-----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, ATlww3WymqUnpLzqXl5m44gQ5rPlrmB4FO+rCmBdbBTQOP5Pi4DpVYOHx6kpTQ58 SSZVwExEaUdKvXN9cUnftw== 0000950117-01-501596.txt : 20020410 0000950117-01-501596.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950117-01-501596 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 39 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHIPCARDS INC CENTRAL INDEX KEY: 0001140221 STANDARD INDUSTRIAL CLASSIFICATION: POWER, DISTRIBUTION & SPECIALTY TRANSFORMERS [3612] IRS NUMBER: 943191805 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-60896 FILM NUMBER: 1786041 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/A 1 a29645.txt PRE-EFFECTIVE AMENDMENT #1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 2001 REGISTRATION NO. 333-60896 ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- PRE-EFFECTIVE AMENDMENT NO. 1 TO 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 JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR CLASSIFICATION IDENTIFICATION NO.) ORGANIZATION) OR CODE NUMBER)
------------------- 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. MICHAEL D. DIGIOVANNA, ESQ. ZIEGLER, ZIEGLER & ALTMAN, LLP PARKER DURYEE ROSOFF & HAFT, P.C. 555 MADISON AVENUE, ELEVENTH FLOOR 529 FIFTH AVENUE NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017 (212) 319-7600 (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. [ ] (continued on following page) ------------------- 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. ________________________________________________________________________________ CALCULATION OF REGISTRATION FEE
=================================================================================================================== PROPOSED AMOUNT MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE OFFERED PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) FEE(5) - ------------------------------------------------------------------------------------------------------------------- Units, each consisting of:. 1,150,000(2) 8.10 9,315,000 2,328.85 (i) one share of common stock, no par value, and (ii) one redeemable 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(o) 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(g) of the Securities Act of 1933, as amended. (5) The full amount of the registration fee was previously paid. 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 , 2001 PROSPECTUS 1,000,000 UNITS CONSISTING OF 1,000,000 SHARES OF COMMON STOCK AND 1,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS [CHIPCARDS LOGO] ------------------- 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 'CHIP' and 'CCD'. 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 our behalf by The Thornwater Company, L.P. as representative of the underwriters. The underwriters have committed to purchase all of the securities being offered. 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 7. ------------------- 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. November , 2001 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 3 Risk Factors................................................ 7 Cautionary Note Regarding Forward Looking Statements........ 17 Use of Proceeds............................................. 18 Dividend Policy............................................. 19 Dilution.................................................... 19 Capitalization.............................................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 21 Description of Business..................................... 30 Management.................................................. 45 Compensation of Directors and Officers...................... 47 Principal Stockholders...................................... 50 Certain Relationships and Related Party Transactions........ 51 Description of Securities................................... 52 Shares Eligible for Future Sale............................. 55 Transfer Agent and Registrar................................ 56 Underwriting................................................ 56 Legal Matters............................................... 58 Experts..................................................... 58 Where You Can Find Additional Information................... 58 Indemnification for Securities Act Liabilities.............. 59 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 59 Index to Financial Statements............................... F-1
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. 2 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 'we,' 'us,' or 'our' refer to Chipcards, Inc., the term 'common stock' refers to our common stock, no par value, and the term '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. A provisional patent application is a simplified filing that may be submitted without a formal patent claim or prior art, and it must be followed with a complete non-provisional application within 12 months. We have also marketed finished smart cards since 1998. We have made arrangements with certain 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 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. 3 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, 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: access to restricted areas (replacing keys and identification cards); public transportation fare collection (replacing tokens and tickets); 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; public telephones; industrial applications such as quality control, warehousing, inventory control, distribution and warranty; health care (replacing patients' paper files in hospitals and HMOs); and 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. 4 THE OFFERING Securities offered:.......................... 1,000,000 units, each consisting of one share of common stock and one redeemable common stock purchase warrant per share. Upon the closing of this offering, the shares of common stock and the warrants included in the units will be separately traded. Terms of Warrants:........................... Each warrant entitles the holder to purchase one share of common stock at an exercise price of $8.40 per share, and may be exercised at any time commencing 30 days after the closing of this offering and ending five years after the closing. We have the right to redeem the warrant at a price of $0.10 per warrant if the price of our common stock is at least $9.60 for twenty trading days and a registration statement is then effective with respect to the shares subject to the warrants. 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 for the common stock, CHIPW for the warrants. Proposed Boston Stock Exchange Symbol:....... CCD for the common stock, CCDW for the warrants. 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 November 1, 2001. Does not include 1,050,000 shares of common stock issuable upon the exercise of outstanding options issued in May 2001 and 10,000 shares of 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. 5 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 and the data for the periods ended June 30, 2001 and June 30, 2000 are derived from unaudited interim 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 combined 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.'
DECEMBER 31, DECEMBER 31, 2000 1999 ---- ---- Revenues................................................... $6,453,739 $4,340,156 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 JUNE 30, JUNE 30, 2001 2000 ---- ---- (UNAUDITED) (UNAUDITED) Revenues................................................... 4,671,379 1,735,440 Net income (loss).......................................... 337,090 (730) Basic and diluted net income (loss) per common share....... 0.03 -- Total assets............................................... 3,419,447 2,858,794 Long-term debt (less current portion)...................... 1,091,387 1,115,082
6 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 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 $571,307 for the years ended December 31, 2000 and 1999. As of December 31, 2000 we had a working capital deficit of $1,510,113, an accumulated deficit of $2,432,394 and a stockholders' deficit of $1,747,294. As of June 30, 2001 we had a working capital deficit of $1,312,871, an accumulated deficit of $2,095,304 and a stockholders' deficit of $1,377,204. Although we recorded operating income of $360,779 and net income of $337,090 for the six months ended June 30, 2001, we may not be able to continue growing our sales and may not be able to maintain profitability in the future. A SIGNIFICANT INCREASE IN OUR BUSINESS MAY REQUIRE ADDITIONAL CAPITAL, AND WE MAY NOT BE ABLE TO OBTAIN THE NECESSARY FUNDS We will need the proceeds of this offering in order to implement our business plan, including the planned expansion of our manufacturing capabilities. In addition, even if this offering is successful, we may need to obtain additional funding if we receive a significantly higher volume of production line orders than in past periods. 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. IF WE DO NOT IMPROVE OUR MANAGEMENT AND ACCOUNTING CONTROLS, WE MAY NOT BE ABLE TO MANAGE OUR BUSINESS EFFECTIVELY Due to our limited size and resources in the early stages of our operations, we did not employ a Chief Financial Officer. As our size increases, and when we become subject to more complex securities law requirements, we will require increased management and accounting controls. To address this issue, in May 2001 we hired Michael Recca as Chief Financial Officer on an interim basis. We believe Mr. Recca will provide the necessary management supervision with respect to financial and accounting matters until we can hire a permanent chief financial officer. However, if we should fail to improve management controls it could 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 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: countries in which we do business may have political, social and economic systems that are unstable, which could result in nationalization and other risks; 7 the impact of possible recessions in economies outside the U.S., particularly in Asian markets which have experienced volatility and in which growth has been uneven across geographic and economic sectors; difficulties in and costs of staffing and managing foreign operations due to the fact that a substantial portion of our business and a significant number of our employees are located outside and at a far distance from our U.S. operations; lack of complete business experience in foreign markets, which may create difficulties in understanding and complying with local laws, regulations, business practices and customs; difficulty in enforcing intellectual property rights outside the U.S. due to the lack of assurance that we will be the first to file any patent application and the risk that laws of certain foreign countries do not provide the protection to intellectual property provided in the United States; the impact of changes in United States and foreign regulatory requirements resulting in, imposition of or increases in customs' duties, other tariffs, export controls and other trade barriers; potentially adverse tax consequences resulting from the imposition of or increases in foreign revenue, income, revenue or earnings taxes and withholding or other taxes on remittances; and language and cultural barriers. Any one or more of the foregoing factors could limit our ability to sustain or increase international revenues, which could 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 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 8 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. Moreover, in the past we have been required to re-negotiate material contract terms with production line customers in China. Although this situation has not arisen in any of our current contracts, if any customer should in the future seek to re-negotiate a contract, we may have limited alternatives given the uncertainties in enforcing our legal rights in China. 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 recently entered into contracts with two Chinese governmental agencies, each providing for the sale of a triple production line. We estimate that 25% of our production line sales and 15% of our smart card sales in the current year will be to Chinese governmental entities. We intend to pursue further government contracts in connection with a broad-based project by the Chinese Ministry of Public Security to provide each citizen with smart cards for identification and other purposes. Accordingly, to the extent that a significant portion of our future business may be with governmental entities, we could face greater exposure to sovereign immunity risks. WE HAVE NO EXPERIENCE IN SELLING OUR PRODUCTION LINES IN MARKETS OTHER THAN CHINA To date, our production line sales have been limited to customers located in mainland China and Hong Kong. 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 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 10 installations at any one time. Each production line takes from three to six months to complete, including assembly, delivery, installation and testing. Until we can add internal capacity with the proceeds of this offering, our capital equipment business will remain dependent on a limited number of customers at any given time. OUR ABILITY TO SUPPLY PRODUCTION LINES TO OUR CUSTOMERS COULD BE DISRUPTED BY PROBLEMS AFFECTING OUR 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 9 significant amount of work. Our success is therefore dependent on the reliability and skill of our manufacturer. To reduce operating risks, in February 2001 we replaced our previous contractor with a new company which we believe has provided better service. However, if this manufacturer fails to continue performing 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 current 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 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: manufacture of products similar to ours by competitors; or 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. In addition, an inability to retain major customers would hurt our efforts to expand our customer base and grow our smart card sales business. OUR ABILITY TO MANUFACTURE PRODUCTION LINES IS CONTINGENT ON THE SUPPLY OF COMPONENTS FROM THIRD PARTY VENDORS 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. 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 MAY HAVE DIFFICULTY MEETING OUR OBLIGATIONS TO PROVIDE RAW MATERIALS TO OUR PRODUCTION LINE CUSTOMERS, OR WE MAY INCUR LOSSES AS A RESULT OF THESE OBLIGATIONS 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. This obligation runs 10 for a period of three years from the date of the respective agreements. 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. In the past we experienced significant shortages of the leading type of microprocessor used in smart cards. Although this shortage has abated, any similar problems in the future could make it difficult for us to meet our obligations, which could adversely affect our revenues and cash flows. 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 SELL SMART CARDS IS RESTRICTED BY OUR RELIANCE ON LIMITED SOURCES OF SUPPLY, WHICH COULD ADVERSELY AFFECT OUR REVENUES AND CASH FLOW 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 three 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. The commencement date of each agreement is set forth in the 'Description of Business' section of this prospectus under the headings 'Production Line Contracts -- China Card' and 'Production Line Contracts - -- Shandong Huaguan'. Quantities of cards purchased 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. However, if market conditions change these fixed prices could be too high to enable us to resell cards at a profit. In addition, we may not be able to continue the current arrangements beyond the three-year period during which they will be in effect. Moreover, there is no assurance that the manufacturers will have a sufficient supply at cards at any given time to meet our needs. There is also a risk that the manufacturers may not be willing to comply with their obligations to sell us cards on the agreed-upon terms, or at all. Since they 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, which would adversely affect our revenues and cash flows. However, if we are successful in establishing an in-house production line, our dependence on third-party suppliers will be reduced. WE HAVE EXPERIENCED SHORTAGES IN SUPPLY OF SMART CARDS BECAUSE OF A WORLDWIDE SHORTAGE OF MICROPROCESSORS, AND WE MAY EXPERIENCE SHORTAGES IN THE FUTURE From the third quarter of 1999 through the end of 2000, there was a worldwide shortage in the supply of Mifare microprocessors. Mifare is the predominant type of microprocessor for smart card systems and is manufactured by only two companies worldwide. This microprocessor is specifically designed to operate the Mifare smart card platform, which is the leading operating system in the smart card industry. Other types of microprocessors are generally incompatible with the Mifare platform and, therefore, are not interchangeable with Mifare chips. The Mifare shortage had a material impact on our smart card sales. We depended, and presently depend, on our production line customers as our sole source of finished cards. We were obligated to provide these customers with the components needed to manufacture cards, including microprocessors. Because of the Mifare shortage, we were unable to obtain adequate microprocessors for our customers, which in turn restricted our supply of cards. As a result, we were forced to substantially curtail fulfillment of orders beginning in January 2000. This 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. During the six months ended June 30, 2001, approximately $328,000 of smart card orders were cancelled, which was caused by continuing shortages in early 2001. At present the Mifare shortage has abated and we have sufficient access to microprocessors. However, if similar shortages should occur in the future, we may again 11 be unable to meet the requirements of our customers. There is no guarantee that we will be able to maintain sufficient inventory to hedge against possible future shortages. 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 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 AND WE MAY NOT HAVE THE NECESSARY RESOURCES TO COMPETE EFFECTIVELY AGAINST OTHER COMPANIES 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, particularly in the area of finished smart card sales, 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. 12 OUR PRODUCTS UTILIZE TECHNOLOGIES OWNED BY THIRD PARTIES, WHICH COULD SEEK TO RESTRICT OUR USE 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. WE ARE DEPENDENT ON CURRENT MANAGEMENT AND THE LOSS OF ANY OF OUR KEY PERSONNEL COULD WEAKEN OUR ABILITY TO COMPETE 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 twenty-two 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 employees or the inability of any of them to devote sufficient time to their duties could weaken our ability to compete and would 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. OUR PRODUCTS CONTAIN TECHNOLOGICALLY COMPLEX COMPONENTS, WHICH MAY MAKE IT DIFFICULT FOR US TO DETECT 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 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. 13 WE MAY BE SUBJECT TO LIABILITY RESULTING FROM OUR PAST INABILITY TO MEET CONTRACTUAL OBLIGATIONS TO PROVIDE RAW MATERIALS 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 were 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. This action was dismissed, because the petitioner's claim was found to be based on an invalid contract containing a falsified signature of Chipcards. Since the claim was brought under the arbitration provision of the purported contract, the arbitration commission determined that it did not have jurisdiction over the matter. Despite this dismissal, the same 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 certain of our recent capital equipment customers, to whom we are contractually obligated to provide raw materials. Any potential litigation, whether or not ultimately found to be meritorious, could consume significant resources and affect our ability to carry on normal operations. WE PLAN TO EXPAND OUR BUSINESS WHICH COULD STRAIN OUR RESOURCES 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, WHICH MAY CAUSE OUR STOCK PRICES TO DECLINE 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. 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 14 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 THERE IS NO PUBLIC MARKET FOR OUR SECURITIES AND WE CANNOT PREDICT THE EXTENT TO WHICH A TRADING MARKET WILL DEVELOP There is no public market for our common stock. Although we expect that our common stock will be traded on the Nasdaq market and the Boston Stock Exchange, we cannot assure you that an active public market for our common stock will develop or be sustained after this offering. THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY 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: fluctuations in our financial results; general conditions or developments in the technology and smart card products industries and the worldwide economy; sales of our common stock into the marketplace; the number of market makers for our common stock; announcements of technological innovations or new or enhanced products by us or our competitors or customers; announcements of major contracts by us or our competitors; a shortfall in revenue, gross margin, earnings or other financial results from operations; and 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. AN INVESTMENT IN THIS OFFERING IS SUBJECT TO IMMEDIATE AND SUBSTANTIAL DILUTION 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.' WE CAN REDEEM THE WARRANTS ON SHORT NOTICE We can redeem your warrants at a price of $.10 per warrant upon 30 days' written notice, if the last reported sale price of our common stock has been at least $9.60 for the twenty consecutive trading days immediately preceding the date of notice of redemption. If we redeem the warrants you will be forced to sell or exercise the warrants or accept the redemption price. If you do not exercise your warrants prior to their expiration or redemption, you will not be able to purchase the securities underlying your warrants. If we redeem the warrants, you will have to: exercise the warrants and pay the exercise price at a time when it may be disadvantageous for you to do so, sell the warrants at the current market price for the warrants when you might otherwise wish to hold the warrants for possible additional appreciation, or accept the redemption price, which will in all likelihood be substantially less than the market value of the warrants at the time of redemption. 15 We will not be able to redeem your warrants unless a registration statement covering the exercise of the warrants is in effect, which would enable you to exercise before any redemption. OUR PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS WILL BE ABLE TO CONTROL OUR COMPANY 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 greater than 5% stockholders and affiliates. As a result, upon completion of this offering, you may not be able to (i) elect, or defeat the 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. OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN ALLOCATING THE PROCEEDS OF THIS OFFERING Our management has no obligation to make any specific use of the proceeds of this offering and have broad discretion as to the manner in which such funds will be utilized. We currently intend to use the net proceeds that we receive from this offering in the manner described in this prospectus under 'Use of Proceeds.' However, we reserve the right to reallocate the proceeds to different uses, including ways which differ from the specific proposed uses described in this prospectus, if management determines the needs of our business so require. In addition, a larger portion of the net proceeds is allocated to discretionary purposes. FUTURE SALES OF OUR COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD HAVE ADVERSE EFFECTS ON THE MARKET PRICE OF OUR COMMON STOCK All of the 10,641,250 shares of our common stock currently issued and outstanding are 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. THE OFFERING PRICE OF THE UNITS DOES NOT NECESSARILY REFLECT THE VALUE OF OUR COMPANY OR OUR SECURITIES 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. 16 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 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: discuss our future expectations; contain projections of our future operating results or of our future financial condition; or 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. 17 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)............................... $2,750,000 40.7% Project Financing(2)............................... 2,200,000 32.5 Machinery & Equipment(3)........................... 500,000 7.4 Product Development................................ 250,000 3.7 Advertising & Marketing............................ 200,000 3.0 Purchase of Real Property(4)....................... 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. (3) Expansion of in-house capabilities for manufacture of capital equipment. (4) Represents the cash amount required to purchase the San Diego facility from an entity owned by Eric Gravell and Xiao Qin Jiang, two of our principal shareholders. The cost is based on the amount of equity initially invested in the property by the owner, plus closing costs and improvements. This facility and related debt are included in the consolidated financial statements for the year ended December 31, 2000 and the six months ended June 30, 2001. 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. 18 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. After the completion of this offering (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 June 30, 2001, we had a negative net tangible book value of $1,377,204 and a negative net tangible book value per share of $0.12. '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 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 combined 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 of common stock (which are part of the units) offered hereby, and deducting the underwriter's commission and associated estimated offering expenses, and the use of the proceeds of the offering described in the 'Use of Proceeds', our pro forma net tangible book value at June 30, 2001 would have been approximately $5,297,296 or $0.42 per share. This represents an immediate increase in net tangible book value per share of $0.54 to existing stockholders and an immediate dilution of $7.58 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........... (0.12) Increase per share attributable to new investors............ 0.54 ------ Pro forma tangible book value per share after offering...... 0.42 ------ Dilution to new investors................................... $ 7.58 ------ ------
The following table sets forth, as of June 30, 2001, 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 per unit.
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 ---------- ---- ---------- ---- ----- ---------- ---- ---------- ---- -----
19 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 June 30, 2001, 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 JUNE 30, 2001 ------------------------- ACTUAL AS ADJUSTED ------ ----------- Debt: Long-Term Debt (including current maturities)........... $ 1,117,248 $ 1,117,248 Short Term Advances..................................... 661,953 661,953 ----------- ----------- Total debt.......................................... $ 1,779,201 $ 1,779,201 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 $ 7,449,100 Additional Paid-In Capital.............................. 33,000 33,000 Accumulated Deficit(2).................................. (2,095,304) (2,245,304) ----------- ----------- Total stockholders' equity (deficit)................ (1,377,204) 5,236,796 ----------- ----------- Total capitalization................................ $ 401,997 $ 7,015,997 ----------- ----------- ----------- -----------
- --------- (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. (2) Accumulated deficit on an as-adjusted basis has been increased by $150,000 to reflect the cash payment to be made to Ampac Technology, LLC for the purchase of the San Diego facility. Ampac intends to distribute such payment of $150,000 to its members. 20 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 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 microprocessors and other smart card components 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 smart card components only at our customers' request. Cost of sales for our production line business consists primarily of internal engineering personnel costs and outsourced engineering and construction costs. Smart card cost of sales consists of our cost of purchasing finished smart cards from third-party manufacturers. Our cost of sales for smart card components represents the cost of purchasing raw materials from third-party suppliers. 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 three to six months to complete, including assembly, delivery, installation and customer testing. At present, we can only undertake approximately ten 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 testing equipment and other machinery used in the production process. 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 21 from a contract cannot be reasonably estimated until payment is received. A material contract renegotiation occurred in fiscal 2000, when the purchase price under a contact for the sale of two production lines was reduced by approximately 40 percent. 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. We generally receive payments on our contracts as follows: (i) upon the commencement of work we receive 10% of the contract price, (ii) upon conditional acceptance at installation, we received 80% of our contract price, (iii) within one to three months after the customer's acceptance, we receive the last 10% of the contract price. One of our production line customers in 2000 was a joint venture company in which we held a 50% ownership interest. Sales to this customer represented approximately 48% of production line revenues for 2000. Under the terms of this joint venture, we were required to make an initial capital contribution in the form of equipment. In September 2001 we divested our entire interest in this joint venture, and we have no further obligations relating to our investment therein. 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 from 1999 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 smart card 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. During the six months ended June 30, 2001, approximately $328,000 of smart card orders were cancelled, which was caused by continuing shortages in early 2001. During the period of limited smart card supply, we gave first priority to orders for which we received cash payment. Other orders were prioritized based on the size of the order and the price per card. Should shortages recur in the future, we do not anticipate changing our allocation policies, even if we are successful in adding an internal smart card production line. With the recent abatement of the Mifare shortage, we have been able to eliminate our deficit of chips and smart cards. We now have a surplus of Mifare microprocessors, having purchased approximately 3.7 million chips from January through July of 2001. During the same period, we purchased approximately 1.5 million finished smart cards containing Mifare microprocessors. In addition, we believe that, with our completion of three production facilities for two new customers, in December 2000 and February 2001 we will be better able to address any future shortages 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, we now have a surplus of Mifare microprocessors. In addition, 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 to the extent non-Mifare platforms gain acceptance by operators of smart card systems, the risk of future microprocessor shortages may be alleviated by allowing us to seek alternate sources of supply. This could ultimately reduce our dependence on Mifare microprocessors by giving us the flexibility to supply non-Mifare smart cards for such alternate systems. 22 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 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. 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. Key developments during fiscal 2001 include entering into installation contracts for a total of fourteen production lines. One double line has recently been delivered to a customer in mainland China for installation and testing. One triple line is being sold to the China Ministry of Public Security, and another triple line is being sold to the Chinese Motor Vehicle Safety Inspection Center. Both of these are governmental authorities taking part in a broad-based national project to provide citizens with smart cards for identification and other purposes. In addition, one double line and one single line are being sold to a customer in Hong Kong, and a triple line is being sold to a customer in mainland China. These remaining lines are in the process of being manufactured, and we expect that they will be delivered during 2001 and 2002. During 2001 we also divested our holdings in a Chinese joint venture company in which we owned a 50% equity interest. 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 combined 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 SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 Total revenues for the six months ended June 30, 2001 were approximately $4.7 million, an increase of 169 percent from $1.7 million for the same period in 2000. This included approximately $2.2 million of production line sales in the first six months of 2001, compared to $862,000 in 2000, and revenues from the sale of smart card components of approximately $1.2 million for the first six months of 2001, compared to $135,000 in 2000. We also recorded revenues of approximately $1.3 million from the sale of finished smart cards in the first two quarters of 2001, compared to $739,000 for the same period in 2000. The increase in production line sales was partially due to the fact that, in the first quarter of 2001, we recognized a majority of the revenues from a project completed in 1999, as the commitment to purchase smart cards from a former production line customer was effectively eliminated as a result of an arbitration. We recognized additional revenues from another production line project that was commenced in 2000 and completed in February 2001. Sales of production line components increased due to an increase in our installed base of production lines. We only sell components to our production line customers, typically under agreements which 23 require us to source the customer's raw material requirements at a fixed price per card. Having installed three new production lines in 2000 and early 2001, the level of demand from our customers for components increased substantially. Our finished smart card sales increased in 2001 because we were able to rebuild our inventory of cards containing Mifare microprocessors, as the worldwide shortage of these microprocessors began to abate. In the prior year, we did not have adequate inventory to fulfill our customers' orders as a result of the shortage. However, by the second quarter of 2001 we were able to replenish our supply and increase sales of finished cards. Despite this recent trend, we believe that our smart card sales may decrease in future periods. Historically, a material portion of our smart card business has depended on our ability to purchase cards on favorable terms from our production line customers, who often did not have well developed distribution channels for their output. These manufacturers have now begun to establish a broader customer base and, as a result, they may not have sufficient supplies of cards to meet our needs. In addition, we do not have any contractual right to buy cards under the new production line contracts we entered into in 2001. Our cost of sales for the six months ended June 30, 2001 was approximately $2.7 million, representing an increase of 118 percent from $1.2 million for the same period in the prior year. This included production line costs of approximately $396,000 in the first six months of 2001 compared to $375,000 in 2000. Although the total production line costs increased slightly, these costs were incurred in the assembly of three lines, whereas the 2000 costs related to only two lines. Our cost per production line decreased in 2001 primarily because we were able to obtain more favorable pricing terms from our new contract manufacturer. Finished smart card costs were approximately $1.4 million in the first six months of 2001 compared to $795,000 in 2000. This increase in costs was a function of the greater inventory of cards we were able to obtain from our suppliers to support increased sales as the microprocessor shortage abated. Also, we recorded an additional provision of approximately $278,000 for inventory purchased that we believe will sell at prices below cost. Our cost per card did not materially change from 2000 to 2001. Smart card component costs increased to approximately $895,000 in the first two quarters of 2001 compared to $80,000 in 2000. This was due primarily to an increase in the volume of raw materials purchased by us. Our cost per unit of raw materials did not materially change from 2000 to 2001. Our gross profit for the six month period ended June 30, 2001 was approximately $2.0 million, an increase of 300 percent from a gross profit of $486,000 for the same period in the prior year. Our overall gross margin for the first six months of 2001 was 42 percent compared to a gross margin of 28 percent for the same period in 2000. These increases are mainly the result of a substantial increase in profit margins on our production line sales. Gross profits on production lines increased from 56 percent for the first half of 2000 to 82 percent for the same period in 2001. This increase was primarily due to substantial cost savings, which are largely attributable to more favorable pricing obtained from the new contract manufacturer we retained in 2001. In addition a portion of the increase was due to the accelerated recognition of gross profit on a prior production line contract as a result of our finished card purchase commitment under that contract having been effectively terminated in February 2001. (See Financial Statements -- Summary of Accounting Policies). Margins on smart card sales declined from a negative gross margin of 7.5 percent for the six months ended June 30, 2000 to a negative gross margin of 13 percent for the same period in 2001. As a result of the reduction in the shortage of smart card microprocessors, the worldwide supply of smart cards increased in the first half of 2001. This resulted in a more competitive environment for selling smart cards, causing us to reduce our pricing. In addition, because a portion of our smart card inventory failed to meet our specifications, we anticipate that we will have to sell these cards below cost, and we established a reserve of $277,500 to cover the potential loss. However, based on current orders, we believe that we will be able to sell the remainder of our current inventory above cost, albeit at lower margins than in prior periods. Gross margins on component sales also decreased, going from 40 percent for the six months ended June 30, 2000 to 23 percent for the same period in 2001. Because component sales were very low in 2000 due to the microprocessor shortage, in our view the resulting margins were inflated and not characteristic for our business. We believe that component sales and gross margins in 2001 provide a more representative figure. The margins achieved in the first six months of 2001 reflect a favorable 24 market for components, as we were able to keep our price of acquiring raw materials below the fixed prices at which we were obligated to provide such raw materials to our customers. Selling, general and administrative expenses for the six months ended June 30, 2001 were approximately $1.6 million. This represents an increase of 168 percent from selling, general and administrative expenses of approximately $595,000 for the six months ended June 30, 2000. Selling expenses consist primarily of commissions payable to sales employees. Selling expenses increased by approximately $394,000 from June 30, 2001 compared to June 30, 2000. This is attributable mainly to commissions paid to sales employees in our China and Korea offices. General and administrative expenses consist primarily of payroll and related expenditures and professional fees including legal, accounting and investment banking. For the first six months of 2001, general and administrative expenses increased by approximately $604,000 compared to the same period in 2000. This resulted principally from a 105 percent increase in salaries, increased travel expenses, and accounting and legal fees incurred in connection with this offering. We also paid a discretionary bonus to an executive officer and incurred non-recurring costs in connection with establishing a new sales office in Korea. 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 in 2000 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 had limited our ability to supply our manufacturers, which in turn 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. 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 25 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 from the strengthening of our support functions, as we added personnel in our San Diego facility. We also granted wage increases to all employees. As a result, payroll and related expenditures increased by approximately $225,000 or 46 percent during 2000. In addition, our professional costs increased by approximately $250,000 in 2000. These costs were related primarily to legal, accounting and investment banking services retained in order to position us for an initial public offering planned for 2001. 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 non-sales employees. In lieu of paying commissions to executive officers involved in securing production line contracts, we adopted a policy of awarding discretionary bonuses based on an officer's contribution to the success of the Company. We believe this compensation structure affords greater flexibility, since the decision to grant bonuses can take into account both the impact of the officer's contribution and the Company's overall cash flow and financial outlook. We continue to pay commissions to sales employees in order to encourage favorable performance. Further, in 1999, we recorded a $420,000 charge to selling expense related to payment made to an agent to seek out investment opportunities in China as we had no assurance regarding the probability of ever obtaining a future benefit from this expenditure. In 1998, the Company contributed $650,000 to this agent, but only received a refund of $230,000 in 1999. 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. LIQUIDITY AND CAPITAL RESOURCES We rely on a combination of equity capital, short-term bank financing and internally-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 at June 30, 2001, we had a working capital deficit of approximately $1.3 million, including a liability of $449,000 relating to revenues deferred as a result of our commitment to purchase all of the smart card output of a former production line customer and our prior joint venture interest in another one of our production line customers. Exclusive of deferred revenues, the cash flow deficit was approximately $860,000. This is attributable primarily to the fact that we were unable to generate sufficient revenues to cover our administrative overhead costs and costs of developing markets for our products. In addition, professional fees and increased compensation contributed to the working capital deficit. As of June 30, 2001, we had outstanding short-term advances pursuant to a line of credit agreement in the amount of $661,953. We currently have no material outstanding long-term 26 indebtedness other than purchase property mortgages on our San Diego property in the amount of approximately $1.1 million. As of June 30, 2001 we had an accounts payable balance of approximately $2.1 million. This relates primarily to subcontractor costs of manufacturing production lines, finders fees of third parties which assisted in securing production line contracts, professional fees in connection with this offering, and subcontractor costs of processing smart cards. Generally, production line subcontractor costs and finders fees are paid upon completion of the relevant production line contract, at which time we receive the majority of our payment under the contract. Professional fees and smart card subcontractor costs are also expected to be paid as and when funds become available upon receipt of payment under our production line contracts. We made payments of approximately $161,000 to our accounting firm and legal counsel subsequent to June 30, 2001. In 1999 and 2000, we received insurance proceeds of approximately $259,000 ($171,000 net of tax expense) as a result of a prior claim. This provided additional operating cash flow for these periods, but as a non-recurring item it will not have any effect on current or future liquidity. 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. 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. However, we expect to fund a portion of these costs by drawing on credit facilities secured by the letters of credit we typically obtain from equipment purchasers. We currently have commitments to install three triple production lines, one double line and one single line during 2001 and 2002, which will require estimated capital expenditures of $7,779,947 million in the aggregate. In order to meet our short-term 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 have also obtained a secured line of credit from Trans Pacific National Bank, supported by a Small Business Administration guaranty, for borrowings of up to $1,100,000 through September 2002. In addition, Bank of America has provided us with an unsecured line of credit for borrowings of up to $100,000 and has required, as a condition of extending the credit, that one of our principal stockholders guarantee all advances under this loan. We also have unsecured lines of credit in the amounts of $25,000 and $15,000. As of November 1, 2001 we had no outstanding borrowings under these lines of credit. We believe that we will be able to meet our present commitments through a combination of utilizing existing lines of credit and increasing our credit line. In addition we intend to allocate a portion of the proceeds from this offering to fund production line assembly costs. 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 produce cards for use in GSM cellular phones and other technologies, 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 to fund the $150,000 cash payment. 27 We expect that our long-term 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 that may 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, except when a right of offset is exercised. We believe that these letters of credit will enable us to obtain financing sufficient to fund a substantial portion of our raw materials costs. At present we do not have any financing in place to cover longer-term liquidity needs for future periods beyond a 12-month horizon. We do not have any current plans to seek long-term financing. To the extent long-term liquidity requirements arise as a result of future installation projects or raw material sourcing obligations, we intend to increase existing lines of credit or seek additional lines of credit to provide cash flow. If we are unable to secure additional short-term financing to fund future operating needs, or if the planned expansion of our business creates unanticipated cash flow shortfalls, we may be required to seek additional debt or equity financing. From time to time in the past, we obtained interest-free loans from shareholders in order to address cash flow shortages that arose because we had incurred expenses to perform installation projects, while the majority of our compensation was not payable until the work was substantially completed. The aggregate amount of these loans was $170,876, and we have repaid all of this indebtedness in full. We do not anticipate further shareholder loans, as we intend to obtain any required project financing by increasing our lines of credit or accessing the capital markets. 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. In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart 28 from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The company has not entered into any business combinations. Therefore, the Company does no expect that the implementation of these standards will have an effect on its financial statements. SFAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001 and is effective for fiscal years beginning after June 15, 2002. SFAS 143 requires that any legal obligation related to the retirement of long-lived assets be quantified and recorded as a liability with the associated asset retirement cost capitalized on the balance sheet in the period it is incurred when a reasonable estimate of the fair value of the liability can be made. SFAS 144, Accounting for the Impairment or Disposal of Long-Loved Assets, was issued in August 2001 and is effective for fiscal years beginning after December 15, 2001. SFAS 144 provides a single, comprehensive accounting model for impairment and disposal of long-lived assets and discontinued operations. SFAS 143 and SFAS 144 will be adopted on their effective dates, and adoption is not expected to result in any material effects on the Company's financial statements. 29 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: expanding our international distribution network; promoting new applications for our capital equipment such as smart labels; 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; replacing vendors with internal equipment-making capability, thus reducing delivery time to customers and costs borne by us; bringing our own factory automation to market by creating in-house capacity to manufacture smart cards; and 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. 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 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. 30 In general, we intend to use the proceeds of this offering to implement a substantial part of the plans described above. However, there is no assurance that the proceeds of this offering will be sufficient for us to successfully implement 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: access to restricted areas (replacing keys and identification cards); public transportation fare collection (replacing tokens and tickets); point of sale purchases (replacing cash or credit cards at cafeterias, newsstands, vending machines and other point of sale locations where speed of purchase is important); public telephones; industrial applications such as quality control, warehousing, inventory control, distribution and warranty; health care (replacing patients' paper files in hospitals and HMOs); and 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 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. 31 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. By financial worth, the smart card market is projected to rise to more than $6.5 billion in 2005. 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 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 32 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 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. In 2000 and 2001 we completed a total of three production line installations for two customers in China. All these lines have been tested and accepted by the customer and full-scale production has commenced. In addition, we recently delivered a double production line to a customer in 33 China for installation and testing. We currently have contracts in place to install three triple production lines, one double line and one single line during 2001 and 2002. 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: Hole Punching Workcell. This workcell has optical sensors that are used to register the placement of the modules for punching 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. Our equipment precisely delivers the module to the targeted location so that no fillers are required to eliminate gaps between the module and the sheet. 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. In addition, our high frequency system consumes less power, can implant into a wider range of materials and can implant a full antenna in less time than in older version untrasonic equipment. Bonding Workcell. This system is used to form the bond between the module and the wire antenna, using thermo-compression welding techniques. A computer interface provides the operator with feedback on welding parameters and automatically prevents faulting welds. 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. We have no written agreement with our contract manufacturer, and all assembly work is done on a purchase order basis. The contract manufacturer recently completed the assembly of a double production line, and currently has accepted orders for and commenced work on the assembly of antenna embedding, pick and place and bonding workcells for the four triple production lines and one single line that we are scheduled to deliver by year end 2001. 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. One full production line consists of each of the six workcells described above. However, we can also design combination lines, such as double lines or triple lines, that use fewer components by taking advantage of the greater production rates achievable by certain workcells. For example, the embedding workcell is faster than both the module pick and place and the bonding workcells. 34 Therefore, we can design a triple line in which three pick and place machines feed into two embedding machines, which in turn feed into three bonding machines. This combination production line has the capacity of three single lines while using only two embedding workcells. This makes our production line products more cost effective for customers requiring high levels of output. 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 and Siemens. 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. 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 in 1998 and 1999. 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, in 2000 and 2001 we installed three new production lines from which we have the ability to purchase finished cards at fixed prices per card. 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. 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 anticipate that the need for dual-interface cards will expand to other markets as demand for secure applications increases. 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 35 supply cards to the developing market for non-Mifare smart cards. These platforms have now been standardized to encourage and accelerate development. 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. This distinguishes GSM phones from conventional cellphones, which have an electronic identification number programmed into each individual cellphone. The smart card gives GSM phones greater flexibility because the card is detachable and interchangeable with any other GSM phone. GSM is a standardized technology produced by all major cellphone manufacturers. It 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 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 36 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, in 2001 we entered into new installation agreements with five customers including a company in mainland China to which we recently delivered a double production line, as well as two Chinese governmental agencies, each of which has ordered a triple line, a company in Hong Kong which has ordered one double line and one single line, and a company in mainland China which has ordered a triple line. We expect that all of these projects will be completed during 2001 and 2002. 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 was initially 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. In September 2001, we transferred our entire interest in the China Card joint venture to three companies based in China. As a result of this transfer, we are released from any liability in connection with the joint venture. Under an equipment purchase agreement, for each production line sold to China Card I.C. (Shanghai) Co., Ltd. we guarantee a manufacturing capacity of 6 million cards per year and a reject rate of less than three percent. The warranty period for the equipment is 12 months from the customer's receipt and acceptance. During this period, we are responsible for repairing or replacing any defective components. To date we have not incurred any significant costs as a result of this warranty. We also entered into a license agreement and a technical support agreement 37 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. We are not obligated to purchase any minimum amount of cards. 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. Our undertaking to source raw materials does not give us a priority over other parties who may seek to purchase finished cards from China Card. 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. The warranty period for the equipment is 12 months from the customer's receipt and acceptance. During this period, we are responsible for repairing or replacing any defective components. To date we have not incurred any significant costs as a result of this warranty. 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. We are not obligated to purchase any minimum amount of cards. 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. Our undertaking to source raw material does not give us priority over other parties who may seek to purchase finished smart cards from Shandong Huaguan. HAINAN PACIFIC In May 2001 we entered into an equipment purchase agreement with Hainan Pacific New High Tech Co, Ltd., a Chinese company, covering the sale of a combination production line that will have the capacity of two full lines. Under this agreement, we guarantee a manufacturing capacity of 1,500 cards per hour and a reject rate of less than 3 percent. The warranty period for the equipment is 12 months from the customer's receipt and acceptance. During this period, we are responsible for repairing or replacing any defective components. 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. MINISTRY OF PUBLIC SECURITY In June 2001 we entered into an equipment purchase agreement with the Beijing Zhongdun Security Technology Development Company, acting as agent for the Chinese Ministry of Public Security. Pursuant to this agreement, we agreed to sell a combination production line capable of achieving the equivalent output of three full lines. By taking advantage of the greater speed of certain workcells, we have designed this unit to use fewer components than would be required for three separate production lines. We guarantee a manufacturing capacity of 2,500 cards per hour, a reject rate of less than two percent for each separate workcell and an overall reject rate of less than three percent for the entire unit. The warranty period for the equipment is 12 months from the customer's receipt and acceptance. During this period we are responsible for repairing or replacing any defective components. We have also entered into a technical services and licensing 38 agreement under which we must provide technical information and support services needed to operate the production lines. CHINA MOTOR VEHICLE SAFETY INSPECTION CENTER In June 2001 we entered into an equipment purchase agreement with the Beijing Bu Lu Dun High Tech Company Limited, acting as agent for the China Motor Vehicle Safety Inspection Center. Pursuant to this agreement, we agreed to sell a combination production line that will have the capacity of three full lines. We guarantee a manufacturing capacity of 2,500 cards per hour, a reject rate of less than two percent for each separate workcell and an overall reject rate of less than three percent for the entire unit. The warranty period for the equipment is 12 months from the customer's receipt and acceptance. During this period we are responsible for repairing or replacing any defective components. We have also entered into a technical services and licensing agreement under which we must provide technical information and support services needed to operate the production lines. TRANCO LTD. In August 2001 we entered into two equipment purchase agreements with Tranco Ltd., a company based in Hong Kong. Pursuant to these agreements, we agreed to sell one single production line and one combination production line that will have the capacity of two full lines. We guarantee a manufacturing capacity of 2,500 cards per hour for the triple line and a manufacturing capacity of 750-850 cards per hour for the single line, with an overall reject rate of less than three percent for each of these production lines. The warranty period for each production line is 12 months from the customer's receipt and acceptance. During this period we are responsible for repairing or replacing any defective components. We have also entered into a separate technical services and licensing agreement for each production line under which we must provide technical information and support services needed to operate the equipment. SHANDONG LU NENG HUANG TAI INDUSTRIAL GROUP LIMITED In September 2001 we entered into an equipment purchase agreement with the Shandong Lu Neng Huang Tai Industrial Group Limited, acting as agent for a company tentatively named Shanghai Lu Neng China Card Smartcard Company Limited. Shandong Lu Neng Huang Tai Industrial Group Limited owns an interest in a joint venture company in which we previously held a 50% interest. Pursuant to this agreement, we agreed to sell a combination production line that will have the capacity of three full lines. We guarantee a manufacturing capacity of 2,500 cards per hour, and an overall reject rate of less than three percent for the entire unit. The warranty period for the equipment is 12 months from the customer's receipt and acceptance. During this period we are responsible for repairing or replacing any defective components. We have also entered into a technical services and licensing agreement under which we must provide 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 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. 39 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. During the 2001 fiscal year, we have continued to focus on improvements that can be implemented as part of our ongoing installation work. In the future we intend 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. 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. 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 a five-fold increase from 1994. 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: The growth and diversity of smart card applications; The need for higher security in Internet e-commerce; The consumer desire for more convenient financial and personal transactions; The progression of radio frequency applications to higher frequencies; and 40 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 largest smart card customers during 2001 includes: Cricon International Business (USA) Printoplant Inc. Korea KD Electronics (South Korea) Electronic Silicon Solutions (UK) KBC (Korea) Our current capital equipment customers are described 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). We believe that we have positioned ourselves as an emerging company within the smart card production line industry. The leading competitors are large, well established companies and have developed a strong worldwide reputation. However, we have been able to offer a competitive product because of the speed and flexibility of our equipment. An important step in the development of our reputation was securing installation contracts from the Chinese Ministry of Public Security and the China Motor Vehicle Safety Inspection Center. These government agencies are participating in a highly publicized project seeking to provide each citizen in China with smart cards for identification and other purposes. The Ministry of Public Security awarded us the first production line contract in connection with this project, after soliciting bids from all of the leading production line suppliers. We believe this has greatly enhanced our competitive position and will enable us to capture significant market share for smart card equipment sales in China. 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). We believe that in the smart card sales industry we have also positioned ourselves as an emerging competitor. Since our marketing resources are limited, the leading competitors have 41 better worldwide market coverage. However, we are focusing our efforts on smaller customers to which we can offer fast turnaround and competitive pricing. 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. Automated key-processes give our equipment greater flexibility to utilize a variety of raw materials and to accommodate alternate operating platforms. Switching raw materials, such as different types of plastic, or using chips containing different operating platforms requires only a simple change in machine operation parameters. These paramaters are stored within the machine's computer system and can be quickly retrieved by the user through a menu choice. Automation also reduces the need for skilled employees to operate the machinery, reducing training and labor expense for our customers. Our production line products face a competitive disadvantage, however, in terms of price. This is partly due to the fact that we require payment in U.S. dollars, whereas most of our competitors are paid in lower-valued currencies. 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 favorable. This has enabled us to decrease our pricing in response to recent competitive pressures. In addition, 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. We are not incorporating the information on our website into this prospectus, and we do not intend to make our website a part of this prospectus. 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 and 2002 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. At the outset, 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 have co-sponsored industry events in China. 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 42 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. 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. 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. These features enable customers to conveniently make any adjustments needed to meet their specific product requirements. Most changes to the production line can be done with simple and often pre-loaded operation settings. Mechanical adaptations typically include only minor and inexpensive changes to the robot mechanism. These are the principal areas in which we apply our proprietary technologies to the basic components that make up our production lines. We 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. 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 within 12 months of the initial filings 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 and/or non-disclosure and assignment of invention agreements with certain 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 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 43 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 where we lease 672 square feet of space. 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 and consists of 13,850 square feet of space, half of which we sublet to an unrelated third party. 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 $1,100,000 at June 30, 2001. Our China office consists of 930 square feet of space 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. Our South Korea office consists of 1,500 square feet of space 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. 44 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 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. We also intend to obtain officers' and directors' insurance coverage at 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. In 1997, Mr. Amadeo served as an electrical engineer for Remec. Prior to joining Chipcards, Mr. Amadeo also conducted research and development in Optical and RF components, managed a medium-scale 45 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. In 1995, Mr. Norman founded a business that engineered lightweight watercraft. Prior thereto, Mr. Norman co-owned Highpoint Presents, a multimedia production company. During that same period, he also served as a financial specialist for the State of Washington. Prior to joining Chipcards, Mr. Norman was also 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. 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. The claimants in that arbitration sought damages of $700,000 against Mr. Mandell based on allegations that certain transactions that were effected over a period of years in their securities brokerage accounts were unauthorized and were unsuitable investments for them. The claimants also asserted that Mr. Mandell was liable to them for an additional $350,000, which they invested in a limited partnership that owned and controlled Roan Capital. This arbitration was settled in November 1999. Pursuant to the written settlement agreement, all claims against Mr. Mandell were dismissed with prejudice, the claimants executed general releases in Mr. Mandell's favor, and they covenanted not to sue him with respect to any matter. Mr. Mandell paid the sum of $75,000 to the Price's in consideration for that settlement. Mr. Mandell was the subject of a New York Stock Exchange Hearing Panel Decision dated January 17, 1995. The matters that were the subject of that decision all occurred during the period beginning in 1986 and ending in 1990. Pursuant to the decision, Mr. Mandell consented to findings 46 that he effected certain transactions without customer knowledge or authorization and accepted orders for customers from a person other than the customer without written authorization. He was censured and served a six week suspension in accordance with the decision. 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 $70,000 per year and an incentive bonus equal to ten percent of the gross profits from any sales directly attributable to him. Each of the above employment agreements grants the employee a severance payment equal to base salary for a period of three months or, if shorter, the balance of the term, should the employee be terminated without cause. The employee is also entitled to three months of base salary in the event of his death or disability. COMPENSATION OF DIRECTORS AND OFFICERS The following table sets forth the aggregate annual remuneration of our President and the four most highly paid executive officers other than the President who served as executive officers as of December 31, 2000: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ----------------------------------------------- (A) (B) (C) (D) (E) - --- --- --- --- --- OTHER ANNUAL NAME & PRINCIPAL POSITION YEAR SALARY ($) 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. 47 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 on each share of common stock held of record as of March 18, 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. 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 48 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. 49 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of our common stock as of November 1, 2001, as adjusted to reflect the sale of the units offered by this prospectus, by: each person who is known by us to beneficially own more than 5% of our common stock each of the named executive officers and each of our directors; and all of our officers and directors as a group. 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.
