures and equipment, provided by Center to its original condition and configuration, reasonable wear and tear excepted, to pay for repairs to any damage to the Premises, Facility and/or Building, caused by Client or Client's guests, or to pay any Monthly Office Charge or other charges that Client owes Center at or prior to the expiration of the Term of this Agreement. b. The refundable retainer (less any sums used by Center in accordance with the terms and conditions of this Agreement) will be returned within sixty (60) days after the termination of any services rendered or expiration of the Term. Client may not direct or request that the refundable retainer be applied in lieu of the final payment(s) of Monthly Office Charge or service charges under this Agreement. In the event that Center applies any of the refundable retainer deposited pursuant to this Agreement, Center will have the right to charge the Client, and Client will pay, in addition to any Monthly Office Charge, such sums as are necessary to cause the refundable retainer to be returned to its entire original amount. 6. Services. a. Provided Client is not in default of this Agreement, Center will make available certain services to Client as more particularly described in Paragraph 1. Charges for such services will be included as part of the Monthly Charge as described in Schedule A. b. Client shall pay a monthly amount equal to $120.00 for a monthly base service package (the "Monthly Base Service Package"). The Monthly Base Service Package will entitle the Client to receive upon request a monthly clerical and/or word processing services from the Center valued at $120 per month. c. In addition to the Monthly Base Service Package, upon request, Center will make available to Client additional services as Center may make generally available, the charges for which will be established as per Center's then published rates as determined by Center. Payment for these services will be subject to the same terms and conditions as those governing the payment of the Monthly Office Charge. Center will have no obligation to provide such services if Client is in default of this Agreement or if the anticipated charges exceed the amount of the refundable retainer. When providing services to Client that involve third parties, Center will have the right to require Client to pay, or to reimburse Center for, the fees and expenses of such third party in advance. 7. Telephone Services. a. Provided Client is not in default of this Agreement, Center will make available to Client a telecommunications package, the charges for which will be established as per Center's then scheduled rates as determined by Center. Payment for these services will be subject to the same terms and conditions as those governing the payment of the Monthly Office Charge. All telephone numbers used by Client will remain at all times the property of Center and Client will acquire no rights in the components of the telecommunications package whatsoever. b. Client hereby agrees to indemnify, hold harmless and to reimburse Center for all charges associated with (1) any toll fraud traceable to telecommunications services provided by Center to Client including, but not limited to, unauthorized use of calling cards or telephone lines, and (2) any advertising costs of Client involving the assigned telephone numbers including, without limitation, yellow pages advertising, it being understood that Center is under no obligation to procure such advertising and that any such advertising by Client is subject to the Operating Standards. c. It is expressly acknowledged and agreed that Center will be the sole and exclusive provider of telecommunication services to Client. Client hereby agrees and covenants that it will not use any other telephone service or telephone carrier to provide it service in the Premises. [ILLEGIBLE] - ------------------------- ----------------------- Initials Initials 2 d. Center shall not be liable for any interruption or error in the performance of its services to Client under this Paragraph "7." Client waives any recourse against Center arising from the provision of such services, including, without limitation, any claim of business interruption or for any indirect, incidental, special, consequential or punitive damages, except for claims arising out of willful misconduct by Center. 8. Limitation of Liability/Insurance. a. Client will indemnify and hold harmless Center from and against any loss, damage, injury, liability or expense to or of person or property occasioned by or resulting from any willful misconduct or grossly negligent act on the part of Client or Client's Users. Center will not be liable to Client or to any other person on account of loss, damage or theft to any business or personal property of Client. Center will not be liable for any loss, damage, injury, liability or expense to or of person or property except as may result from Center's willful misconduct or grossly negligent acts. Center will indemnify and hold harmless Client from and against any loss, damage, injury, liability or expense to or of person or property occasioned by or resulting from any willful misconduct or grossly negligent act on the part of the Center, its agents, employees, or invitees, or persons permitted on the Premises by Center. b. Center will not be liable for any claim of business interruption or for any indirect, incidental, special, consequential exemplary or punitive damages arising out of any failure to furnish any service or facility, any error or omission with respect thereto, or any delay or interruption of same. Neither Center nor any of its agents, employees, officers or directors will be deemed to be making any representations or warranties, whether express or implied, as