PERCENTAGE OWNERSHIP NUMBER OF SHARES ------------------------- 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 ........................... 285,000(3) 2.7% 2.4% 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 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)................. 6,827,500 64.1% 58.7%
- --------- (1) Percentage of ownership is based on 10,641,250 shares outstanding as of November 1, 2001, 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. 50 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. Aggregate fees of $48,000 have been paid to Mr. Mandell through October 31, 2001 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 President and Chief Executive Officer of The Thornwater Company, L.P., the underwriter for this offering. Mr. Mandell was formerly registered as a broker with the underwriter. For over one year prior to the execution of the consulting agreement, Mr. Mandell performed substantial services on behalf of the Company including numerous trips for meetings with our executive officers concerning business matters, trips to London and Paris, including attendance at a smart card show, and review of our business and industry. During this period, Mr. Mandell met with numerous customers and suppliers and rendered significant advice concerning our business and prospects, including diversification by marketing smart cards and seeking to do business in countries other than China. Mr. Mandell also was instrumental in restructuring and strengthening the present management team and devising sales strategy. After the execution of the consulting agreement, Mr. Mandell has continued to provide services including introductions to suppliers and analysis of potential acquisitions. We believe these services were obtained on terms no less favorable than could otherwise have been obtained from an unaffiliated third party. 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. Mr. Ziegler was issued 500,000 shares of our common stock in compensation for his services. 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 or to other third parties. Mr. Ziegler was instrumental in restructuring and strengthening the present management team and devising financial strategy. We believe these services were obtained on terms no less favorable than could otherwise have been obtained from an unaffiliated third party. 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 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. The $150,000 payment is based on the amount of equity initially invested in the property by Ampac Technology, LLC, plus closing costs and improvements. 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 51 December 31, 2000. We believe the terms of these loans were no less favorable than those which could have been obtained from unaffiliated third parties. 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. We believe the terms of this loan were no less favorable than those which could have been obtained from an unaffiliated third party. 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 2000, 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 was formerly a principal stockholder, officer and director. The original principal amount of the loan was $180,000 bearing interest at a rate of six percent per annum. We believe the terms of this loan were no less favorable than could otherwise have been obtained from an unaffiliated third-party borrower. At the time of the settlement, the amount of $75,000 remained outstanding and was repayable within one week of an initial public offering by TicketPlanet. We accepted a payment of $57,000 in full satisfaction of this debt, based on our assessment that TicketPlanet would be unlikely to conduct an initial public offering in the foreseeable future. All material facts with respect to the transactions described above, and the related party's interest in the transaction, were fully disclosed to the board of directors and, after consultation with counsel at our expense, were approved or ratified by all of the directors who did not have an interest in the transaction. All future material transactions with related parties will require approval of a majority of independent directors who do not have an interest in the transaction and who have access at our expense to company counsel or independent legal counsel. We anticipate that all future material transactions with related parties will be on terms no less favorable to us than can otherwise be obtained from unaffiliated third parties. 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 November 1, 2001, 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 option), there will be 11,641,250 shares of common stock issued and outstanding and 1,000,000 common stock purchase warrants outstanding. REDEEMABLE WARRANTS Each redeemable 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 52 the units. The exercise price is subject to adjustment upon the occurrence of certain events as provided in the redeemable warrant certificate and summarized below. Our redeemable 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 redeemable warrants which have not previously been exercised will expire on the expiration date. A redeemable warrant holder will not be deemed to be a holder of the underlying common stock for any purpose until the redeemable warrant has been properly exercised. Our common stock and redeemable 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 redeemable warrants included in the units. The amount of $0.10 is being allocated to each warrant included in the units. We have the right to redeem all (but not less than all) of the redeemable warrants issued in this offering at a redemption price of $0.10 per redeemable warrant, after providing 30 days prior written notice to the redeemable 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 consecutive trading days immediately preceding the date of the notice. A redeemable warrant holder may exercise our redeemable 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 redeemable warrants are qualified for sale under the securities laws of the state in which the holder resides. We are not under any obligation to maintain an effective current registration statement. Our redeemable warrants may be exercised by delivering to our transfer agent the applicable redeemable 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 redeemable warrants being exercised. The exercise price of the redeemable 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 dividend, stock split or reverse split with respect to our common stock, the exercise price in effect immediately prior to such event will be proportionately reduced or increased, as appropriate. Any adjustment of the exercise price will also result in an adjustment of the number of shares purchasable upon exercise of a redeemable warrant or, if we elect, an adjustment of the number of redeemable warrants outstanding. These adjustments are intended to protect the interests of the warrant holders from being diluted. Investors who choose to hold warrants in 'street name' or other form of indirect ownership should consult their broker or other financial institution for information on how they can exercise their warrants. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES The following discussion is a summary of certain U.S. federal tax consequences relevant to the purchase, ownership, and disposition of the redeemable warrants by persons who hold the warrants as capital assets (generally, property held for investment within the meaning of Section 1221 of the Internal Revenue Code). This discussion is based upon the Internal Revenue Code, Treasury Regulations, Internal Revenue Service rulings and pronouncements, and judicial decisions now in effect, all of which are subject to change at any time by legislative, administrative, or judicial action, possibly with retroactive effect. This discussion does not discuss every aspect of U.S. federal taxation that may be relevant to a particular taxpayer in light of their personal circumstances or to persons who are otherwise subject to special tax treatment (including, without limitation, banks, broker-dealers, insurance companies, pension and other employee benefit plans, tax exempt organizations and entities, investors in pass-through entities, persons who acquire warrants in 53 connection with the performance of services, certain U.S. expatriates, persons holding warrants as a part of a hedging or conversion transaction or a straddle, certain hybrid entities and owners of interests therein, holders whose functional currency is not the U.S. dollar, and persons who are not U.S. holders (as defined below)), and it does not discuss the effect of any applicable U.S. state and local or non-U.S. tax laws or U.S. tax laws other than U.S. income tax law. We have not sought and will not seek any rulings from the Internal Revenue Service concerning the tax consequences of the purchase, ownership or disposition of the warrants and, accordingly, we cannot assure you that the Internal Revenue Service will not successfully challenge the tax consequences described below. EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT THEIR OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF HOLDING AND DISPOSING OF WARRANTS, AS WELL AS ANY TAX CONSEQUENCES APPLICABLE UNDER THE LAWS OF ANY U.S. STATE, LOCAL, OR NON-U.S. TAXING JURISDICTION. This section summarizes certain U.S. federal income tax consequences of the ownership and disposition of warrants by 'U.S. holders.' The term 'U.S. holder' refers to a person that is classified for U.S. federal tax purposes as a United States person. For this purpose, a United States person includes a citizen or resident of the United States, a corporation created or organized in the United States or under the laws of the United States or of any state or political subdivision thereof, an estate the income of which is subject to U.S. federal income taxation regardless of its source, or a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust. Notwithstanding the preceding sentence, to the extent provided in Treasury Regulations, certain trusts in existence on August 20, 1996, and treated as United States persons prior to such date that elect to continue to be treated as United States persons, shall also be considered U.S. holders. Issue Price of the Warrants. For U.S. federal income tax purposes, the common stock and warrants included in the units being sold in this offering are treated as an investment unit. The issue price of $8.10 per unit is required to be allocated between the common stock and warrants based upon their relative fair market values. Based on an estimate of the relative fair market values of the common stock and warrants, we have allocated the amount of $8.00 to the common stock and $0.10 to the warrants. Our allocation is not binding on the Internal Revenue Service, which may challenge such allocation. Tax Treatment of Warrants. A U.S. holder will generally not recognize gain or loss upon exercise of warrants for cash (except with respect to any cash received in lieu of a fractional share). A U.S. holder will have a tax basis in the common stock received on exercise of a warrant equal to the sum of its tax basis in the warrant and the aggregate cash exercise price paid in respect of such exercise. The holding period of common stock received upon the exercise of a warrant will commence on the day after the warrant is exercised. The tax consequences of a cashless exercise of a warrant are not clear. Such an exercise may be tax-free, either because the exercise is not a gain realization event or because it qualifies as a tax-free recapitalization. In the former case, a U.S. holder's tax basis in the common stock received would equal the tax basis in the surrendered warrants and the holding period of such common stock would commence on the day after the warrant is exercised. In the latter case, a U.S. holder's tax basis in the common stock received would equal the tax basis in the surrendered warrants, and the holding period of such common stock would include the holding period of the surrendered warrants. It is also possible that the cashless exercise of a warrant could be treated as a taxable exchange in which gain or loss should be recognized. If a warrant expires without being exercised, a U.S. holder will recognize a capital loss in an amount equal to its tax basis in the warrant. The deductibility of capital losses is subject to limitation. Upon the sale, exchange or redemption of a warrant, a U.S. holder will generally 54 recognize a capital gain or loss equal to the difference, if any, between the amount realized on such sale, exchange or redemption and the U.S. holder's tax basis in such warrant. Such capital gain or loss will be long-term capital gain or loss if, at the time of such sale, exchange or redemption, the warrant has been held for more than one year. Under Section 305 of the Internal Revenue Code, a U.S. holder of a warrant may be deemed to have received a constructive distribution from the issuer, which may result in the inclusion of ordinary dividend income, in the event of certain adjustments to the number of shares of common stock to be issued on exercise of a warrant. Backup Withholding. A U.S. holder may be subject to backup withholding with respect to proceeds received from a disposition of the warrants. Certain holders (including, among others, corporations and certain tax-exempt organizations) are generally not subject to backup withholding. A U.S. holder will be subject to backup withholding if such holder is not otherwise exempt and such holder: fails to furnish its taxpayer identification number, which, for an individual is ordinarily his or her social security number; furnishes an incorrect taxpayer identification number; is notified by the Internal Revenue Service that it has failed to properly report payments of interest or dividends; or fails to certify, under penalties of perjury, that it has furnished a correct taxpayer identification number and that the Internal Revenue Service has not notified the U.S. holder that it is subject to backup withholding. Backup withholding is not an additional tax but, rather, is a method of tax collection. U.S. holders will be entitled to credit any amounts withheld under the backup withholding rules against their actual tax liabilities provided the required information is furnished to the Internal Revenue Service. 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 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. All of the 10,641,250 shares held by our existing shareholders, are currently eligible for resale pursuant to Rule 144 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 55 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: 1% of the then outstanding shares of our common stock; or 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. 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 $ . 56 The following table provides information regarding the amount of the discount to be received by the underwriters.
TOTAL WITHOUT TOTAL WITH FULL EXERCISE OF 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, 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 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. The warrants may not be transferred except to partners of any underwriter that is a partnership, or if an underwriter is a corporation, to officers and employees of the underwriter who are also shareholders, or by will, the laws of descent and distribution, or by the operation of law. 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 stabilizing transactions by making 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. In connection with this offering, the underwriters may make short sales of our shares and may purchase our shares on the open market to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. There are generally two types of short sales, 'covered' short sales and 'naked' short sales. 57 'Covered' short sales are sales made in an amount not greater than the underwriters' overallotment option to purchase additional shares in the offering. The underwriters may close out any covered short position by either exercising their overallotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. 'Naked' short sales are sales in excess of the overallotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our stock or preventing or retarding a decline in the market price of our stock. As a result, the price of our stock may be higher than the price that might otherwise exist in the open market. 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 250,000 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 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 233 Broadway, 16th Floor, New York, New York 10279 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment of the fees prescribed by the SEC. Electronic reports and other information 58 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We have not had any changes in or disagreements with our principal independent accountants during the two most recent fiscal years or any later interim period. 59 INDEX TO FINANCIAL STATEMENTS Financial Statements filed as a part of this Prospectus
PAGE ---- (i) Report of Independent Certified Public Accountants.......... F-2 (ii) Combined Balance Sheet as at December 31, 2000 and June 30, F-3 2001...................................................... (iii) Combined Statements of Operations for the years ended F-4 December 31, 2000 and December 31, 1999 and the six months ended June 30, 2001 and June 30, 2000..................... (iv) Combined Statements of Stockholders' Deficit................ F-5 (v) Combined Statements of Cash Flows for the years ended F-6 December 31, 2000 and December 31, 1999 and the six months ended June 30, 2001 and June 30, 2000..................... (vi) Summary of Accounting Policies.............................. F-7 (vii) Notes to Financial Statements............................... F-11
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors CHIPCARDS, INC. fka: AMERICAN PACIFIC TECHNOLOGY CORPORATION AND AFFILIATE San Francisco, California We have audited the accompanying combined balance sheet of Chipcards, Inc., fka: American Pacific Technology Corporation and Affiliate as of December 31, 2000, and the related combined 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 combined financial statements referred to above present fairly, in all material respects, the financial position of Chipcards, Inc., fka: American Pacific Technology Corporation and Affiliate 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. February 9, 2001, except for Note 13 which is as of May 11, 2001 F-2 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEET
DECEMBER 31, JUNE 30, 2001 2000 ------------- ---- (UNAUDITED) ASSETS (Note 3) Current Cash and cash equivalents............................... $ 325,393 $ 294,806 Trade receivables....................................... 461,846 28,461 Smart card component inventory.......................... 1,273,157 286,634 Costs and estimated earnings on uncompleted contracts in excess of billings (Note 1)........................... 105,000 1,011,977 Prepaid expenses and other current assets............... 29,997 56,021 ----------- ----------- Total Current Assets................................ 2,195,393 1,677,899 ----------- ----------- Property and Equipment: Buildings and improvements (Note 4)..................... 1,187,294 1,215,816 Office equipment........................................ 147,467 137,423 ----------- ----------- 1,334,761 1,353,239 Less accumulated depreciation............................... 110,707 110,257 ----------- ----------- Net property and equipment.................................. 1,224,054 1,242,982 ----------- ----------- $ 3,419,447 $ 2,920,881 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' DEFICIT Current Checks issued against future deposits................... $ -- $ 74,356 Short-term borrowings (Note 3).......................... 661,953 14,500 Accounts payable........................................ 2,132,124 1,484,308 Current portion of long-term debt (Note 4).............. 25,861 28,070 Accrued compensation and commissions (Note 2)........... 80,596 288,910 Income taxes payable (Note 5)........................... 140,147 66,000 Other accrued liabilities............................... 18,760 64,903 Billings in excess of costs and estimated earnings on uncompleted contracts (Note 1)........................ -- 30,621 Deferred profit on production line contracts............ 448,823 1,136,344 ----------- ----------- Total Current Liabilities........................... 3,508,264 3,188,012 ----------- ----------- Deferred profit on production line contracts................ 197,000 379,000 Long-term debt, less current portion (Note 4)............... 1,091,387 1,101,163 ----------- ----------- Total Liabilities................................... 4,796,651 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.............. 685,100 685,100 Additional paid-in capital.............................. 33,000 -- Accumulated deficit..................................... (2,095,304) (2,432,394) ----------- ----------- Total Stockholders' Deficit......................... (1,377,204) (1,747,294) ----------- ----------- $ 3,419,447 $ 2,920,881 ----------- ----------- ----------- -----------
See accompanying summary of accounting policies and notes to financial statements. F-3 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ----------------------- ------------------------- 2001 2000 2000 1999 ---- ---- ---- ---- (UNAUDITED) Revenues Production line sales..................... $2,243,166 $ 861,697 $5,359,063 $1,520,108 Finished smart card sales................. 1,258,666 739,047 956,851 1,293,096 Smart card component sales and other sales................................... 1,169,547 134,696 137,825 1,526,952 ---------- ---------- ---------- ---------- Total Revenue......................... 4,671,379 1,735,440 6,453,739 4,340,156 ---------- ---------- ---------- ---------- Cost of Sales Production line costs..................... 395,581 374,995 3,779,619 546,700 Finished smart cards costs................ 1,427,873 794,569 1,119,979 1,419,279 Smart card component costs and other costs................................... 895,108 79,942 88,160 1,264,875 ---------- ---------- ---------- ---------- Total Costs of Sales.................. 2,718,562 1,249,506 4,987,758 3,230,854 ---------- ---------- ---------- ---------- Gross Profit.................................. 1,952,817 485,934 1,465,981 1,109,302 ---------- ---------- ---------- ---------- Selling, General and Administrative Expenses.................................... 1,592,038 594,584 1,811,208 1,832,271 Research and Development...................... -- -- -- 99,324 ---------- ---------- ---------- ---------- Operating Income (Loss)....................... 360,779 (108,650) (345,227) (822,293) ---------- ---------- ---------- ---------- Other Income (Expense) Other income (including $181,000 in 2000 on recovery of previously written-off amounts receivable and $430,357 of insurance proceeds from fire in 1999) (Note 9)................................ 65,555 182,013 256,489 506,247 Other expense............................. (30,823) (756) (9,054) (114,188) Interest expense, net..................... (57,621) (71,737) (160,045) (139,473) ---------- ---------- ---------- ---------- Total Other Income (Expense).......... (22,889) 109,520 87,390 252,586 ---------- ---------- ---------- ---------- Income (Loss) Before Income Taxes............. 337,890 870 (257,837) (569,707) Income tax expense (Note 5)................... 800 1,600 67,600 1,600 ---------- ---------- ---------- ---------- Net Income (Loss)............................. $ 337,090 $ (730) $ (325,437) $ (571,307) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic and Diluted Net Income (Loss) Per Common Share....................................... $ 0.03 $ -- $ (0.03) $ (0.09) ---------- ---------- ---------- ---------- Shares Used in Basic Net Income (Loss) Per Common Share Calculations................... 10,641,250 9,376,400 9,710,000 6,037,000 Shares Used in Diluted Net Income (Loss) Per Common Share Calculations................... 10,651,250 9,376,400 9,710,000 6,037,000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying summary of accounting policies and notes to financial statements. F-4 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
COMMON STOCK ADDITIONAL --------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL 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) Sale of common stock.............. 115,000 575,000 -- -- 575,000 Issuance of common stock for consulting services (Note 6).... 3,500,000 103,500 -- -- 103,500 Net loss.......................... -- -- -- (325,437) (325,437) ---------- -------- ----------- ----------- ----------- Balance, December 31, 2000........ 10,641,250 685,100 -- (2,432,394) (1,747,294) Stock-based compensation (unaudited)..................... -- -- 33,000 -- 33,000 Net income (unaudited)............ -- -- -- 337,090 337,090 ---------- -------- ----------- ----------- ----------- Balance, June 30, 2001 (Unaudited)..................... 10,641,250 $685,100 $ 33,000 $(2,095,304) $(1,377,204) ---------- -------- ----------- ----------- ----------- ---------- -------- ----------- ----------- -----------
See accompanying summary of accounting policies and notes to financial statements. F-5 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31, ------------------------- ----------------------- 2001 2000 2000 1999 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) Cash Flows from Operating Activities Net income (loss)........................................ $ 337,090 $ (730) $(325,437) $ (571,307) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss on investment in Chinese businesses.............. -- -- -- 420,000 Depreciation.......................................... 15,132 15,289 52,040 51,581 Inventory write-downs................................. 277,500 -- 44,600 -- Stock-based compensation.............................. 33,000 103,500 103,500 6,500 Loss on disposal of property and equipment............ 30,161 18,193 19,550 6,792 Changes in operating assets and liabilities: Trade receivables.................................. (433,385) (202,767) 37,727 228,276 Inventory.......................................... (1,264,023) 1,127 651,352 (764,584) Related party receivable........................... -- 71,887 71,887 113,116 Receivable from insurance provider................. -- 430,357 430,357 (430,357) Prepaid expenses and other current assets.......... 26,024 (121,216) (45,291) 10,551 Costs and estimated earnings on uncompleted contracts in excess of billings.................. 906,977 331,098 (538,020) (299,917) Accounts payable and accrued expenses.............. 417,766 (863,172) (12,949) (93,102) Accrued compensation and commissions............... (24,407) (199,318) (19,433) 294,600 Income taxes payable............................... 74,147 -- 66,000 (120,000) Billings in excess of costs and estimated earnings on uncompleted contracts......................... (30,621) 287,867 30,621 -- Deferred profit on production line contracts....... (869,521) (486,704) (397,707) (639,566) ----------- --------- --------- ----------- Net Cash Provided by (Used in) Operating Activities......... (504,160) (614,589) 168,797 (1,787,417) ----------- --------- --------- ----------- Cash Flows from Investing Activities Partial refund of investment in Chinese businesses....... -- -- -- 230,000 Acquisitions of property and equipment................... (36,773) (13,393) (28,822) (1,221,857) Proceeds from disposal of property and equipment............ 10,408 -- -- -- ----------- --------- --------- ----------- Net Cash Used in Investing Activities....................... (26,365) (13,393) (28,822) (991,857) ----------- --------- --------- ----------- Cash Flows from Financing Activities Checks issued against future deposits.................... (74,356) (82,695) (8,339) 82,695 Net proceeds from the sale of common stock............... -- 382,500 575,000 -- Net borrowings (repayments) under bank credit agreements and line of credit...................................... 647,453 (173,132) (520,163) 515,663 Proceeds from notes payable.............................. -- 9,700 506,339 650,000 Proceeds from shareholder loans.......................... -- (50,284) 9,700 591,797 Principal payments on shareholder loans.................. -- 498,919 (525,324) (76,173) Principal payments on long-term debt..................... (11,985) (31,247) (24,516) (2,590) ----------- --------- --------- ----------- Net Cash Provided by Financing Activities................... 561,112 553,761 12,697 1,761,392 ----------- --------- --------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents........ 30,587 (74,221) 152,672 (1,017,882) Cash and Cash Equivalents, beginning of period.............. 294,806 142,134 142,134 1,160,016 ----------- --------- --------- ----------- Cash and Cash Equivalents, end of period.................... $ 325,393 $ 67,913 $ 294,806 $ 142,134 ----------- --------- --------- ----------- ----------- --------- --------- ----------- Supplemental Disclosures Of Cash Flow Information Cash paid for interest................................... $ 66,329 $ 88,817 $ 98,922 $ 78,674 Cash paid for income taxes............................... 110,800 1,600 1,600 112,927 ----------- --------- --------- ----------- ----------- --------- --------- -----------
See accompanying summary of accounting policies and notes to financial statements. F-6 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. BASIS OF PRESENTATION The combined 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 accompanying combined financial statements as of June 30, 2001 and for the six months ended June 30, 2001 and 2000 are unaudited. In the opinion of management, they include all adjustments necessary for a fair presentation of the financial position and the results of operations for the periods presented. The results of operations for the six months ended June 30, 2001 are not necessarily indicative of results to be expected for any future period. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and in banks, and all highly liquid investments with a maturity of three months or less at the time of purchase. REVENUE AND COST RECOGNITION Revenues from long-term contracts for the construction 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 as an increase in production line costs. 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 their fair market value. Due to historical renegotiation of contract terms with several customers, the actual profit from a contract cannot be reasonably estimated until payment is received. Therefore, profit is estimated to be zero until the Company can be assured of collection of profit based on cash receipts. Accordingly, equal amounts of revenue and costs are recognized until final payment is received. 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. As of December 31, 2000 and June 30, 2001, the Company was a partner in one joint venture which was accounted for under the equity method. F-7 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED) Two 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, which commenced in 1998. For these contracts, risk is not deemed to have been 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. The Company offers a one year warranty to its production line customers. During this period the Company is responsible for repairing or replacing any defective components. The Company accrues for warranty costs based on its experience. 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 AND DEPRECIATION Property and equipment are stated at cost. Major 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: Buildings and improvements................... 39 years Office furniture and equipment............... 3 to 7 years
RESEARCH AND DEVELOPMENT The Company expenses the costs associated with the research and development of new products as incurred. STOCK-BASED COMPENSATION The Company has adopted the provisions of Statement of Financial Accounting Standards ('SFAS') No. 123, 'Accounting for Stock-Based Compensation'. Under this standard, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based transactions. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Companies are permitted to continue to account for employee stock-based transactions under Accounting Principles Board Opinion ('APB') No. 25, 'Accounting for Stock Issued to Employees', but are required to disclose pro forma net income (loss) and earnings (loss) per share as if the fair value method had been adopted. The Company has elected to continue to account for employee stock-based compensation under APB. No. 25. F-8 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED) 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 PRONOUNCEMENTS 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, adoption of the new standard on January 1, 2001 had no effect on the Company's financial statements. In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an F-9 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED) indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter a fter adoption of SFAS 142. The Company has not entered into any business combinations. Therefore, the Company does not expect that the implementation of these standards will have an effect on its financial statements. SFAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001 and is effective for fiscal years beginning after June 15, 2002. SFAS 143 requires that any legal obligation related to the retirement of long-lived assets be quantified and recorded as a liability with the associated asset retirement cost capitalized on the balance sheet in the period it is incurred when a reasonable estimate of the fair value of the liability can be made. SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued in August 2001 and is effective for fiscal years beginning after December 15, 2001. SFAS 144 provides a single, comprehensive accounting model for impairments and disposal of long-lived assets and discontinued operations. SFAS 143 and SFAS 144 will be adopted on their effective dates, and adoption is not expected to result in any material effects on the Company's financial statements. EARNINGS 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-10 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS 1. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Details of costs and estimated earnings on uncompleted contracts are summarized as follows:
JUNE 30, DECEMBER 31, 2001 2000 ---- ---- (UNAUDITED) Costs incurred on uncompleted contracts.................... $ 705,000 $1,831,356 Estimated earnings recognized.............................. -- -- ---------- ---------- Revenues earned to date.................................... 705,000 1,831,356 Less billings to date...................................... 600,000 850,000 ---------- ---------- $ 105,000 $ 981,356 ---------- ---------- ---------- ---------- Costs and estimated earnings on uncompleted contracts in excess of billings....................................... $ 105,000 $1,011,977 Billings in excess of costs and estimated earnings on uncompleted contracts.................................... -- (30,621) ---------- ---------- $ 105,000 $ 981,356 ---------- ---------- ---------- ----------
2. RELATED PARTY TRANSACTIONS During 2000 and 1999, the Company's principal stockholders 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. There were no accrued commissions due to related parties at June 30, 2001. The Company pays $3,000 per month to Ross Mandell, a shareholder for consulting services relating to the public offering. The total fees paid in the six months ended June 30, 2001 total $18,000. The San Diego office is currently leased from Ampac Technology, LLC. The two members of Ampac Technology, LLC are both principal stockholders of the Company. One of the members is also an officer of the Company. Ampac Technology, LLC has entered into an agreement to transfer title to the San Diego property to the Company upon the completion of a public offering of the Company's common stock, at a consideration of $150,000 plus an assumption of the outstanding indebtedness on the property. The Company believes that this price represents the fair market value of the property, and that the terms of this sale are no less favorable to them than could otherwise have been obtained from an unaffiliated third party. In August 1999, the Company entered into a settlement relating to an outstanding loan that had been provided by the Company to TicketPlanet.com, Inc., a corporation in which an officer of the Company is a principal stockholder, officer and director. At such time, the amount of $75,000 remained unpaid under the loan. The Company accepted a payment of $57,000 in full satisfaction of this debt. During 1998, the Company advanced $650,000 to an agent in Hong Kong to make an equity investment in a smart card production company and solicit new business opportunities. In 1999, $230,000 of this advance was returned to the Company and the remaining $420,000 was recorded as selling expense as management believed that the prospect of a future economic benefit from this cash outlay to be unlikely. F-11 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. SHORT-TERM BORROWINGS The Company has a $1,950,000 credit facility, bearing interest at prime rate plus 1.5% (11% at December 31, 2000 and 8.5% at June 30, 2001), 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 and June 30, 2001. In September 2001, this credit facility was renewed through September 2002. Under the renewed agreement, borrowings cannot exceed 70% of eligible receivables and 75% of eligible inventory (unaudited). 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 totaled $14,500 and were paid in full in January 2001. During the six months ended June 30, 2001, the Company received proceeds from various short-term advances ranging from approximately $13,000 to $469,000 with interest rates between 8.75% and 11.0%. At June 30, 2001, outstanding short-term advances totaled of $661,953. They mature at varying dates through September 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 matured 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 and June 30, 2001. Interest on such advances is calculated at the bank's reference rate plus 3.625% (or 13.125% at December 31, 2000 and 10.37% at June 30, 2001) and expired in February 2001. The line was subsequently extended through February 2002 under the same terms. At June 30, 2001, there were no outstanding borrowings on the line of credit. The Company also has an unsecured $25,000 line of credit bearing interest at prime plus 1.75% (11.25% at December 31, 2000 and 8.75% at June 30, 2001) 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 and June 30, 2001. 4. LONG-TERM DEBT Long-term debt consists of:
JUNE 30, DECEMBER 31, 2001 2000 ---- ---- (UNAUDITED) 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 of approximately $414,000 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 and 7.75% at June 30, 2001)..................................................... $ 634,745 $ 639,229 Note payable, secured by real property guaranteed by the Company's principal stockholders, bearing interest at 8.12%, principal and interest due in monthly installments of approximately $4,500 through May 2020.................. $ 477,188 $ 482,411 Other....................................................... 5,315 7,593 ---------- ---------- 1,117,248 1,129,233 Less current portion........................................ 25,861 28,070 ---------- ---------- $1,091,387 $1,101,163 ---------- ---------- ---------- ----------
F-12 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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:
JUNE 30, DECEMBER 31, ------------------- --------------------- 2001 2000 2000 1999 ---- ---- ---- ---- (UNAUDITED) Current Federal............................ $ -- $ -- $ 33,000 $ -- State.............................. 800 1,600 34,600 1,600 ------- --------- --------- --------- $ 800 $ 1,600 $ 67,600 $ 1,600 ------- --------- --------- --------- ------- --------- --------- ---------
Deferred tax assets are comprised of the following:
JUNE 30, DECEMBER 31, 2001 2000 ---- ---- (UNAUDITED) Net operating loss carryforwards................... $ 434,000 $ -- Deferred profit on production line contracts....... 429,000 1,145,000 Accrued commission and compensation................ 27,000 74,000 Inventory reserve.................................. 145,000 34,000 Organization costs................................. 11,000 17,000 Other.............................................. -- 13,000 ----------- ----------- 1,046,000 1,283,000 ----------- ----------- Less valuation allowance........................... (1,046,000) (1,283,000) ----------- ----------- Total.......................................... $ -- $ -- ----------- ----------- ----------- -----------
The Company has net operating loss carryforwards (NOL) as of June 30, 2001 available to reduce future taxable income, if any, of approximately $1,090,000. The benefits from these carryforwards expire through 2021 and 2011 for Federal and State purposes. Should significant changes in the Company's ownership occur, the annual amount of NOL carryforwards available for future use would be limited. 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 the years ended December 31, 2000 and 1999. F-13 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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)% -- --- --- --- ---
The effective tax rate for the six months ended June 30, 2001 and 2000 differs from the statutory tax rate due primarily to changes in the valuation allowance and state income taxes. 6. STOCKHOLDERS' DEFICIT On February 25, 1999, the stockholders approved and the Company effected a 1,600 for 1 stock split of the Company's outstanding common stock. On April 18, 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 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 to its investment banker and attorney 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. Compensation expense of $0 and $33,000 for the year ended December 31, 2000 and the six months ended June 30, 2001 was recorded in connection with this award. STOCK OPTIONS The 2000 Equity Incentive Plan (the 'Plan') provides for grants of stock options. Awards may be granted over a 10-year period to employees of the Company as well as nonemployees, including directors. The aggregate number of shares of common stock that may be issued under the Plan shall not exceed 2,500,000 shares. F-14 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Changes that occurred in options outstanding are summarized below:
SIX MONTHS ENDED AVERAGE REMAINING JUNE 30, 2001 SHARES CONTRACTUAL LIFE ------------- ------ ---------------- Outstanding at beginning of period.............. -- Granted......................................... 1,050,000 ---------- ---------- Outstanding at end of period.................... 1,050,000 9.3 years ---------- ---------- Exercisable at end of period.................... 90,000 9.9 years ---------- ---------- ---------- ----------
Of the options granted, 930,000 options (inclusive of the 90,000 options exercisable at June 30, 2001) are exercisable at the lower of $8.00 or the price per share at which the Company's common stock is offered in its initial public offering price. A total of 120,000 options are exercisable at the lower of $8.80 or 110% of the price per share at which the Company's common stock is offered in its initial public offering price. For all of the options granted, the exercise price will be adjusted to $5.00 if an initial public offering is not consummated prior to January 1, 2002. Until the exercise price of the 720,000 stock options granted to employees can be determined, these options are subject to variable plan accounting. Under variable plan accounting, changes in the intrinsic value of an award between the date of the grant and the measurement date (the first date on which both the number of shares that the grantee is eligible to receive and the exercise price is known) result in a change in the measure of compensation for the award. As of June 30, 2001, the intrinsic value of these options was zero. Because the exercise price of the Company's options will not be known until the earlier of a) the consummation of an initial public offering or b) January 1, 2002, the Company cannot reasonably estimate the fair value of the options granted. Therefore, until the exercise price can be determined, the Company will recognize expense related to awards granted to consultants based on the intrinsic value of the award in accordance with SFAS No. 123. As of June 30, 2001, the 330,000 options granted to consultants did not have any intrinsic value. 7. COMMITMENTS AND CONTINGENCIES PRODUCTION LINE CONTRACTS 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. If a drop in product demand or resale prices to a level that will not enable the Company to recover its costs became probable, the Company would record a loss in relation to these commitments. Subsequent to December 31, 2000, as a result of arbitration, commitments for material purchases and sales were eliminated for one of the contracts. The Company did not incur any losses related to the arbitration. The other commitment expires during December 2001. 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 subsequently increased to $387,000 in May 2001. F-15 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 8. CONCENTRATION OF RISK The Company derives the majority of its revenue 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 is not assured given the Chinese economic infrastructure. The Company uses a single supplier to manufacture smart card production equipment. Therefore, the Company's ability to supply equipment is substantially dependent on the availability and quality of the supplier. The loss of this supplier could have material adverse effect on the Company's results of operations and financial position. The Company relies on one vendor for its supply on Mifare microprocessors, which is the predominant type of microprocessor for smart card systems. The capability of this vendor to provide microprocessors has a material impact on the Company's ability to obtain finished smart cards. The Company is obligated to provide certain customers with the components needed to manufacture cards, including microprocessors. Should there be a shortage in microprocessors, the Company would be unable to obtain adequate microprocessors for its customers, which in turn would restrict its supply of cards and expose the Company to claims for damages. Such a shortage occurred during the third quarter of 1999 through the first quarter of 2001 and forced the Company to curtail fulfillment of orders beginning January 2000. This caused cancelled orders and impaired the Company's ability to expand smart card sales. Orders totaling approximately $328,000 and $412,000 were cancelled during the six months ended June 30, 2001 and 2000, and orders totaling $443,000 and $80,000 were canceled during the years ended December 31, 2000 and 1999. 9. INSURANCE PROCEEDS In 1999, uncertainty regarding the proceeds to be recovered by the Company from the warehouse's insurer was resolved. The claim was the result of a fire in the Company's warehouse in 1998. As a result, the Company recorded other income of $430,357. The full amount was received in 2000. 10. EARNINGS PER SHARE Warrants to purchase 25,000 shares of the Company's common stock and 35,000 contingently issuable shares of common stock were outstanding at December 31, 2000 and 1999 and June 30, 2000. Because their effect would be anti-dilutive, they were not included in the computation of diluted net loss per common share. Options to purchase 1,050,000 shares of the Company's common stock were outstanding at June 30, 2001 but did not have a dilutive effect on earnings per share as these options were not 'in the money'. 10,000 contingently issuable shares were included in the calculation of diluted net income per common share for the six months ended June 30, 2001. 11. SEGMENT REPORTING The Company, from its headquarters in San Francisco and 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. F-16 CHIPCARDS, INC. FKA: AMERICAN PACIFIC TECHNOLOGY CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Revenue from customers exceeding 10% of total revenue:
YEARS ENDED 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 ---------- ---------- ---------- ----------
Revenues were derived from the following geographic sources:
YEARS ENDED DECEMBER 31, ------------------------- 2000 1999 ---- ---- United States........................................ 5% 6% China................................................ 84% 76% Other Non-U.S........................................ 11% 18%
All of the Company's long-lived assets are held in the United States. 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. 13. SUBSEQUENT EVENTS 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. In May 2001, the Company granted 1,050,000 stock options to employees and consultants at a price to be determined. In September 2001, the Company entered into a line of credit agreement permitting borrowings of up to $1,100,000 through September 2002. Outstanding borrowings will bear interest at the prime rate plus 2%, are guaranteed by two of the Company's principal stockholders and are collateralized by substantially all assets. Borrowings cannot exceed 50% of the value of letters of credit posted by customers to secure payment to the Company. In September 2001, the Company and its joint venture partner terminated their relationship. As a result, the Company has no further obligations with respect to any joint ventures. F-17 ============================================================================== 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 [CHIPCARDS LOGO] EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE 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. 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. II-1 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. 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 issued 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 10/1/99.................... 25,000 Common Samuel de St. Services rendered(1) Stock purchase Laurent warrants 10/29/99................... 50,000 shares Fillian Lei Services rendered of Common Stock 10/29/99................... 50,000 shares Timothy Norman Services rendered of Common Stock 10/29/99................... 50,000 shares Paul Amadeo Services rendered of Common Stock 10/29/99................... 50,000 shares Mo Jia Services rendered of Common Stock 10/29/99................... 25,000 shares Jose Flores Services rendered of Common Stock 10/30/99................... 100,000 shares Allen Yue Services rendered of Common Stock 3/20/00.................... 3,000,000 Ross Mandell Consulting services shares of Common Stock 3/20/00.................... 500,000 shares Scott Ziegler Consulting services of Common Stock
(table continued on next page) II-2 (table continued from previous page)
TITLE AND AMOUNT PERSON OR CLASS TOTAL OFFERING PRICE OF DATE OF SECURITIES OF PERSONS TYPE OF CONSIDERATION ---- ------------- ---------- --------------------- 5/18/00 - 10/16/00......... 115,000 shares Private placement $575,000 of Common Stock investors 5/11/01.................... 240,000 options Michael Recca Incentive Stock to purchase Options(2) Common Stock 5/11/01.................... 120,000 options Allen Yue Incentive Stock to purchase Options(2) Common Stock 5/11/01.................... 120,000 options Eric Gravell Incentive Stock to purchase Options(2) Common Stock 5/11/01.................... 120,000 options Fillian Lei Incentive Stock to purchase Options(2) Common Stock 5/11/01.................... 120,000 options Paul Amadeo Incentive Stock to purchase Options(2) Common Stock 5/11/01.................... 120,000 options Timothy Norman Incentive Stock to purchase Options(2) Common Stock 5/11/01.................... 120,000 options Jose Flores Incentive Stock to purchase Options(2) Common Stock 5/11/01.................... 90,000 options Ziegler, Ziegler Incentive Stock to purchase & Altman, LLP Options(2) Common Stock
- --------- (1) All of these warrants have lapsed unexercised. (2) All options are exercisable at the lower of $8.00 per share or the initial public offering price of shares of common stock included in the units being offered, provided that if the initial public offering is not consummated prior to January 1, 2002, the option exercise price will be adjusted to $5.00 per share. 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, except the shares issued on October 29, 1999 and October 30, 1999, which were a stock bonus to employees and, consequently, did not involve a 'sale' under the Securities Act of 1933. The above table does not give effect to a 1,600 for 1 stock split effected on February 25, 1999 or a 2.65 for 1 stock dividend declared on each share held of record as of March 18, 2000. II-3 INDEX TO EXHIBITS EXHIBITS FILED AS PART OF THIS REGISTRATION STATEMENT
EXHIBIT NUMBER EXHIBIT ------ ------- 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, together with all Amendments thereto 3.2* -- 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 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.
II-4
EXHIBIT NUMBER EXHIBIT ------ ------- 10.16** -- Technical Support Agreement, dated February 18, 2000, between the Registrant and China Card I.C. (Shanghai) Co., Ltd. 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 the Registrant and Hainan Pacific New High Tech Company. 10.24** -- Letter Regarding Translation of Certain Exhibits. fairly and accurately translated. 10.25*** -- Consulting Agreement dated March 20, 2000, between Ross Mandell and the Registrant 10.26*** -- Consulting Agreement dated March 20, 2000 between Scott Ziegler and the Registrant 10.27** -- Technical Services and Licensing Agreement, dated May 8, 2001, between Hainan Pacific New High Tech Company and the Registrant 10.28** -- Agreement for Purchase of Equipment and Supplement, dated June 28, 2001, between the Registrant and Beijing Zhong Dun Security Technology Development Company on behalf of the Ministry of Security No. 1 Research Institute. 10.29** -- Technical Services and Licensing Agreement dated June 28, 2001 between the Registrant and Beijing Zhong Dun Security Technology Development Company on behalf of the Ministry of Security No. 1 Research Institute. 10.30** -- Agreement for Purchase of Equipment, dated September 3, 2001, between the Registrant and Beijing Bu Lu Dun High Tech Company Limited on behalf of the China Motor Vehicle Safety Inspection Center. 10.31** -- Technical Services and Licensing Agreement dated September 3, 2001 between the Registrant and Beijing on behalf of the China Motor Vehicle Safety Inspection Center. 10.32** -- Agreement for Purchase of Equipment, dated August 10, 2001, between the Registrant and Tranco Limited. 10.33** -- Technical Services and Licensing Agreement dated August 10, 2001 between the Registrant and Tranco Limited. 10.34** -- Agreement for Purchase of Equipment, dated August 10, 2001, between the Registrant and Tranco Limited. 10.35** -- Technical Services and Licensing Agreement dated August 10, 2001 between the Registrant and Tranco Limited. 10.36** -- Equipment Purchase Agreement, dated September 6, 2001, between the Registrant and Shangdong Lu Neng Huang Tai Industrial Group Limited.
II-5
EXHIBIT NUMBER EXHIBIT ------ ------- 10.37** -- Technical Services and Licensing Agreement, dated September 6, 2001, between the Registrant and Shangdong Lu Neng Huang Tai Industrial Group Limited. 10.38** -- Agreement of Transfer of Shares, dated September 6, 2001, between the Registrant and Shangdong Lu Neng Huang Tai Industrial Group Llimited. 10.39** -- Agreement of Transfer of Shares, dated September 6, 2001, between the Registrant and Shangdong Lu Neng Huang Tai Industrial Group Material Trading Company. 10.40** -- Agreement of Transfer of Shares, dated September 6, 2001, between the Registrant and United Powers (USA). 23.1*** -- Consent of Ziegler, Ziegler & Altman LLP (to be included in Exhibit 5.1) 23.2** -- Consent of BDO Seidman, LLP 23.3** -- Consent of Ross Mandell 23.4** -- Consent of Scott Ziegler 23.5** -- Consent of Paul Amadeo
- --------- * Previously filed. ** Filed herewith *** To be filed by amendment. II-6 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. (E) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the 'Act') may be permitted to directors, officer and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. II-7 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 November 13, 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 President and Director November 13, 2001 ......................................... ALLEN YUE /s/ ERIC GRAVELL Executive Vice President and November 13, 2001 ......................................... Director ERIC GRAVELL /s/ MICHAEL RECCA Chief Financial Officer November 13, 2001 ......................................... MICHAEL RECCA /s/ FILLIAN LEI Controller November 13, 2001 ......................................... FILLIAN LEI
II-8 INDEX TO EXHIBITS EXHIBITS FILED AS PART OF THIS REGISTRATION STATEMENT
EXHIBIT NUMBER EXHIBIT ------ ------- 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, together with all Amendments thereto 3.2* -- 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 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.
EXHIBIT NUMBER EXHIBIT ------ ------- 10.16** -- Technical Support Agreement, dated February 18, 2000, between the Registrant and China Card I.C. (Shanghai) Co., Ltd. 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 the Registrant and Hainan Pacific New High Tech Company. 10.24** -- Letter Regarding Translation of Certain Exhibits. fairly and accurately translated. 10.25*** -- Consulting Agreement dated March 20, 2000, between Ross Mandell and the Registrant 10.26*** -- Consulting Agreement dated March 20, 2000 between Scott Ziegler and the Registrant 10.27** -- Technical Services and Licensing Agreement, dated May 8, 2001, between Hainan Pacific New High Tech Company and the Registrant 10.28** -- Agreement for Purchase of Equipment and Supplement, dated June 28, 2001, between the Registrant and Beijing Zhong Dun Security Technology Development Company on behalf of the Ministry of Security No. 1 Research Institute. 10.29** -- Technical Services and Licensing Agreement dated June 28, 2001 between the Registrant and Beijing Zhong Dun Security Technology Development Company on behalf of the Ministry of Security No. 1 Research Institute. 10.30** -- Agreement for Purchase of Equipment, dated September 3, 2001, between the Registrant and Beijing Bu Lu Dun High Tech Company Limited on behalf of the China Motor Vehicle Safety Inspection Center. 10.31** -- Technical Services and Licensing Agreement dated September 3, 2001 between the Registrant and Beijing on behalf of the China Motor Vehicle Safety Inspection Center. 10.32** -- Agreement for Purchase of Equipment, dated August 10, 2001, between the Registrant and Tranco Limited. 10.33** -- Technical Services and Licensing Agreement dated August 10, 2001 between the Registrant and Tranco Limited. 10.34** -- Agreement for Purchase of Equipment, dated August 10, 2001, between the Registrant and Tranco Limited. 10.35** -- Technical Services and Licensing Agreement dated August 10, 2001 between the Registrant and Tranco Limited. 10.36** -- Equipment Purchase Agreement, dated September 6, 2001, between the Registrant and Shangdong Lu Neng Huang Tai Industrial Group Limited.
EXHIBIT NUMBER EXHIBIT ------ ------- 10.37** -- Technical Services and Licensing Agreement, dated September 6, 2001, between the Registrant and Shangdong Lu Neng Huang Tai Industrial Group Limited. 10.38** -- Agreement of Transfer of Shares, dated September 6, 2001, between the Registrant and Shangdong Lu Neng Huang Tai Industrial Group Llimited. 10.39** -- Agreement of Transfer of Shares, dated September 6, 2001, between the Registrant and Shangdong Lu Neng Huang Tai Industrial Group Material Trading Company. 10.40** -- Agreement of Transfer of Shares, dated September 6, 2001, between the Registrant and United Powers (USA). 23.1*** -- Consent of Ziegler, Ziegler & Altman LLP (to be included in Exhibit 5.1) 23.2** -- Consent of BDO Seidman, LLP 23.3** -- Consent of Ross Mandell 23.4** -- Consent of Scott Ziegler 23.5** -- Consent of Paul Amadeo
- --------- * Previously filed. ** Filed herewith *** To be filed by amendment. STATEMENT OF DIFFERENCES ------------------------ Characters normally expressed as subscript shall be preceded by........ [u] EX-4 3 ex4-2.txt EXHIBIT 4.2 EXHIBIT 4.2 WARRANT REPRESENTATIVE'S WARRANT AGREEMENT (the "Warrant Agreement"), dated as of __________ ___, 2001, between CHIPCARDS, INC., a California corporation (the "Company"), and THE THORNWATER COMPANY, L.P. (hereinafter referred to variously as the "Holder" or the "Representative"). The Company proposes to issue to the Representative warrants (the "Warrants") to purchase up to 100,000 units (the "Units"), each Unit consisting of one share of the Company's common stock, no par value (the "Common Stock") and one Warrant for the Purchase of Common Stock (the "Redeemable Warrant"); The Representative has agreed, pursuant to the underwriting agreement (the "Underwriting Agreement") dated ______________, 200[1] among the Company, the Representative and the other underwriters named in Schedule I thereof (collectively with the Representative, the "Underwriters") to act as the representative of the Underwriters in connection with the Company's proposed initial public offering (the "Initial Public Offering") of 1,000,000 Units at an initial public offering price of $8.10 per Unit (1,150,000 Units if the over-allotment option is exercised); and The Warrants to be issued pursuant to this Agreement will be issued on the Closing Date (as such term is defined in the Underwriting Agreement) by the Company to the Representative in consideration for, and as part of the compensation in connection with, the Representative acting as representative of the Underwriters pursuant to the Underwriting Agreement; NOW, THEREFORE, in consideration of the premises, the payment by the Representative to the Company of ONE THOUSAND DOLLARS AND NO CENTS ($1,000.00), the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant. The Holder (as hereinafter defined) is hereby granted the right to purchase, at any time from _________, 200[2] until 5:30 p.m., New York time, on ___________________, 200[6], up to 100,000 Units at an initial exercise price (subject to adjustment as provided in Article 8 hereof) of $9.72 per Unit, subject to the terms and conditions of this Agreement. Except as set forth in this Section 1, the Redeemable Warrants issuable upon exercise of the Warrants are in all respects identical to the Redeemable Warrants being sold in the Initial Public Offering pursuant to the terms and provisions of the Warrant Agreement, dated as of _________, 200[1], between the Company and The Thornwater Company, L.P. 2. Warrant Certificates. The warrant certificates (the "Warrant Certificates") delivered and to be delivered pursuant to this Agreement shall be in the form set forth in Exhibit A, attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions, and other variations as required or permitted by this Agreement. 3. Exercise of Warrant. The Warrants initially are exercisable at the initial exercise price per Unit set forth in Section 6 hereof, payable by certified or official bank check in New York Clearing House funds, subject to adjustment as provided in Section 8 hereof. Upon surrender of a Warrant Certificate with the annexed Form of Election to Purchase duly executed, together with payment of the Exercise Price (as hereinafter defined) for the Units purchased at the Company's principal offices (presently located at Citicorp Center, One Sansome Street, 19th Floor, San Francisco, California 94104), the registered holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the shares of Common Stock and a certificate or certificates for the Redeemable Warrants evidencing the Units. The purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder thereof, in whole or in part (but not as to fractional shares of Common Stock and Redeemable Warrants underlying the Warrants). In the case of the purchase of less than all the securities purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the securities purchasable thereunder. 4. Issuance of Certificates. Upon the exercise of the Warrants, the issuance of certificates evidencing the shares of Common Stock and the Redeemable Warrants or other securities, properties or rights underlying such Warrants, and upon the exercise of the Redeemable Warrants, the issuance of certificates for shares of Common Stock or other securities, properties or rights underlying such Redeemable Warrants, shall be made forthwith (and in any event within three (3) business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Warrant Certificates and the certificates evidencing the shares of Common Stock and the Redeemable Warrants or other securities, property or rights shall be executed on behalf of the Company by the manual or facsimile signature of the Chairman of the Board of Directors, or the President or any Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. 5. Restriction On Transfer of Warrants. The Holder of a Warrant Certificate, by its acceptance thereof, covenants and agrees that (a) the Warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one (1) year from the date hereof, except to the Underwriters, including the Representative, to the Selected Dealers participating in the Initial Public Offering or to bona fide officers or partners thereof (collectively, the "Transferees"), and (b) subsequent to such one (1) year period any transfer of the Warrants may occur; provided, however, that the Warrants are exercised immediately upon transfer and if not immediately exercised upon such transfer, that such Warrants will lapse. The Holder of a Warrant Certificate, by its acceptance thereof, also covenants and agrees that the Warrants may not be exercised nor may the Common Stock and Redeemable Warrants comprising the Units that underly the Warrants be resold, transferred or assigned for a period of one (1) year from the date hereof. 6. Exercise Price. 6.1 Initial and Adjusted Exercise Price. The initial exercise price of each Warrant shall be $9.72 per share of Unit. The adjusted exercise price shall be the price that shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Section 8 hereof. 6.2 Exercise Price. The term "Exercise Price" herein shall mean the initial exercise price or the adjusted exercise price, depending upon the context. 7. Registration Rights. 7.1 Registration Under the Securities Act of 1933. The Warrants, the Units, including the shares of Common Stock and the Redeemable Warrants that are included in the Units, and the shares of Common Stock issuable upon exercise of the Redeemable Warrants have been registered under the Securities Act of 1933, as amended (the "Securities Act"). Upon exercise, in part or in. whole, of the Warrants, certificates evidencing the shares of Common Stock, the Redeemable Warrants and upon exercise of the Redeemable Warrants, in whole or in part, certificates evidencing the shares of Common Stock underlying the Redeemable Warrants and any other securities issuable upon exercise of the Warrants (collectively, the "Warrant Securities") shall bear the following legend: The securities represented by this certificate may not be offered or sold except pursuant to (i) an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), (ii) to the extent applicable, Rule 144 under the Securities Act (or any similar rule under the Securities Act relating to the disposition of securities), or (iii) an opinion of counsel, if such opinion shall be reasonably satisfactory to counsel to CHIPCARDS, INC., that an exemption from registration under the Securities Act is available. 7.2 Piggyback Registration. If, at any time commencing on ___________, 200[2], and expiring six (6) years thereafter, the Company proposes to register any of its securities under the Securities Act (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-4, Form S-8 or any successor form thereto), it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such registration statement, to the Representative and to all other Holders of the Warrants and/or Warrant Securities of its intention to do so. If the Representative or other Holders of the Warrants and/or Warrant Securities notify the Company within twenty (20) days after receipt of any such notice of its or their desire to include any such securities in such proposed registration statement, the Company shall afford the Representative and such Holders of the Warrants and/or Warrant Securities the opportunity to have any such Warrant Securities registered under such registration statement. Notwithstanding the provisions of this Section 7.2, the Company shall have the right at any time after it shall have given written notice pursuant to this Section 7.2 (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. 7.3 Demand Registration. (a) At any time commencing on _________, 200[2] and expiring ____ (___) years thereafter, the Holders of Warrants and/or Warrant Securities representing more than ____% of such securities at that time outstanding (assuming the exercise of all of the Warrants), shall have the right (which right is in addition to the registration rights under Section 7.2 hereof), exercisable by written notice to the Company, to have the Company prepare and file with the Securities and Exchange Commission (the "Commission"), on one occasion, a registration statement and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for the Representative and Holders in order to comply with the provisions of the Securities Act, so as to permit a public offering and sale of their respective Warrant Securities for _____ (___) consecutive months by such Holders and any other Holders of the Warrants and/or Warrant Securities who notify the Company within ____ (___) days after receiving notice from the Company of such request. (b) The Company covenants and agrees to give written notice of any registration request under this Section 7.3 by the majority of the Holders to all other registered Holders of the Warrants and the Warrant Securities within ___ (___) days from the date of the receipt of any such registration request. (c) In addition to the registration rights under Section 7.2 and subsection (a) of this Section 7.3, at any time commencing on _________, 200[2] and expiring _____ (___) years thereafter, the Holders of Warrants and/or Warrant Securities representing more than ____% of such securities at the time outstanding (assuming the exercise of all of the Warrants) shall have the right, exercisable by written request to the Company, to have the Company prepare and file, on one occasion, with the Commission a registration statement so as to permit a public offering and sale for _____ (___) consecutive months by any such Holder of its Warrant Securities; provided, however, that the provisions of Section 7.4(b) hereof shall not apply to any such registration request and registration and all costs incident thereto shall be at the expense of the Holder or Holders making such request. 7.4 Covenants of the Company With Respect to Registration. In connection with any registration under Section 7.2 or 7.3 hereof, the Company covenants and agrees as follows: (a) The Company shall use its best efforts to file a registration statement within _________ (____) days of receipt of any demand pursuant to Section 7.3, shall use its best efforts to have any registration statements declared effective at the earliest possible time, and shall furnish each Holder desiring to sell Warrant Securities such number of prospectuses as shall reasonably be requested. (b) The Company shall pay all costs (excluding transfer taxes, if any, and fees and expenses of Holder(s)' counsel and any underwriting or selling commissions), fees and expenses in connection with all registration statements filed pursuant to Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses. The Holder(s) will pay all costs, fees and expenses in connection with any registration statement filed pursuant to Section 73(c). If the Company shall fail to comply with the provisions of Section 7.4(a), the Company shall, in addition to any other equitable or other damages or relief available to the Holder(s), be liable for any or all incidental, special and consequential damages and damages due to loss of profit sustained by the Holder(s) requesting registration of their Warrant Securities. (c) The Company will take all necessary action which may be required in qualifying or registering the Warrant Securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as reasonably are requested by the Holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (d) The Company shall indemnify the Holder(s) of the Warrant Securities to be sold pursuant to any registration statement and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions to which the Company has agreed to indemnify the Underwriters contained in Section 8 of the Underwriting Agreement. (e) The Company shall not require the Holder(s) to exercise their Warrants prior to the initial filing of any registration statement or the effectiveness thereof. (f) The Company shall not permit the inclusion of any securities other than the Warrant Securities to be included in the registration statement filed pursuant to Section 7.3(a) hereof, without the prior written consent of the Holders of Warrants and/or Warrant Securities representing more than _____% of such securities at that time outstanding (assuming the exercise of all of the Warrants). (g) The Company shall furnish to the Representative on behalf of each Holder participating in the offering and to the managing underwriter, if any, a signed counterpart, addressed to the Representative on behalf of each such Holder and to the managing underwriter, if any, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement if there is no managing underwriter or the date of the closing under the underwriting agreement if there is a managing underwriter, and (ii) a "cold comfort" letter, dated the effective date of such registration statement and the date of the closing under the underwriting agreement if there is a managing underwriter, signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (h) The Company shall as soon as practicable after the effective date of the registration statement, and in any event within 15 months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Securities Act) an earnings statement (which need not be audited) complying with Section 11 (a) of the Securities Act and covering a period of at least 12 consecutive months beginning after the effective date of the registration statement. (i) The Company shall deliver promptly to each Holder who so requests and the managing underwriter, if any, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to any registration statement filed pursuant to this Agreement, and permit each Holder who so requests and the managing underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. ("NASD"). Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as each Holder and the managing underwriter shall reasonably request. (j) With respect to a registration statement filed pursuant to Section 7.3, -the Company shall enter into an underwriting agreement with the managing underwriter selected for such underwriting by Holders holding a majority of the Warrant Securities requested to be included in such underwriting. Such agreement shall be satisfactory in form and substance to the Company, each Holder and such managing underwriter, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Warrant Securities and may, at their option, require that any or all of the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders and their intended methods of distribution. 7.6 Covenants of the Holders With Respect to Registration. The Holder(s) of the Warrant Securities to be sold pursuant to a registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 8 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company. 8. Adjustments to Exercise Price and Number of Securities. 8.1 Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. 8.2 Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 8, the number of Units issuable upon the exercise of each Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Units issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 8.3 Definition of Common Stock. For the purpose of this Agreement, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Certificate of Incorporation of the Company as it may be amended as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. 8.4 Merger or Consolidation. In case of any consolidation of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or merger shall execute and deliver to the Holder a supplemental warrant agreement providing that the Holder of each Warrant then outstanding or to be outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or merger, by a holder of the number of shares of Common Stock of the Company for which such warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments, which shall be identical to the adjustments provided in Section 8. The above provision of this Subsection shall similarly apply to successive consolidations or mergers. 8.5 Dividends and Other Distributions. In the event that the Company shall at any time prior to the exercise of all Warrants declare a dividend (consisting of shares of Common Stock) or otherwise distribute to its stockholders any assets, property, rights, evidences of indebtedness, securities (other than shares of Common Stock), whether issued by the Company or by another, or any other thing of value, the Holders of the unexercised Warrants shall thereafter be entitled, in addition to the shares of Common Stock, Redeemable Warrants or other securities and property receivable upon the exercise thereof, to receive, upon the exercise of such Warrants, the same property, assets, rights, evidences of indebtedness. securities or any other thing of value that they would have been entitled to receive at the time of such dividend or distribution as if the Warrants had been exercised immediately prior to such dividend or distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this subsection 8.5. Nothing contained herein shall provide for the receipt or accrual by a Holder of cash dividends prior to the exercise by such Holder of the Warrants. 9. Exchange and Replacement of Warrant Certificates. Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by the registered Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of Units in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrants, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 10. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of shares of Common Stock or Redeemable Warrants upon the exercise of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock, Redeemable Warrants or other securities, properties or rights as the case may be. 11. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants and the Redeemable Warrants, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all shares of Common Stock, Redeemable Warrants and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. The Company further covenants and agrees that upon exercise of the Redeemable Warrants underlying the Warrants and payment of the Redeemable Warrant exercise price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock and Redeemable Warrants issuable upon the exercise of the Warrants and shares of Common Stock issuable upon exercise of the Redeemable Warrants to be listed (subject to official notice of issuance) on all securities exchanges on which the Common Stock and the Redeemable Warrants issued in connection with the Initial Public Offering may then be listed and/or quoted on The Nasdaq Stock Market. 12. Notices to Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the Holders the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or Warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; then, in any one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend, or the issuance of any convertible or exchangeable securities, or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to the registered Holder of the Warrants, to the address of such Holder as shown on the books of the Company; or (b) If to the Company, to the address set forth in Section 3 hereof or to such other address as the Company may designate by notice to the Holders. 14. Supplements and Amendments. The Company and tile Representative may from time to time supplement or amend this Agreement without the approval of any Holders of Warrant Certificates (other than the Representative) in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Representative may deem necessary or desirable and which the Company and the Representative deem shall not adversely affect the interests of the Holders of Warrant Certificates. 15. Successors. All the covenants and provisions of this Agreement shall be binding upon and inure to the benefit of the Company, the Holders and their respective successors and assigns hereunder. 16. Termination. This Agreement shall terminate at the close of business on ________, 200__. Notwithstanding the foregoing, the indemnification provisions of Section 7 shall survive such termination until the close of business on _________, 200__. 17. Governing Law: Submission to Jurisdiction. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State without giving effect to the rules of said State governing the conflicts of laws. The Company, the Representative and the Holders hereby agree that any action, proceeding or claim against it arising out of, or relating in any way to, this Agreement shall be brought and enforced in the courts of the State of New York or of the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company, the Representative and the Holders hereby irrevocably waive any objection to such exclusive jurisdiction or inconvenient forum. Any such process or summons to be served upon any of the Company, the Representative and the Holders (at the option of the party bringing such action, proceeding or claim) may be served by transmitting a copy thereof, by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 13 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the party so served in any action, proceeding or claim. The Company, the Representative and the Holders agree that the prevailing party(ies) in any such action or proceeding shall be entitled to recover from the other part(ies) all of its/their reasonable legal costs and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. 18. Entire Agreement, Modification. This Agreement (including the Underwriting Agreement to the extent portions thereof are referred to herein) contains the entire understanding between the parties hereto with respect to the subject matter hereof and may not be modified or amended except by a writing duly signed by the party against whom enforcement of the modification or amendment is sought. 19. Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. 20. Captions. The caption headings of the Sections of this Agreement are for convenience of reference only and are not intended, nor should they be construed as, a part of this Agreement and shall be given no substantive effect. 21. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Representative and any other registered Holder(s) of the Warrant Certificates or Warrant Securities any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and the Representative and any other Holder(s) of the Warrant Certificates or Warrant Securities. 22. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. CHIPCARDS, INC. By: ___________________________ Name: Allen Yue Title: President Attest: By: ___________________________ Name: Title: Secretary THE THORNWATER COMPANY, L.P. By: ___________________________ Name: Title: Chief Executive Officer Attest: By: ___________________________ Name: Title: Secretary EX-10 4 ex10-3.txt EXHIBIT 10.3 Exhibit 10.3 EMPLOYMENT AGREEMENT This Employment Agreement, dated as of November 1, 2000, is by and between Chipcards, Inc., a California corporation (the "Company"), and Fillian Lei (the "Employee"). WHEREAS, the Company and Employee desire to enter into an Employment Agreement setting forth the terms and conditions of Employee's employment with the Corporation; and WHEREAS, the Company desires assurance of the continued association and services of the Employee in order to retain her experience, abilities, and knowledge, and is therefore willing to engage her services on the terms and conditions set forth below, and the Employee 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 Employee, each intending to be legally bound, agree as follows: 1. Employment. (a) Duties. The Employee will serve the Company faithfully to the best of her ability and shall perform such duties as shall be assigned and designated by the President or the Board of Directors of the Corporation. 2. Compensation. (a) Salary. For all duties and services to be performed by the Employee hereunder, the Company shall pay the Employee an annual salary (the "Base Salary") in the amount of One Hundred Thousand Dollars ($100,000) 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 Employee'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), Employee 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 Employee'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 Employee for all reasonable out-of-pocket business expenses incurred by the Employee on behalf of or in connection with the services rendered to the Company, provided that the Employee properly accounts to the Company for all such expenses in accordance with the rules and regulations of the Internal Revenue Service under the 1 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 Employee is entitled to participate in all normal and customary employee benefit plans adopted by the Company to the extent that the Employee 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 Employee shall be entitled to three (3) weeks of paid vacation each twelve-month period, which shall accrue on a pro rata basis from the date the Employee's employment commences under this Agreement. In the event that the Employee 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 her or its intention not to renew. (b) Termination. Subject to the respective continuing obligations of the Company and the Employee under Sections 4 and 5: (1) The Company may terminate this Agreement immediately on written notice to the Employee for "Cause." For purposes of this Section 3, Cause shall mean: (i) conduct by the Employee 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 Employee's willful misconduct or negligence in the performance of her duties hereunder, including the failure or refusal to comply with any legal directives of the Board of Directors; (iii) the commission by the Employee of an act constituting a felony for which the Employee has been convicted or has pleaded nolo contendere; (iv) the commission of a crime by the Employee involving moral turpitude or fraud for which the Employee has been convicted or has pleaded nolo contendere; (v) the failure to substantially perform her duties hereunder after written notice and failure to cure within fifteen (15) days (other than by reason of disability); (vi) chronic and unexcused absenteeism; (vii) the Employee's use of alcohol or any controlled substance to an extent that it 2 interferes with the performance of her duties under this Agreement; or (viii) a breach by the Employee of any of her obligations under this Agreement. (2) This Agreement will terminate upon the Employee's death or upon written notice from the Company in the event of the Employee's "permanent disability." The term "permanent disability" means a physical or mental incapacity or disability which renders the Employee 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 Employee'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 Employee's attending physician and such physician retained by the Company, the matter shall be resolved by a third licensed physician selected jointly by the Employee'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 Employee. The date this Agreement is terminated is hereinafter referred to as the "Termination Date." (c) Compensation Upon Termination. (1) If the Employee 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 Employee 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. (2) If this Agreement terminates pursuant to paragraph (2) of Section 3(b), the Company will be obligated to pay the Employee: (i) Base Salary as may be due and owing or otherwise accrued through the Termination Date; (ii) an additional amount equal to the Employee'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 Employee or her personal representative pursuant to insurance policies maintained by the Company for the benefit of the Employee; 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 Employee (i) Base 3 Salary as may be due and owing or otherwise accrued through the Termination Date; (ii) an additional amount equal to the Employee's Base Salary for a period of three (3) months following the Termination Date or, if shorter, the balance of the Term had her employment not been so terminated, at the rate in effect on the Termination Date, as a severance payment (which sum the Employee 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 Employee; 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 Employee will not disclose, divulge or make accessible the Confidential Information or any part thereof to any unauthorized person or entity or use it for her own benefit or the benefit of any third party; (ii) the Employee will use all reasonable care to protect the Confidential Information of the Company from unauthorized use, disclosure and publication; and (iii) the Employee will not render any services to any person, firm, corporation, partnership, limited liability company, association or other entity to which any such Confidential Information, in whole or in part, has been disclosed or is threatened to be disclosed by or at the instance of the Employee. The Employee 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 4 compiled by the Employee or made available to the Employee 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 Employee'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 Employee. 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 Employee represents and warrants to the Company that he is not currently subject to a non-competition, confidentiality or other such agreement which prohibits the Employee from working for the Company. (b) Non-Compete. The Employee agrees that, during her employment with the Company and for a period of one (1) year after employment with the Company terminates for any reason whatsoever, the Employee 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 her 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, 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 5 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 Employee'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 Employee's employment with the Company. (c) Personal Investments. Nothing herein contained shall prevent the Employee 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 Employee (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 Employee'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 6 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 Employee. (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 Employee has violated this Agreement, the Employee 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 Employee for her reasonable costs and legal fees in connection with such action. (b) No Conflicts. The Employee 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 Employee under any agreement or contract to which the Employee is a party or any other obligation by which the Employee 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 Employee, but it shall be binding upon, and shall inure to the benefit of, her 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 Employee. (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 Employee's employment by the Company, including, without limitation, any and all claims, controversies and disputes related to her hiring, the terms of her employment or the 7 termination of her 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. (h) Waivers. No failure or delay by the Company or the Employee 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 Employee 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 8 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 Employee have executed this Agreement as of the date first above written. CHIPCARDS, INC. EMPLOYEE By: ------------------------------- ------------------------------- Name: Fillian Lei Title: 9 EX-10 5 ex10-4.txt EXHIBIT 10.4 Exhibit 10.4 EMPLOYMENT AGREEMENT This Employment Agreement, dated as of November 1, 2000, is by and between Chipcards, Inc., a California corporation (the "Company"), and Paul Amadeo (the "Employee"). WHEREAS, the Company and Employee desire to enter into an Employment Agreement setting forth the terms and conditions of Employee's employment with the Corporation; and WHEREAS, the Company desires assurance of the continued association and services of the Employee in order to retain her experience, abilities, and knowledge, and is therefore willing to engage her services on the terms and conditions set forth below, and the Employee 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 Employee, each intending to be legally bound, agree as follows: 1. Employment. (a) Duties. The Employee will serve the Company faithfully to the best of his ability and shall perform such duties as shall be assigned and designated by the President or the Board of Directors of the Corporation. 2. Compensation. (a) Salary. For all duties and services to be performed by the Employee hereunder, the Company shall pay the Employee an annual salary (the "Base Salary") in the amount of One Hundred Thousand Dollars ($100,000) 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 Employee'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), Employee 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 Employee'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 Employee for all reasonable out-of-pocket business expenses incurred by the Employee on behalf of or in connection with the services rendered to the Company, provided that the Employee 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 Employee is entitled to participate in all normal and customary employee benefit plans adopted by the Company to the extent that the Employee 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 Employee shall be entitled to three (3) weeks of paid vacation each twelve-month period, which shall accrue on a pro rata basis from the date the Employee's employment commences under this Agreement. In the event that the Employee 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 Employee under Sections 4 and 5: (1) The Company may terminate this Agreement immediately on written notice to the Employee for "Cause." For purposes of this Section 3, Cause shall mean: (i) conduct by the Employee 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 Employee'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 Employee of an act constituting a felony for which the Employee has been convicted or has pleaded nolo contendere; (iv) the commission of a crime by the Employee involving moral turpitude or fraud for which the Employee 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) chronic and unexcused absenteeism; (vii) the Employee's use of alcohol or any controlled substance to an extent that it 2 interferes with the performance of his duties under this Agreement; or (viii) a breach by the Employee of any of his obligations under this Agreement. (2) This Agreement will terminate upon the Employee's death or upon written notice from the Company in the event of the Employee's "permanent disability." The term "permanent disability" means a physical or mental incapacity or disability which renders the Employee 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 Employee'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 Employee's attending physician and such physician retained by the Company, the matter shall be resolved by a third licensed physician selected jointly by the Employee'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 Employee. The date this Agreement is terminated is hereinafter referred to as the "Termination Date." (c) Compensation Upon Termination. (1) If the Employee 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 Employee 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. (2) If this Agreement terminates pursuant to paragraph (2) of Section 3(b), the Company will be obligated to pay the Employee: (i) Base Salary as may be due and owing or otherwise accrued through the Termination Date; (ii) an additional amount equal to the Employee'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 Employee or his personal representative pursuant to insurance policies maintained by the Company for the benefit of the Employee; 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 Employee (i) Base 3 Salary as may be due and owing or otherwise accrued through the Termination Date; (ii) an additional amount equal to the Employee'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 Employee 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 Employee; 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 Employee 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 Employee will use all reasonable care to protect the Confidential Information of the Company from unauthorized use, disclosure and publication; and (iii) the Employee will not render any services to any person, firm, corporation, partnership, limited liability company, association or other entity to which any such Confidential Information, in whole or in part, has been disclosed or is threatened to be disclosed by or at the instance of the Employee. The Employee 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 4 compiled by the Employee or made available to the Employee 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 Employee'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 Employee. 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 Employee represents and warrants to the Company that he is not currently subject to a non-competition, confidentiality or other such agreement which prohibits the Employee from working for the Company. (b) Non-Compete. The Employee 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 Employee 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, 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 5 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 Employee'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 Employee's employment with the Company. (c) Personal Investments. Nothing herein contained shall prevent the Employee 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 Employee (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 Employee'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 6 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 Employee. (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 Employee has violated this Agreement, the Employee 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 Employee for his reasonable costs and legal fees in connection with such action. (b) No Conflicts. The Employee 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 Employee under any agreement or contract to which the Employee is a party or any other obligation by which the Employee 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 Employee, 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 Employee. (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 Employee'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 7 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. (h) Waivers. No failure or delay by the Company or the Employee 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 Employee 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 8 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 Employee have executed this Agreement as of the date first above written. CHIPCARDS, INC. EMPLOYEE By: -------------------------------- ---------------------------------- Name: Paul Amadeo Title: 9 EX-10 6 ex10-5.txt EXHIBIT 10.5 Exhibit 10.5 EMPLOYMENT AGREEMENT This Employment Agreement, dated as of November 1, 2000, is by and between Chipcards, Inc., a California corporation (the "Company"), and Timothy Norman (the "Employee"). WHEREAS, the Company and Employee desire to enter into an Employment Agreement setting forth the terms and conditions of Employee's employment with the Corporation; and WHEREAS, the Company desires assurance of the continued association and services of the Employee in order to retain her experience, abilities, and knowledge, and is therefore willing to engage her services on the terms and conditions set forth below, and the Employee 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 Employee, each intending to be legally bound, agree as follows: 1. Employment. (a) Duties. The Employee will serve the Company faithfully to the best of his ability and shall perform such duties as shall be assigned and designated by the President or the Board of Directors of the Corporation. 2. Compensation. (a) Salary. For all duties and services to be performed by the Employee hereunder, the Company shall pay the Employee an annual salary (the "Base Salary") in the amount of One Hundred Thousand Dollars ($100,000) 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 Employee'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), Employee 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 Employee'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 Employee for all reasonable out-of-pocket business expenses incurred by the Employee on behalf of or in connection with the services rendered to the Company, provided that the Employee properly accounts to the Company for all such expenses in 1 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 Employee is entitled to participate in all normal and customary employee benefit plans adopted by the Company to the extent that the Employee 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 Employee shall be entitled to three (3) weeks of paid vacation each twelve-month period, which shall accrue on a pro rata basis from the date the Employee's employment commences under this Agreement. In the event that the Employee 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 Employee under Sections 4 and 5: (1) The Company may terminate this Agreement immediately on written notice to the Employee for "Cause." For purposes of this Section 3, Cause shall mean: (i) conduct by the Employee 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 Employee'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 Employee of an act constituting a felony for which the Employee has been convicted or has pleaded nolo contendere; (iv) the commission of a crime by the Employee involving moral turpitude or fraud for which the Employee 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) chronic and unexcused absenteeism; (vii) the 2 Employee's use of alcohol or any controlled substance to an extent that it interferes with the performance of his duties under this Agreement; or (viii) a breach by the Employee of any of his obligations under this Agreement. (2) This Agreement will terminate upon the Employee's death or upon written notice from the Company in the event of the Employee's "permanent disability." The term "permanent disability" means a physical or mental incapacity or disability which renders the Employee 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 Employee'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 Employee's attending physician and such physician retained by the Company, the matter shall be resolved by a third licensed physician selected jointly by the Employee'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 Employee. The date this Agreement is terminated is hereinafter referred to as the "Termination Date." (c) Compensation Upon Termination. (1) If the Employee 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 Employee 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. (2) If this Agreement terminates pursuant to paragraph (2) of Section 3(b), the Company will be obligated to pay the Employee: (i) Base Salary as may be due and owing or otherwise accrued through the Termination Date; (ii) an additional amount equal to the Employee'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 Employee or his personal representative pursuant to insurance policies maintained by the Company for the benefit of the Employee; 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 (3) If the Company terminates this Agreement pursuant to paragraph (3) of Section 3(b), the Company will be obligated to pay the Employee (i) Base Salary as may be due and owing or otherwise accrued through the Termination Date; (ii) an additional amount equal to the Employee'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 Employee 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 Employee; 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 Employee 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 Employee will use all reasonable care to protect the Confidential Information of the Company from unauthorized use, disclosure and publication; and (iii) the Employee will not render any services to any person, firm, corporation, partnership, limited liability company, association or other entity to which any such Confidential Information, in whole or in part, has been disclosed or is threatened to be disclosed by or at the instance of the Employee. The Employee 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, 4 typewritten, printed, recorded, computer-generated or graphic material, however produced or reproduced, constituting or containing Confidential Information made or compiled by the Employee or made available to the Employee 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 Employee'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 Employee. 