to the ability of any systems, including, without limitation, computer and electronic based equipment, relating to the Building, Facility or Premises or to any services to be provided hereunder to process date fields relating to the Year 2000 nor will any of them be liable for the failure of such systems to process such date fields. Center's liability under this Agreement will in no event exceed the amount paid by Client for the services for which the claim arose. The parties agree to the allocation of risk contained herein. c. Client will, prior to the Commencement Date of this Agreement provide Center with a certificate of insurance evidencing General/Public Liability coverage with liability limits of not less than One Million Dollars ($1,000,000.00) per occurrence for Bodily Injury and/or Property Damage Liability and One Hundred Thousand Dollars ($100,000.00) per occurrence for Fire/Legal Liability. Said insurance coverage will remain in force during the Term of this Agreement. VANTAS International Incorporated and Vantas Corporate Center, Inc. will be named as an additional named insured on each of these policies. Client agrees that failure by Client to provide such coverage increases VANTAS's risk of loss and may increase VANTAS's cost of insurance. Should Client fail to provide the Certificate of Insurance, VANTAS may charge, and Client shall pay, a monthly fee of forty dollars ($40.00) for the first office and twenty dollars ($20.00) for each additional office occupied under this Agreement as compensation for the additional risk and/or costs incurred by VANTAS. Client's failure to provide or maintain such insurance will not reduce or otherwise alter Client's liability or responsibility to pay any judgment rendered against Client for any liability or damages. All insurance required to be maintained by Client include a waiver of subrogation in favor of Center and the landlord under the Main Lease. Center will not have any obligation to maintain insurance for Client's benefit. d. The provisions of this Paragraph 8 will survive the expiration or earlier termination of the term of this Agreement. 9. Operating Standards. The Operating Standards attached to this Agreement as Schedule A are hereby made an integral part of this Agreement. Client, its employees, agents, guests, invitees, visitors and/or any other persons caused to be present in and around the Premises by the Client ("Client's Users") will perform and abide by the Operating Standards then in effect. 10. Restrictions on Center's Employees. Client agrees that it will not, during the Term of this Agreement and for a period of one year thereafter, directly or indirectly, employ or offer to employ any person who is or has been an employee of Center without prior consent from Center. If Client, Client's principals, or any affiliated companies hire either an employee of Center or any person who has been an employee of Center within six months prior to the time such person is hired by Client, Client will be liable to Center for liquidated damages equal to six months wages of the employee, at the rate last paid that employee by Center. The provisions of this paragraph will survive the Teen of this Agreement. 11. Access. Center and its agents will have the right of access to the Premises at any time for the purpose of (i) making any repairs, alterations and/or inspections which it deems necessary in its sole discretion for the preservation, safety or improvements of the Premises, or (ii) to show the Premises to prospective Clients, without in any way being deemed or held to have committed an eviction (constructive or otherwise) of or trespass against Client. 12. Relocation. Client agrees that the Center may, in its sole discretion, relocate the Client from its present Premises to a like or similar office space within the same Facility upon ten (10) days notice to the Client. In the event that the Center requires the Client to relocate, the Center will bear the reasonable moving costs of any such relocation. All terms and conditions of this Agreement, other than the designation of [ILLEGIBLE] - ------------------------- ----------------------- Initials Initials 3 the Premises provided herein, will remain unaffected and in full force and effect. 13. Assignment and Subletting. No assignment or subletting of the Premises, this Agreement or any part thereof will be made by Client without Center's prior written consent, which consent may be withheld in Center's sole discretion. Center may assign its rights and its obligations under Agreement in whole or in part without Client's consent. 14. Termination. a. On expiration or earlier termination of the Term, Client will, without demand, promptly surrender and deliver the Premises, including any furniture, fixtures and equipment provided by Center, to Center in its original condition and configuration, reasonable wear and tear excepted. If Client fails to so surrender and deliver the Premises, Client agrees to pay Center, as liquidated damages, a sum equal to twice the Monthly Office Charge for each month or portion thereof that the Client retains possession of the Premises. b. If Client vacates the Premises and leaves behind any property, whatsoever, such property will be deemed abandoned by Client and may be disposed of by Center at Client's expense and without liability to Center. c. In the event the Premises, the Facility or the Building is damaged, destroyed or taken by eminent domain either party may terminate this Agreement without liability on (30) days written notice to the other party. d. Upon termination of the Main Lease or termination of the Center operation for any reason, this Agreement will terminate without liability to any party unless the Landlord under such Main Lease elects to have this Agreement assigned to such Landlord or another entity as provided in such Main Lease. 