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 Employee represents and warrants to the Company that he is not currently subject to a non-competition, confidentiality or other such agreement which prohibits the Employee from working for the Company. (b) Non-Compete. The Employee 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 Employee 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, 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 5 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 Employee'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 Employee's employment with the Company. 6 (c) Personal Investments. Nothing herein contained shall prevent the Employee 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 Employee (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 Employee'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 Employee. (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 Employee has violated this Agreement, the Employee 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 Employee for his reasonable costs and legal fees in connection with such action. (b) No Conflicts. The Employee 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 Employee under any agreement or contract to which the Employee is a party or any other obligation by which the Employee 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 Employee, 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 Employee. (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 Employee'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 Employee 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 Employee 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 Employee have executed this Agreement as of the date first above written. CHIPCARDS, INC. EMPLOYEE By: ---------------------------------- --------------------------------- Name: Timothy Norman Title: 9 EX-10 7 ex10-9.txt EXHIBIT 10.9 Exhibit 10.9 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. SINO FOREIGN JOINT VENTURE AGREEMENT February 2000 FOREIGN JOINT VENTURE AGREEMENT ARTICLE 1: GENERAL PRINCIPLES This agreement is made between the Shandong Huang Tai Industrial Group of China with the American Pacific Aviation Technology Company (AMPAC) of the United States, according to the "People's Republic of China Sino-Foreign Joint Venture Laws" and other related Chinese laws, and based on the principle of mutual benefits and through friendly negotiations to establish in Shanghai, China, a joint venture. ARTICLE 2: PARTIES Provision 1: Parties of this Agreement are: The Shandong Huang Tai Industrial Group of China (hereinafter as Party A), registered at Jinan, Shandong, China. Address: 172 Industry Road North, Jinan, Shandong, China Legal Representative: Lu Shou Shan Title: General Manager Nationality: The People's Republic of China American Pacific Aviation Technology Company (hereinafter as Party B), registered at California, the United States of America. Address: 1 Sansome Street, 19th Floor, San Francisco, CA 94104, USA Legal Representative: Eric Gravell Title: Chairman Nationality: US ARTICLE 3: FORMATION OF THE JOINT VENTURE Provision 2: According to the "People's Republic of China Sino-foreign Joint Venture Laws" and other related Chinese laws, both parties agree to establish in China the China Card.Com, Limited (hereinafter as joint venture). Provision 3: The name of the joint venture shall be: China Card.Com, Limited. Name in English: China Card.Com, Limited Address: 230, Xin Jin Qiao Road, T17-5-1, Jin Qiao Export Processing Industrial Region, Shanghai Provision 4: All activities conducted by the joint venture shall observe the laws, rules and regulations of the People's Republic of China. Provision 5: The joint venture shall be registered as a company of limited liability. Both parties shall assume the debts of the joint venture based on the ratio of investment contribution. Both parties shall distribute profits and assume risk and loss based on the ratio of investment contribution. ARTICLE 4: SCOPE OF PRODUCTION Provision 6: The goal of the joint venture is, based on the enhancement of economic cooperation and technology exchange, to adopt state-of-art technology and scientific management to promote the quality of product, to develop new products that are competitive in quality and price in the world market, thus to generate economic gains to create profits for the investors. Provision 7: Scope of Operation: Production of contactless smartcards, double interface cards, counterfeit protection cards and related products, reading and writing devices and system integration, marketing of self-produced products, after-sale services, and research and development of related new products. Provision 8: Production Scope: 1. The joint venture shall be able to produce 1500 cards/hour after production. Annual production shall be 8000 hours, which shall produce 12,000,000 cards. 2. With the growth the production, double interface cards, counterfeit protection cards, three-in-one card and reader/writer shall also be produced. ARTICLE 5: THE INVESTMENT TOTAL AND REGISTERED CAPITAL Provision 9: The total investment of the joint venture shall be RMB$[ ]. Provision 10: Each party shall contribute an investment amount of RMB$[ ], which is 50% of the total investment, for the registered capital of the joint venture. Each shall contribute 50% of its investment. Provision 11: The parties shall contribute their investment in the following formats: Party A: Shall contribute RMB$[ ], in form of cash. Party B: Shall contribute RMB$[ ], in form of equipment (if conversion to US currency is needed, shall be based on the foreign exchange rate announced by the Foreign Exchange Administration of the People's Republic of China of the date when conversion is made). Provision 12: The registered capital shall be contributed by both parties based on their ratio of contribution, by two installments, at 50% of the contributed amount per installment, that is, with Parties A and B each making a contribution of RMB$[ ] per installment (Party B shall make its contribution in form of equipment). Provision 13: In the event any party assigns all or portions of its investment to a third party, it shall obtain the agreement of the other party and shall be submitted for approval by reviewing agency. In the event any party intends to assign all or portions of its investment, the other party shall have the priority to buy. ARTICLE 6: RESPONSIBILITIES OF PARTIES Provision 14: Parties A and B shall each fulfill the following responsibilities: Party A Shall obtain approval by appropriate departments in China, registration, and license for operation. ARTICLE 7: MARKETING OF PRODUCTS Provision 15: Products produced by the joint venture shall be marketed both at home and abroad, 75% of which shall be sold abroad, and 25% shall be sold at home. The joint venture shall authorize Party B to market the products of the joint venture outside China. Provision 16: Marketing of the products of the joint venture in China can be arranged with appropriate material departments or business departments in China or can be done directly by the joint venture. Provision 17: For the purpose of marketing the products at home and abroad, and for the provision of after sales service, the joint venture, with the approval by appropriate Chinese department, shall establish service divisions both inside and outside China. Provision 18: The trademark used for the products of the joint venture shall be ______. ARTICLE 8: BOARD OF DIRECTORS Provision 19: The date the joint venture is registered shall be the date the Board of Directors of the joint venture established. Provision 20: The Board of Directors shall be composed of five members, with Party A appointing three members and Party B appointing two members. The chairman of the Board shall be appointed by Party A. The term of the Board member and the chairman of the Board shall be four years and can be reappointed to serve. Provision 21: The Board of Directors shall be the ultimate authority of the joint venture to decide all important matters of the joint venture. Unanimous approval is required to decide on the following issues: 1. Amendment of the Bylaws of the joint venture; 2. Discontinuation or liquidation of the joint venture; 3. Increase or transfer of the registered capital of the joint venture; 4. Merge with other economic organizations; 5. The hiring of the General Manager. Approval of other important matters shall require 2/3 of the votes from the Board. Provision 22: The chairman of the Board is the legal representative of the joint venture. In the event the chairman cannot perform his/her duties, s/he can authorize other board member to act on his/her behalf. Provision 23: The Board of Directors shall meet at least once a year, to be called by the chairman of the board. At the proposal of one third of the Board, the chairman of the Board can call on an ad hoc meeting. Minutes of meeting must be recorded and kept in file. ARTICLE 9: THE ADMINISTRATION OF THE OPERATION Provision 24: The administration of the joint venture shall oversee the daily operation of the joint venture. The post of General Manager shall be created. The General Manager shall be hired by the Board of Directors, for a term of four years. Provision 25: The General Manager shall execute all decisions of the Board of Directors and shall manage the daily operation of the joint venture. Within the scope of authorization, the General Manager shall represent the joint venture and shall have the authority to hire and terminate staff and to exercise other authorities granted by the Board of Directors. Departmental managers can be created to lead different divisions of the operation, to implement the directives of the General Manager and shall be accountable to the General Manager. Provision 26: In the event that the General Manager is found engaging in malpractice for selfish ends, or not doing the job properly, the Board can, by adopting a resolution, terminate the employment of the General Manager at any time. ARTICLE 10: PURHCASE OF EQUIPMENT Provision 27: Raw materials, accessories, transportation tools and office supplies shall be purchased in China if conditions are the same. ARTICLE 11: LABOR MANAGEMENT Provision 28: Labor related issues such as recruitment, hiring, termination, compensation, insurance, social benefits, merit award and discipline shall be handled according to the "Rules and Regulations of Sino-Foreign Joint Venture Labor Management of the People's Republic of China" and policy shall be set up by the Board of Directors to draft a labor contract. When the labor contract is drafted, it shall be filed with the local labor management department. Provision 29: Compensation, insurance, benefits, business expense for General Manager shall be determined by the Board of Directors. ARTICLE 12: TAX, FINANCIAL MATTERS, AND AUDITING Provision 30: The joint venture shall pay all the taxes required by the Chinese laws and rules and regulations. Provision 31: Employees of the joint venture shall pay individual income tax based on the "People's Republic of China Individual Income Tax Laws". Provision 32: The joint venture shall, based on the "People's Republic of China Sino-Foreign Joint Venture Laws", set aside certain amount each year for General Reserve, Enterprise Development Fund and Employee Benefit and Merit Fund. The amount of which shall be determined by the Board of Directors based on the operation conditions. Provision 33: The fiscal year of the joint venture shall begin on January 1 of each year, through December 31. All vouchers, bills, statements, bookkeeping records shall be written in Chinese. Provision 34: Auditing of the finance of the joint venture shall be performed by registered accountant in China. The result shall be reported to the Board of Directors and General Manager. In the event Party B believes it is necessary to hire auditor from other country to perform auditing, the joint venture shall agree to such request. All expense shall be paid by Party B. Provision 35: Within the first three months of each fiscal year, the General Manager shall organize to prepare the General Ledger, Statement of Profit and Loss and Profit Distribution Plan of the fiscal year to be submitted for approval by the Board of Directors. ARTICLE 13: TERM OF THE JOINT VENTURE Provision 36: The term of the joint venture shall be 12 years. The founding date of the joint venture shall be the date when the business license is issued. At the suggestion of either party, and with the approval of the Board of Directors, the term of the joint venture can be extended by submitting extension to the Ministry of Foreign Economic Relations and Trade (or its authorized reviewing agency), six months before the term expires. ARTICLE 14: DISPOSITION OF PROPERTY WHEN JOINT VENTURE TERM EXPIRES Provision 37: When the joint venture term expires or when the joint venture liquidated before the term expires, clearance must be performed to determine the distribution of property between parties based on the ratio of investment contribution. ARTICLE 15: INSURANCE Provision 38: All required insurances should be purchased with the China People's Insurance Company. The type, value, and term of the insurance shall be based on rules and regulations of the China People's Insurance Company, and discussed and decided by the Board of Directors. ARTICLE 16: AMENDMENT, CHANGES AND TERMINATION OF THE CONTRACT Provision 39: Any change of this contract and its appendix must be done by having both parties sign a written agreement which shall be submitted to the original approving department for approval. Provision 40: In the event of failure to execute the contract due to force majeure or due to continued loss suffered by the joint venture resulting in inability to continue operation, at the unanimous approval of the Board of Directors, it shall be reported to the original approval agency to apply for termination of the contract and dissolution of the joint venture. Provision 41: In the event of failure to execute the contract, the duties specified in the Bylaws, or seriously defaulting the terms of the contract or the Bylaws by either party that results in the inability of the joint venture to continue operation or to accomplish the operation goal, said party shall be considered as terminating the contract. The other party, in addition to the right to ask for compensation, shall also have the right to terminate the contract by reporting to the original approving agency. In the event both parties agree to continue operation, the default party shall compensate the economic loss to the joint venture. ARTICLE 17: DEFAULT Provision 42: When either party fails to comply with Article 5 of this contract to make the required contribution on time, said party shall pay a penalty to the other party, beginning from the first month when the amount is overdue, at 1% of the said contribution for each month. In the event said party fails to make contribution more than three months, the other party, in addition to the right of receiving the 3% required penalty, shall also have the right, based on Provision 41 of this contract, to terminate this contract, and to ask for compensation from the defaulting party. Provision 43: In the event of any mistakes caused by any party resulting in failure to execute this contract and its appendix, said party shall assume the responsibility of default. In the event the mistake is caused by both parties, both party shall assume their shares of responsibilities based on the actual situations. ARTICLE 18: FORCE MAJEURE Provision 44: Due to earthquake, typhoon, flood, fire, war or any other unpredictable event, the cause and consequence of which cannot be prevented or avoided, which results in directly affecting the execution of the contract or the provisions, the party experiencing said force majeure shall notify the other party by telegram immediately, and shall provide, with 15 days the occurrence of force majeure, valid documentation to prove that the contract, or portion of the contract cannot be executed, or the execution of the contract shall be postponed. This documentation shall be issued by the government agency in the area where force majeure occurs. Depending on the degree of effect, both parties shall negotiate whether to terminate the contract, or to waive the obligation of executing certain provisions, or to postpone executing the contract. ARTICLE 19: GOVERNING LAWS Provision 45: The making, validation, interpretation, execution, and settlement of disputes of this contract shall be governed by the laws of People's Republic of China. ARTICLE 20: SETTLEMENT OF DISPUTES Provision 46: Any dispute of the contract or over the contract while executing the contract shall be negotiated in a friendly manner. In the event negotiation fails to settle the dispute, it shall be brought to arbitration by the Arbitration Commission of the Ministry of Foreign Economic Relations and Trade, based on the arbitration procedures of said commission. The decision of the arbitration shall be final and shall have binding effect upon both all parties. Provision 47: During the process of arbitration, except for the disputed provision(s), other provisions shall be executed as usual. ARTICLE 21: EFFECTIVENESS AND OTHERS Provision 48: Appendix made according to provisions of this contract include: Equipment Purchase Agreement, Technology Service and Patent Technology Utilization Agreement, Raw Material Supply and Product Marketing Agreement, and Technology Agreement. They all constitute part of this contract. Provision 49: This contract and its appendix shall be approved by the People's Republic of China Ministry of Foreign Economic Relations and Trade (or its authorized agency) and shall become effective the date it is approved. Provision 50: When notices sent to the other party by telegram or fax involving rights and duties, these notices must be followed by a written format and sent by mail. The legal address of each party listed in this contract shall be the mailing address of the respective party. Provision 51: This contract is signed in Shanghai, China, on February 18, 2000, by authorized representative of Parties A and B. Representative of Shandong Huang Tai Industrial Group, China (Signature) Representative of American Pacific Aviation Technology Company, the United States (Signature) (2/18/00) EX-10 8 ex10-10.txt EXHIBIT 10.10 Exhibit 10.10 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. AGREEMENT FOR EXTENDING THE DEADLINE OF FOREIGN INVESTMENT CONTRIBUTION The China Card IC (Shanghai) Company Limited, represented by the Shandong Huang Tai Industrial Group (hereinafter as Party A), has registered to establish a joint venture with the American Pacific Aviation Technology Company Limited (hereinafter as Party B) on March 21, 2000. The total investment of the joint venture is RMB$[ ], with a registered capital of RMB$[ ]. Party A shall contribute RMB$[ ] in cash and Party B shall contribute in foreign exchange RMB$[ ] (Party B shall make the contribution in US currency which shall be converted to RMB based on the same date foreign exchange rate announced by the People's Republic of China Foreign Exchange Administration). Both parties shall contribute 50% of the total investment. The registered capital of the joint venture shall be paid by installment by both parties according to the ratio of contribution. Of which, Party A shall pay 50% of said capital in the amount of RMB$[ ] by April 15, and another 50% in the amount of RMB$[ ] by July 31; and Party B shall pay RMB$[ ] by August 10 (Party B shall make the contribution in US currency which shall be converted to RMB based on the same date foreign exchange rate announced by the People's Republic of China Foreign Exchange Administration). As of to date, contribution by the Chinese partner has been received. Contribution by the foreign partner is yet to be received due to the fact that the company is in the process of going public. After discussion, the Board of Directors has agreed to extend the deadline of the investment contribution. The following agreement is therefore made between Party A and Party B to extend the deadline of investment contribution: I. Extend the deadline of foreign investment contribution: II. The new deadline of contribution is now set for late October, 2000: and III. By said time the foreign partner shall make a contribution of RMB$[ ] (Party B shall make the contribution in US currency which shall be converted to RMB based on the same date foreign exchange rate announced by the People's Republic of China Foreign Exchange Administration). This resolution shall become effective upon the date the Board of Directors approves. It shall also be submitted for approval by the appropriate governmental department. Party A: The Shandong Huang Tai Industrial Group Legal Representative Party B: American Pacific Aviation Technology Company Limited Legal Representative August 12, 2000 EX-10 9 ex10-11.txt EXHIBIT 10.11 Exhibit 10.11 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. AGREEMENT FOR PURCHASE OF EQUIPMENT CHAPTER I - GENERAL PRINCIPLE 1.1 China Card I.C. (Shanghai) Co., Ltd. (hereinafter as Party A) and the American Pacific Aviation and Technology Corporation (hereinafter as Party B), based on the principle of mutual benefits and through negotiation, have entered the following contract for the purchase by Party A from Party B the production equipment of contactless smart cards. 1.2 This contract contains the following appendixes: Appendix 1: Detail Lists of the Production Equipment, Laboratory Equipment, and Other Accessories Appendix 2: Technical Services & Patent Technology Licensing Agreement Appendix 3: Agreement of Supply of Raw Materials and Product Marketing Appendix 4: Technical Support Agreement CHAPTER II - PARTIES 2.1 Party A: China Card I.C. (Shanghai) Co., Ltd. is a registered corporation in Pudong New Development District, Shanghai, the Peoples Republic of China. Legal Address: 230 Xin Qin Qiao Road, T17-5-1, Qin Qiao Export Processing Region, Shanghai, the People's Republic of China Legal Representative: Lu Shou Shan Title: Chairman Nationality: Chinese Telephone: Fax: Zip Code: Bank:Account Number: US Dollars RMB 2.2 Party B: American Pacific Aviation & Technology Corp. Legal Address: 1 Sansome Street, 19th Floor, San Francisco, CA 94104, USALegal Representative: Eric Gravell Title: Chairman Nationality: U.S. Telephone: (415) 951-1078 Fax: (415) 951-1046 Zip Code: 550017 Bank: Account Number: CHAPTER III - NAME, SPECIFICATIONS, QUANTITY, PRICE AND DELIVERY OF EQUIPMENT 3.1 Party B shall provide Party A with two complete brand new production lines of 1 advanced international standards for the production of contactless smart cards. Each of these production lines shall be able to produce 750 pieces of smart cards per hour (6 million pieces per year x 2). 3.2 The total contractual price of which shall be US$[ ] US Dollars), based on the CIF Shanghai price, and shall include the following: 3.2.1 Production equipment, laboratory equipment, and other accessories (see Appendix 1 - Detail List of Production Equipment, Laboratory Equipment and Accessories for details); 3.2.2 Party B shall provide Party A the technical services and patent technology licensing (see Appendix 2 - Technical Services and Patent Technology Licensing for details); 3.2.3 Party B shall provide Party A the raw materials and marketing services (see Appendix 3 - Agreement of Supply of Raw Materials and Production Marketing for details); 3.2.4 Other services as specified in the Technical Agreement (See Appendix 4). 3.3 Before packaging the equipment for shipment, three technical staff from Party a shall visit the United States to perform preliminary inspection. Expenses for lodging, meal and transportation during the visit of the personnel from Party A in the United States shall be covered by Party B. The visit shall last two weeks. 3.4 Delivery of said equipment shall be concluded within six months when this contract becomes effective. CHAPTER IV - PAYMENT 4.1 Within 30 days when the contract becomes effective, Party A shall pay Party B by T/T, [ ]% of the total amount for the purchase of said production line and accessories, that is, US$[ ] US Dollars). 4.2 One month before the equipment is delivered, Party A shall open a L/C to Party B in the amount of US$[ ] US Dollars), or [ ]% of the total price for the purchase of said production line and accessories. 4.3 One month before the delivery of equipment, Party B shall issue a three-year Revolving Letter of Credit to Party A for processing fee of 36 million pieces of contactless smart cards (starting from the date when Party A begins production). The price for the first 10 million pieces shall be FOB Shanghai US$[ ]/piece, and FOB Shanghai US$[ ]/piece for the last 26 million pieces. The accumulative total amount of the L/C shall be US$[ ]. 4.4 After approved preliminary inspection but before packaging for shipment, Party 2 B shall, based on the signed approval, air waybill, invoice and quality certificate issued by personnel of Party A, provide Party A with the L/C specified in 4.2. 4.5 Three months upon receipt of equipment by Party A from Party B, Party A shall pay Party B by T/T [ ]% of the total amount for the purchase of said production line and accessories, that is, US$[ ] US Dollars). CHAPTER V - SPECIFICATIONS AND TECHNICAL CONDITIONS OF THE EQUIPMENT 5.1 The production lines supplied by Party B shall be brand new, complete and shall correspond to the specifications of Appendix I - A Details of Production Equipment, Laboratory Equipment and Other Accessories. 5.2 The performance and quality of the equipment shall meet the following requirements: 5.2.1 Operation Capacity: Shall meet the requirements specified in the equipment manual 5.2.2 Production Capacity: In normal production, each production line shall be able to produce 750 pieces/hour, that is, 6,000,000 pieces/year 5.2.3 Product Specification: Shall meet the ISO/Mifare standards 5.2.4 Product Quality: The strength and durability of cards mechanically tested shall meet the standards set by ISO and the electrically tested cards shall meet the standards set by IEC 5.2.5 The reject rates during the processing shall be under 3% 5.3 The following accessories shall be accompanied when delivering the production equipment by Party B: 5.3.1 Special operation tools, maintenance and repair tools and testing tools 5.3.2 Easily damaged parts of the equipment 5.3.3 Raw materials for test run production (chips used during the test run production period are only for test run purpose only, they do not have the reading/writing function.) 5.4 The following technical documents shall be accompanied by the equipment when shipped by Party B: 5.4.1 Manual of the equipment (including such contents as the configuration, performance, installation and test run, operation, inspection and maintenance) 5.4.2 The packing list of the equipment 5.4.3 The quality assurance certificate and documentation, as specified in Chapter VII 5.4.4 Drawings of the easily damaged parts and the list of accessories. 5.5 Within 10 days upon receipt of US$[ ] US Dollars), or [ ]% of the total amount for the purchase of the production line and accessories made by Party A through T/T, Party B shall deliver the 3 following information: 5.5.1 Provision of a technical layout drawing and power supply information by mail to Party A to enable Party A to prepare the technical design and to make purchase domestically; 5.5.2 The manual of the equipment; 5.5.3 Inspection and acceptance standards of the equipment. 5.6 Party B shall, two months before the installing and test running of the equipment, provide the following documents by mail or having technical staff on-site to provide guidance to Party A: 5.6.1 The installation diagram and the foundation diagram 5.6.2 The power parameters (including electrical power, compressed air, water and stream) of the equipment, the technical information of power supply and special shop requirements 5.7 The power utilization standards shall correspond to the power standards of the People's Republic of China, that is, 380+-10 volts for the transformer, and 50+-5% hertz for the frequency. CHAPTER VI - INSTALLATION, TROUBLE-SHOOTING, TEST RUNNING AND RECEIPT AND ACCEPTANCE 6.1 Party B shall install and test run the equipment, train staff of Party A, and shall make sure that installation and test running be completed within two weeks (when sufficiently accommodated by Party A) after the equipment arrives the shop. Party A shall provide the needed personnel, site and equipment to help accomplish the job. 6.2 The test run period shall be seven working days, eight hours per day. The purpose of the test run is to test whether the production equipment and the products meeting the requirements specified in Provision 5.2. Upon satisfactory inspection and examination, the equipment shall be received and accepted. 6.3 Besides test run, the receipt and acceptance process includes such inspection as whether documents accompanied are complete, the quality and quantity of raw materials accompanied meet the requirements, and the conditions of the easily damaged parts. 6.4 In the event there is breakdown of the equipment during the test run period, or the rate of product rejected falls under the level of 97%, a second test run shall be made to test the equipment for another six working days until the equipment meets the receipt and acceptance standards. After receipt and acceptance, both parties shall sign the "Certificate of Receipt and Acceptance". 6.5 Large volume of production shall begin only when the process of receipt and acceptance is completed. 6.6 Party B shall cover the cost of its technical personnel working in the factory. Party A shall provide food by the factory and transportation within the city. 4 CHAPTER VII - QUALITY INSPECTION 7.1 Party B shall guarantee that the equipment is made of top materials, in top craftsmanship. The quality, specification and performance of the equipment shall meet the requirements specified in this contract. 7.2 Before delivery, Party B shall conduct a thorough and full inspection of the quality, specification and performance, as well as the quantity/weight of the equipment, and shall provide a certificate of inspection, along with details and results of the inspection which confirm that the quality and quantity of the equipment meeting the requirements of this contract. When making delivery to Party A for preliminary inspection, Party B shall provide Party A with a quality and quantity certificate. 7.3 When the equipment arrives at the destination, Party A shall, in accordance to the laws and rules and regulations of the Peoples Republic of China, apply that the equipment be inspected by the Import and Export Inspection Bureau (hereinafter as Inspection Bureau). Parties A and B shall be both present at said inspection. In the event Party B fails to show up on time or fails to send a representative to participate in the inspection, the Inspection Bureau shall continue inspection as scheduled. Party A shall provide the inspection result to Party B and Party B shall acknowledge the result accordingly. 7.4 In the event that any quality or quantity problem or any part missing is found which do not correspond to the contract or in the event of any damage due to packaging, Party B shall within six weeks upon knowing this, make repair or replacement at its own cost. In the event that any damage is caused by Party A, Party B shall replace the damaged item as soon as possible, and the cost of replacement shall be assumed by Party A. 7.5 In the event the any serious quality or quantity problem is found, Party A shall, based on the provisions in Chapter IX, have the right to ask for compensation, or to return the equipment and ask for compensation. 7.6 The warranty period of the equipment shall be 12 months, commencing the date when the equipment is received and accepted. During the warranty period Party B shall be responsible for repair or replace the equipment if breakdown of the equipment is due to its own defects. In the event that any damage of the equipment or parts is caused by Party A, Party B shall provide repair or replace services to Party A as soon as possible, and the cost of which shall by assumed by Party A. CHAPTER VIII - PACKAGING AND SHIPMENT 8.1 When packaging, Party B shall use a new and solid wood container which shall meet the quarantine inspection requirements for imports, with necessary measures taken to prevent moist, shock, rust and rough loading and unloading of 5 the equipment to ensure that the package is suitable for long distance transportation. 8.2 Packaging and Delivery Marks Party B shall mark with paint at the four sides of the container such information as the number of the container, the size, weight, net weight, destination, receipt code, "face up", "handle with care", "no moist", "hoisting point" and "gravity point". 8.3 Shipment Information 8.3.1 Within 5 days after shipping the equipment, Party B shall fax Party A the following information: A. Date of Shipment, B. Port of Shipment, C. Port of Destination, D. Number, Name, Quantity, Weight, Total Weight and Size of the Container. 8.3.2 Within 2 days after shipping the equipment, Party B shall send Party A via express mail the following information: A. Invoice and Shipment Slip, specifying the name and the quantity of the merchandise; B. Packaging Slip (2 copies) specifying the number, dimension, weight of the container, the name, quantity, net weight of the merchandise, and the date of shipment; C. The inspection certificate provided by the manufacturer, as specified in Chapter VII, and the certificate of origin. CHAPTER IX - COMPENSATION AND PENALTY 9.1 After arrival of shipment at the port of destination, in the event Party A finds that the specification, quality and quantity of the equipment do not meet the requirement of this contract, Party A shall have right to request compensation from Party B by presenting the Inspection Certificate issued by the Inspection Bureau. If it is confirmed that Party B shall assume the responsibility, Party B shall pay all the related direct loss and cost. If Party B has dispute over the inspection certificate provided by Party A, Party B can request another inspection made by a higher inspection authority (Beijing Inspection General Bureau). The cost of which shall be assumed by Party B. Party A shall have the right to attend the second inspection. If the result of the second inspection is different from the original inspection, the result of second inspection shall prevail. 9.2 In the event of any reason caused by Party A that delays the installation and test run, Party A shall assume the actual cost of overtime for Party B. 9.3 In the event Party B fails to respond within 30 days after Party A formally makes a written request for compensation, it shall be considered that Party B accept the claim. If Party B disputes the claim in writing in a timely manner, the dispute shall then be settled by negotiation. If negotiation fails to resolve the issue, either party can, based on Provision 11, request for an arbitration. 9.4 Except for the reason of force majeure as specified in Provision 10.1, in the 6 event Party B fails to comply to the contractual terms to deliver the merchandise on time, Party A shall agree that Party B postpone the delivery, provided that Party B shall pay a penalty at 0.5% of the total cost for every delayed week. Nevertheless, this penalty shall not exceed 5% of the total cost. In the event the delay of delivery exceeds ten weeks, Party A shall have the right to terminate the contract, and Party B shall still have to pay the penalty for the actual delayed days and shall refund Party A all the payment it has made. 9.5 Without a written agreement of Party B, Party A cannot transfer the patent technology of the said equipment to a third party, nor can Party A duplicate said equipment of Party B. In the event that Party A allows a third party to use or to duplicate said technology, Party A shall pay a sum of US$[ ] US Dollars) to Party B as defaulting the contract. Payment made by Party A to Party B for defaulting the contract does not preclude Party B the right to prosecute infringement by the third party or Party A. CHAPTER X - FORCE MAJEURE 10.1 During the time of manufacturing or in the process of shipping, in the event of war, fire, flood, typhoon, earthquake or other force majeure acknowledged by both parties that causes Party B fail or delay to execute the provisions of this contract as schedule, Party B shall assume no liability. In the event of force majeure, Party B shall notify Party A immediately and shall within two weeks, send a certificate issued by a government agency (confirming said force majeure) to Party A via air mail. CHAPTER XI - ARBITRATION 11.1 All disputes caused by executing this contract or over this contract shall be resolved through friendly negotiation. In the event friendly negotiation fails to settle the dispute, it shall be arbitrated by the China International Economic and Trade Arbitration Committee based by the judicial procedures of said Committee and the hearing shall be heard in Beijing. 11.2 During the period of arbitration, other non-disputed provisions of the contract shall remain legally valid. 11.3 The decision of the Arbitration Committee shall be final and shall have binding effect upon both parties. Arbitration fee shall be paid by the losing party. CHAPTER XII - GOVERNING LAWS AND VALIDITY 12.1 When executing this agreement, both Parties A and B shall comply with the laws and rules and regulations of the Peoples Republic of China. 12.2 This agreement shall be signed by representative of each party. Party A shall, in compliance with the related laws, submit the agreement for approval. The date 7 when the agreement is approved shall be the effective date of this agreement. 12.3 Party A shall fax the government approved notice to Party B, followed by a confirmation letter. In the event that Party A fails to obtain government approval after six months starting the date when the agreement is signed by the last party, Party B has the right to cancel this agreement. 12.4 After this agreement becomes effective, both Parties A and B shall, if needed, make revisions to accommodate the practicalities in executing the agreement. The revisions shall become effective when both parties sign the amendment. Neither party can amend the agreement individually. CHAPTER XIII - DOCUMENTS 13.1 This agreement shall be written in Chinese. 13.2 This agreement contains four original copies with each party holding two copies, and six duplicated copies, with each party holding three copies.. PARTY A: China Card I.C. (Shanghai) Co., Ltd. Company Representative: Signature: (3/3/00) PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: Signature: (2/18/00) 8 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. APPENDIX 1 Appendix 1: Details of Production Equipment, Laboratory Equipment and Spare Parts 1. List of Production Equipment
---------------------------- Watt, Estimated - --------------------------------------------------------------------------------------------------------------- No. Equipment Name Quantity Part No. Production Rate Manufacturer and Price - --------------------------------------------------------------------------------------------------------------- 1 Punch Hole 1 CICC-1 6kw, 3000 pcs/h [ ] - --------------------------------------------------------------------------------------------------------------- 2 Pick/Place 2 CICC-18 2*3.5kw, 1540 pcs/h [ ] - --------------------------------------------------------------------------------------------------------------- 3 Wire Embedder 2 CICC-13 2*7kw, floor level +- 1/16" [ ] 80-100psi, 1500 pcs/h - --------------------------------------------------------------------------------------------------------------- 4 Welder 2 CICC-20 2*4.4kw, 1660 pcs/h [ ] - --------------------------------------------------------------------------------------------------------------- 5 Laminator 1 CICC-9 76kw, 1920 pcs/h [ ] - --------------------------------------------------------------------------------------------------------------- 6 Lam Control 1 CICC-3 [ ] - --------------------------------------------------------------------------------------------------------------- 7 Computer Controller for 1 [ ] Laminator - --------------------------------------------------------------------------------------------------------------- 8 Lam Cool Tank 1 CICC-4 [ ] - --------------------------------------------------------------------------------------------------------------- 9 Water Chiller 1 CM004/CH [ ] - --------------------------------------------------------------------------------------------------------------- 10 Lam Loader 1 CICC-5 0.5kw [ ] - --------------------------------------------------------------------------------------------------------------- 11 Tacker 1 CICC-16 2.2kw,3000pcs/h,60psi [ ] - --------------------------------------------------------------------------------------------------------------- 12 Refrigeration Unit 1 CICC-18 [ ] - --------------------------------------------------------------------------------------------------------------- 13 Card-Punch 1 CICC-CP-001 6kw, 3000 pcs/h, 80psi [ ] - --------------------------------------------------------------------------------------------------------------- Total: [ ]
EX-10 10 ex10-12.txt EXHIBIT 10.12 Exhibit 10.12 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. SUPPLEMENTAL AGREEMENT AS A REVISION OF THE AGREEMENT SIGNED ON 2/18/2000 China Card I.C. (Shanghai) Co., Ltd. (hereinafter referred to as Party A) and American Pacific Aviation & Technology Corporation (hereinafter referred to as Party B) signed on 2/18/00 the Equipment Purchase Contract, the Technical Aid And Know-how License Contract and the Raw Materials Supply And Products Sales Contract, in relation to the purchase by Party A of Party B's production facilities for the manufacture of the contactless smart cards. Now and hereby, the parties, through friendly negotiations, conclude the following supplemental agreement. Article 1 Purchase of Raw Materials 1. Party B shall supply to the order of Party A after the former receives and confirms the order by the latter for the procurement of production materials for the non-contact smart cards. 2. The unit price for the needed raw material for each non-contact smart card is CIF US$[ ] per piece (PVC and outer packaging material excluded). 3. Party A guarantees that the quality of the non-contact smart cards made of the raw materials supplied are up to the ISO standard. 4. Party B shall, after receiving and confirming the order placed by Party A, make delivery in accordance with quantity, variety, specifications, time of shipment indicated in the order, so as to enable Party A to continue its normal production. In case the stoppage of production by Party A is attributed to the delay of Party B in delivering the material ordered, Party B shall be liable to the economic loss suffered by Party A. Notwithstanding the aforesaid stipulation, when Party B informs Party A by written notice of certain unusual situation in which Party B needs to defer in the supply of the ordered goods, the 1 latter shall give its consent to the requirement. 5. Party A shall, in accordance with the purchase order, make remittance to the bank account designated by Party B for the payment under the sight L/C for the buying of the raw materials. To ensure timely payments, the parties agree that part of the payments will be made by remittance by American Huasu Trading Inc., and the remaining part will be made by L/C opened by Party A in favor of Party B. The specific amounts of each payment will be negotiated and decided by the three parties. Article 2 Sales of Products 1. Party B is willing to assist Party A to sell the contactless smart cards produced by Party A. The sales price will be negotiated and fixed by the parties every three years. The price is FOB US$[ ] per piece in the first three years. 2. Party B shall provide Party A with annual sales plan and the exact amount of sales shall be subject to each specific order. Party B shall provide Party A with the needed new moulds free of charge before any change in the varieties of the ordered products. 3. Party B shall open a three-year revolving L/C for the purchase of Party A's products. Party A shall make delivery in conformity with the order. Settlement of payment shall be subject to the amount of each order. 4. Party A shall produce and deliver the goods in accordance with the varieties, specifications, quantities and shipment time under each order confirmed by the parties, and shall be liable to the economic loss incurred to Party B in case Party A fails to effect the shipment as regulated under the confirmed order. 2 5. If Party A receives order from a third party, it shall send notice to Party B 30 days in advance, to enable the latter to adjust the carrying-out of the confirmed order. 6. These terms replace paragraph 1.2 of the Agreement for Purchase of Equipment and the Agreement of Purchase of Raw Materials signed on 2/18/2000, which is now eliminated. Article 3 Force Majeure In the course of the performance of the duties under this agreement, if either party is prevented from performing its duties under the agreement due to such events or incidents as earthquake, typhoon, flood, fire, war, government action or restriction, industrial turmoil, riots or other domestic upheavals, or any accident beyond control of the parties, the suffering party shall obtain a certification issued by its government and express-mail or fax the certification to the other party. The agreement shall be suspended after the notification. When the suspension of the agreement is more than six months, the parties shall decide whether to terminate the agreement or not. Article 4 Liabilities for Breach The contractual parties shall carry out the terms and conditions under the agreement honestly. In case either party fails to perform any of the above-mentioned stipulations and causes the other party economic loss, it shall be liable to the compensation of the contract-honoring party. If the breaching party fails to reply 30 days after the honoring party lodges a claim against the breaching party, the claimed shall be deemed to accept the claim. Article 5 Dispute Resolution In case of any dispute in the course of the carrying-out of this 3 agreement, the parties should seek a settlement through friendly consultation and negotiation. If the parties fail to reach a settlement by consultation, the dispute shall be submitted to China International Economic And Trade Arbitration Commission (CIETAC) for arbitration. CIETAC Rules shall apply and the venue shall be in Beijing. The award shall be binding on the parties. Arbitration fees shall be borne by the losing party. Article 6 Validity This agreement shall be valid and enforceable upon the signatures by the parties. In view of the fact that the parties signed on 2/18/00 the Equipment Purchase Contract, the Technical Aid and Know-how Licensing Contract and the Raw Materials Supply and Products Sales Contract, if there is any discrepancy between that of the three contracts and what is stipulated in this agreement, the relevant stipulation in this agreement shall prevail. Article 7 Originals This agreement has 4 copies of originals being equally valid and each party shall have two. Party A Party B China Card I.C. (Shanghai) Co., Ltd. American Pacific Aviation & Technology Corporation Authorized Representative Authorized Representative Signature Signature 4 EX-10 11 ex10-13.txt EXHIBIT 10.13 Exhibit 10.13 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. ADDENDUM TO THE AGREEMENT FOR PURCHASE OF EQUIPMENT AGREEMENT After negotiations by both parties, Provision 4.4 of Article 4 in the "Agreement for Purchase of Equipment" is amended as follow: After approval of preliminary inspection and before packaging for shipment, Party B shall, by presenting the signed approval of the preliminary inspection, airway bill, invoice and quality certification, request for payment by Party A of US$[ ] US Dollars). Ten days after the full set of equipment is on actual production, Party B shall, by presenting the test run approval and receipt and acceptance certificates, request payment by Party A of US$[ ] US Dollars). Party A: China Card I.C.(Shanghai) Co., Ltd. Party B: American Pacific Aviation & Tech Corp. EX-10 12 ex10-14.txt EXHIBIT 10.14 Exhibit 10.14 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. ADDENDUM TO EQUIPMENT PURCHASE AGREEMENT I. China Card I.C. (Shanghai) Co., Ltd. (hereinafter as Chinese Party) purchases the production equipment of contactless smart cards from American Pacific Aviation and Technology Corp. (hereinafter as US Party). The total value of the equipment shall be US$[ ]. II. Payment Method: 1. The Chinese Party shall pay the US Party for the equipment deposit of US$[ ]. 2. The Chinese Party shall issue a Letter of Credit for US$[ ] to the US Party for purchase of equipment. 3. Three months after the Chinese Party receive the equipment from the US Party, Chinese Party shall pay US Party US$[ ] by T/T. 4. US$[ ] shall be converted into equity of factory to US Party. 5. US$[ ] will be paid by deducting from cost of manufacturing cards US$[ ] per month. China Card I.C. (Shanghai) Co., Ltd. November 10, 2000 EX-10 13 ex10-15.txt EXHIBIT 10.15 Exhibit 10.15 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. AGREEMENT OF RAW MATERIALS AND SALES The following agreement is made by China Card I.C. (Shanghai) Co., Ltd. (hereinafter as Party A) and American Pacific Aviation & Technology Corporation (hereinafter as Party B), based on the principle of mutual benefits and through sincere friendly negotiations, for the purchase of raw materials for the production of contactless smart cards by Party B on behalf of Party A and for granting Party B the exclusive right for selling the contactless smart cards produced by Party A. I. PURCHASE OF RAW MATERIALS 1. Party B shall purchase on behalf of Party A all needed raw materials for the production of contactless smart cards according to the specifications of Party A. The quality of the raw materials must meet the inspection standards (See Table 1: List of Raw Materials for Contactless Smartcards and Standards of Inspection and Acceptance). 2. The price of all raw materials needed for the production of contactless smartcards shall be set as follow: materials for the first 10,000,000 pieces, at CIF US$[ ]/piece, and for the remaining 26,000,000 pieces, at CIF US$[ ]/piece. 3. Party A confirms Provision 3 of Article 2 that Party B provide a three-year Revolving Letter of Credit to Party A and that Party B shall provide raw materials to Party A based on Party A's specifications. Party A shall provide the bank account designated by Party B a letter of guarantee (standby letter of credit) for the purchase of raw materials, the amount of which shall be US$[ ], as secured guarantee of product buyback. 4. Contactless smartcards produced by Party A using the above mentioned raw materials shall meet the ISO/Mifare standards and IEC standards (See Table 2: Contactless Smartcard Products Quality Inspection and Acceptance Standards for details). In the event the equipment provided by Party B fails to produce the required quality causing economic loss of Party A, Party B shall assume the responsibility. 5. Party A shall organize production based on the orders supplied by Party B. In the event Party B fails to deliver the raw materials on time or fails to place any order which causes Party A stop work, Party B shall compensate Party A [ ]% of the profit made during normal production. 6. The quantity of the raw materials needed for each piece of contactless smartcard shall be based on Provision 6 of the "Agreement for Purchase of Equipment", according to the actual data obtained during the test run period. II. SALES OF PRODUCTS 1. Party B shall have the exclusive right to sell the contactless smartcards produced by Party A. The price of which shall be negotiated every three years. In the first three years, the sale price shall be US$[ ]/piece. In the second three year period, the variation between the cost of raw material and sale price shall be between US$[ ] (supply of raw materials does not include PVC, see List of Contactless Smartcard Product Raw Materials and Standards of Quality Inspection and Acceptance for detail). 2. Party B shall place an order with Party A every year. The annual order shall be 12,000,000 pieces. The cycle of delivery shall correspond to the production capability of the equipment. Annual order must be confirmed by Party A before it becomes valid. When changing the type of products ordered, Party B shall provide new moulds to Party A at no charge. 3. Party B shall, based on the provisions of the Agreement for Purchase of Equipment, provide a three year revolving Letter of Credit to Party A for the purchase of products produced by Party A. Party A shall deliver the products twice a month, at 500,000 pieces for each delivery. Based on the quality inspection report, package slip and invoice, the amount of which shall be US$[ ] or US$[ ] (the first 1,000,000 pieces shall be calculated at US$[ ]/piece, and the remaining 26,000,000 pieces shall be calculated at US$[ ]/piece). In the event of any emergency order placed by Party B, additional charges shall be negotiated. 4. Party A shall, based on the confirmed annual order, produce and deliver the products according to the types, specifications, quantity and shipment date specified. In the event Party A has difficulties of delivery or producing the products ordered, it shall notify Party B in a timely manner or Party A shall assume the economic loss of Party B. 5. In the event Party B fails to sell the products as agreed, Party B shall compensate the economic loss of Party A ([ ] of the normal gross profit). III. FORCE MAJEURE In the event during the execution of the agreement that either party experiences force majeure which delays the execution of the agreement as in the cases of earthquake, typhoon, flood, fire, war, government restraints or intervention, industrial chaos, riots or other national disturbances, or other incidents that both parties cannot control, the affected party shall send by express mail or by fax a copy of the government issued certification to the other party and the execution of the agreement shall be temporarily suspended. In the event the suspension is over six months, both parties shall consider if they should terminate the agreement. IV. DEFAULT Both parties shall execute the provisions of the agreement sincerely. In the event any party fails to execute any of the above provisions which causes the loss of the other party, the defaulting party shall compensate the economic loss of the other party. In the event the defaulting party does not respond to the claim made by the other party within 30 days after said claim is made, the defaulting party shall be considered as accepting the claim. V. SETTLEMENT OF DISPUTE Any dispute over the execution of the agreement by Parties A and B shall be settled if possible by friendly negotiations. In the event negotiations fail to settle the issue, the dispute shall be brought to arbitration by the China International Economic and Trade Committee Foreign Trade Committee, based on the arbitration process set by said committee. The decision of the arbitration is final and shall have binding effect on both parties. The cost of arbitration shall be paid by the losing party. VI. This agreement shall become effective on the date signed. VII. This agreement, along with the Agreement for Purchase of Equipment and its appendix, shall become effective at the same time. VIII. This agreement shall contain four original copies, with each party holding two copies, and six duplicates, with each party holding three copies. All copies bear equal validity. PARTY A: China Card I.C. (Shanghai) Co., Ltd. Signature: (3/3/00) PARTY B: American Pacific Aviation & Technology Corporation Signature: (2/18/00) EX-10 14 ex10-16.txt EXHIBIT 10.16 Exhibit 10.16 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. TECHNICAL SUPPORT AGREEMENT February 22, 2000 TECHNOLOGY AGREEMENT The China Card IC (Shanghai) Company, based on the research of market demand of smartcards and survey of equipment vendors, has decided to purchase from American Pacific Aviation Technology Company the full set of equipment and technology for the production of smartcards. Based on the principle of mutual benefits, both parties have signed the "Agreement for Purchase of Equipment", the "Technical Services and Patent Technology Licensing Agreement" (Appendix II), and the "Agreement of Supply of Raw Materials and Product Marketing" (Appendix III). After several negotiations over the issues of technology, the following agreement is made between the two parties: I. GENERAL PRINCIPLES 1.1 It is confirmed that the American Pacific Aviation Technology Company (hereinafter as Party B) shall provide a complete brand new and state-of-art line production line and quality control equipment for the production of smartcards to the China Card I.C. (Shanghai) Company Limited (hereinafter as Party A). 1.2 Party B shall provide Party A at the same time with a full set of production technology, technical information, management information and all the software to ensure that the strength and durability of the cards produced by Party A, mechanically tested, shall meet the ISO/Mifare standards, and electrically tested, shall meet the standards of IEC. 1.3 Party B shall also provide Party A at the same time with a full set of state-of-art manufacturing technology for the production of contactless smartcards. These cards can be used in such areas as paying public transit fees, toll fees, or for identification purpose. 2. Major Performance Indices: 2.1 For production of smartcards: a. MIFARE STANDARD b. MIFARE LIGHT c. MIFARE PRO d. I-CODE CARD 2.2 Specified Production Capacity: 1500 pieces/hour, that is, 12,000,000 pieces/year (four-layer PVC chips, antenna coil based on four coils). 2.3 Reject rates: should not exceed 3% 2.4 Annual utilization limit of the equipment: 8000 hours (based on 350 days per year). 3. Production Equipment and Technology 3.1 The processing procedures of this production line include hole punching - -- module picking/placing -- antenna embedding -- welding -- spot welding -- card punching. 3.2 Should be able to use [ ], ABS and PC texture chips to complete auto package of the MIFARE series of standard, light, pro and I-code cards. 3.3 Should meet all the INLAYS specifications within the [ ] range. 3.4 The hole puncher should be able to complete the hole punching operating for the [ ] thick PVB, ABS and PC texture material. The life of the mould used should not be less than three years (repair six times). 3.5 The pick/place should be able to perform such operations as punching the module, distinguishing the good and bad modules, applying glues, adhering and picking and placing materials by vacuum automatically. The precision level of the high precision auto SONY robot is set at [ ]. 3.6 The wire embedder will adopt the [ ] high frequency shocking embedding wire which allows any change of the wire style and INLAYS specifications. The parallel level of the embedded wire is within [ ], the pressures is [ ]. 3.7 The welder will use the vacuum absorber to pick and place material (same as the pick/place machine). The hot welding method will be applied. The welding strength should not be less than [ ] (the diameter of the cooper wire is [ ]. 3.8 The welding machine will use eight temperature adjustable [ ] thermal heads to thermal press the layers making up the INLAY or BOOK. It will also guarantee the module will embed into the pre-punched hole precisely. The dynamic pressure is [ ]. 3.9 The laminator will adopt the layer thermal pressing technology, the time is [ ]. Adoption of different laminated blocks can allow laminating shining and less shining cards. 3.10 The card puncher has the functions of cutting white cards and printing cards. The pressure is [ ]. 3.11 Equipment listed from 3.4-3.10 are all controlled by process, with adjustable parameters and auto memory functions. Preset performance parameters (100 sets or more) can be restored any time. The time for adjusting parameters will not exceed four hours. The time for recovery will not exceed 15 minutes. 3.12 Facility Requirement in the Factory: 3.12.1 Air purity: inside the laminating room it should be [ ] (the US federal standard is [ ]; 3.12.2 Temperature: [ ] 3.12.3 Humidity: [ ] 3.12.4 The factory should have ventilation system, air filter system, and ventilation outlet reserved for the welding machine. 3.12.5 The dynamic compressed air is [ ], the pressure is [ ], and the quality should reach the ISO8573.1: class1.-.1 standard. 3.12.6 Power load for production system is about [ ] (based on 1500 pieces/hour). 3.12.7 People entering the factory must wear electrostatic prevention clothing. 3.12.8 The height of the factory should be [ ] 3.12.9 The loading strength of the ground should not be less than [ ] 3.12.10 Should equip with voltage regulators for pick/place, welder and wire embedder. 3.12.11 Sealing for doors and windows must be good. Suggest spray painting the ceiling and the walls and installing terrazzo floor. 3.12.12 Voltage for the elevator of the laminator, welder and some of the testing equipment should be [ ] 4. Technology Information Provided by Party B 4.1 Detail list of the equipment of the production line, including the name of the equipment, quantity, component number, power, production capacity, outer dimension, weight, unit price, name of the producer, etc. 4.2 Detail list of the equipment in the laboratory, including the name, quantity, component number, major performance index, name of producer and price, etc. 4.3 Detail list of the accessories, including the name, quantity, accessory number, name of producer and price, etc. 4.4 List of free consumption material supplied by Party B during the exclusive dealership period, including the name, quantity, specification number, name of producer and price, etc. 4.5 List of supplementary equipment to be purchased by Party A, including the name, quantity, specification number, name of producer and price, etc. 4.6 List of raw materials for standard Mifare cards and standards of inspection. 4.7 Operation manuals of all equipment, quality certifications, packaging slips, lists of accessories and illustrations of easily damaged parts. 4.8 Operation software CD, including operation software for laminator. 4.9 Inspection standards of all equipment. 4.10 The flow chart of production and inspection of contactless smartcards. 4.11 Working drawings for production site (within one month after the agreement is signed). 4.12 Quality confirmation by Philipps (within one month after production begins). V. TRAINING 5.1 Technical staff will go to the United States to receive 2 week training. 5.2 Party B shall provide one week training to staff of Party A before installing and test running the equipment. Installation and test running shall be performed by Party B but actual operation shall be performed by staff of Party A. 5.3 During the trial production period (two to three months), Party B shall guide the production personnel of Party A to master the production technology to make sure they can operate independently. VI. This agreement shall become effective at the same time with "Agreement for Purchase of Equipment". VII. Default Both parties shall execute the provisions of the agreement sincerely. In the event any party fails to execute any of the above provisions, which causes the economic loss of the other party, the defaulting party shall compensate the loss. Claims and penalties shall be executed according to provisions of Chapter IX of the greement for Purchase of Equipment. VIII. Settlement of Dispute Any dispute over the agreement by Parties A and B shall be settled through friendly negotiation. In the event negotiation fails to settle the dispute, it shall be heard in Beijing, by the China International Economic and Trade Arbitration Committee. Fee for arbitration shall be paid by the losing party. IX. This agreement contains four copies of the original with each party holding two copies, and six copies of the duplicates, with each party holding three copies. All copies have the same validity. (no provision in this page) Party A: China Card I.C. (Shanghai) Company Limited Representative: Party B: American Pacific Aviation Technology Company Limited Representative: February 18, 2000 EX-10 15 ex10-17.txt EXHIBIT 10.17 Exhibit 10.17 TECHNICAL SERVICES AND PATENT TECHNOLOGY LICENSING AGREEMENT This agreement is made between the China Card IC (Shanghai) Company, (hereinafter as Party A), of China, and the American Pacific Aviation & Technology Corporation (hereinafter as Party B), based on the principle of mutual benefits and through friendly negotiations, for the provision of technical services and patent technology by Party B to Party A. 1. Party B shall provide Party A with the full set of technology (including technical process, operation rules, maintenance rules, inspecting and testing rules, administration system and all drawings, information, software or patent technology) for the production of contactless smart cards and shall guarantee that the production equipment and products produced meet the requirements of the Agreement for Purchase of Equipment 2. Without written permission of Party B, Party A shall not transfer the patent technology or exclusive technology to any third party, nor shall Party A duplicate the equipment provided by Party B. Without the permission of Party B, Party A shall not allow business or technical personnel of other party to examine the production line, nor shall Party A provide any technical information to any other party. Party A shall have the legal right to use the patent technology of Party B. In the event of any dispute brought forth by a third party against Party A for using said technology, Party B shall be responsible for resolving the issue. 3. Party B shall be responsible for providing all technical services of installation, trouble shooting, test running, receipt and acceptance and shall solve all the technical problems before receipt and acceptance to ensure that each production line be able to produce 750 pieces/hour. Party A shall delegate special staff to coordinate the project to ensure that installation, trouble shooting and test running go through smoothly. The installation and testing period shall be two weeks. Expenses of experts from Party B shall be paid by Party B but Party A shall provide meal in the factory and transportation within the city. 4. Party B shall train the staff of Party A for a period of two weeks. Party A shall select qualified staff to receive the training. In the event that members from Party A do not fully master the production technology after the training period, said period can be extended to three or four weeks, the cost of such extension shall be assumed by Party A. 5. Within six months after actual production starts, Party B shall send one to two technical staff to work at Party A site to provide on-site production assistance and technical support. The expenses of which shall be paid by Party B. 6. This agreement, along with the Agreement for Purchase of Equipment and its appendices, shall become effective at the same time. 7. Default Both parties shall execute the provisions of the agreement sincerely. In the event any party fails to execute any of the above provisions, which causes the economic loss of the other party, the defaulting party shall compensate the loss. Claims and penalties shall be executed according to provisions of Chapter IX of the Agreement for Purchase of Equipment 8. Settlement of Dispute Any dispute over the agreement by Parties A and B shall be settled through friendly negotiation. In the event negotiation fails to settle the dispute, it shall be heard in Beijing, by the China International Economic and Trade Arbitration Committee. Fee for arbitration shall be paid by the losing party. 9. This agreement contains four original copies, with each party holding two copies each. All copies bear equal validity. PARTY A: China Card IC (Shanghai) Representative of Company: Signature: March 3, 2000 PARTY B: American Pacific Aviation & Technology Corporation Representative of Company: Signature: February 18, 2000 EX-10 16 ex10-18.txt EXHIBIT 10.18 Exhibit 10.18 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. CONTRACT For business of processing Party B's materials into finished products.
Contract No. Date of Signing: Party A: China Cards.Com Party B: American Pacific Aviation & Technology Add: Room 1704 Huaneng Unite Mansion Add: 1 Sansome St., 19th Floor 139 Yincheng Road (E), Pudong San Francisco, CA 94104 Shanghai 200120, China USA Tel: 86-021-68533930 Tel: (415) 951-1078 Fax: 86-021-68865258 Fax: (415) 951-1046
An agreement is reached on this date between Party A and Party B on the conclusion of the following business of processing Party B's materials into finished products according to the provision of this contract. 1. Materials (and findings, if any) to be supplied to Party A by Party B, at Party B's expense, freight and insurance also to be borne by Party B.
- --------------------------------------------------------------------------------------------------------------------- Quantity Description Packing Total estimated cost (insurances & freight included) - --------------------------------------------------------------------------------------------------------------------- The materials needed for 10 million smart cards: CIF SHANGHAI 10,000,000 pcs Module The unit price of materials of each 4,000 syringe Glue piece of smart card is $[ .] 1,600 rolls Cooper Wire Total: [ About: ] USD only. - --------------------------------------------------------------------------------------------------------------------- Shipment Date: 10/31/00 Destination (for materials): Shanghai
2. Finished products to be supplied to Party B by Party A.
- --------------------------------------------------------------------------------------------------------------------- Processing charges -------------------------------------------- Quantity Description Packing Unit price & term Amount - -------------------------------------------------------------------------------------------------------------------- FOB SHANGHAI 10,000,000 pcs Contactless Smart Card US$[ ]/piece US$[ ] - --------------------------------------------------------------------------------------------------------------------- Total: [ ] USD only -------------------------------------------- Shipment Date: 8/31/01 Destination: Los Angeles Airport, USA (Subject to materials for processing arriving at Shanghai (for finished product) no later than dd/mm/yy)
Payment: Insurance for materials & the other materials during the period of processing: For other terms & conditions, please refer to the agreement signed on: Party A: Party B: EX-10 17 ex10-19.txt EXHIBIT 10.19 Exhibit 10.19 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. AGREEMENT OF PURCHASE OF EQUIPMENT CHAPTER I - GENERAL PRINCIPLES 1.1 The following contract is made by Shandong Huaguan Group General Company (hereinafter as Party A) and the American Pacific Aviation and Technology Corporation (hereinafter as Party B), based on the principle of mutual benefits and through negotiation, the purchase by Party A from Party B the production equipment of contactless smart cards. 1.2 It is agreed that Party B shall provide Party A with a full set, brand new, and state-of-art production lines for the production of contactless smart cards and the complete production technology, technical information and all software, to ensure that strength and durability of the mechanically tested cards produced by Party A meeting the ISO/Mifare standards, and of the electrically tested cards meeting the IEC standards. Party B shall also act as the sole agent of selling the contactless smart cards for and produced by Party A, the price of which shall be negotiated every three years. In the first three years, 18,000,000 pieces of cards shall be sold to Party B at US$[ ]/piece. For this purpose Party A and Party B shall, in addition to this agreement, sign the "Agreement of Technical Service and Licensing" and "Agreement for the Purchase of Raw Materials and Sale of Products". Both Party A and Party B have agreed, for the purpose of promoting the domestic local market, Party A will sell 10% of the total contactless smart cards produced in first year, 20% of the second year, and 30% of the third year. Party B, as the sole sales agent, shall take over any unsold amount in the following month. 1.3 According to the laws and rules and regulations of the Peoples Republic of China and based on the principle of mutual benefits, the provisions of this agreement shall become effective and shall be executed at the same time with the "Agreement of Technical Services and Licensing" and the "Agreement for the Purchase of Raw Materials and Sale of Products". CHAPTER II - PARTIES 2.1 Party A: Shandong Huaguan Group General Company is a registered corporation in the Peoples Republic of China. Legal Address: 134 Wen Hua Road South, Lai Wu City, Shandong, People's Republic of China Legal Representative: Wang Shi Fan Title: Chairman Nationality: Chinese Telephone: (0634) 621-2901 Fax: (0634) 621-5934 Zip Code: 271100 Bank: Bank of China Lai Wu Branch Account Number: US Dollars RMB 2.2 Party B: American Pacific Aviation & Technology Corp Legal Address: One Sansome Street, 19th Street, San Francisco, CA 94104, USA Legal Representative: Eric Gravell Title: Chairman Nationality: U.S. Telephone: (415) 951-1078 Fax: (415) 951-1046 Zip Code: 550017 CHAPTER III - NAME, SPECIFICATIONS, QUANTITY, PRICE AND DELIVERY OF EQUIPMENT 3.1 Party B shall provide Party A with a complete brand new production line in the state-of-art of the late 1990s (see Appendix I - "Details of Equipment, Moulds and Accessories") and accessories for the production of contactless smart cards. Said production line shall be able to produce 750 pieces of smart cards per hour. The total cost of the equipment and the moulds (including technical services, licensing and accessories) shall be US$[ ] US Dollars), based on the CIF Jinan Airport price. 3.2 Before packaging said production line for shipment, Party A shall send five technical staff to come to the United States to conduct preliminary inspection of the equipment. Party B shall pay for the expense of the two-way air tickets, and provide lodging and transportation in the United States for the staff of Party A. Staff of Party A will stay in the United States for two weeks. CHAPTER IV - PAYMENT 4.1 Within six weeks after the agreement is signed and approved, Party A shall make a deposit in the amount of US$[ ], or [ ] of the total contractual amount, to Party B in form of T/T. (AMPAC will issue stand-by LC for [ ]). 4.2 Two months before equipment is shipped, Party A shall issue a Letter of Credit representing [ ]% of the total price to Party B. 4.3 After approval of the preliminary inspection and one month before packaging for shipment, Party B shall issue a Revolving Letter of Credit to Party A for the purchase of 18,000,000 pieces of contactless smart cards for a period of three years (starting from the date when Party A begins production), the price of which shall be FOB Jinan airport US$[ ]/piece. The total amount of the Letter of Credit shall be US$[ ]. 4.4 Upon receipt and successful test running of the equipment, Party A shall pay Party B a Letter of Credit in the amount of US$[ ], or [ ] of the total contractual price. CHAPTER V - SPECIFICATIONS AND TECHNICAL CONDITIONS OF THE EQUIPMENT 5.1 The production line supplied by Party B must be brand new, complete and shall correspond to the specifications of Appendix I - "Details of Equipment, Moulds and Accessories". 5.2 The performance and quality of the equipment shall meet the following requirements: 5.2.1 Operation Capacity: Shall meet the specifications of the manual of the equipment 5.2.2 Production Capacity: 6 million pieces/year 5.2.3 Product Specification: Shall meet the ISO/Mifare standards 5.2.4 Product Quality: the strength and durability of the mechanically tested cards shall meet the ISO standards, and the electrically tested cards shall meet the IEC standards 5.2.5 Reject rates: under 3% (not including chips) 5.3 The following accessorize shall be accompanied with the equipment delivered by Party B: 5.3.1 Special operation tools, maintenance and repair tools and testing tools 5.3.2 Easily damaged parts of equipment (the quantity shall be enough for one year normal consumption) 5.3.3 Qualified raw materials to b used for the 56-hour test run production (chips used during the test run period are fake). 5.4 The following documents shall be accompanied with the equipment delivered by Party B: 5.4.1 The quality approval certificate and the manual of the equipment 5.4.2 The packaging list of the equipment 5.4.3 Manuals of installation, testing, operation and maintenance 5.4.4 The quality assurance certificate and documentation, as specified in Chapter VII 5.4.5 Drawings of easily damaged parts and the list of accessories. 5.5 After making a deposit by Party A, Party B shall, within forty days, mail a technical layout drawing and power supply information to Party A for the purpose of technical design 5.6 Party B shall, two months before the installation and test running of the equipment, send the following documents via air mail or dispatch staff to provide on-site guidance for Party A: 5.6.1 The installation diagram and the foundation diagram 5.6.2 The power parameters (including electrical power, compressed air, water and stream) of the equipment, and the technical information of power supply and special shop requirements 5.7 The power utilization standards shall correspond to the power standards of the Peoples Republic of China, that is, 380+-10 volts for the transformer, and 50+-5% hertz for the frequency. CHAPTER VI - INSTALLATION, TROUBLE-SHOOTING, TEST RUNNING AND RECEIPT AND ACCEPTANCE 6.1 Party B shall be responsible for installing and test running the equipment, as well as training the staff for Party A, to ensure that successful installation and test running be completed within two weeks upon the arrival of the equipment in the shop. Party A shall provide technical staff, workers and other needs to accomplish the job. 6.2 The test run period shall be seven working days, eight hours a day. The purpose of the test run is to inspect the production equipment, and to examine if the products produced meet the requirements as specified in Provision 5.2. After satisfactory inspection and examination, the equipment shall be received and accepted. 6.3 The process of receipt and acceptance includes, in addition to test run, inspection of whether documentations accompanied are complete and whether the quality and quantity of the raw materials accompanied meet the requirements, and the conditions of the easily damaged parts. 6.4 No breakdown of the equipment shall be allowed during the test run period. In the event the breakdown rate or the rate of the rejected products is under 97%, it shall be ruled that the test run fails to pass the receipt and acceptance process and that a second test run shall be made to test the equipment for another fourteen working days until the equipment meeting the receipt and acceptance standards. After receipt and acceptance, both parties shall sign the "Certificate of Receipt and Acceptance". 6.5 Large volume of production shall only begin after receipt and acceptance of the equipment. Both parties agree that after receipt and acceptance, the production volume of the first month shall meet 50% of the contractual volume, the second month, 70%, and the third month, 100%. 6.6 Party B shall assume the cost of its staff during their period of working in the factory. Party A shall provide food in the factory and transportation within the city. CHAPTER VII - QUALITY INSPECTION 7.1 Party B shall guarantee that the equipment is made of top materials, in top craftsmanship. The quality, specification and performance of the equipment shall meet the requirements specified in this contract. 7.2 Before delivery, Party B shall conduct a thorough and full inspection of the quality, specification and performance, as well as the quantity/weight of the equipment, and shall provide a certificate of inspection, along with the details and results of inspection confirming that the quality and quantity of the equipment meets the requirements of this contract. A quality and quantity inspection certificate shall be provided by Party B when the equipment is delivered to Party A. 7.3 Upon arrival of the equipment at the destination, Party A shall, in accordance to the laws and rules and regulations of the Peoples Republic of China, apply to have the equipment inspected by the Import and Export Inspection Bureau (hereinafter as Inspection Bureau). Parties A and B shall be both present at said inspection. Party A shall notify Party B thirty days in advance the inspection date and representative from Party B shall arrive at the inspection site on said inspection date. In the event Party B does not show up on time or does not send any representative to participate in the inspection, the Inspection Bureau shall continue the inspection as scheduled and Party A shall notify the result to Party B who shall acknowledge the result accordingly. 7.4 In the event that any quality or quantity error, or any missing part is found during the inspection that does not meet the requirements of this agreement, or any damage due to packaging, Party B shall within six weeks make compensation, or shall make repairs at its own cost. In the event that any damage is caused by Party A, Party B shall replace the damaged item as soon as possible, and the cost of replacement shall be assumed by Party A. 7.5 In the event the inspection finds any serious quality or quantity problem of the equipment, Party A shall have the right to return the equipment or request compensation based on the provisions of Chapter IX. 7.6 The warranty period of the equipment shall be 12 months, commencing the date when the equipment is received and accepted. During the warranty period Party B shall be responsible to repair or replace the equipment if the equipment is damaged or broken due its inherent problem. CHAPTER VIII - PACKAGING AND SHIPMENT 8.1 When packaging, Party B shall use a new and solid wood container with necessary measures taken to prevent moist, shock, rust and rough loading and unloading of the equipment to ensure that the package is suitable for long distance transportation. 8.2 Packaging and Delivery Marks 8.2.1 Party B shall mark with paint at the four sides of the container such information as the number of the container, the size, weight, net weight, destination, receipt code, "face up", "handle with care", "no moist", "hoisting point" and "gravity point". 8.3 Shipment Information 8.3.1 When shipping, Party B shall fax Party A the following information: A. Date of Shipment, B. Port of Shipment, C. Port of Destination, and D. Number, Name, Quantity, Weight, Total Weight and Size of the Container. 8.3.2 When shipping, Party B shall send Party A via express mail the following information: A. Shipment Slip, with specification of the name and the quantity of the merchandize; B. Packaging Slip (2 copies), specifying the number, size, weight of the container, and the name, quantity, net weight of the merchandize, and the date of shipment; and C. The inspection certificate provided by the manufacturer, as specified under Chapter VII. CHAPTER IX - COMPENSATION AND PENALTY 9.1 In the event Party B fails to execute this contract after Party B receives the deposit required by this contract, Party B shall return all deposits to Party A and shall, based on the USD loan interest rate of China Bank of the date when the deposit is remitted, make a penalty compensation for the period of delay at a rate twice the said interest rate. 9.2 When executing this contract, if the specifications, quality and quantity do not meet the requirements of this contract, Party A shall, when presenting the inspection certificate of the Inspection Bureau, have the right to request that Party B make compensation within 30 days and Party B shall pay all the direct related loss and cost. 9.3 During the warranty period if it is due to the inherent problem of the equipment itself which causes any production problem, Party A shall have the right to request that Party B compensate. 9.4 Party A shall assume the cost of overtime for any delay of installation and test running of the equipment caused by Party A. 9.5 In the event Party B does not respond within 30 days upon compensation demand made by Party A, it shall be considered that Party B accept said claim. 9.6 Except for force majeure as specified in Provision 10.1, in the event the seller fails to deliver the merchandize on time according to the contract, Party A shall agree that Party B can postpone its delivery provided that Party B shall pay a penalty of 0.5% of the total cost for every delayed week but this penalty shall not exceed 5% of the total cost. In the event the delay of delivery exceeds ten weeks, Party A shall have the right to terminate the contract and Party B shall still pay for the penalty for the actual delayed days. 9.7 Without written agreement of Party B, Party A cannot transfer the patent technology to a third party, nor Party A can duplicate the equipment of Party B. Party B can request compensation from Party A for any violation of this provision. CHAPTER X - FORCE MAJEURE 10.1 During the time of manufacturing or in the process of shipping, in the event of war, fire, flood, typhoon, earthquake or other force majeure acknowledged by both parties that causes Party B fail or delay to execute the provisions of this contract as schedule, Party B shall assume no liability. In the event of force majeure, Party B shall notify Party A immediately and shall within two weeks, send a (certificate issued by the) government agency (to confirm said force majeure) to Party A via air mail. CHAPTER XI - ARBITRATION 11.1 In the event of any dispute arises during the execution of this agreement or over this agreement and when both parties fail to settle the dispute by friendly negotiation, said dispute shall be brought for arbitration. The dispute shall be heard by the China International Economic and Trade Arbitration Committee, regardless who the plaintiff is, and shall be conducted according to the arbitrary procedures set by said committee. 11.2 In the event that both parties fail to settle the dispute by friendly negotiation within 60 days, plaintiff shall have the right to request arbitration and the arbitration shall be conducted in Chinese. 11.3 The decision of the Arbitration Committee shall be final and shall have binding effect upon both parties. Neither party can request the court or other government agencies to change the decision. Arbitration fee shall be paid by the losing party. 11.4 During the period of arbitration, other non-disputed provisions of the contract shall remain legally valid. CHAPTER XII - GOVERNING LAWS AND VALIDATY 12.1 When executing this agreement, both Parties A and B shall comply with the laws and rules and regulations of the Peoples Republic of China. 12.2 This agreement shall be signed by representative of both parties and shall apply for official approval by respective government. The date of approval obtained by either Party A or B, whicever is later, shall be considered as the effective date of this agreement. 12.3 Both parties shall fax the government approval to the other party and shall be followed with a letter of confirmation. In the event that after six months any party fails to obtain the government approval, the other party shall have the right to terminate the agreement. 12.4 After this agreement becomes effective, both Parties A and B shall, if needed, negotiate revisions to accommodate the practicalities of executing this agreement. These revisions shall become effective when both parties sign the amendment. Neither party can amend the agreement individually. CHAPTER XIII - DOCUMENTS 13.1 This agreement shall be written in Chinese. 13.2 This agreement is signed April 1, 2000 13.3 This agreement contains four original copies, with each party holding two copies. PARTY A: Shandong Huaguan Group General Company Company Representative: Wang Shifan Signature: PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: Allen Yue Signature: EX-10 18 ex10-20.txt EXHIBIT 10.20 Exhibit 10.20 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. AGREEMENT FOR PURCHASE OF RAW MATERIALS AND SALES This agreement is made between the Shandong Huaguan Group General Company, (hereinafter as Party A), of China, and the American Pacific Aviation & Technology Corporation (hereinafter as Party B), based on the principle of mutual benefits and through sincere friendly negotiations, for the purchase of raw materials for the production of contactless smart cards by Party B on behalf of Party A and for exclusive dealership by Party B to sell the contactless smart cards produced by Party A. 1 Purchase of Raw Materials 1. Party B shall purchase on the behalf of Party A all the needed raw materials for the production of the contactless smart cards and shall supply the raw materials to Party A based on the specifications of the products. 2. The price of raw materials shall be set at Jinan Airport CIP US$[ ] piece. 3. Contactlesss smart cards produced by Party A using the raw materials supplied by Party B shall meet the ISO/Mifare standards (see "Agreement for Purchase of Equipment" and its appendices). In the event the products do not meet the standards which causes direct economic loss of Party A, Party B shall assume the responsibility of the loss. 4. Party B shall provide the raw materials according to the exact demand of quantity, types, specifications, and delivery date made by Party A to ensure that Party A maintain the normal production. In the event of any delay of supply of raw materials by Party B that causes Party A to suspend production, Party B shall assume the responsibility of economic loss, unless such delay is caused by special reason which Party B will notify Party A in writing and which Party A shall agree to the delay. 5. Party A confirms Provision 3 of Article 2 that after provision of a three-year Revolving Letter of Credit and raw materials to Party A by Party B, Party A shall deposit into the bank account designated by Party B the Sight Letter of Credit for the purchase of raw materials. 6. The quantity of raw materials needed for the production of one contactless smart cards shall be based on the provisions of Chapter VI of the "Agreement for Purchase of Equipment" and the actual estimation both parties agree data during the test run period. 7. The above provisions shall be revised every three years. This agreement shall apply to the first three years. 2 Sale of Products 1. Party B shall have exclusive right of selling the contactless smart cards produced by Party A (starting from the date when the equipment production capacity and the quality of products are accepted). The sales price of which shall be determined every three years. In the first three years, the sales price shall be FOB US$[ ]/piece. 2. Annual order by Party B to Party A shall not less than 6,000,000 pieces. Monthly order shall not be less than 500,000 pieces. The annual order shall be confirmed by Party A before it becomes effective. Party B shall provide the needed new moulds to Party A at no charge before changing the type of products ordered. 3. Party B shall comply with the "Agreement for Purchase of Equipment" to issue a Letter of Credit for the purchase of products of Party A. Party A shall deliver the products one to three times a month, and the total amount of each delivery shall be between US$[ ] to $[ ]. Additional cost for any emergency order by Party B shall be negotiated. 4. Party A shall base on the annual order confirmed by both parties, deliver products of the requested type, specifications, quantity and to organize production and delivery on time. In the event Party A fails to deliver the products according to the annual order confirmed by both parties, Party A shall assume the responsibility for the economic loss of Party B. 3 Force Majeure In the event during the execution of the agreement that either party experiences force majeure which delays the execution of the agreement as in the cases of earthquake, typhoon, flood, fire, war, government restraints or intervention, industrial chaos, riots or other national disturbances, or other incidents that both parties cannot control, the affected party shall send by express mail or by fax a copy of the government issued certification to the other party and the execution of the agreement shall be temporarily suspended. In the event the suspension is over six months, both parties shall consider the agreement shall be terminated. 4 Default Both parties shall execute the provisions of the agreement sincerely. In the event any party fails to execute any of the above provisions which causes the loss of the other party, the defaulting party shall compensate the economic loss of the party complying the contract. In the event the defaulting party does not respond to the compensation claim by the other party within 30 days after said claim is made, the defaulting party shall be considered as accepting the claim. 5 Settlement of Dispute Any dispute over the execution of the agreement by Parties A and B shall be settled if possible by friendly negotiations. In the event negotiations fail to settle the issue, the dispute shall be heard in Beijing by the China International Trade Promotion Committee Foreign Trade Committee, based on the arbitration procedures set by the committee. The decision of the arbitration is final and has binding effect on both parties. The cost of arbitration shall be paid by the losing party. 6 This agreement shall become effective the date when it is signed. 7 This agreement, along with the "Agreement for Purchase of Equipment" and the "Agreement of Technical Services and Licensing" shall become effective at the same time. 8 This agreement shall contain four original copies, with each party holding two copies. All copies have equal validity. PARTY A: Shandong Huaguan Group General Company Company Representative: Wang Shifan Signature: April 1, 2000 PARTY B: American Pacific Aviation & Technology Corporation Company Representative: Allen Yue Signature: April 1, 2000 EX-10 19 ex10-21.txt EXHIBIT 10.21 Exhibit 10.21 TECHNICAL SERVICES AND LICENSING AGREEMENT This agreement is made between the Shandong Huaguan Group General Company, (hereinafter as Party A), of China, and the American Pacific Aviation & Technology Corporation (hereinafter as Party B), based on the principle of mutual benefits and through friendly negotiations, for the provision of technical services and patent technology (exclusive technology) by Party B to Party A for the production of contactless smart cards. 1. Party B shall provide Party A with the full set of technology (including technical process, operation rules, maintenance rules, inspecting and testing rules, administration system and all drawings, information, software or patent technology) for the production of contactless smart cards and shall guarantee that the production equipment and products produced meet the requirements of the "Agreement for Purchase of Equipment". 2. The patent technology and exclusive technology provided by Party B to be used by Party A shall not involve any industrial property rights of any other countries or companies and Party A shall be legally protected that it has the legal right of utilization. 3. Without written permission of Party B, Party A shall not transfer the patent technology or exclusive technology to any third party, nor Party A shall duplicate the equipment provided by Party B. Without the permission of Party B, Party A shall not allow business or technical personnel of other party to look at the production line, nor Party A shall provide any technical information to any other party. 4. Party B shall be responsible for providing all technical services of installation, trouble shooting, test running, receipt and acceptance and shall solve all the technical problems before receipt and acceptance to ensure that the equipment will be able produce 6 million pieces/year. Party A shall provide lodging, food and transportation for technical staff from Party B and shall delegate special staff to coordinate the project to ensure that installation, trouble shooting and test running go through smoothly. Travel expenses for experts from Party B shall be paid by Party B. 5. Party B shall train the staff of Party A for a period of two weeks. Party A shall select five qualified staff to receive training. In the event that members from Party A do not fully master the production technology after the training period, said period can be extended to three or four weeks, the cost of such extension shall be assumed by Party A. 6. Party B shall cover the full cost of providing the complete technology (including the cost of providing technical details, operation rules, maintenance rules, inspection and testing rules, administration system, drawings and information and software and the compensation and travel expenses of experts from Party B sent to China) and the cost of patent technology and exclusive technology licensing, and staff training. All these costs are included in the equipment purchase cost paid by Party A and Party A shall pay no additional fee. In addition, at least half a year before the actual production starts, Party B shall send one to three technical staff to work at Party A's site to provide on-site production assistance and technical support. 7. This agreement, along with the "Agreement for Purchase of Equipment" and "Agreement for Purchase of Raw Materials and Sales of Products", shall become effective at the same time. 8. Default Both parties shall execute the provisions of the agreement sincerely. In the event any party fails to execute any of the above provisions, which causes the economic loss of the other party, the defaulting party shall compensate the loss. Claims and penalties shall be executed according to provisions of Chapter IX of the "Agreement for Purchase of Equipment". 9. Settlement of Dispute Any dispute over the agreement by Parties A and B shall be settled through friendly negotiation. In the event negotiation fails to settle the dispute, it shall be arbitrated by the China International Economic and Trade Arbitration Committee. Fee for arbitration shall be paid by the losing party. 10. This agreement shall become effective on the date when it is signed. 11. This agreement contains four original copies, with each party holding two copies each. All copies bear equal validity. PARTY A: Shandong Huaguan Group General Company Representative of Company: Signature: PARTY B: American Pacific Aviation & Technology Corporation Representative of Company: Allen Yue Signature: EX-10 20 ex10-22.txt EXHIBIT 10.22 Exhibit 10.22 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. SUPPLEMENTAL AGREEMENT AS A REVISION OF THE AGREEMENT SIGNED ON 4/1/2000 Shangdong Huaguan Group Ltd. (hereinafter referred to as Party A) and American Pacific Aviation & Technology Corporation (hereinafter referred to as Party B) signed on 4/1/00 the Equipment Purchase Contract, the Technical Aid And Know-how License Contract and the Raw Materials Supply And Products Sales Contract, in relation to the purchase by Party A of Party B's production facilities for the manufacture of the contactless smart cards. Now and hereby, the parties, through friendly negotiations, conclude the following supplemental agreement. Article 1 Purchase of Raw Materials 1. Party B shall supply to the order of Party A after the former receives and confirms the order by the latter for the procurement of production materials for the non-contact smart cards. 2. The unit price for the needed raw material for each non-contact smart card is CIF US$[ ] per piece (PVC and outer packaging material excluded). 3. Party A guarantees that the quality of the non-contact smart cards made of the raw materials supplied are up to the ISO standard. 4. Party B shall, after receiving and confirming the order placed by Party A, make delivery in accordance with quantity, variety, specifications, time of shipment indicated in the order, so as to enable Party A to continue its normal production. In case the stoppage of production by Party A is attributed to the delay of Party B in delivering the material ordered, Party B shall be liable to the economic loss suffered by Party A. Notwithstanding the aforesaid stipulation, when Party B informs Party A by written notice of certain unusual situation in which Party B needs to defer in the supply of the ordered goods, the 1 latter shall give its consent to the requirement. 5. Party A shall, in accordance with the purchase order, make remittance to the bank account designated by Party B for the payment under the sight L/C for the buying of the raw materials. To ensure timely payments, the parties agree that part of the payments will be made by remittance by American Huasu Trading Inc., and the remaining part will be made by L/C opened by Party A in favor of Party B. The specific amounts of each payment will be negotiated and decided by the three parties. Article 2 Sales of Products 1. Party B is willing to assist Party A to sell the contactless smart cards produced by Party A. The sales price will be negotiated and fixed by the parties every three years. The price is FOB US$[ ] per piece in the first three years. 2. Party B shall provide Party A with annual sales plan and the exact amount of sales shall be subject to each specific order. Party B shall provide Party A with the needed new moulds free of charge before any change in the varieties of the ordered products. 3. Party B shall open a three-year revolving L/C for the purchase of Party A's products. Party A shall make delivery in conformity with the order. Settlement of payment shall be subject to the amount of each order. 4. Party A shall produce and deliver the goods in accordance with the varieties, specifications, quantities and shipment time under each order confirmed by the parties, and shall be liable to the economic loss incurred to Party B in case Party A fails to effect the shipment as regulated under the confirmed order. 2 5. If Party A receives order from a third party, it shall send notice to Party B 30 days in advance, to enable the latter to adjust the carrying-out of the confirmed order. 6. These terms replace paragraph 1.2 of the Agreement for Purchase of Equipment and the Agreement of Purchase of Raw Materials signed on 4/1/2000, which is now eliminated. Article 3 Force Majeure In the course of the performance of the duties under this agreement, if either party is prevented from performing its duties under the agreement due to such events or incidents as earthquake, typhoon, flood, fire, war, government action or restriction, industrial turmoil, riots or other domestic upheavals, or any accident beyond control of the parties, the suffering party shall obtain a certification issued by its government and express-mail or fax the certification to the other party. The agreement shall be suspended after the notification. When the suspension of the agreement is more than six months, the parties shall decide whether to terminate the agreement or not. Article 4 Liabilities for Breach The contractual parties shall carry out the terms and conditions under the agreement honestly. In case either party fails to perform any of the above-mentioned stipulations and causes the other party economic loss, it shall be liable to the compensation of the contract-honoring party. If the breaching party fails to reply 30 days after the honoring party lodges a claim against the breaching party, the claimed shall be deemed to accept the claim. Article 5 Dispute Resolution In case of any dispute in the course of the carrying-out of this 3 agreement, the parties should seek a settlement through friendly consultation and negotiation. If the parties fail to reach a settlement by consultation, the dispute shall be submitted to China International Economic And Trade Arbitration Commission (CIETAC) for arbitration. CIETAC Rules shall apply and the venue shall be in Beijing. The award shall be binding on the parties. Arbitration fees shall be borne by the losing party. Article 6 Validity This agreement shall be valid and enforceable upon the signatures by the parties. In view of the fact that the parties signed on 3/6/00 the Equipment Purchase Contract, the Technical Aid and Know-how Licensing Contract and the Raw Materials Supply and Products Sales Contract, if there is any discrepancy between that of the three contracts and what is stipulated in this agreement, the relevant stipulation in this agreement shall prevail. Article 7 Originals This agreement has 4 copies of originals being equally valid and each party shall have two. Party A Party B Shandong Huaguan Group Ltd. American Pacific Aviation & Technology Corporation Authorized Representative Authorized Representative Signature Signature