15. Default and Remedies. a. Client will be deemed to be in default of this Agreement if Client fails to fulfill any of its terms, conditions, covenants or provisions of this Agreement, including but not limited to (1) payment of Monthly Office Charge and/or any other charges hereunder within ten days of the date such charges become due: or the abandonment and/or vacatur of the Premises by the Client prior to expiration of the Term, or (2) if Client becomes insolvent, makes an assignment for the benefit of creditors or files a voluntary petition, or has an involuntary petition filed against it, under any bankruptcy or insolvency law. b. In case of such default, the Center may, at its sole discretion, terminate this Agreement upon five days notice to the Client. Upon the expiration the five day period, Client will vacate the Premises. Should Client fail to vacate the Premises, the Center may: i. enter premises and remove property therefrom; and ii. disconnect any telephone lines installed for the benefit of Client; and iii. cease supplying Client with the services described in Paragraph 1 and Schedule A hereof. If Client defaults and Center takes any of the foregoing action, or changes the locks, removes Client's property, or otherwise denies access to Client, Center will not be liable for any damages to the Client. c. 1n addition to the foregoing, Center may elect to accelerate all of Client's obligations hereunder, including without limitation, Monthly Office Charge and other monthly recurring charges, for all or part of the term. Center is under no obligation, implied or otherwise, to mitigate its damage(s) under a default by Client. d. Should Center be unable to enter into another Office Service Agreement relating to the Premises, or should Center enter into another Office Service Agreement relating to the Premises for less than the Monthly Office Charge which Client is obligated to pay under this Agreement, Client will pay the amount of such deficiency, plus the expenses of entering into such other Service Agreement relating to the Premises, immediately in one lump sum, to Center upon demand and/or, at Center's option, as such obligations accrue hereunder. e. In connection with any default by Client under this Agreement, if Center incurs attorney's fees and/or costs of collection or of ensuring performance, Client will pay all such sums with interest, and such sums will be deemed to be owed by Client in addition to the Monthly Office Charge hereunder. If the Term has expired at the time of incurring such sums, such sums will be recoverable by Center as damages. 16. Mail & Telephone Forwarding. Upon expiration of the Term, Center for three months at a rate of $150 per month will, unless otherwise instructed by Client in writing no later than 30 days prior to the expiration of the Term, forward mail to Client's new address and announce Client's new telephone number via voice mail message on Client's VANTAS phone number, such amount to be deducted from any amounts deposited with the Center from the refundable retainer deposited hereunder or otherwise paid in advance. Unless the Client pays the Charge set forth herein to the Center in advance, Center will have no obligation to provide the services set forth in the paragraph. 17. Notices. Any notice under this Agreement will be in writing and will be delivered by hand, first class mail or by overnight courier to the party at the address set forth below. Center hereby designates its address as: Vantas Corporate Centers One Sansome Street, Suite 2000 San Francisco, CA 94104 Attn: Shonda Yvette Scott A.Y. - ------------------------- ----------------------- Initials Initials 4 Client hereby designates its address which address must be within the United States, as American Pacific Aviation Attn: Allen Hao ------------------------------- ------------------------------- Phone: ------------------------------- Fax: ------------------------------- If such mail is properly addressed and mailed as above, it will be deemed Notice for all purposes, when sent or delivered, even if returned as undelivered. 18: Severability. The invalidity of any one or more of the sections, subsections, sentences, clauses or words contained in this Agreement or the application thereof to any particular set of circumstances, will not affect the validity of the remaining portions of this Agreement or of their valid application to any other set of circumstances. Regardless of whether or not either patty has elected to consult with legal counsel in reviewing this Agreement, it is the intent of the parties that in no event will the terms, conditions or provisions of this Agreement be construed against either party as the drafter of this Agreement. 19. Execution by Client The party or parties executing this Agreement on behalf of the Client warrant(s) and represent(s): (i) that such executing party (or parties) has (or have) complete and full authority to execute this Agreement on behalf of Client; and (ii) that Client will fully perform its obligations hereunder. 