4 EX-10 21 ex10-23.txt EXHIBIT 10.23 Exhibit 10.23 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. AGREEMENT FOR PURCHASE OF EQUIPMENT 2001 CHAPTER I - GENERAL PRINCIPLE 1.1 This contract is made between the Hainan Pacific New High Tech Company (hereinafter as Party A) and the American Pacific Aviation Technology Company (hereinafter as Party B), based on the principle of mutual benefit and through friendly negotiations, to purchase from Party B by Party A the equipment for the production of the contactless smartcards. 1.2 It is agreed that Party B shall provide a full set, brand new, and state-of-art production line and the complete production technology, technical information and software for the production of contactless smartcards, which shall ensure that the strength and durability of the mechanically tested cards produced by Party A meet the standards of ISO/Mifare, and that the electrically tested cards meet the standards of the IEC. 1.3 According to the laws and rules and regulations of the People's Republic of China and based on the principle of mutual benefits, the provisions of this agreement shall become effective and shall be executed at the same time with the "Agreement of Technical Services and Licensing" and the "Agreement for the Purchase of Raw Materials and Sales of Products". CHAPTER II - PARTIES 2.1 Party A: Hainan Pacific New High Tech Company Limited is a registered corporation in the People's Republic of China. Legal Address: The People's Republic of China Legal Representative: Ying Xue Tian Title: Chairman of the Board Nationality: Chinese Telephone: Fax: Zip Code: Bank: Account Number: US Dollars RMB 1 2.2. Party B: American Pacific Aviation & Technology Corp. Legal Address: 1 Sansome Street, 19th Street San Francisco, CA 94104, USA Legal Representative: Allen Yue Title: V.P. Asian Pacific Region Nationality: U.S. Telephone: (415) 951-1078 Fax: (415) 951-1046 Zip Code: Bank: Account Number: CHAPTER III - NAME, SPECIFICATIONS, QUANTITY, PRICE AND DELIVERY OF EQUIPMENT 3.1 Party B shall provide Party A with a complete brand new production line with the state-of-art of the 2001 (see Appendix I - "Details of Equipment, Moulds and Accessories") and accessories for the production of contactless smart cards. Said production lines shall be able to produce 1500 pieces of smart cards per hour. The total cost of the equipment shall be US$[ ], based on the CIF Haikou Airport price, which shall cover the equipment, moulds, technical service, patent and licensing, and accessories. 3.2 Before packaging said production line for shipment, Party A shall send three technical staff to come to the United States to conduct preliminary inspection of the equipment. Party B shall pay for the expense of the two-way air tickets, and provide lodging and transportation in the United States for the visiting staff of Party A. Staff of Party A will stay in the United States for two weeks. 3.3 Delivery Date of the Equipment: about August. CHAPTER IV - PAYMENT 4.1 After signing this agreement, Party A shall, within ten working days, issue a Letter of Bank Guarantee to Party B in the amount of US$[ ]. Upon receipt of Letter of Bank Guarantee from Party A, Party B shall, within three working days, remit by T/T a deposit of US$ ] US Dollars). 2 4.2 Party A shall, before May 26, issue a Letter of Credit in the amount of US$[ ] US Dollars) to Party B for the purchase of the equipment. On June 20, 2001, Party A shall issue a Letter of Credit for the balance of the purchase of the equipment to Party B in the amount of US$[ ] US dollars). 4.3 Upon approval of the preliminary inspection by Party A, Party A shall negotiate the full amount of US$[ ] US dollars) of Letter of Credit, per Provision 4.2. CHAPTER V - SPECIFICATIONS AND TECHNICAL CONDITIONS OF THE EQUIPMENT 5.1 The production line supplied by Party B must be brand new, complete and shall correspond to the specifications of Appendix I - "Details of Equipment, Moulds and Accessories". 5.2 The performance and quality of the equipment shall meet the following requirements: 5.2.1 The operation capacity of the equipment shall meet the specifications of the manual of the equipment 5.2.2 The production capacity of the equipment: 1500 pieces/hour 5.2.3 Product Specification: shall meet the ISO standards 5.2.4 Product Quality: the strength and durability of the cards, when mechanically tested, shall meet the ISO standards, and when electrically tested, shall meet the IEC standards 5.3 Party B shall deliver the following supplements along with the equipment 5.3.1 Special operation tools, maintenance and repair tools and testing tools 5.3.2 Easily damaged parts of equipment (the quantity shall be enough for one year normal consumption). See Attachment II. 5.3.3 Qualified raw materials for the 56-hour production test run purpose (chips used in the test run period are fake). 5.4 Party B shall deliver the following technical documents when packaging and shipping the equipment: 5.4.1 The quality approval certificate and the manual of the equipment 3 5.4.2 The packaging list of the equipment 5.4.3 Manuals of installation, testing, operation and maintenance 5.4.4 The quality assurance certificate and documentation, as specified in Chapter VII 5.4.5 Drawings of easily damaged parts and the list of accessories. 5.5 Upon effective of the contract, Party B shall, within forty days, mail a technical layout drawing and power supply information to Party A for the technical design purpose. 5.6 Party B shall, two months before the installation and test running of the equipment, mail the following documents to Party A or have staff work at Party A's place to provide instructions: 5.6.1 The installation diagram and the foundation diagram 5.6.2 The power parameters (including electrical power, compressed air, water and stream) of the equipment, and the technical information of power supply and special shop requirements 5.7 The power utilization standards shall correspond to those of the People's Republic of China, that is, 380(+ or -)10 volts for the transformer, and 50(+ or -)5% hertz for the frequency. CHAPTER VI - INSTALLATION, TROUBLE-SHOOTING, TEST RUNNING AND RECEIPT AND ACCEPTANCE 6.1 Party B shall be responsible for installing and trouble-shooting the equipment, and training the staff of Party A, ensuring that the installation and trouble shooting of the equipment be completed within two weeks after the arrival of the equipment in the shop. Party A shall provide the necessary technical staff, workers and other necessities to accommodate the project. 6.2 The test run period shall be seven working days, at eight hours per day. The purpose of the test run is to inspect the production equipment, and to examine whether the products produced meet the requirements specified in Provision 5.2. After satisfactory inspection and examination, the equipment shall be received and accepted. 4 6.3 The process of receipt and acceptance includes, in addition to test run, inspection of whether documentations accompanied are complete and whether the quality and quantity of the raw materials accompanied meet the requirements, and whether the consumable parts are included. 6.4 No breakdown of the equipment is allowed during the test run period. In the event the breakdown rate or the rate of the rejected products falls under the level of 97%, a second testing shall be made to test the equipment for another six working days until the equipment meets the receipt and acceptance standards. After receipt and acceptance, both parties shall sign the "Certificate of Receipt and Acceptance". 6.5 Large volume of production shall not begin until receipt and acceptance is completed. 6.6 Party B shall assume the cost of its staff during their period of working in the factory. Party A shall provide food by the factory and transportation within the city. CHAPTER VII - QUALITY INSPECTION 7.1 Party B shall guarantee that the equipment is made by top craftsmanship and of top materials. The quality, specification and performance of the equipment shall meet the requirements specified in this contract. 7.2 Before delivery, Party B shall conduct a thorough and full inspection of the quality, specification and performance, as well as the quantity/weight of the equipment, and shall provide a certificate of inspection, along with the details and results of the inspection confirming that the quality and quantity of the equipment meets the requirements of this contract. A quality and quantity inspection certificate shall be provided by Party B when the equipment is delivered to Party A. 7.3 Upon arrival of the equipment at the destination, Party A shall, in accordance to the laws and rules and regulations of the People's Republic of China, request that the Import and Export Inspection Bureau (hereinafter as Inspection Bureau) to conduct an inspection. Parties A and B shall both be present at said inspection. Party A shall notify Party B thirty days in advance about the inspection date and 5 representative from Party B shall arrive at the inspection site of A on said inspection date. In the event Party B fails to show up on time or fails to send any representative to participate in the inspection, the Inspection Bureau shall continue inspection as scheduled and the result of which shall be notified by Party A to Party B and Party B shall acknowledge the result accordingly. 7.4 In the event the inspection finds any quality or quantity error, or any missing part that does not meet the requirements of this agreement, or any damage due to packaging, Party B shall within six weeks make compensation, or shall make repairs at its own cost. In the event that any damage is caused by Party A, Party B shall replace the damaged item as soon as possible, and the cost of replacement shall be paid by Party A. 7.5 In the event the inspection finds any serious quality or quantity problem of the equipment, Party A shall have the right to return the equipment or request compensation based on the provisions of Chapter IX. 7.6 The warranty period of the equipment shall be 12 months, commencing the date when the equipment is received and accepted. During the warranty period Party B shall be responsible for repairing the equipment if the damage of the equipment is caused by the defects of the equipment. 7.7 After the warranty period, in the event of any damage to the parts of the equipment or the product backups (easily consumed items) that Party A needs to purchase from Party B, Party B shall only charge these items at cost. CHAPTER VIII - PACKAGING AND SHIPMENT 8.1 When packaging, Party B shall use a new and solid wood container with necessary measures taken to prevent moist, shock, rust and rough loading and unloading of the equipment to ensure that the package is suitable for long distance transportation. 8.2 Packaging and Delivery Marks Party B shall mark with non-erasable paint at the four sides of the container such information as the number of the container, the size, weight, net weight, destination, receipt code, "face up", "handle with care", "no moist", "hoisting point" and "gravity point". 6 8.3 Shipment Information 8.3.1 Within three days after shipping, Party B shall fax Party A the following information: A. Date of Shipment, B. Port of Shipment, C. Port of Destination, D. Number, Name, Quantity, Weight, Total Weight and Size of the Container. (2) Within five days after shipping, Party B shall send the following information to Party A via express mail: A. Shipment Slip, with specification of the name and the quantity of the merchandize; B. Packaging Slip (2 copies) which specifies the number, size, weight of the container, and the name, quantity, net weight of the merchandize, and the date of shipment; C. The inspection certificate provided by the manufacturer, as specified in Chapter VII. CHAPTER IX - COMPENSATION AND PENALTY 9.1 In the event Party A, within three days upon the arrival of the equipment at the destination port, finds any disagreement of the specifications, quality and quantity of the equipment as specified in this contract, Party A shall, by presenting the inspection certificate of the Inspection Bureau, request compensation from Party B. In the event Party B has any dispute over the inspection certificate, Party B shall ask any other inspection agencies in China to make another inspection, the cost of which shall be assumed by Party A. Party A shall have the right to participate in the second inspection. In the event the result of the second inspection differs from the original inspection, the result of the second inspection shall prevail. 9.2 Party A shall assume the cost of overtime due to any delay of installation and testing of the equipment caused by Party A. 9.3 In the event Party B fails to respond within 30 days after Party A makes its claim for compensation, it shall be considered that Party B accept the claim. In the event Party B present a timely written dispute, both parties shall try to settle the dispute by negotiation. In the event the negotiation fails to settle the dispute, either party shall have the right, according to Article XI, request for an 7 arbitration. 9.4 Except for force majeure as specified in Provision 10.1, in the event the seller fails to deliver the merchandize on time according to the contract, Party A shall agree that Party B postpone delivery provided that Party B shall pay a penalty at 0.5% of the total cost for every delayed week but this penalty shall not exceed 5% of the total cost. In the event the delay of delivery exceeds ten weeks of the scheduled date, Party A shall have the right to terminate the contract and Party B shall still pay for the penalty for the actual delayed days. 9.5 Without written agreement of Party B, Party A cannot transfer the patent technology and licensing to any third party, nor Party A can duplicate the equipment of Party B. In the event Party A allows any third party to use aid technology at its discretion, Party A shall pay Party B an amount of US$[ ] for violation of the contract. Payment of this amount does not waive the right of Party B to prosecute against any third party or Party A for violation of rights. CHAPTER X - FORCE MAJEURE 10.1 During the time of manufacturing or in the process of shipping, in the event of war, fire, flood, typhoon, earthquake or other force majeure acknowledged by both parties that causes Party B fail or delay to execute the provisions of this contract as schedule, Party B shall assume no liability. In the event of force majeure, Party B shall notify Party A immediately and shall within two weeks, send, via air mail, a government issued certificate to Party A confirming said force majeure. 10.2 When the force majeure vanishes, both parties shall negotiate whether to continue executing the contract. CHAPTER XI - ARBITRATION 11.1 In the event there arises any dispute during the execution of this agreement or over this agreement and when both sides fail to settle the dispute by friendly negotiation, said dispute shall be brought for arbitration. The dispute shall be heard by the China International Economic and Foreign Trade Arbitration Committee, in Beijing, according to the procedures set by said committee. 8 11.2 The decision of the Arbitration Committee shall be final and shall have binding effect upon both parties. Arbitration fee shall be paid by the losing party. 11.3 During the period of arbitration, both parties shall continue to execute other non-disputed terms of the contract. CHAPTER XII - GOVERNING LAWS AND VALIDATY 12.1 When executing this agreement, both Parties A and B shall comply with the laws and rules and regulations of the People's Republic of China. 12.2 This agreement shall be signed by representative of both parties and shall apply for official approval by respective government. The date of approval obtained by either Party A or B, whichever is later, shall be considered as the effective date of this agreement. 12.3 Both parties shall fax the government approval to the other party and shall be followed with a letter of confirmation. In the event any party fails to obtain the government approval after six months the contract is signed, the other party shall have the right to terminate the agreement. 12.4 After this agreement becomes effective, both Parties A and B shall, if needed, discuss revisions to accommodate the practicalities of executing this agreement. These revisions shall become effective when signed by both parties. Neither party can amend the agreement individually. CHAPTER XIII - DOCUMENTS 13.1 This agreement shall be written in Chinese. 13.2 This agreement is signed on May 8, 2001. 13.3 This agreement contains four original copies, with each party holding two copies. PARTY A: Company Representative: Ying Xue Tian Signature: (signature) 9 May 8, 2001 PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: Allen Yue Signature: (signature) May 08, 2001 10 EX-10 22 ex10-24.txt EXHIBIT 10.24 Exhibit 10.24 The undersigned, Eric Gravell, Executive Vice President and member of the Board of Directors of Chipcards, Inc., a California corporation (the "Corporation"), represents that the following material contracts required to be filed as part of the Corporation's registration statement on Form SB-2 are, to the best of his knowledge, fair and accurate English translations of the Chinese originals: 1. Sino Foreign Joint Venture Agreement, dated February 18, 2000, between the Company and Shandong Huang Tai Industrial Group 2. Agreement for Extending the Deadline of Foreign Investment Contribution, dated August 12, 2000 between the Company and Shandong Huang Tai Industrial Group of China. 3. Agreement of Purchase of Equipment, dated February 18, 2000, between the Company and China Card I.C. (Shanghai) Co., Ltd. 4. 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 Company and China Card I.C. (Shanghai) Co., Ltd. 5. Addendum to the Agreement for Purchase of Equipment, between the Company and China Card I.C. (Shanghai) Co., Ltd. 6. Addendum to the Agreement for Purchase of Equipment, dated November 10, 2000, between the Company and China Card I.C. (Shanghai) Co., Ltd. 7. Agreement of Raw Materials and Sales, dated February 18, 2000, between the Company and China Card I.C. (Shanghai) Co., Ltd. 8. Technical Support Agreement, dated February 18, 2000, between the Company and China Card I.C. (Shanghai) Co., Ltd. 9. Technical Services and Patent Technology Licensing Agreement, dated February 18, 2000, between the Company and China Card I.C. (Shanghai) Co., Ltd. 10. Materials Processing Agreement between the Company and China Card I.C. (Shanghai) Co., Ltd. 11. Agreement of Purchase of Equipment, dated April 1, 2000, between the Company and Shandong Huaguan Group General Company. 12. Agreement for Purchase of Raw Materials, dated April 1, 2000, between the Company and Shandong Huaguan Group General Company 13. Technical Services and Licensing Agreement, dated April 1, 2000, between the Company and Shandong Huaguan Group General Company. 14. 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 Company and Shandong Huaguan Group General Company 15. Agreement of Purchase of Equipment, dated May 8, 2001, between the Company and Hainan Pacific New High Tech Company. 16. Technical Services and Licensing Agreement, dated May 8, 2001, between the Company and Hainan Pacific New High Tech Company. 17. Agreement for Purchase of Equipment and Supplement, dated June 28, 2001, between the Company and Beijing Zhong Dun Security Technology Development Company on behalf of the Ministry of Security No. 1 Research Institute. 18. Technical Services and Licensing Agreement dated June 28, 2001 between the Company and Beijing Zhong Dun Security Technology Development Company on behalf of the Ministry of Security No. 1 Research Institute. 19. Agreement for Purchase of Equipment, dated September 3, 2001, between the Company and Beijing Bu Lu Dun High Tech Company Limited on behalf of the China Motor Vehicle Safety Inspection Center 20. Technical Services and Licensing Agreement, dated September 3, 2001, between the Company and Beijing Bu Lu Dun High Tech Company Limited on behalf of the China Motor Vehicle Safety Inspection Center. 21. Agreement for Purchase of Equipment, dated August 10, 2001, between the Company and Tranco Limited. 22. Technical Services and Licensing Agreement, dated August 10, 2001, between the Company and Tranco Limited. 23. Agreement for Purchase of Equipment, dated August 10, 2001, between the Company and Tranco Limited. 24. Technical Services and Licensing Agreement, dated August 10, 2001, between the Company and Tranco Limited. 25. Equipment Purchase Agreement, dated September 6, 2001, between the Company and Shangdong Lu Neng Huang Tai Industrial Group Limited. 26. Technical Services and Licensing Agreement, dated September 6, 2001, between the Company and Shangdong Lu Neng Huang Tai Industrial Group Limited. 27. Agreement of Transfer of Shares, dated September 6, 2001, between the Company and Shangdong Lu Neng Huang Tai Industrial Group Limited. 28. Agreement of Transfer of Shares, dated September 6, 2001, between the Company and Shangdong Lu Neng Huang Tai Industrial Group Material Trading Company. 29. Agreement of Transfer of Shares, dated September 6, 2001, between the Company and United Power (USA). Signed to this 12th day of November, 2001. By: /s/ Eric Gravell ------------------------------------------- Name: Eric Gravell Title: Executive Vice President and Director EX-10 23 ex10-27.txt EXHIBIT 10.27 Exhibit 10.27 TECHNICAL SERVICES AND LICENSING AGREEMENT Technical Services and Licensing Agreement This agreement is made by the Hainan Pacific New High Tech Company Limited (hereinafter as Party A) and the American Pacific Aviation & Technology Corporation (hereinafter as Party B), based on the principle of mutual benefits and through friendly negotiations, for the provision of technical services and licensing (patent technology) by Party B to Party A for the production of contactless smart cards. 1. Party B shall provide the full set of technology (including technical process, operation rules, maintenance rules, inspecting and testing rules, administration system and all drawings, information, software or patent technology) for the production of contactless smart cards and shall guarantee that the production equipment and products produced by Party A meet the requirements of the "Agreement for Purchase of Equipment". 2. The patent technology and exclusive technology provided by Party B to Party A shall not involve any industrial property right of other countries or companies and Party A shall be legally protected that it has the legal right of utilization. 3. Without written permission of Party B, Party A shall not transfer the patent technology or exclusive technology to any third party, nor Party A shall duplicate the equipment provided by Party B. Without the permission of Party B, Party A shall not allow business or technical personnel of other party to examine the production line or give any technical information from Party B to any third party. 4. Party B shall be responsible for providing all technical services of installation, trouble shooting, test running, receipt and acceptance, and shall solve all technical problems before receipt and acceptance to guarantee that the equipment will produce 1500 pieces/hour. Party A shall provide lodging and food for technical experts of Party B and shall assign special staff to coordinate the project to ensure that installation, trouble shooting and test running go through smoothly. The period for installation and test running the equipment shall be two weeks. The travel expenses of experts from Party B shall be assumed by Party B. 1 5. Party B shall train the staff of Party A for a period of two weeks. Party A shall select qualified staff to receive training. In the event that members from Party A fail to master the production technology during the training period, said period can be extended to three or four weeks, the cost of such extension shall be assumed by Party A. 6. Party B shall cover the cost of providing the complete technology (including the cost of providing technical details, operation rules, maintenance rules, inspection and testing rules, administration system, drawings and information and software and the compensation and travel expenses of experts from Party B coming to China) and the cost of patent technology and exclusive technology licensing, and staff training. All these costs are included in the equipment purchase cost paid by Party A. With the exception of the equipment purchase cost, Party A shall pay no additional fee. In addition, at least in the first half year after the actual production starts, Party B shall send one to three technical staff to stay in Party A's site to help Party A produce and to provide technical support. Party B shall also help Party A to obtain the certification by Philips and Visa. 7. This agreement and the "Agreement of Purchase of Raw Materials and Sales of Products" shall become effective at the same time. 8. Default Both parties shall execute the provisions of the agreement sincerely. In the event any party fails to execute any of the above provisions that causes the economic loss of other party, the defaulting party shall compensate the loss. Claims and penalties shall be executed according to Chapter IX of the "Agreement for Purchase of Equipment". 9. Settlement of Dispute Any dispute over the agreement by Parties A and B shall be settled through friendly negotiation. In the event negotiation fails to settle the dispute, it shall be arbitrated by the China Economic and Foreign Trade Arbitration Committee in Beijing. Fee for arbitration shall be paid by the losing party. 10. This agreement shall become effective on the date signed. 11. This agreement contains four original copies, with each party holding two copies each. All copies bear equal validity. 2 PARTY A: Company Representative: Ying Xue Tian Signature: (signature) May 8, 2001 PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: Allen Yue Signature: (signature) May 08, 2001 3 EX-10 24 ex10-28.txt EXHIBIT 10.28 Exhibit 10.28 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. AGREEMENT FOR PURCHASE OF EQUIPMENT Number: 2001BZD (2)-019 2001 CHAPTER I - GENERAL PRINCIPLES 1.1 This contract is made between the Beijing Zhong Dun Security Technology Development Company, on behalf of the Ministry of Security No. 1 Research Institute (hereinafter referred as Party A) and the American Pacific Aviation Technology Company (hereinafter referred as Party B), based on the principle of mutual benefit and through friendly negotiations, to purchase from Party B by Party A the equipment for the production of the contactless smartcards. 1.2 It is agreed that Party B shall provide a full set, brand new, and state-of-art production line and the complete production technology, technical information and software for the production of contactless smartcards, which shall ensure that the strength and durability of the mechanically tested cards produced by Party A meet the standards of ISO/IEC7810, ISO/IEC10536, and ISO/IEC14443. 1.3 According to the laws and rules and regulations of the People's Republic of China and based on the principle of mutual benefits, the provisions of this agreement shall become effective and shall be executed at the same time with the "Agreement of Technical Services and Licensing". CHAPTER II - PARTIES 2.1 Party A: The Beijing Zhong Dun Security Technology Development Company (The Ministry of Security No. 1 Research Institute) Legal Address: 1 Shou Ti Road South, Haiding District, Beijing, China Telephone: (86) 10-68420099-2857 Fax: (86) 10-68428709 Zip Code: 100044 2.2. Party B: American Pacific Aviation & Technology Corp. Legal Address: Sansome Street, 19th Street San Francisco, CA 94104, USA Telephone: (415) 951-1078 1 Fax: (415) 951-1046 Zip Code: 550017 CHAPTER III - NAME, SPECIFICATIONS, QUANTITY, PRICE AND DELIVERY OF EQUIPMENT 3.1 Party B shall provide Party A with a complete brand new and state-of-art production line (see Appendix I - "Equipment Functions and Technical Specifications") for the production of contactless smart cards. Said production lines shall be able to produce 2500 pieces of smart cards per hour. The total cost of the equipment shall be US$[ ] US Dollars), based on the CIF Beijing Airport cost, which shall include the equipment, moulds, technical service, patent and licensing, and accessories. 3.2 Before packaging said production line for shipment, Party A shall send four technical staff to come to the United States to conduct preliminary inspection of the equipment. See Appendix V, "Equipment Acceptance Details" for preliminary inspection standards. Party B shall pay for the expense of the two-way air tickets, and provide lodging and transportation in the United States for the visiting staff of Party A. Staff of Party A will stay in the United States for two weeks. 3.3 Delivery Date of the Equipment: Three and a half months after the agreement is signed by both parties. CHAPTER IV - PAYMENT 4.1 Within 15 working days upon the effect of this agreement, Party A shall issue a Letter of Credit at [ ] of the total amount to Party B, that is, US$[ ] US Dollars). 4.2 Upon approval of preliminary inspection made by Party A in the United States and after Party B ship the equipment, Party B shall, based on the shipment documents and preliminary inspection report, negotiate with Party A for the portion of the amount of the Letter of Credit specified in 4.1, that is, [ ] of the total price of the equipment, in the amount of US$[ ] 2 [ ] US Dollars). 4.3 Upon completion of installation, test-run and acceptance when the performance of the equipment is proven meeting the standards of "Appendix V - Equipment Acceptance Details), both parties shall sign the "Receipt and Acceptance Certificate". Party B shall, based on the Receipt and Acceptance Certificate and letter of guarantee from the bank, negotiate with Party A for the balance of the Letter of Credit specified in 4.1, that is, [ ] of the total cost of the equipment, in the amount of US$[ ] US Dollars). CHAPTER V - SPECIFICATIONS AND TECHNICAL CONDITIONS OF THE EQUIPMENT 5.1 The production line supplied by Party B must be brand new, complete and shall correspond to the specifications of Appendix I - "Equipment Functions and Technical Specifications". 5.2 The performance and quality of the equipment shall meet the following requirements: 5.2.1 The operation capacity of the equipment shall meet the specifications of the manual of the equipment 5.2.2 The production capacity of the equipment: 2500 pieces/hour 5.2.3 Product Specification: 4 coil antenna, ISO7810 standard ID1_1 size (thickness excluded) 5.2.4 Product Acceptance Rate: Single set equipment, one time acceptance rate >= 98%, total acceptance rate >= 97% 5.2.5 Product Quality: the strength and durability of the cards, when mechanically and electronically tested, shall meet the ISO/IEC7810, ISO/IEC10536, ISO/IEC14443 standards and product standards specified by Party A in Appendix V, "Equipment Acceptance Details" of the contract. 5.3 Party B shall deliver the following supplements along with the equipment: 5.3.1 Special operation tools, maintenance and repair tools and testing tools (See Appendix IV) 5.3.2 Wearing parts of equipment (enough for one year normal consumption) (See Appendix II) 5.3.3 Approved raw materials needed for the 54-hour production test run (See Appendix 6) The fake chips used for 48 hours and real chips will be 3 used for 6 hours during the test run period shall be purchased by Party B in China. 5.4 Party B shall deliver the following technical documents when packaging and shipping the equipment: 5.4.1 The quality approval certificate and the manual of the equipment 5.4.2 The packaging list of the equipment 5.4.3 Manuals of installation, testing, operation and maintenance 5.4.4 The quality assurance certificate and documentation, as specified in Chapter VII 5.4.5 Drawings of wearing parts and the list of accessories. 5.5 Upon effect of the contract, Party B shall, within 10 working days, mail a technical layout drawing and power supply information to Party A for technical design purpose. 5.6 Party B shall, two months before the installation and test running of the equipment, mail the following documents to Party A or have staff work at Party A's place to provide instructions: 5.6.1 The installation diagram and the foundation diagram 5.6.2 The power parameters (including power, compressed air, water and stream) of the equipment, and the technical information of power supply and special shop requirements 5.7 The power utilization standards shall correspond to those of the People's Republic of China, that is, 380 (+ or -) 10 volts for the transformer, and 50 (+ or -) 5% hertz for the frequency. CHAPTER VI - INSTALLATION, TROUBLE-SHOOTING, TEST RUNNING AND RECEIPT AND ACCEPTANCE 6.1 Party B shall be responsible for installing and trouble-shooting the equipment, and training the staff of Party A, ensuring that the installation and trouble shooting of the equipment be completed within two weeks after the arrival of the equipment in the shop. Party A shall provide the necessary technical staff, workers and other necessities to accommodate the project. 4 6.2 Methods and Procedures of Final Acceptance of the Equipment (See Appendix V - Equipment Acceptance Details) 6.3 The test run period shall be seven working days, at eight hours per day. The purpose of the test run is to inspect the production equipment, and to examine whether the products produced meet the requirements specified in Provision 5.2. After approval of test results by Parties A and B, the receipt and acceptance certificate shall be signed. 6.4 During the test run period, if the acceptance rate of the product falls under the level of 97%, a second testing shall be made to test the equipment for another seven working days, the cost of the materials for test run shall be assumed by Party B. If the acceptance rate is still under 97%, a maximum of another seven working days can be extended. If it still fails to meet the demand, Party A shall have the right to request replacement and compensation. 6.5 Large volume of production shall not begin until receipt and acceptance is completed. 6.6 Party B shall assume the cost of its staff during their period of working in the factory. Party A shall provide food by the factory and transportation within the city. CHAPTER VII - QUALITY INSPECTION 7.1 Party B shall guarantee that the equipment is made by top craftsmanship and of top materials. The quality, specification and performance of the equipment shall meet the requirements specified in this contract. 7.2 Before delivery, Party B shall conduct a thorough and full inspection of the quality, specification and performance, as well as the quantity/weight of the equipment, and shall provide a certificate of inspection, along with the details and results of the inspection confirming that the quality and quantity of the equipment meets the requirements of this contract. A quality and quantity inspection certificate shall be provided by Party B when the equipment is delivered to Party A. 7.3 Upon arrival of the equipment at the destination, Party A shall, in accordance to 5 the laws and rules and regulations of the People's Republic of China, request that the Import and Export Inspection Bureau (hereinafter as Inspection Bureau) to conduct an inspection. Parties A and B shall both be present at said inspection. Party A shall notify Party B ten days in advance about the inspection date and representative from Party B shall arrive at the inspection site of A on said inspection date. In the event Party B fails to show up on time or fails to send any representative to participate in the inspection, the Inspection Bureau shall continue inspection as scheduled and the result of which shall be notified by Party A to Party B and Party B shall acknowledge the result accordingly. 7.4 In the event the inspection finds any quality or quantity error, or any missing part that does not meet the requirements of this agreement, or any damage due to packaging, Party B shall within six weeks make compensation, or shall make repairs at its own cost. In the event that any damage is caused by Party A, Party B shall replace the damaged item as soon as possible, and the cost of replacement shall be paid by Party A. 7.5 In the event the inspection finds any serious quality or quantity problem of the equipment, Party A shall have the right to return the equipment or request compensation based on the provisions of Chapter IX. 7.6 The warranty period of the equipment shall be 12 months, commencing the date when the equipment is received and accepted. During the warranty period Party B shall be responsible for repairing the equipment if the damage of the equipment is caused by the defects of the equipment. CHAPTER VIII - PACKAGING AND SHIPMENT 8.1 When packaging, Party B shall use a new and solid wood container with necessary measures taken to prevent moist, shock, rust and rough loading and unloading of the equipment to ensure that the package is suitable for long distance transportation. If the package material used is of the conifruticeta type, Party B shall provide proof that the material used has been fumigated. If the package material used is of the non-conifruticeta type, Party B shall provide description of the type of material used which will be used by Party A 6 during the Custom process. 8.2 Packaging and Delivery Marks Party B shall mark with non-erasable paint at the four sides of the container such information as the number of the container, the size, gross weight, net weight, destination, receipt code, "face up", "handle with care", "no moist", "hoisting point" and "gravity point". 8.3 Shipment Information 8.3.1 Within two days after shipping, Party B shall fax Party A the following information: A. Date of Shipment, B. Port of Shipment, C. Port of Destination, D. Number, Name, Quantity, Weight, Total Weight and Size of the Container. 8.3.2 Within two days after shipping, Party B shall send the following information to Party A via express mail: A. Invoice, with specification of the name and the quantity of the merchandise; B. Packaging Slip which specifies the number, size, weight of the container, and the name, quantity, net weight of the merchandise, and the date of shipment; C. Air way bill. D. The inspection certificate provided by the manufacturer, as specified in Chapter VII. E. Insurance policy CHAPTER IX - COMPENSATION AND PENALTY 9.1 In the event Party A, within 90 days upon the arrival of the equipment at the destination port, finds any disagreement of the specifications, quality and quantity of the equipment as specified in this contract, Party A shall, by presenting the inspection certificate of the Inspection Bureau, request compensation from Party B. 9.2 Party A shall assume the actual cost of overtime for any delay of installation and testing of the equipment caused by Party A. 9.3 In the event Party B fails to respond within 30 days after Party A makes its claim 7 for compensation, it shall be considered that Party B accept the claim. In the event Party B presents a timely written dispute, both parties shall try to settle the dispute by negotiation. In the event the negotiation fails to settle the dispute, either party shall have the right, according to Article XI, request for arbitration. 9.4 Except for force majeure as specified in Provision 10.1, in the event the seller fails to deliver the merchandise on time according to the contract, Party A shall agree that Party B postpone delivery provided that Party B shall pay a penalty at 0.5% of the total cost for every delayed week but this penalty shall not exceed 5% of the total cost. In the event the delay of delivery exceeds ten weeks of the scheduled date, Party A shall have the right to terminate the contract and Party B shall still pay for the penalty for the actual delayed days. 9.5 Without written agreement of Party B, Party A cannot transfer the patent technology and licensing to any third party, nor Party A can duplicate the equipment of Party B. In the event Party A allows any third party to use said technology at its discretion, Party A shall pay Party B an amount of US$[ ] for violation of the contract. In the event Party A duplicates the technology of Party B, it shall pay Party B an amount of US$[ ] for defaulting the contract. Payment of this amount does not waive the right of Party B to prosecute against any third party or Party A for violation of rights. CHAPTER X - FORCE MAJEURE 10.1 During the time of manufacturing or in the process of shipping, in the event of war, fire, flood, typhoon, earthquake or other force majeure acknowledged by both parties that causes Party B fail or delay to execute the provisions of this contract as schedule, Party B shall assume no liability. In the event of force majeure, Party B shall notify Party A immediately and shall within two weeks, send, via air mail, a government issued certificate to Party A confirming said force majeure. 10.2 When the force majeure vanishes, both parties shall negotiate whether to continue executing the contract. CHAPTER XI - ARBITRATION 11.1 In the event there arises any dispute during the execution of this agreement or 8 over this agreement and when both sides fail to settle the dispute by friendly negotiation, said dispute shall be brought for arbitration. The dispute shall be heard by the China International Economic and Foreign Trade Arbitration Committee, in Beijing, according to the procedures set by said committee. 11.2 The decision of the Arbitration Committee shall be final and shall have binding effect upon both parties. Arbitration fee shall be paid by the losing party. 11.3 During the period of arbitration, both parties shall continue to execute other non-disputed terms of the contract. CHAPTER XII - GOVERNING LAWS AND VALIDATY 12.1 When executing this agreement, both Parties A and B shall comply with the laws and rules and regulations of the People's Republic of China. 12.2 This agreement shall become effective upon the date signed. 12.3 After this agreement becomes effective, both Parties A and B shall, if needed, discuss revisions to accommodate the practicalities of executing this agreement. These revisions shall become effective when signed by both parties. Neither party can amend the agreement on its own. CHAPTER XIII - DOCUMENTS 13.1 This agreement shall be written in Chinese. 13.2 This agreement is signed on _____ 2001. 13.3 This agreement contains eight original copies, with four copies in Chinese and four copies in English. PARTY A: Bejing Zhong Dun Security Technology Development Company (The People's Republic of China Ministry of Security No. 1 Research Institute) Company Representative: Signature: (signature) 9 PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: Signature: (signature) 10 SUPPLEMENTARY TO EQUIPMENT PURCHASE AGREEMENT 2001 Given the IC mould for the second generation identification cards for the citizens of the People's Republic of China is being developed, the IC mould used during the test run period will be different from said IC mould. After negotiation by the People's Republic of China Ministry of Security No. 1 Research Institute (Party A) with The American Pacific Aviation and Technology Company (Party B), it is agreed that when Party A finalizes its IC mould, Party B shall replace and test run the hole punch machine, the IC pick and place machine and related moulds at no charge. PARTY A: Being Zhong Dun Security Technology Development Company (The People's Republic of China Ministry of Security No. 1 Research Institute) Company Representative: Signature: (signature) PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: Signature: (signature) 11 APPENDIX 1 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. EQUIPMENT FUNCTION & TECHNICAL SPECIFICATIONS 15 List of Production Line Equipment and Laboratory Instruments Included in This Set of Production Line
- --------------------------------------------------------------------------------------------------- Serial Quantity Name Model Price No. of Equipment No. (in US$10,000) - --------------------------------------------------------------------------------------------------- Production 1 1 Hole Punch Machine CICC-001 [ ] Line ----------------------------------------------------------------------------------- 2 3 Pick & Place With Module CICC-002 [ ] Testing ----------------------------------------------------------------------------------- 3 2 Ultrasonic Wire Implanting CICC-003 [ ] (4) ----------------------------------------------------------------------------------- 4 3 Welding With Testing Reader CICC-004 [ ] ----------------------------------------------------------------------------------- 5 2 Bonding Re-work Station CICC-005 [ ] ----------------------------------------------------------------------------------- 6 2 Tacker CICC-006 [ ] ----------------------------------------------------------------------------------- 7 4 Lamination System CICC-007 [ ] ----------------------------------------------------------------------------------- 8 4 Cooling System CICC-008 [ ] ----------------------------------------------------------------------------------- 9 1 Card Punching Machine CICC-009 [ ] - --------------------------------------------------------------------------------------------------- Laboratory 10 1 Flexion & Torsion Test System OASYS [ ] ----------------------------------------------------------------------------------- 11 1 Pull Tester MP5/230 [ ] ----------------------------------------------------------------------------------- 12 1 LCR Meter DEME-3010, [ ] Frequency Analyzer DEWE-3010 - --------------------------------------------------------------------------------------------------- 13 Test Run Raw Materials (glue [ ] 400 pieces, wire coil, 160) - --------------------------------------------------------------------------------------------------- Total: US$[ ]
16 HOLE PUNCH MACHINE 1. FUNCTION: Working with varied moulds, able to hole punch the [ ] PC, PET, PETG and PVC films into varied location holes and module holes based on varied specifications, to be used for follow-up process. With automatic protection device that will automatically stop during exceptional cases. 2. SYSTEM SET: Three high precision moulds (to hole punch [ ] materials and location holes respectively), safety protection device, hole punch time controller. 3. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] 4. PRODUCTION CAPACITY: [ ] cards/hour 5. SYSTEM PARAMETERS: - ---------------------------------------------- -------------------------------- Hole punch pressure [ ] - ---------------------------------------------- -------------------------------- Punching process [ ] - ---------------------------------------------- -------------------------------- Punching Mould Foundation [ ] - ---------------------------------------------- -------------------------------- Effective punching and area [ ] - ---------------------------------------------- -------------------------------- Punching precision [ ] - ---------------------------------------------- -------------------------------- Power Supply [ ] - ---------------------------------------------- -------------------------------- Maximum Electric Current [ ] - ---------------------------------------------- -------------------------------- Power [ ] - ---------------------------------------------- -------------------------------- Frequency [ ] - ---------------------------------------------- -------------------------------- Electrical Machinery [ ] - ---------------------------------------------- -------------------------------- Hydraulic Pressure Oil Capacity [ ] - ---------------------------------------------- -------------------------------- Condensed Air Pressure [ ] - ---------------------------------------------- -------------------------------- Condensed Air Flow [ ] - ---------------------------------------------- -------------------------------- Condensed Air Conditions [ ] - ---------------------------------------------- --------------------------------
17 PICK AND PLACE 1. FUNCTION: Pick and place the moulds into corresponding holes of the PVC, PC, PET and PETG films. The placement position can be adjusted and fixed by adhesives. With automatic protection device that can automatically turn off the machine in exceptional cases. 2. SYSTEM SET: Chip punched moulds, chip recognition sensor, high precision gluing system, Adept robot, Pentium 4 computer, LCD Monitor, interchangable drawer, safety protection device. 3. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] 4. CONSUMPTION MATERIALS: Adhesives, [ ] 5. PRODUCTION CAPACITY: [ ] cards/hour/set (based on three rows of the module tapes) 6. SYSTEM PARAMETERS: - ---------------------------------------------- -------------------------------- Width [ ] - ---------------------------------------------- -------------------------------- Thickness [ ] - ---------------------------------------------- -------------------------------- Height [ ] - ---------------------------------------------- -------------------------------- Weight [ ] - ---------------------------------------------- -------------------------------- Placement Area [ ] - ---------------------------------------------- -------------------------------- Placement Precision [ ] - ---------------------------------------------- -------------------------------- Power Supply [ ] - ---------------------------------------------- -------------------------------- Maximum Electric Current [ ] - ---------------------------------------------- -------------------------------- Power [ ] - ---------------------------------------------- -------------------------------- Frequency [ ] - ---------------------------------------------- -------------------------------- Condensed Air Pressure [ ] - ---------------------------------------------- -------------------------------- Condensed Air Flow [ ] - ---------------------------------------------- -------------------------------- Condensed Air Conditions [ ] - ---------------------------------------------- --------------------------------
18 WIRE IMPLANTING MACHINE 1. FUNCTIONS: Said machine uses the [ ] directional movement [ ] ultrasound wire implanting head to implant the enamel-insulated wire accurately into the PC, [ ] material and coil into a wire coil The position, size, shape, and the circles of coil can be set up by the computer. With automatic protection device that can automatically turn off the machine in exceptional cases. 2. SYSTEM SET: Second generation ultrasound wire implant head (with four implanting heads in each station), Adept robot, Pentium 4 computer, LCD monitor, interchangable drawer, safety protection device. 3. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] 4. PRODUCTION CAPACITY: [ ] 5. CONSUMPTION MATERIALS: Ultrasound head: [ ] Wire: [ ] cards/spool 6. SYSTEM PARAEMTERS: - ----------------------------------------------- ------------------------------- Width [ ] - ----------------------------------------------- ------------------------------- Thickness [ ] - ----------------------------------------------- ------------------------------- Height [ ] - ----------------------------------------------- ------------------------------- Weight [ ] - ----------------------------------------------- ------------------------------- Implanting Area [ ] - ----------------------------------------------- ------------------------------- Power Supply [ ] - ----------------------------------------------- ------------------------------- Maximum Electric Current [ ] - ----------------------------------------------- ------------------------------- Power [ ] - ----------------------------------------------- ------------------------------- Frequency [ ] - ----------------------------------------------- ------------------------------- Condensed Air Pressure [ ] - ----------------------------------------------- ------------------------------- Condensed Air Flow [ ] - ----------------------------------------------- ------------------------------- Condensed Air Conditions [ ] - ----------------------------------------------- -------------------------------
19 WELDING MACHINE 1. FUNCTIONS: Using the hot pressure welding method to weld the coil end enamel -insulated wire with the module chips. Outputs of the welding machine include constant power, constant electric current and constant voltage, with automatic compensation adjustment function. Adept robot can perform welding in any set position within the operation area. Welding strength normally should exceed [ ], and minimum should be no less than [ ]. With automatic function of polishing the chips. With automatic protection device. Able to turn off the machine automatically in exceptional cases. 2. SYSTEM SET: High precision electric current generator, Adept robot and its Vision System, hydraulic (illegible) system, Pentium 4 Computer, LCD Monitor, interchangable drawer, safety protection device. 3. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] 4. CONSUMPTION MATERIALS: [ ] 5. PRODUCTION CAPACITY: [ ] cards/hour/station 6. SYSTEM PARAMETERS: - ---------------------------------------------- -------------------------------- Height [ ] - ---------------------------------------------- -------------------------------- Width [ ] - ---------------------------------------------- -------------------------------- Thickness [ ] - ---------------------------------------------- -------------------------------- Weight [ ] - ---------------------------------------------- -------------------------------- Welding Area [ ] - ---------------------------------------------- -------------------------------- Power Supply [ ] - ---------------------------------------------- -------------------------------- Maximum Electric Current [ ] - ---------------------------------------------- -------------------------------- Power [ ] - ---------------------------------------------- -------------------------------- Frequency [ ] - ---------------------------------------------- -------------------------------- Condensed Air Pressure [ ] - ---------------------------------------------- -------------------------------- Condensed Air Flow [ ] - ---------------------------------------------- -------------------------------- Condensed Air Conditions [ ] - ---------------------------------------------- --------------------------------
20 BONDING RE-WORK STATION 1. FUNCTIONS: Reworking the problematic pieces from the welding machine. 2. SYSTEM SET: High precision current generator. 3. SYSTEM PARAMETERS: - --------------------------------------------- --------------------------------- Height [ ] - --------------------------------------------- --------------------------------- Width [ ] - --------------------------------------------- --------------------------------- Thickness [ ] - --------------------------------------------- --------------------------------- Weight [ ] - --------------------------------------------- --------------------------------- Power Supply [ ] - --------------------------------------------- --------------------------------- Maximum Electric Current [ ] - --------------------------------------------- --------------------------------- Power [ ] - --------------------------------------------- --------------------------------- Frequency [ ] - --------------------------------------------- --------------------------------- Condensed Air Pressure [ ] - --------------------------------------------- --------------------------------- Condensed Air Flow [ ] - --------------------------------------------- --------------------------------- Condensed Air Conditions [ ] - --------------------------------------------- ---------------------------------
21 TACKER 1. FUNCTIONS: Using eight hot pressure heads hot pressing edges of materials of varied thickness in layers together so that they will not be intricated against each other. 2. SYSTEM SET: Eight automatic temperature adjustment hot pressure heads, humidity controller, and time controller. 3. MATERIALS SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] 4. PRODUCTION CAPACITY: [ ] cards/hour/station 5. SYSTEM PARAMETERS: - ---------------------------------------------- -------------------------------- Height [ ] - ---------------------------------------------- -------------------------------- Width [ ] - ---------------------------------------------- -------------------------------- Thickness [ ] - ---------------------------------------------- -------------------------------- Tacking Area [ ] - ---------------------------------------------- -------------------------------- Power Supply [ ] - ---------------------------------------------- -------------------------------- Maximum Electric Current [ ] - ---------------------------------------------- -------------------------------- Power [ ] - ---------------------------------------------- -------------------------------- Frequency [ ] - ---------------------------------------------- -------------------------------- Condensed Air Pressure [ ] - ---------------------------------------------- -------------------------------- Condensed Air Flow [ ] - ---------------------------------------------- -------------------------------- Condensed Air Conditions [ ] - ---------------------------------------------- --------------------------------
22 LAMINATING MACHINE 1. FUNCTION: Able to laminate all card producing materials such as PC, PETG or PVC. The temperature can be adjusted by the PLC controller, with the capacity to control different segments in different time. Pressure can be adjusted by the computer, with the capacity to control and show different segments in different time. With zero pressure control system. The minimum pressure is [ ]. With automatic protection device that can turn off the machine in exceptional cases. 2. SYSTEM SET: Cooling system, three separating rooms/stations, power heater, PLC control and display system, safety protection, over pressure and low pressure safety protection devices. Six laminating boxes, 12 laminating pads, and 66 laminating boards. 3. MATERIAL SPECIFICATIONS: Length x Width: [ ] Scope of Thickness: [ ] 4. PRODUCTION CAPAICTY: [ ] cards/hour/station. 5. SYSTEM PARAMETERS: - ------------------------------------------ ------------------------------------- Height [ ] - ------------------------------------------ ------------------------------------- Width [ ] - ------------------------------------------ ------------------------------------- Thickness [ ] - ------------------------------------------ ------------------------------------- Weight [ ] - ------------------------------------------ ------------------------------------- Size of Laminating Board [ ] - ------------------------------------------ ------------------------------------- Laminating Area [ ] - ------------------------------------------ ------------------------------------- Power Supply [ ] - ------------------------------------------ ------------------------------------- Maximum Electric Current [ ] - ------------------------------------------ ------------------------------------- Power [ ] - ------------------------------------------ ------------------------------------- Frequency [ ] - ------------------------------------------ ------------------------------------- Pressure [ ] - ------------------------------------------ ------------------------------------- Pressure Precision [ ] - ------------------------------------------ ------------------------------------- Maximum Temperature [ [ ] ] - ------------------------------------------ ------------------------------------- Temperature Control Precision [ [ ] ] - ------------------------------------------ ------------------------------------- Heater Board Thickness [ ] - ------------------------------------------ ------------------------------------- Heater Board Separation Distance1 [ ] - ------------------------------------------ ------------------------------------- Stabilizing Board Surface Temperature [ [ ] ] Distribution - ------------------------------------------ ------------------------------------- Condensed Air Pressure [ ] - ------------------------------------------ ------------------------------------- Condensed Air Flow [ ] - ------------------------------------------ ------------------------------------- Condensed Air Conditions [ ] - ------------------------------------------ -------------------------------------
23 COOLING SYSTEM 1. FUNCTION: Working with the laminating machine to form a closed cooling system for the provision of cooling effect. 2. SYSTEM SET: Low water level alarm device, constant temperature control pump. 3. SYSTEM PARAMETERS: - ----------------------------------------------------- ------------------------- Height [ ] - ----------------------------------------------------- ------------------------- Width [ ] - ----------------------------------------------------- ------------------------- Thickness [ ] - ----------------------------------------------------- ------------------------- Weight [ ] - ----------------------------------------------------- ------------------------- Power Supply [ ] - ----------------------------------------------------- ------------------------- Maximum Electric Current [ ] - ----------------------------------------------------- ------------------------- Power [ ] - ----------------------------------------------------- ------------------------- Frequency [ ] - ----------------------------------------------------- ------------------------- Water Flow Volume [ ] - ----------------------------------------------------- ------------------------- Buffer Tank Volume [ ] - ----------------------------------------------------- ------------------------- Cooling Water Temperature [ ] - ----------------------------------------------------- -------------------------
24 CARD CUTTING MACHINE 1. FUNCTION: Automatically completing the location, cutting long pieces and punching cards. Based on different needs, able to punch white cards or printed cards. With the ability to correct deviation, placement error within the scope. With automatic protection device that will turn off the machine in exceptional cases. 2. SYSTEM SET: Automatic feeding system, touch screen, cutter knife, single card punching mould, safety protection device. 3. MATERIAL SPECIFICATIONS: Standard Board Size: [ ] Thickness of Material: [ ] 4. PRODUCTION CAPACITY: [ ] cards/hour/station 5. SYSTEM PARAEMTERS - ---------------------------------------------- -------------------------------- Height [ ] - ---------------------------------------------- -------------------------------- Width [ ] - ---------------------------------------------- -------------------------------- Thickness [ ] - ---------------------------------------------- -------------------------------- Weight [ ] - ---------------------------------------------- -------------------------------- Power Supply [ ] - ---------------------------------------------- -------------------------------- Maximum Electric Current [ ] - ---------------------------------------------- -------------------------------- Power [ ] - ---------------------------------------------- -------------------------------- Frequency [ ] - ---------------------------------------------- -------------------------------- Hole Punch Area [ ] - ---------------------------------------------- -------------------------------- Card Punching Location Precision [ ] - ---------------------------------------------- -------------------------------- Condensed Air Pressure [ ] - ---------------------------------------------- -------------------------------- Condensed Air Flow [ ] - ---------------------------------------------- -------------------------------- Condensed Air Conditions [ ] - ---------------------------------------------- --------------------------------
25 APPENDIX 2 SPARE PARTS & WEARING PARTS 26 CARD PUNCHING MACHINE
- ------------------------------------------------------------------------------------------------------- NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------------- 1 1 [ ] - ------------------------------------------------------------------------------------------------------- 2 1 [ ] - ------------------------------------------------------------------------------------------------------- 3 1 [ ] - ------------------------------------------------------------------------------------------------------- 4 1 [ ] - ------------------------------------------------------------------------------------------------------- 5 1 [ ] - ------------------------------------------------------------------------------------------------------- 6 1 [ ] - ------------------------------------------------------------------------------------------------------- 7 1 [ ] - ------------------------------------------------------------------------------------------------------- 8 1 [ ] - ------------------------------------------------------------------------------------------------------- 9 1 [ ] - ------------------------------------------------------------------------------------------------------- 10 2 [ ] - ------------------------------------------------------------------------------------------------------- 11 1 [ ] - -------------------------------------------------------------------------------------------------------
27 MODULE PLACEMENT MACHINE
- ------------------------------------------------------------------------------------------------------- NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------------- 1 24 [ ] - ------------------------------------------------------------------------------------------------------- 2 30 [ ] - ------------------------------------------------------------------------------------------------------- 3 3 [ ] - ------------------------------------------------------------------------------------------------------- 4 3 [ ] - ------------------------------------------------------------------------------------------------------- 5 18 [ ] - ------------------------------------------------------------------------------------------------------- 6 3 [ ] - ------------------------------------------------------------------------------------------------------- 7 3 [ ] - ------------------------------------------------------------------------------------------------------- 8 3 [ ] - ------------------------------------------------------------------------------------------------------- 9 12 [ ] - ------------------------------------------------------------------------------------------------------- 10 3 [ ] - ------------------------------------------------------------------------------------------------------- 11 3 [ ] - ------------------------------------------------------------------------------------------------------- 12 3 [ ] - ------------------------------------------------------------------------------------------------------- 13 3 [ )] - ------------------------------------------------------------------------------------------------------- 14 3 [ ] - ------------------------------------------------------------------------------------------------------- 15 9 [ ] - ------------------------------------------------------------------------------------------------------- 16 3 [ ] - ------------------------------------------------------------------------------------------------------- 17 9 [ ] - ------------------------------------------------------------------------------------------------------- 18 3 [ ] - ------------------------------------------------------------------------------------------------------- 19 3 [ ] - ------------------------------------------------------------------------------------------------------- 20 3 [ ] - ------------------------------------------------------------------------------------------------------- 21 3 [ ] - ------------------------------------------------------------------------------------------------------- 22 3 [ ] - ------------------------------------------------------------------------------------------------------- 23 3 [ ] - ------------------------------------------------------------------------------------------------------- 24 3 [ ] - ------------------------------------------------------------------------------------------------------- 25 3 [ ] - ------------------------------------------------------------------------------------------------------- 26 3 [ ] - ------------------------------------------------------------------------------------------------------- 27 3 [ ] - ------------------------------------------------------------------------------------------------------- 28 60 [ ] - -------------------------------------------------------------------------------------------------------
28 WIRE IMPLANTING MACHINE
- ------------------------------------------------------------------------------------------------------- NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------------- 1 12 [ ] - ------------------------------------------------------------------------------------------------------- 2 20 [ ] - ------------------------------------------------------------------------------------------------------- 3 2 [ ] - ------------------------------------------------------------------------------------------------------- 4 2 [ ] - ------------------------------------------------------------------------------------------------------- 5 2 [ ] - ------------------------------------------------------------------------------------------------------- 6 2 [ ] - ------------------------------------------------------------------------------------------------------- 7 2 [ ] - ------------------------------------------------------------------------------------------------------- 8 2 [ ] - ------------------------------------------------------------------------------------------------------- 9 6 [ ] - ------------------------------------------------------------------------------------------------------- 10 2 [ ] - ------------------------------------------------------------------------------------------------------- 11 2 [ ] - ------------------------------------------------------------------------------------------------------- 12 60 [ ] - ------------------------------------------------------------------------------------------------------- 13 36 [ ] - ------------------------------------------------------------------------------------------------------- 14 2 [ ] - ------------------------------------------------------------------------------------------------------- 15 6 [ ] - ------------------------------------------------------------------------------------------------------- 16 4 [ ] - ------------------------------------------------------------------------------------------------------- 17 2 [ ] - ------------------------------------------------------------------------------------------------------- 18 4 [ ] - ------------------------------------------------------------------------------------------------------- 19 4 [ ] - ------------------------------------------------------------------------------------------------------- 20 2 [ ] - ------------------------------------------------------------------------------------------------------- 21 2 [ ] - ------------------------------------------------------------------------------------------------------- 22 2 [ ] - ------------------------------------------------------------------------------------------------------- 23 2 [ ] - ------------------------------------------------------------------------------------------------------- 24 16 [ ] - -------------------------------------------------------------------------------------------------------
29 WELDING AND REW0RKING MACHINE
- ------------------------------------------------------------------------------------------------------- NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------------- 1 24 [ ] - ------------------------------------------------------------------------------------------------------- 2 30 [ ] - ------------------------------------------------------------------------------------------------------- 3 3 [ ] - ------------------------------------------------------------------------------------------------------- 4 3 [ ] - ------------------------------------------------------------------------------------------------------- 5 18 [ ] - ------------------------------------------------------------------------------------------------------- 6 3 [ ] - ------------------------------------------------------------------------------------------------------- 7 3 [ ] - ------------------------------------------------------------------------------------------------------- 8 3 [ ] - ------------------------------------------------------------------------------------------------------- 9 12 [ ] - ------------------------------------------------------------------------------------------------------- 10 3 [ ] - ------------------------------------------------------------------------------------------------------- 11 3 [ ] - ------------------------------------------------------------------------------------------------------- 12 3 [ ] - ------------------------------------------------------------------------------------------------------- 13 18 [ ] - ------------------------------------------------------------------------------------------------------- 14 9 [ ] - ------------------------------------------------------------------------------------------------------- 15 3 [ ] - ------------------------------------------------------------------------------------------------------- 16 3 [ ] - ------------------------------------------------------------------------------------------------------- 17 180 [ ] - ------------------------------------------------------------------------------------------------------- 18 18 [ ] - ------------------------------------------------------------------------------------------------------- 19 3 [ ] - ------------------------------------------------------------------------------------------------------- 20 3 [ ] - ------------------------------------------------------------------------------------------------------- 21 300 [ ] - -------------------------------------------------------------------------------------------------------
30 LAMINATING MACHINE AND COOLING SYSTEM
- ------------------------------------------------------------------------------------------------------- NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------------- 1 132 [ ] - ------------------------------------------------------------------------------------------------------- 2 24 [ ] - ------------------------------------------------------------------------------------------------------- 3 12 [ ] - ------------------------------------------------------------------------------------------------------- 4 4 [ ] - ------------------------------------------------------------------------------------------------------- 5 60 [ ] - ------------------------------------------------------------------------------------------------------- 6 36 [ ] - ------------------------------------------------------------------------------------------------------- 7 4 [ ] - ------------------------------------------------------------------------------------------------------- 8 4 [ ] - ------------------------------------------------------------------------------------------------------- 9 4 [ ] - ------------------------------------------------------------------------------------------------------- 10 12 [ ] - ------------------------------------------------------------------------------------------------------- 11 20 [ ] - ------------------------------------------------------------------------------------------------------- 12 40 [ ] - ------------------------------------------------------------------------------------------------------- 13 40 [ ] - ------------------------------------------------------------------------------------------------------- 14 20 [ ] - ------------------------------------------------------------------------------------------------------- 15 4 [ ] - ------------------------------------------------------------------------------------------------------- 16 4 [ ] - ------------------------------------------------------------------------------------------------------- 17 8 [ ] - ------------------------------------------------------------------------------------------------------- 18 4 [ ] - ------------------------------------------------------------------------------------------------------- 19 16 [ ] - ------------------------------------------------------------------------------------------------------- 20 4 [ ] - ------------------------------------------------------------------------------------------------------- 21 40 m [ ] - ------------------------------------------------------------------------------------------------------- 22 4 [ ] - ------------------------------------------------------------------------------------------------------- 23 4 [ ] - -------------------------------------------------------------------------------------------------------
31 CARD PUNCHING MACHINE
- ------------------------------------------------------------------------------------------------------- NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------------- 1 1 [ ] - ------------------------------------------------------------------------------------------------------- 2 1 [ ] - ------------------------------------------------------------------------------------------------------- 3 1 [ ] - ------------------------------------------------------------------------------------------------------- 4 1 [ ] - ------------------------------------------------------------------------------------------------------- 5 3 [ ] - ------------------------------------------------------------------------------------------------------- 6 1 set [ ] - ------------------------------------------------------------------------------------------------------- 7 1 set [ ] - ------------------------------------------------------------------------------------------------------- 8 5 m [ ] - ------------------------------------------------------------------------------------------------------- 9 1 set [ ] - ------------------------------------------------------------------------------------------------------- 10 1 set [ ] - ------------------------------------------------------------------------------------------------------- 11 1 set [ ] - ------------------------------------------------------------------------------------------------------- 12 1 [ ] - ------------------------------------------------------------------------------------------------------- 13 1 [ ] - ------------------------------------------------------------------------------------------------------- 14 1 [ ] - ------------------------------------------------------------------------------------------------------- 15 1 [ ] - ------------------------------------------------------------------------------------------------------- 16 1 set [ ] - -------------------------------------------------------------------------------------------------------
32 APPENDIX 3 TECHNICAL DOCUMENTATION LIST 33 Accompanied documentations include: 1. Equipment Approval Certificate and Quality Certificate 2. Operation, Repair, Usage and Maintenance Manuals of Each Equipment (including laboratory instruments) 3. Assembly Illustrations of Equipment 4. Theoretical Illustration and Wiring Illustration of the Electric System 5. Illustrations of Wearing Parts of the Equipment 6. Backup copy of the accompanied software 7. Backup copy of PLC Procedures 34 APPENDIX 4 TOOL LIST 35
- -------------------- --------------------------------- ---------------- NO. NAME OF TOOL QTY. - -------------------- --------------------------------- ---------------- 1. [ ] 1 - -------------------- --------------------------------- ---------------- 2. [ ] 1 set - -------------------- --------------------------------- ---------------- 3. [ ] 1 - -------------------- --------------------------------- ---------------- 4. [ ] 1 set - -------------------- --------------------------------- ---------------- 5. [ ] 1 - -------------------- --------------------------------- ---------------- 6. [ ] 1 - -------------------- --------------------------------- ---------------- 7. [ ] 1 set - -------------------- --------------------------------- ---------------- 8. [ ] 1 set - -------------------- --------------------------------- ---------------- 9. [ ] 1 set - -------------------- --------------------------------- ---------------- 10. [ ] 1 - -------------------- --------------------------------- ---------------- 11. [ ] 1 set - -------------------- --------------------------------- ---------------- 12. [ ] 1 - -------------------- --------------------------------- ---------------- 13. [ ] 1 - -------------------- --------------------------------- ---------------- 14. [ ] 6 - -------------------- --------------------------------- ---------------- 15. [ ] 1 set - -------------------- --------------------------------- ---------------- 16. [ ] 1 - -------------------- --------------------------------- ---------------- 17. [ ] 39 - -------------------- --------------------------------- ---------------- 18. [ ] 2 - -------------------- --------------------------------- ---------------- 19. [ ] 10 - -------------------- --------------------------------- ---------------- 20. [ ] 7 - -------------------- --------------------------------- ---------------- 21. [ ] 5 - -------------------- --------------------------------- ---------------- 22. [ ] 1 - -------------------- --------------------------------- ---------------- 23. [ ] 20 - -------------------- --------------------------------- ---------------- 24. [ ] 6 - -------------------- --------------------------------- ---------------- 25. [ ] 1 - -------------------- --------------------------------- ---------------- 26. [ ] 1 - -------------------- --------------------------------- ---------------- 27. [ ] 3 - -------------------- --------------------------------- ---------------- 28. [ ] 3 - -------------------- --------------------------------- ---------------- 29. [ ] 3 - -------------------- --------------------------------- ---------------- 30. [ ] 3 - -------------------- --------------------------------- ---------------- 31. [ ] 1 - -------------------- --------------------------------- ---------------- 32. [ ] 1 - -------------------- --------------------------------- ---------------- 33. [ ] 6 - -------------------- --------------------------------- ---------------- 34. [ ] 1 - -------------------- --------------------------------- ---------------- 35. [ ] 2 - -------------------- --------------------------------- ---------------- 36. [ ] 1 - -------------------- --------------------------------- ---------------- 37. [ ] 2 - -------------------- --------------------------------- ---------------- 38. [ ] 1 - -------------------- --------------------------------- ---------------- 39. [ ] 1 - -------------------- --------------------------------- ---------------- 40. [ ] 1 - -------------------- --------------------------------- ---------------- 41. [ ] 1 - -------------------- --------------------------------- ----------------
36 Technical Agreement Appendix 5 EQUIPMENT ACCEPTANCE DETAILS 37 I. GENERAL PRINCIPLES Materials used during the Acceptance shall be [ ], which can demonstrate [ ] and [ ] Moulds used shall be moulds by [ ]. Production rate shall be based on arrangement of [ ] cards. Acceptance shall be based on [ ] 1.1 According to the Technical Agreement Appendix 1 "Equipment Functions and Technical Specifications", a test run of the equipment and its production capacity, and examination of the production acceptance rate shall be performed. If necessary, Party A shall, based on the Technical Agreement Appendix 1 and the ISO and IEC standards, and the actual demands of the project, request that additional test runs be performed. 1.2 If necessary, Party A shall, at the time of preliminary inspection and acceptance of the equipment upon delivery, request that Party B perform a second inspection according to the specifications of the "Equipment Inspection Details and Results". 1.3 Equipment items to be inspected shall include: o Information and material accompanied with the equipment o Appearance o Equipment functions o Equipment system 1.4 Inspection shall be performed in two stages: 1.4.1 Preliminary inspection upon delivery of equipment 1.4.2 Inspection and acceptance of the equipment 2. METHODS AND PROCEDURES OF INSPECTION AND ACCEPTANCE 2.1 Preliminary Inspection of the Equipment To be performed in the shop of Party B. Items to be inspected include: o Equipment functions o Equipment system 2.1.1 Inspection of Equipment Functions Hole Punch Machine 38 a. Consistency of the size and the location of the punch hole b. Any adhesive debris found in the hole punch area Pick and Place with Module a. Function of identifying and removing the unqualified modules b. Smoothness of the hole punch and pick and place functions. Any blocking situations due to halting of these functions c. Function of adjusting the placement of the module d. Smoothness of auto feeding and receiving pieces e. Trouble shooting alarming system f. Proper operation of the equipment display system Wire Implanting Machine a. Whether the ultrasonic rate meets the standard of [ ] times/ round b. Adjustment of the position, size, forms and distance of the wire coil c. Inspection and record of the frequency of wire breaking during operation d. Proper operation of the monitor system e. Smoothness of auto feeding and receiving pieces f. Trouble shooting alarming system Welder a. Inspect by samples, whether the pulling force meeting the standards [ ] b. Whether the reader is able to check the success of the welding job c. When welding is not successful, whether the bad card marker is able to mark on the corresponding card d. Function of auto polishing welded pieces e. Proper operation of the monitor system f. Adjustment and display functions of the power generator g. Smoothness of auto feeding and receiving pieces h. Automatic indication of replacement of welded pieces i. Proper operation of the equipment display system j. Trouble shooting alarming system Laminator a. Temperature control precision, when between [ ], should be less 39 than [ ]; when between [ ], should be less than [ ] b. Pressure control precision [ ] c. PLC device, and functions of adjusting the parameters of pressure, temperature, etc. d. High temperature up to [ ] e. Whether machine will be automatically shut off when operation is not in compliance with rules f. Proper operation of the display system of the equipment g. Trouble shooting the alarming system Card Punching Machine a. Trouble shooting any layered pieces during the auto feeding process b. Smoothness of the punch card edge (Based on the ISO7810 standards, PC material excluded) c. Computation function d. Positioning precision [ ] e. Trouble shooting alarming system f. Proper operation of display system of the equipment 2.1.2 Preliminary Inspection of the Equipment System The stability, production capacity and production acceptance rate of the equipment shall be tested. Fake modules shall be used for steady operation for [ ], and real modules shall be used for [ ]. Since the equipment includes separate machines, actual operation can be performed units by units. The [ ] operation using the fake modules and the [ ] operation using the real modules must be run continuously. The time spent in adjusting the software and technical parameters, and fixing the hardware problems during the test run period must be included in the operation time. Adjustment contents and frequency must be recorded. All products (excluding test products during the repair time) shall be included in the total production number. The one-time acceptance rate of the pick and place machine, wire implanting machine and the welding machine shall be at 98% or above. Each equipment shall produce 2500 cards/hour. The total acceptance rate of the final product shall be over 97%. a. Inspect the Inspection Certificate (including inspection details and results) and Quality Certificate provided by Party B. 40 b. Acceptance Rate of Production The following items and indices shall be used to inspect the acceptance rate of the products. (1) N1 Welding Acceptance Rate Multimeter shall be used to inspect the fake module card (those that are rejected must be specified with reasons). Reader shall be used to test the real module card. The computing acceptance rate shall be N1. (2) N2 Antenna Registration Acceptance Rate The index of Direction X the direction of the long edge of the card) shall be [ ]; of Direction Y, [ ]. Inspect by sample, at [ ], of the hole punch cards. The computing acceptance rate shall be N2x and N2y. (3) N3 Punch Card Acceptance Rate (the inspected surface shall be the punch marked surface) That is the variation of the card's printed message center and the card geometry center. The index of Direction X (the direction of the long edge of the card) shall be [ ]; of Direction Y, [ ]. Inspect by sample, at [ ], of the hole punch cards. The computing acceptance rate shall be N3x and N3y. (4) N4 Punch Card Inclination Acceptance Rate The index shall be whether the long edge of the card is parallel to the level of the printed message. The level should extend to both ends. The distance of the two ending points toward the respective card edges shall be less than [ ]. Inspect card by sampling, at [ ]. The computing acceptance rate shall be N4. (5) N5 Card Tilting Acceptance Rate The index shall be [ ] (excluding thickness of card, see ISO 7810). Inspect the punch card by samples, at [ ]. The computing acceptance rate shall be N5. (6) N6 Card Stripping Strength Acceptance Rate The index shall be [ ]. Inspect [ ] pieces of punch card. The computing acceptance rate shall be N6. Total Acceptance Rate: N1 X N2 [u]x X N2[u]y X N3[u]x X N3[u]y X N4 X N5 X N6 >= 97%. 2.3 Inspection and Acceptance of Equipment To be performed at the shop of Party A. Items to be inspected include: o Information and material accompanied with the equipment o Appearance o Equipment functions o Equipment system 41 2.3.1 INSPECTION OF THE INFORMATION AND MATERIALS ACCOMPANIED WITH THE QUIPMENT Verify with Appendix I of the Agreement, "List of Production Line Equipment and Laboratory Devices" Verify with Appendix 2 of the Agreement, "Equipment Parts and Consumption Parts" Verify with Appendix 3 of the Agreement, "List of Technical Documents" Verify with Appendix 4 of the Agreement, "List of Maintenance Tools" Verify with the approved raw materials provided by Party B for 54-hour test run operation use. 2.3.2 INSPECTION OF APPEARANCE Inspect the frame and the door. The structure of the equipment shall be solid and the door switches shall be acute. Inspect whether the equipment has been bumped or damaged. The cover of the cover shall be in perfect condition. The paint of the cover shall be bright and perfect. The plated surface of the conveyance section of the equipment shall be polished, bright, with no defects or rusty spots. 2.3.3 INSPECTION AND ACCEPTANCE OF THE EQUIPMENT FUNCTION Inspect the Inspection Certificate (including inspection details and results) and Quality Certificate provided by Party B. Inspect the equipment functions based on 2.1.1. 2.3.4 INSPECTION AND ACCEPTANCE OF THE EQUIPMENT SYSTEM Use fake modules for steady operation for six days, eight hours a day. Use real modules on the 7th day for six hours. Since the equipment includes separate machines, actual operation can be performed units by units. During the test run period, the time spent in adjusting the software and technical parameters, and fixing the hardware problems period shall be included in the operation time. Adjustment contents and frequency must be recorded. Between intervals during the test run period, for example, at noon or in the evening when the machine is turned off, no adjustment of software or repair of hardware shall be done. All products (excluding test products 42 during the repair time) shall be included in the total production number. The one-time acceptance rate of the pick and place machine, wire implanting machine and the welding machine shall be at 98% or above. The total acceptance rate of the final product shall be over 97%. a. Computation of Production Capacity After test running 54 hours, the computed average production capacity shall meet the standard of 2500 cards/hour. b. Production Acceptance Rate Items and indices same as 2.1.2 c. Schedules: 1st to 6th day: a.m. - using fake modules, operate the machine continuously for four hours p.m. - using fake modules, operate the machine continuously for four hours The 7th day: Using the real modules, - using real module, operate the machine continuously for six hours 43 EX-10 25 ex10-29.txt EXHIBIT 10.29 Exhibit 10.29 TECHNICAL SERVICES AND LICENSING AGREEMENT 2001 Technical Services and Licensing Agreement This agreement is made by the Beijing Zhong Dun Technology Development Company, on behalf of the People's Republic of China Ministry of Security No. 1 Research Institute (hereinafter referred as Party A) and the American Pacific Aviation & Technology Corporation (hereinafter referred as Party B), based on the principle of mutual benefits and through friendly negotiations, for the provision of technical services and licensing (patent technology) by Party B to Party A for the production of contactless smart cards. 1. Party B shall provide the full set of technology (including technical process, operation rules, maintenance rules, inspecting and testing rules, administration system and all drawings, information, software or patent technology) for the production of contactless smart cards and shall guarantee that the production equipment and products produced by Party A meet the requirements of the "Agreement for Purchase of Equipment". 2. The patent technology and exclusive technology provided by Party B to Party A shall not involve any industrial property right of other countries or companies and Party A shall be legally protected that it has the legal right of utilization. 3. Without written permission of Party B, Party A shall not transfer the patent technology or exclusive technology to any third party, nor Party A shall duplicate the equipment provided by Party B. Without the permission of Party B, Party A shall not allow business or technical personnel of other party to examine the production line or give any technical information from Party B to any third party. 4. Party B shall be responsible for providing all technical services of installation, trouble shooting, test running, receipt and acceptance, and shall solve all technical problems before receipt and acceptance to guarantee that the equipment will produce 2500 pieces/hour. Party A shall provide lodging and food for technical experts of Party B and shall assign special staff to coordinate the project to ensure that installation, trouble shooting and test running go through smoothly. The period for installation and test running the equipment shall be two weeks. The travel expenses of experts from Party B shall be assumed by Party B. 12 5. Party B shall train the staff of Party A for a period of two weeks. Party A shall select qualified staff to receive training. In the event that members from Party A fail to master the production technology during the training period, said period can be extended to three or four weeks, the cost of such extension shall be assumed by Party A. 6. Party B shall cover the cost of providing the complete technology (including the cost of providing technical details, operation rules, maintenance rules, inspection and testing rules, administration system, drawings and information and software and the compensation and travel expenses of experts from Party B coming to China) and the cost of patent technology and exclusive technology licensing, and staff training. All these costs are included in the equipment purchase cost paid by Party A. With the exception of the equipment purchase cost, Party A shall pay no additional fee. In addition, at least in the first half year after the actual production starts, Party B shall send one to three technical staff to stay in Party A's site to help Party A produce and to provide technical support. The cost of which shall be assumed by Party B. 7. Default Both parties shall execute the provisions of the agreement sincerely. In the event any party fails to execute any of the above provisions that causes the economic loss of other party, the defaulting party shall compensate the loss. Claims and penalties shall be executed according to Chapter IX of the "Agreement for Purchase of Equipment". 8. Settlement of Dispute Any dispute over the agreement by Parties A and B shall be settled through friendly negotiation. In the event negotiation fails to settle the dispute, it shall be arbitrated by the China Economic and Foreign Trade Arbitration Committee in Beijing. Fee for arbitration shall be paid by the losing party. 9. This agreement shall become effective on the date signed by both parties. 10. This agreement contains eight original copies, with four copies in Chinese and four copies in English. The Chinese version shall rule. 13 PARTY A: Being Zhong Dun Security Technology Development Company (The People's Republic of China Ministry of Security No. 1 Research Institute) Company Representative: Signature: (signature) PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: Signature: (signature) 14 EX-10 26 ex10-30.txt EXHIBIT 10.30 Exhibit 10.30 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. AGREEMENT FOR PURCHASE OF EQUIPMENT Number: 20010903MPS-CVIC September 2001 CHAPTER I - GENERAL PRINCIPLES 1.1 This contract is made between the Beijing Bu Lu Dun High Tech Company Limited, on behalf of the China Motor Vehicle Safety Inspection Center (hereinafter referred as Party A) and the American Pacific Aviation Technology Company (hereinafter referred as Party B), based on the principle of mutual benefit and through friendly negotiations, to purchase from Party B by Party A the equipment for the production of the contactless smartcards. 1.2 It is agreed that Party B shall provide a full set, brand new, and state-of-art production line and the complete production technology, technical information and software for the production of contactless smartcards, which shall ensure that the strength and durability of the mechanically tested cards produced by Party A meet the standards of ISO/IEC7810, ISO/IEC10536, and ISO/IEC14443. 1.3 According to the laws and rules and regulations of the People's Republic of China and based on the principle of mutual benefits, the provisions of this agreement shall become effective and shall be executed at the same time with the "Agreement of Technical Services and Licensing". CHAPTER II - PARTIES 2.1 Party A: The Beijing Bu Lu Dun High Tech Company Limited Legal Address: 9, Zhi Xin Road, Haiding District, Beijing, China Telephone: (86) 10-62395516 Fax: (86) 10-62394207 Zip Code: 100083 2.2. Party B: American Pacific Aviation & Technology Corp. Legal Address: Sansome Street, 19th Street San Francisco, CA 94104, USA Telephone: (415) 951-1078 Fax: (415) 951-1046 Zip Code: 550017 1 CHAPTER III - NAME, SPECIFICATIONS, QUANTITY, PRICE AND DELIVERY OF EQUIPMENT 3.1 Party B shall provide Party A with a complete brand new and state-of-art production line and accessories (see Appendix I) for the production of contactless smart cards. Said production line shall be able to produce 2500 pieces of smart cards per hour. The total cost of the equipment shall be US$[ ] US Dollars), based on the CIF Beijing Airport cost, which shall include the equipment, moulds, technical service, patent and licensing, and accessories. 3.2 Before packaging said production line for shipment, Party A shall send four technical staff to come to the United States to conduct preliminary inspection of the equipment. See Appendix V, "Equipment Acceptance Details" for preliminary inspection standards. Party B shall pay for the expense of the two-way air tickets, and provide lodging and transportation in the United States for the visiting staff of Party A. Staff of Party A will stay in the United States for two weeks. 3.3 Delivery Date of the Equipment: By air, to be delivered within four months after the remittance of the first payment. CHAPTER IV - PAYMENT 4.1 Within 20 working days upon the effect of this agreement, Party A shall issue a Letter of Credit at [ ] of the total amount to Party B, that is, US$[ ] US Dollars). 4.2 Upon approval of preliminary inspection made by Party A in the United States and after Party B ship the equipment, Party B shall, based on the shipment documents and preliminary inspection report, negotiate with Party A for the portion of the amount of the Letter of Credit specified in 4.1, that is, [ ] of the total price of the equipment, in the amount of US$[ ] US Dollars). 4.3 Upon completion of installation and test run, Party A shall negotiate the balance 2 of the Letter of Credit specified in 4.1, that is, [ ] of the total cost of the equipment, in the amount of US$[ ] US Dollars). CHAPTER V - SPECIFICATIONS AND TECHNICAL CONDITIONS OF THE EQUIPMENT 5.1 The production line supplied by Party B must be brand new, complete and shall correspond to the specifications of Appendix I - "Equipment Functions and Technical Specifications". 5.2 The performance and quality of the equipment shall meet the following requirements: 5.2.1 The operation capacity of the equipment shall meet the specifications of the manual of the equipment 5.2.2 The production capacity of the equipment: 2500 pieces/hour 5.2.3 Product Specification: 4 coil antenna, ISO7810 standard ID1_1 size (thickness excluded) 5.2.4 Product Quality: the strength and durability of the cards, when mechanically and electronically tested, shall meet the ISO/IEC7810, ISO/IEC10536, ISO/IEC14443 standards and product standards specified by Party A in Appendix V, "Equipment Acceptance Details" 5.2.5 Product Acceptance Rate: Single set equipment, one time acceptance rate >= 98%, total acceptance rate >= 97% 5.3 Party B shall deliver the following supplements along with the equipment: 5.3.1 Special operation tools, maintenance and repair tools and testing tools (See Appendix IV) 5.3.2 Wearing parts of equipment (enough for one year normal consumption) (See Appendix II) 5.3.3 Approved raw materials needed for the 54-hour production test run (See Appendix 6) The fake chips used for 48 hours and real chips be used for 6 hours during the test run period shall be purchased by Party B in China. 5.4 Party B shall deliver the following technical documents when packaging and shipping the equipment: 5.4.1 The quality approval certificate and the manual of the equipment 3 5.4.2 The packaging list of the equipment 5.4.3 Manuals of installation, testing, operation and maintenance 5.4.4 The quality assurance certificate and documentation, as specified in Chapter VII 5.4.5 Drawings of wearing parts and the list of accessories. 5.5 Upon effect of the contract, Party B shall, within 10 working days, mail a technical layout drawing and power supply information to Party A for technical design purpose. 5.6 Party B shall, two months before the installation and test running of the equipment, mail the following documents to Party A or have staff work at Party A's place to provide instructions: 5.6.1 The installation diagram and the foundation diagram 5.6.2 The power parameters (including power, compressed air, water and stream) of the equipment, and the technical information of power supply and special shop requirements 5.7 The power utilization standards shall correspond to those of the People's Republic of China, that is, 380(+ or -)10 volts for the transformer, and 50(+ or -)5% hertz for the frequency. CHAPTER VI - INSTALLATION, TROUBLE-SHOOTING, TEST RUNNING AND RECEIPT AND ACCEPTANCE 6.1 Party B shall be responsible for installing and trouble-shooting the equipment, and training the staff of Party A, ensuring that the installation and trouble shooting of the equipment be completed within two weeks after the arrival of the equipment in the shop. Party A shall provide the necessary technical staff, workers and other necessities to accommodate the project. 