20. Miscellaneous. a. Failure of the Center to insist upon the strict performance of any term or condition of this Agreement or to exercise any right or remedy available for a breach thereof, or acceptance of full or partial payment during the continuance of any such breach, will not constitute a waiver of any such breach or any such term or condition. No term or condition of this Agreement required to be performed by Client and no breach thereof, will be waived, altered or modified, except by a written instrument executed by Center. b. VANTAS Monthly Fees have been established based on expected Client electrical usage for one computer, one printer, and miscellaneous low-consumption devices in each office. Client's use of office equipment in excess of this standard shall result in an additional charge for electrical consumption at a rate reflecting typical consumption for the additional equipment. c. Time is of the essence as to the performance by Client of all covenants, terms and provisions of this Agreement. d. This Agreement embodies the entire understanding between the parties relative to its subject matter, and will not be modified, changed or altered in any respect except in writing signed by all parties. e. This Agreement may be executed in two or more counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument. f. This Agreement is subject and subordinate to the Building lease (the "Main Lease") governing the Facility, under which Center is bound as tenant and the provisions of the Main Lease, other than as to the payment of Monthly Office Charge or other monies, are incorporated into this Agreement as if completely herein rewritten. Client will comply with and be bound by all provisions of the Main Lease except that the payment of Monthly Office Charge will be governed by the provisions of this Agreement, and Client will indemnify and hold Center harmless from and against any claim or liability under the Main Lease arising from Client's breach of the Main Lease or this Agreement. IN WITNESS WHEREOF, Center and Client have executed this Agreement as of the date first above written. CENTER: Vantas Corporate Centers. Inc. --------------------------------------- By: -------------------------------------------- CLIENT: American Pacific Aviation (If a corporation) By: /s/ Allen Yue -------------------------------------------- Name: Allen Yue ------------------------------------------ Title: President ------------------------------------------ [Corporate Seal] CLIENT: (If an individual or partnership) By: -------------------------------------------- By: ------------------------------------------- A.Y. - ------------------------- ----------------------- Initials Initials 5 SCHEDULE A OPERATING STANDARDS 1. Client and guests will conduct themselves in a businesslike manner; proper attire will be worn at all times; and noise. will be kept to a level so as not to interfere with or annoy other Clients. 2. Client will not provide or offer to provide any services to Center's customers if such services are available from Center. 3. Client will not prop open any corridor doors, exit doors or doors connecting corridors during or after business hours. 4. Clients using public areas may only do so with the consent of the Center. 5. Client will not conduct any activity within the Premises, or Building which in the sole judgment of the Center will create excessive traffic or is inappropriate to a shared office environment. 6. Client may not conduct business in the corridors or any other areas except in its designated offices or conference rooms without the written consent of Center. 7. No corridors, halls, elevators and stairways will be obstructed by Client or used for any purpose other than normal egress and ingress. 8. No advertisement, identifying signs or other notices will be inscribed, painted or affixed on any part of the corridors, doors, windows or public areas. 9. Without Center's prior written consent, Client is not permitted to place "mass market", direct mail or advertising (i.e.. newspaper, classified advertisements, yellow pages, billboards) using Center's assigned telephone number or take any such action that would generate an excessive number of incoming calls. 10. Client will not solicit clients of Center or their employees in the Building without first obtaining Center's prior written consent. 11. Immediately following Client's use of conference room space and/or audio/visual equipment, Client will clean up and return the space and equipment to the state and condition it was in prior to Client's use. Center may charge Client for any efforts required to restore the conference space and/or equipment to its original condition. 12. Center must be notified in writing if Client desires to utilize the conference room or other common areas of the Facility during evening or weekend hours. Center may deny the Client access if the desired usage is inappropriate or may disrupt normal operations. 13. Client will not, without Center's prior written consent, store or operate any computer (except a desktop/laptop computer, personal printers, calculators, adding machines, fax machine, etc.) or any other large business machines, copier and postage equipment, heating equipment, stove, speaker phones, radios, stereo equipment or other mechanical amplification equipment, refrigerator or coffee equipment, or conduct a mechanical business, do any cooking, or use or allow to be used on the Premises oil, burning fluids, gasoline, kerosene for heating, warming or lighting. No article deemed extra hazardous on account of fire or any explosives will be brought into said Premises or Facility. No offensive gases, odors on liquids will be permitted. 14. Client will bring no animals into the Premises or Facility except for those assisting disabled individuals. 15. Client will not remove furniture fixtures or decorative material from offices or common areas without the prior written consent of Center. 16. Client will not make any additional copies of any Center issued keys. All keys and security cards are the property of Center and must be returned upon request or by the close of the business on the expiration or sooner termination of the Agreement term. Any lost or unreturned keys or cards will incur a Twenty Five Dollar ($25.00) per item charge and the cost to re-key the office. 17. Client will not smoke nor allow smoking in any area of the Facility, including the Premises, and will comply with all governmental regulations and ordinances concerning smoking. 18. Client will not allow Client's visitors to be disruptive to normal operations in the reception lobby of the Premises at any time. 19. Client's parking rights (if any) are defined by the Main Lease. Landlord reserves the right to modify parking arrangements if required to do so by Building management. A.Y. - ------------------------- ----------------------- Initials Initials 6 20. Any alterations to the Premises requested by Client, including affixing anything to the walls of the Premises, will be done only (i) with the written permission of Center, which permission may be withheld by the Center for any reason whatsoever, and (ii) by an agent of the Center's choosing at the Client's sole cost and expense. 21. Client will cooperate and be courteous with all other occupants of the Facility and Center's staff and personnel. 22. Upon request, Client will use a chair mat to prevent wear damage to carpeting. 23. Center reserves the right, without prior notice, to modify any of the foregoing and to make such other reasonable rules and regulations as in its sole discretion may from time to time be needed for the safety, care, appropriate operation and cleanliness of the Facility. A.Y. - ------------------------- ----------------------- Initials Initials 7 OPENING INVOICE MUST ACCOMPANY ALL SERVICE AGREEMENTS, FAX TO BILLING COORDINATOR TO SETUP BILLING VANTAS Offing Solutions Worldwide SCHEDULE A -- OPENING ACCOUNT INVOICE Client America Pacific Aviation Suite# 1906-1908; 1910 VAMTAS ACCT#: 3061 - -------------------------------- -------------------- ---- Occupant(s)------------------------- Billing Contact-------------------------- Billing Address One Sansome Street, Suite 2000 - ---------------------------------------------- ----------------- ------------------ City San Francisco State CA Zip 94104 - --------------------------------------- ---------------- ---------------- Billing Ph# Term: From July 1,2000 To June 30, 2001 ---------------------------- ---------------- ---------------- Billing Fx# Lobby Directory ---------------------------- ---------------------------- Client Ph# Client Fx# ---------------------------- ---------------------------- Client Mod# Mailbox# ---------------------------- ---------------------------- Special Stipulations ----------------------------------------------------------------- - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- Mult. Suite Breakdown: Suite # Amount Suite # Amount ------------------ ------------------ 1906 $1,288.00 1908 $1,117.00 ------------------ ------------------ 1907 $1,117.00 1910 $1,117.00 ------------------ ------------------ Deposits: Monthly Fees: -----------------------# Days Prorated [ ] Security Deposit $ 4,535.00 Office Rent $4,638.00 $ -- ---------- ---------------------- ----------------- Furniture Deposit ---------- *Furniture Rent Qty $ -- Long Distance Deposit ---------- ----------------------- ----------------- Deposits On-Hand $(4,535.00) *Telephone w/voicemail $125 6 $ 750.00 $ ---------- ------------------ ----------------- TOTAL DEPOSITS: $ -- *Fax/Data Line $ 50 6 $ 300.00 $ -- ========== ------------------ ----------------- *Extra Voice Mailbox $ 25 $ -- $ -- One-Time Move-in Fees: Qty ------------------ ------------------ --------- *Directory Listing $ 5 1 $ 5.00 $ -- Telephone Install $175 $ -- ------------------ ------------------ ----------------- Telephone Screening $ 75 $ -- $ -- Fax/Data Installation $175 $ -- ------------------ ------------------ ---------------- Beverage Package $ 12 $ -- $ -- Extra Voice Mail Install $ 25 $ -- ------------------ ------------------ ---------------- * $ $ -- Lobby Directory Listing $ 40 $ -- ------------------ ------------------ ---------------- Other $ -- $ -- Furniture--Delivery $ 40 $ -- ------------------ ------------------ ---------------- *Sales Tax (8.50%) $ 89.68 $ -- Credit Report Fees-Cor $ 55 $ -- ------------------ ------------------ ---------------- TOTAL MONTHLY FEES $5,782.68 $ --- Credit Report Fees-Indi $ 20 $ -- ================== ================== ---------------- Set-Up Fee $ 25 $ -- ---------------- * Sales Tax (8.50%) Per Month Conference Room Time: 24 hours TOTAL-ONE TIME MOVE-IN FEES ---------------- $ -- Cost Per Additional Hour: $15-$20 ---------------- ====== Deposits $ -- * ------ One-Time Move-in Fees $ -- ------ First Month's Fees for the month of ------- ------------------------------------------- Prorated Monthly Fees $ -- for dates to/from ------ ------------------------------------------- Total Received DATE REC'D CHECK # DEPOSIT ====== ---------- ----------- DATE REC'D CHECK # other ---------- ---------- *Please submit a separate check for security deposit ============================================================================== Client /s/ Allen Yue VANTAS Officing Solutions Worldwide ----------------------- By Allen Yue By --------------------------- -------------------------------- Date 6/15/00 Date --------------------------- -------------------------------- ALTERNATE ADDRESS ----------------------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
EX-23 14 ex23-2.txt EXHIBIT 23.2 Exhibit 23.2 Consent of Independent Certified Public Accountants Board of Directors Chipcards, Inc. fka: American Pacific Technology Corporation San Francisco, California We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated February 9, 2001, except for Note 13 which is as of May 11, 2001, relating to the consolidated financial statements of Chipcards, Inc., which is contained in that Prospectus We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO Seidman, LLP San Francisco, California May 11, 2001 -----END PRIVACY-ENHANCED MESSAGE-----