6.2 Methods and Procedures of Final Acceptance of the Equipment (See Appendix V - Equipment Acceptance Details) 6.3 The test run period shall be seven working days, at eight hours per day. The purpose of the test run is to inspect the production equipment, and to examine whether the products produced meet the requirements specified in Provision 5.2. 4 After approval of test results by Parties A and B, the receipt and acceptance certificate shall be signed. 6.4 During the test run period, if the acceptance rate of the product falls under the level of 97%, a second testing shall be made to test the equipment for another seven working days, the cost of the materials for test run shall be assumed by Party B. If the acceptance rate is still under 97%, a maximum of another seven working days can be extended. If it still fails to meet the demand, Party A shall have the right to request replacement and compensation. 6.5 Large volume of production shall not begin until receipt and acceptance is completed. 6.6 Party B shall assume the cost of its staff during their period of working in the factory. Party A shall provide food by the factory and transportation within the city. CHAPTER VII - QUALITY INSPECTION 7.1 Party B shall guarantee that the equipment is made by top craftsmanship and of top materials. The quality, specification and performance of the equipment shall meet the requirements specified in this contract. 7.2 Before delivery, Party B shall conduct a thorough and full inspection of the quality, specification and performance, as well as the quantity/weight of the equipment, and shall provide a certificate of inspection, along with the details and results of the inspection confirming that the quality and quantity of the equipment meets the requirements of this contract. A quality and quantity inspection certificate shall be provided by Party B when the equipment is delivered to Party A. 7.3 Upon arrival of the equipment at the destination, Party A shall, in accordance to the laws and rules and regulations of the People's Republic of China, request that the Import and Export Inspection Bureau (hereinafter as Inspection Bureau) to conduct an inspection. Parties A and B shall both be present at said inspection. Party A shall notify Party B ten days in advance about the inspection date and representative from Party B shall arrive at the inspection site of A on said inspection date. In the event Party B fails to show up on time or fails to send any 5 representative to participate in the inspection, the Inspection Bureau shall continue inspection as scheduled and the result of which shall be notified by Party A to Party B and Party B shall acknowledge the result accordingly. 7.4 In the event the inspection finds any quality or quantity error, or any missing part that does not meet the requirements of this agreement, or any damage due to packaging, Party B shall within six weeks make compensation, or shall make repairs at its own cost. In the event that any damage is caused by Party A, Party B shall replace the damaged item as soon as possible, and the cost of replacement shall be paid by Party A. 7.5 In the event the inspection finds any serious quality or quantity problem of the equipment, Party A shall have the right to return the equipment or request compensation based on the provisions of Chapter IX. 7.6 The warranty period of the equipment shall be 12 months, commencing the date when the equipment is received and accepted. During the warranty period Party B shall be responsible for repairing the equipment if the damage of the equipment is caused by the defects of the equipment. CHAPTER VIII - PACKAGING AND SHIPMENT 8.1 When packaging, Party B shall use a new and solid wood container with necessary measures taken to prevent moist, shock, rust and rough loading and unloading of the equipment to ensure that the package is suitable for long distance transportation. If the package material used is of the conifruticeta type, Party B shall provide proof that the material used has been fumigated. If the package material used is of the non-conifruticeta type, Party B shall provide description of the type of material used which will be used by Party A during the Custom process. 8.2 Packaging and Delivery Marks Party B shall mark with non-erasable paint at the four sides of the container such information as the number of the container, the size, gross weight, net weight, destination, receipt code, "face up", "handle with care", "no moist", "hoisting 6 point" and "gravity point". 8.3 Shipment Information 8.3.1 Within two days after shipping, Party B shall fax Party A the following information: A. Date of Shipment, B. Port of Shipment, C. Port of Destination, D. Number, Name, Quantity, Weight, Total Weight and Size of the Container. 8.3.2 Within two days after shipping, Party B shall send the following information to Party A via express mail: A. Invoice, with specification of the name and the quantity of the merchandise; B. Packaging Slip which specifies the number, size, weight of the container, and the name, quantity, net weight of the merchandise, and the date of shipment; C. Air way bill. D. The inspection certificate provided by the manufacturer, as specified in Chapter VII. E. Insurance policy CHAPTER IX - COMPENSATION AND PENALTY 9.1 In the event Party A, within 90 days upon the arrival of the equipment at the destination port, finds any disagreement of the specifications, quality and quantity of the equipment as specified in this contract, Party A shall, by presenting the inspection certificate of the Inspection Bureau, request compensation from Party B. 9.2 Party A shall assume the actual cost of overtime for any delay of installation and testing of the equipment caused by Party A. 9.3 In the event Party B fails to respond within 30 days after Party A makes its claim for compensation, it shall be considered that Party B accept the claim. In the event Party B presents a timely written dispute, both parties shall try to settle the dispute by negotiation. In the event the negotiation fails to settle the dispute, either party shall have the right, according to Article XI, request for arbitration. 9.4 Except for force majeure as specified in Provision 10.1, in the event the seller 7 fails to deliver the merchandise on time according to the contract, Party A shall agree that Party B postpone delivery provided that Party B shall pay a penalty at 0.5% of the total cost for every delayed week but this penalty shall not exceed 5% of the total cost. In the event the delay of delivery exceeds ten weeks of the scheduled date, Party A shall have the right to terminate the contract and Party B shall still pay for the penalty for the actual delayed days. 9.5 Without written agreement of Party B, Party A cannot transfer the patent technology and licensing to any third party, nor Party A can duplicate the equipment of Party B. In the event Party A allows any third party to use said technology at its discretion, Party A shall pay Party B an amount of US$[ ] for violation of the contract. In the event Party A duplicates the technology of Party B, it shall pay Party B an amount of US$[ ] for defaulting the contract. Payment of this amount does not waive the right of Party B to prosecute against any third party or Party A for violation of rights. CHAPTER X - FORCE MAJEURE 10.1 During the time of manufacturing or in the process of shipping, in the event of war, fire, flood, typhoon, earthquake or other force majeure acknowledged by both parties that causes Party B fail or delay to execute the provisions of this contract as schedule, Party B shall assume no liability. In the event of force majeure, Party B shall notify Party A immediately and shall within two weeks, send, via air mail, a government issued certificate to Party A confirming said force majeure. 10.2 When the force majeure vanishes, both parties shall negotiate whether to continue executing the contract. CHAPTER XI - ARBITRATION 11.1 In the event there arises any dispute during the execution of this agreement or over this agreement and when both sides fail to settle the dispute by friendly negotiation, said dispute shall be brought for arbitration. The dispute shall be heard by the China International Economic and Foreign Trade Arbitration Committee, in Beijing, according to the procedures set by said committee. 11.2 The decision of the Arbitration Committee shall be final and shall have binding 8 effect upon both parties. Arbitration fee shall be paid by the losing party. 11.3 During the period of arbitration, both parties shall continue to execute other non-disputed terms of the contract. CHAPTER XII - GOVERNING LAWS AND VALIDATY 12.1 When executing this agreement, both Parties A and B shall comply with the laws and rules and regulations of the People's Republic of China. 12.2 This agreement shall become effective upon the date signed. 12.3 After this agreement becomes effective, both Parties A and B shall, if needed, discuss revisions to accommodate the practicalities of executing this agreement. These revisions shall become effective when signed by both parties. Neither party can amend the agreement on its own. CHAPTER XIII - DOCUMENTS 13.1 This agreement shall be written in Chinese. 13.2 This agreement is signed in September, 2001. 13.3 This agreement contains four original copies. PARTY A: Bejing Bu Lu Dun High Tech Company Limited Company Representative: Signature: (signature) September 3, 2001 PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: Signature: (signature) September 3, 2001 9 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. APPENDIX 1 EQUIPMENT FUNCTION & TECHNICAL SPECIFICATIONS 13 List of Production Line Equipment and Laboratory Instruments Included in This Set of Production Line
- ------------------------------------------------------------------------------------------------------- Serial Quantity Name Model Price No. of Equipment No. (in US$10,000) - ------------------------------------------------------------------------------------------------------- Production 1 1 Hole Punch Machine CICC-001 [ ] Line --------------------------------------------------------------------------------------- 2 3 Pick & Place With Module CICC-002 [ ] Testing - ------------------------------------------------------------------------------------------------------- 3 2 Ultrasonic Wire Implanting CICC-003 [ ] (4) - ------------------------------------------------------------------------------------------------------- 4 3 Welding With Inline Testing CICC-004 [ ] - ------------------------------------------------------------------------------------------------------- 5 2 Bonding Re-work Station CICC-005 [ ] - ------------------------------------------------------------------------------------------------------- 6 2 Tacker CICC-006 [ ] - ------------------------------------------------------------------------------------------------------- 7 4 Lamination System CICC-007 [ ] - ------------------------------------------------------------------------------------------------------- 8 4 Cooling System CICC-008 [ ] - ------------------------------------------------------------------------------------------------------- 9 1 Card Punching Machine CICC-009 [ ] - ------------------------------------------------------------------------------------------------------- Laboratory 10 1 Flexion & Torsion Test System OASYS [ ] - ------------------------------------------------------------------------------------------------------- 11 1 Pull Tester MP5/230 [ ] - ------------------------------------------------------------------------------------------------------- 12 1 Frequency Analyzer DEME-3010, [ ] DEWE-3010 - ------------------------------------------------------------------------------------------------------- Total: US$[ ]
14 HOLE PUNCH MACHINE FUNCTION: Working with varied moulds, able to hole punch the [ ] films into varied location holes and module holes based on varied specifications, to be used for follow-up process. With automatic protection device that will automatically stop during exceptional cases. SYSTEM SET: Two sets of three high precision moulds to be used for MOA2, MPS modules (for hole punching [ ] materials and location holes respectively), safety protection device, hole punch time controller. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] PRODUCTION CAPACITY: [ ] cards/hour SYSTEM PARAMETERS: - -------------------------------------------------------------------------------------- Hole punch pressure [ ] - -------------------------------------------------------------------------------------- Punching process [ ] - -------------------------------------------------------------------------------------- Punching Mould Foundation [ ] - -------------------------------------------------------------------------------------- Effective punching and area [ ] - -------------------------------------------------------------------------------------- Punching precision [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Electrical Machinery [ ] - -------------------------------------------------------------------------------------- Hydraulic Pressure Oil Capacity [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
15 PICK AND PLACE FUNCTION: Pick and place the moulds into corresponding holes of the PVC, PC, PET and PETG films. The placement position can be adjusted and fixed by adhesives. With automatic protection device that can automatically turn off the machine in exceptional cases. SYSTEM SET: Chip punched moulds (MOA2, MCC2, MPS modules), chip recognition sensor, high precision gluing system, Adept robot, Pentium 4 computer, LCD Monitor, interchangable drawer, safety protection device. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] CONSUMPTION MATERIALS: Adhesives, [ ] PRODUCTION CAPACITY: [ ] cards/hour/set (based on three rows of the module tapes) SYSTEM PARAMETERS: - -------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------- Weight [ ] - -------------------------------------------------------------------------------------- Placement Area [ ] - -------------------------------------------------------------------------------------- Placement Precision [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
16 WIRE IMPLANTING MACHINE FUNCTIONS: Said machine uses the [ ] [ ]ultrasound wire implanting head to implant the enamel-insulated wire accurately into the PC, adhesive coated PET, PETG and PVC material and coil into a wire coil The position, size, shape, and the circles of coil can be set up by the computer. With automatic protection device that can automatically turn off the machine in exceptional cases. SYSTEM SET: Second generation ultrasound wire implant head (with four implanting heads in each station), Adept robot, Pentium 4 computer, LCD monitor, interchangable drawer, safety protection device. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] PRODUCTION CAPACITY: [ ] cards/hour/set. CONSUMPTION MATERIALS: Ultrasound head: [ ] cards/head Wire: [ ] cards/spool SYSTEM PARAEMTERS: - -------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------- Weight [ ] - -------------------------------------------------------------------------------------- Implanting Area [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
17 IC MODULE WELDING MACHINE FUNCTIONS: Using the hot pressure welding method to weld the coil end enamel - -insulated wire with the module chips. Outputs of the welding machine include constant power, constant electric current and constant voltage, with automatic compensation adjustment function. Adept robot can perform welding in any set position within the operation area. Welding strength normally should exceed [ ], and minimum should be no less than [ ]. With automatic function of polishing the chips. With automatic protection device. Able to turn off the machine automatically in exceptional cases. SYSTEM SET: High precision electric current generator, Adept robot and its Vision System, hydraulic (illegible) system, Pentium 4 Computer, LCD Monitor, interchangable drawer, safety protection device. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] CONSUMPTION MATERIALS: Thermode: [ ] cards/piece PRODUCTION CAPACITY: [ ] cards/hour/station SYSTEM PARAMETERS: - -------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------- Weight [ ] - -------------------------------------------------------------------------------------- Welding Area [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
18 IC MODULE BONDING RE-WORK STATION FUNCTIONS: Reworking the problematic pieces from the welding machine. SYSTEM SET: High precision current generator. SYSTEM PARAMETERS: - -------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------- Weight [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
19 IC SMARTCARD LAMINATING MACHINE FUNCTION: Able to laminate all card producing materials such as PC, PETG or PVC. The temperature can be adjusted by the PLC controller, with the capacity to control different segments in different time. Pressure can be adjusted by the computer, with the capacity to control and show different segments in different time. With zero pressure control system. The minimum pressure is [ ]. With automatic protection device that can turn off the machine in exceptional cases. SYSTEM SET: Cooling system, three separating rooms/stations, power heater, PLC control and display system, safety protection, over pressure and low pressure safety protection devices. Six laminating boxes, 12 laminating pads, and 66 laminating boards. MATERIAL SPECIFICATIONS: Length x Width: [ ] Scope of Thickness: [ ] PRODUCTION CAPAICTY: [ ] cards/hour/station. SYSTEM PARAMETERS: - -------------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------------- Weight [ ] - -------------------------------------------------------------------------------------------- Size of Laminating Board [ ] - -------------------------------------------------------------------------------------------- Laminating Area [ ] - -------------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------------- Pressure [ ] - -------------------------------------------------------------------------------------------- Pressure Precision [ ] - -------------------------------------------------------------------------------------------- Maximum Temperature [ ] - -------------------------------------------------------------------------------------------- Temperature Control Precision [ ] - -------------------------------------------------------------------------------------------- Heater Board Thickness [ ] - -------------------------------------------------------------------------------------------- Heater Board Separation Distance1 [ ] - -------------------------------------------------------------------------------------------- Stabilizing Board Surface Temperature Distribution [ ] - -------------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------------
20 COOLING SYSTEM FUNCTION: Working with the laminating machine to form a closed cooling system for the provision of cooling effect. SYSTEM SET: Low water level alarm device, constant temperature control pump. SYSTEM PARAMETERS: - --------------------------------------------------------------------------- Height [ ] - --------------------------------------------------------------------------- Width [ ] - --------------------------------------------------------------------------- Thickness [ ] - --------------------------------------------------------------------------- Weight [ ] - --------------------------------------------------------------------------- Power Supply [ ] - --------------------------------------------------------------------------- Maximum Electric Current [ ] - --------------------------------------------------------------------------- Power [ ] - --------------------------------------------------------------------------- Frequency [ ] - --------------------------------------------------------------------------- Water Flow Volume [ ] - --------------------------------------------------------------------------- Buffer Tank Volume [ ] - --------------------------------------------------------------------------- Cooling Water Temperature [ ] - ---------------------------------------------------------------------------
21 IC SMARTCARD CARD CUTTING MACHINE FUNCTION: Automatically completing the location, cutting long pieces and punching cards. Based on different needs, able to punch white cards or printed cards. With the ability to correct deviation, placement error within the scope. With automatic protection device that will turn off the machine in exceptional cases. SYSTEM SET: Automatic feeding system, touch screen, cutter knife, single card punching mould, safety protection device. MATERIAL SPECIFICATIONS: Standard Board Size: [ ] Thickness of Material: [ ] PRODUCTION CAPACITY: [ ] cards/hour/station SYSTEM PARAEMTERS - ------------------------------------------------------------------------------------- Height [ ] - ------------------------------------------------------------------------------------- Width [ ] - ------------------------------------------------------------------------------------- Thickness [ ] - ------------------------------------------------------------------------------------- Weight [ ] - ------------------------------------------------------------------------------------- Power Supply [ ] - ------------------------------------------------------------------------------------- Maximum Electric Current [ ] - ------------------------------------------------------------------------------------- Power [ ] - ------------------------------------------------------------------------------------- Frequency [ ] - ------------------------------------------------------------------------------------- Hole Punch Area [ ] - ------------------------------------------------------------------------------------- Card Punching Location Precision [ ] - ------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - ------------------------------------------------------------------------------------- Condensed Air Flow [ ] - ------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - -------------------------------------------------------------------------------------
22 APPENDIX 2 SPARE PARTS & WEARING PARTS 23 CARD PUNCHING MACHINE
- ------------------------------------------------------------------------------------------------ NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------ 1 1 [ ] - ------------------------------------------------------------------------------------------------ 2 1 [ ] - ------------------------------------------------------------------------------------------------ 3 1 [ ] - ------------------------------------------------------------------------------------------------ 4 1 [ ] - ------------------------------------------------------------------------------------------------ 5 1 [ ] - ------------------------------------------------------------------------------------------------ 6 1 [ ] - ------------------------------------------------------------------------------------------------ 7 1 [ ] - ------------------------------------------------------------------------------------------------ 8 1 [ ] - ------------------------------------------------------------------------------------------------ 9 1 [ ] - ------------------------------------------------------------------------------------------------ 10 2 [ ] - ------------------------------------------------------------------------------------------------ 11 1 [ ] - ------------------------------------------------------------------------------------------------
24 MODULE PLACEMENT MACHINE
- ------------------------------------------------------------------------------------------------ NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------ 1 24 [ ] - ------------------------------------------------------------------------------------------------ 2 30 [ ] - ------------------------------------------------------------------------------------------------ 3 3 [ ] - ------------------------------------------------------------------------------------------------ 4 3 [ ] - ------------------------------------------------------------------------------------------------ 5 18 [ ] - ------------------------------------------------------------------------------------------------ 6 3 [ ] - ------------------------------------------------------------------------------------------------ 7 3 [ ] - ------------------------------------------------------------------------------------------------ 8 3 [ ] - ------------------------------------------------------------------------------------------------ 9 12 [ ] - ------------------------------------------------------------------------------------------------ 10 3 [ ] - ------------------------------------------------------------------------------------------------ 11 3 [ ] - ------------------------------------------------------------------------------------------------ 12 3 [ ] - ------------------------------------------------------------------------------------------------ 13 3 [ ] - ------------------------------------------------------------------------------------------------ 14 3 [ ] - ------------------------------------------------------------------------------------------------ 15 9 [ ] - ------------------------------------------------------------------------------------------------ 16 3 [ ] - ------------------------------------------------------------------------------------------------ 17 9 [ ] - ------------------------------------------------------------------------------------------------ 18 3 [ ] - ------------------------------------------------------------------------------------------------ 19 3 [ ] - ------------------------------------------------------------------------------------------------ 20 3 [ ] - ------------------------------------------------------------------------------------------------ 21 3 [ ] - ------------------------------------------------------------------------------------------------ 22 3 [ ] - ------------------------------------------------------------------------------------------------ 23 3 [ ] - ------------------------------------------------------------------------------------------------ 24 3 [ ] - ------------------------------------------------------------------------------------------------ 25 3 [ ] - ------------------------------------------------------------------------------------------------ 26 3 [ ] - ------------------------------------------------------------------------------------------------ 27 3 [ ] - ------------------------------------------------------------------------------------------------ 28 60 [ ] - ------------------------------------------------------------------------------------------------
25 IC MODULE WIRE IMPLANTING MACHINE
- ------------------------------------------------------------------------------------------------ NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------ 1 12 [ ] - ------------------------------------------------------------------------------------------------ 2 20 [ ] - ------------------------------------------------------------------------------------------------ 3 2 [ ] - ------------------------------------------------------------------------------------------------ 4 2 [ ] - ------------------------------------------------------------------------------------------------ 5 2 [ ] - ------------------------------------------------------------------------------------------------ 6 2 [ ] - ------------------------------------------------------------------------------------------------ 7 2 [ ] - ------------------------------------------------------------------------------------------------ 8 2 [ ] - ------------------------------------------------------------------------------------------------ 9 6 [ ] - ------------------------------------------------------------------------------------------------ 10 2 [ ] - ------------------------------------------------------------------------------------------------ 11 2 [ ] - ------------------------------------------------------------------------------------------------ 12 60 [ ] - ------------------------------------------------------------------------------------------------ 13 36 [ ] - ------------------------------------------------------------------------------------------------ 14 2 [ ] - ------------------------------------------------------------------------------------------------ 15 2 [ ] - ------------------------------------------------------------------------------------------------ 16 4 [ ] - ------------------------------------------------------------------------------------------------ 17 2 [ ] - ------------------------------------------------------------------------------------------------ 18 2 [ ] - ------------------------------------------------------------------------------------------------ 19 2 [ ] - ------------------------------------------------------------------------------------------------ 20 2 [ ] - ------------------------------------------------------------------------------------------------ 21 16 [ ] - ------------------------------------------------------------------------------------------------
26 IC MODULE WELDING AND REW0RKING MACHINE
- ------------------------------------------------------------------------------------------------ NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------ 1 24 [ ] - ------------------------------------------------------------------------------------------------ 2 30 [ ] - ------------------------------------------------------------------------------------------------ 3 3 [ ] - ------------------------------------------------------------------------------------------------ 4 3 [ ] - ------------------------------------------------------------------------------------------------ 5 18 [ ] - ------------------------------------------------------------------------------------------------ 6 3 [ ] - ------------------------------------------------------------------------------------------------ 7 3 [ ] - ------------------------------------------------------------------------------------------------ 8 3 [ ] - ------------------------------------------------------------------------------------------------ 9 12 [ ] - ------------------------------------------------------------------------------------------------ 10 3 [ ] - ------------------------------------------------------------------------------------------------ 11 3 [ ] - ------------------------------------------------------------------------------------------------ 12 3 [ ] - ------------------------------------------------------------------------------------------------ 13 18 [ ] - ------------------------------------------------------------------------------------------------ 14 9 [ ] - ------------------------------------------------------------------------------------------------ 15 3 [ ] - ------------------------------------------------------------------------------------------------ 16 3 [ ] - ------------------------------------------------------------------------------------------------ 17 180 [ ] - ------------------------------------------------------------------------------------------------ 18 18 [ ] - ------------------------------------------------------------------------------------------------ 19 3 [ ] - ------------------------------------------------------------------------------------------------ 20 3 [ ] - ------------------------------------------------------------------------------------------------ 21 300 [ ] - ------------------------------------------------------------------------------------------------
27 IC MODULE LAMINATING MACHINE AND COOLING SYSTEM
- ------------------------------------------------------------------------------------------------ NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------ 1 132 [ ] - ------------------------------------------------------------------------------------------------ 2 24 [ ] - ------------------------------------------------------------------------------------------------ 3 12 [ ] - ------------------------------------------------------------------------------------------------ 4 4 [ ] - ------------------------------------------------------------------------------------------------ 5 60 [ ] - ------------------------------------------------------------------------------------------------ 6 36 [ ] - ------------------------------------------------------------------------------------------------ 7 4 [ ] - ------------------------------------------------------------------------------------------------ 8 4 [ ] - ------------------------------------------------------------------------------------------------ 9 4 [ ] - ------------------------------------------------------------------------------------------------ 10 12 [ ] - ------------------------------------------------------------------------------------------------ 11 20 [ ] - ------------------------------------------------------------------------------------------------ 12 40 [ ] - ------------------------------------------------------------------------------------------------ 13 40 [ ] - ------------------------------------------------------------------------------------------------ 14 20 [ ] - ------------------------------------------------------------------------------------------------ 15 4 [ ] - ------------------------------------------------------------------------------------------------ 16 4 [ ] - ------------------------------------------------------------------------------------------------ 17 8 [ ] - ------------------------------------------------------------------------------------------------ 18 4 [ ] - ------------------------------------------------------------------------------------------------ 19 16 [ ] - ------------------------------------------------------------------------------------------------ 20 4 [ ] - ------------------------------------------------------------------------------------------------ 21 40 m [ ] - ------------------------------------------------------------------------------------------------ 22 4 [ ] - ------------------------------------------------------------------------------------------------ 23 4 [ ] - ------------------------------------------------------------------------------------------------
28 IC MODULE CARD PUNCHING MACHINE
- ------------------------------------------------------------------------------------------------ NO. QTY. Spare Parts' Specifications - ------------------------------------------------------------------------------------------------ 1 1 [ ] - ------------------------------------------------------------------------------------------------ 2 1 [ ] - ------------------------------------------------------------------------------------------------ 3 1 [ ] - ------------------------------------------------------------------------------------------------ 4 1 [ ] - ------------------------------------------------------------------------------------------------ 5 3 [ ] - ------------------------------------------------------------------------------------------------ 6 1 set [ ] - ------------------------------------------------------------------------------------------------ 7 1 set [ ] - ------------------------------------------------------------------------------------------------ 8 5 m [ ] - ------------------------------------------------------------------------------------------------ 9 1 set [ ] - ------------------------------------------------------------------------------------------------ 10 1 set [ ] - ------------------------------------------------------------------------------------------------ 11 1 set [ ] - ------------------------------------------------------------------------------------------------ 12 1 [ ] - ------------------------------------------------------------------------------------------------ 13 1 [ ] - ------------------------------------------------------------------------------------------------ 14 1 [ ] - ------------------------------------------------------------------------------------------------ 15 1 [ ] - ------------------------------------------------------------------------------------------------ 16 1 set [ ] - ------------------------------------------------------------------------------------------------
29 APPENDIX 3 TECHNICAL DOCUMENTATION LIST 30 Accompanied documentation include: 1. Equipment Approval Certificate and Quality Certificate 2. Operation, Repair, Usage and Maintenance Manuals of Each Equipment (including laboratory instruments) 3. Mechanical Assembly Illustrations 4. Theoretical Illustration and Wiring Illustration of the Electric System 5. Illustrations of Wearing Parts of the Equipment 6. Backup copy of the accompanied software 7. Backup copy of PLC Procedures 31 APPENDIX 4 TOOL LIST 32 Appendix 5 EQUIPMENT ACCEPTANCE DETAILS 33 I. GENERAL PRINCIPLES Materials used during the Acceptance shall be PETG, which can demonstrate PC and PVC. Moulds used shall be moulds by Dai Tang Company. Production rate shall be based on arrangement of 4 x 8 cards. Acceptance shall be based on printed cards. 1.1 According to the Technical Agreement Appendix 1 "Equipment Functions and Technical Specifications", a test run of the equipment and its production capacity, and examination of the production acceptance rate shall be performed. If necessary, Party A shall, based on the Technical Agreement Appendix 1 and the ISO and IEC standards, and the actual demands of the project, request that additional test runs be performed. 1.2 If necessary, Party A shall, at the time of preliminary inspection and acceptance of the equipment upon delivery, request that Party B perform a second inspection according to the specifications of the "Equipment Inspection Details and Results". 1.3 Equipment items to be inspected shall include: o Information and material accompanied with the equipment o Appearance o Equipment functions o Equipment system 1.4 Inspection shall be performed in two stages: 1.4.1 Preliminary inspection upon delivery of equipment 1.4.2 Inspection and acceptance of the equipment 2. METHODS AND PROCEDURES OF INSPECTION AND ACCEPTANCE 2.1 Preliminary Inspection of the Equipment To be performed in the shop of Party B. Items to be inspected include: o Equipment functions o Equipment system 2.1.1 Inspection of Equipment Functions Hole Punch Machine 34 a. Consistency of the size and the location of the punch hole b. Any adhesive debris found in the hole punch area Pick and Place with Module a. Function of identifying and removing the unqualified modules (module illustration and explanation be provided before October 10) b. Smoothness of the hole punch and pick and place functions. Any blocking situations due to halting of these functions c. Function of adjusting the placement of the module d. Smoothness of auto feeding and receiving pieces e. Trouble shooting alarming system f. Proper operation of the equipment display system Wire Implanting Machine a. Whether the ultrasonic rate meets the standard of [ ] times/round b. Adjustment of the position, size, forms and distance of the wire coil c. Inspection and record of the frequency of wire breaking during operation d. Proper operation of the monitor system e. Smoothness of auto feeding and receiving pieces f. Trouble shooting alarming system Welder a. Inspect by samples, whether the pulling force meeting the standards [ ] b. Whether the reader is able to check the success of the welding job c. When welding is not successful, whether the bad card marker is able to mark on the corresponding card d. Function of auto polishing welded pieces e. Proper operation of the monitor system f. Adjustment and display functions of the power generator g. Smoothness of auto feeding and receiving pieces h. Automatic indication of replacement of welded pieces i. Proper operation of the equipment display system j. Trouble shooting alarming system Laminator a. Temperature control precision, when between [ ], should be less than [ ]; when between [ ], should be less than [ ] 35 b. Pressure control precision [ ] c. PLC device, and functions of adjusting the parameters of pressure, temperature, etc. d. High temperature up to [ ] e. Whether machine will be automatically shut off when operation is not in compliance with rules f. Proper operation of the display system of the equipment g. Trouble shooting the alarming system Card Punching Machine a. Trouble shooting any layered pieces during the auto feeding process b. Smoothness of the punch card edge (Based on the ISO7810 standards, PC material excluded) c. Computation function d. Positioning precision [ ] e. Trouble shooting alarming system f. Proper operation of display system of the equipment 2.1.2 Preliminary Inspection of the Equipment System The stability, production capacity and production acceptance rate of the equipment shall be tested. Fake modules shall be used for steady operation for four hours, and real modules shall be used for two hours. Since the equipment includes separate machines, actual operation can be performed units by units. The four-hour operation using the fake modules and the two-hour operation using the real modules must be run continuously. The time spent in adjusting the software and technical parameters, and fixing the hardware problems during the test run period must be included in the operation time. Adjustment contents and frequency must be recorded. All products (excluding test products during the repair time) shall be included in the total production number. The one-time acceptance rate of the pick and place machine, wire implanting machine and the welding machine shall be at 98% or above. Each equipment shall produce 2500 cards/hour. The total acceptance rate of the final product shall be over 97%. a. Inspect the Inspection Certificate (including inspection details and results) and Quality Certificate provided by Party B. 36 b. Acceptance Rate of Production The following items and indices shall be used to inspect the acceptance rate of the products. (1) N1 Welding Acceptance Rate Multimeter shall be used to inspect the fake module card (those that are rejected must be specified with reasons). Reader shall be used to test the real module card. The computing acceptance rate shall be N1. (2) N2 Antenna Registration Acceptance Rate The index of Direction X (the direction of the long edge of the card) shall be [ ]; of Direction Y, [ ]. Inspect by sample, at [ ], of the hole punch cards. The computing acceptance rate shall be N2x and N2y. (3) N3 Punch Card Acceptance Rate (the inspected surface shall be the punch marked surface) That is the variation of the card's printed message center and the card geometry center. The index of Direction X (the direction of the long edge of the card) shall be [ ]; of Direction Y, [ ]. Inspect by sample, at [ ], of the hole punch cards. The computing acceptance rate shall be N3x and N3y. (4) N4 Punch Card Inclination Acceptance Rate The index shall be whether the long edge of the card is parallel to the level of the printed message. The level should extend to both ends. The distance of the two ending points toward the respective card edges shall be less than [ ]. Inspect card by sampling, at [ ]. The computing acceptance rate shall be N4. (5) N5 Card Tilting Acceptance Rate The index shall be [ ] mm (excluding thickness of card, see ISO 7810). Inspect the punch card by samples, at [ ]. The computing acceptance rate shall be N5. (6) N6 Card Stripping Strength Acceptance Rate The index shall be [ ] Inspect [ ] pieces of punch card. The computing acceptance rate shall be N6. Total Acceptance Rate: N[u]1 x N[u]2 x N[u]3 x N[u]4 x N[u]5 x N[u]6 >= 97%. 2.3 Inspection and Acceptance of Equipment To be performed at the shop of Party A. Items to be inspected include: o Information and material accompanied with the equipment o Appearance o Equipment functions o Equipment system 2.3.1 INSPECTION OF THE INFORMATION AND MATERIALS 37 ACCOMPANIED WITH THE QUIPMENT Verify with Appendix I of the Agreement, "List of Production Line Equipment and Laboratory Devices" Verify with Appendix 2 of the Agreement, "Equipment Parts and Consumption Parts" Verify with Appendix 3 of the Agreement, "List of Technical Documents" Verify with Appendix 4 of the Agreement, "List of Maintenance Tools" Verify with the approved raw materials provided by Party B for 54-hour test run operation use. 2.3.2 INSPECTION OF APPEARANCE Inspect the frame and the door. The structure of the equipment shall be solid and the door switches shall be acute. Inspect whether the equipment has been bumped or damaged. The cover of the cover shall be in perfect condition. The paint of the cover shall be bright and perfect. The plated surface of the conveyance section of the equipment shall be polished, bright, with no defects or rusty spots. 2.3.3 INSPECTION AND ACCEPTANCE OF THE EQUIPMENT FUNCTION Inspect the Inspection Certificate (including inspection details and results) and Quality Certificate provided by Party B. Inspect the equipment functions based on 2.1.1. 2.3.4 INSPECTION AND ACCEPTANCE OF THE EQUIPMENT SYSTEM Use fake modules for steady operation for six days, eight hours a day. Use real modules on the 7th day for six hours. Since the equipment includes separate machines, actual operation can be performed units by units. During the test run period, the time spent in adjusting the software and technical parameters, and fixing the hardware problems period shall be included in the operation time. Adjustment contents and frequency must be recorded. Between intervals during the test run period, for example, at noon or in the evening when the machine is turned off, no adjustment of software or repair of hardware shall be done. All products (excluding test products during the repair time) shall be included in the total production number. The one-time acceptance rate of the pick and place machine, wire implanting 38 machine and the welding machine shall be at 98% or above. The total acceptance rate of the final product shall be over 97%. a. Computation of Production Capacity After test running 54 hours, the computed average production capacity shall meet the standard of 2500 cards/hour. b. Production Acceptance Rate Items and indices same as 2.1.2 c. Schedules: 1st to 6th day: a.m. - using fake modules, operate the machine continuously for four hours p.m. - using fake modules, operate the machine continuously for four hours The 7th day: Using the real modules, - using real module, operate the machine continuously for six hours 39 APPENDIX 6 PETG SPECIFICATIONS FOR ACCEPTANCE OF EQUIPMENT 1. Specifications of the PETG material used during the 54 hour test run period:
- ------------------------------------------------------------------------------------------------------- Production Number Thickness ( m) Size (MD x MD) Quantity (kg) - ------------------------------------------------------------------------------------------------------- White PETG [ ] [ ] 600 - ------------------------------------------------------------------------------------------------------- [ ] [ ] 600 - ------------------------------------------------------------------------------------------------------- Transparent PETG [ ] [ ] 300 - -------------------------------------------------------------------------------------------------------
2. Party B shall ensure that the quantity, performance index and technical support provided should be the same as provided to Ministry of Security Division I. 40 EX-10 27 ex10-31.txt EXHIBIT 10.31 Exhibit 10.31 TECHNICAL SERVICES AND LICENSING AGREEMENT This agreement is made by the Beijing Bu Lu Dun High Tech Company Limited, on behalf of China Motor Vehicle Inspection Center (hereinafter referred as Party A) and the American Pacific Aviation & Technology Corporation (hereinafter referred as Party B), based on the principle of mutual benefits and through friendly negotiations, for the provision of technical services and licensing (patent technology) by Party B to Party A for the production of contactless smart cards. 1. Party B shall provide the full set of technology (including technical process, operation rules, maintenance rules, inspecting and testing rules, administration system and all drawings, information, software or patent technology) for the production of contactless smart cards and shall guarantee that the production equipment and products produced by Party A meet the requirements of the "Agreement for Purchase of Equipment". 2. The patent technology and exclusive technology provided by Party B to Party A shall not involve any industrial property right of other countries or companies and Party A shall be legally protected that it has the legal right of utilization. 3. Without written permission of Party B, Party A shall not transfer the patent technology or exclusive technology to any third party, nor Party A shall duplicate the equipment provided by Party B. Without the permission of Party B, Party A shall not allow business or technical personnel of other party to examine the production line or give any technical information from Party B to any third party. 4. Party B shall be responsible for providing all technical services of installation, trouble shooting, test running, receipt and acceptance, and shall solve all technical problems before receipt and acceptance to guarantee that the equipment will produce 2500 pieces/hour. Party A shall provide lodging and food for technical experts of Party B and shall assign special staff to coordinate the project to ensure that installation, trouble shooting and test running go through smoothly. The period for installation and test running the equipment shall be two weeks. The travel expenses of experts from Party B shall be assumed by Party B. 5. Party B shall train the staff of Party A for a period of two weeks. Party A shall select qualified staff to receive training. In the event that members from Party A 10 fail to master the production technology during the training period, said period can be extended to three or four weeks, the cost of such extension shall be assumed by Party A. 6. Party B shall cover the cost of providing the complete technology (including the cost of providing technical details, operation rules, maintenance rules, inspection and testing rules, administration system, drawings and information and software and the compensation and travel expenses of experts from Party B coming to China) and the cost of patent technology and exclusive technology licensing, and staff training. All these costs are included in the equipment purchase cost paid by Party A. With the exception of the equipment purchase cost, Party A shall pay no additional fee. In addition, at least in the first half year after the actual production starts, Party B shall send one to three technical staff to stay in Party A's site to help Party A produce and to provide technical support. The cost of which shall be assumed by Party B. 7. Default Both parties shall execute the provisions of the agreement sincerely. In the event any party fails to execute any of the above provisions that causes the economic loss of other party, the defaulting party shall compensate the loss. Claims and penalties shall be executed according to Chapter IX of the "Agreement for Purchase of Equipment". 8. Settlement of Dispute Any dispute over the agreement by Parties A and B shall be settled through friendly negotiation. In the event negotiation fails to settle the dispute, it shall be arbitrated by the China Economic and Foreign Trade Arbitration Committee in Beijing. Fee for arbitration shall be paid by the losing party. 9. This agreement shall become effective on the date signed by both parties. 10. This agreement contains four copies. PARTY A: Being Bu Lu Dun High Tech Company Limited Company Representative: Signature: (signature) 11 September 3, 2001 PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: Signature: (signature) September 3, 2001 12 EX-10 28 ex10-32.txt EXHIBIT 10.32 Exhibit 10.32 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. EQUIPMENT PURCHASE AGREEMENT Number: TRANCO-PC001 August 2001 CHAPTER I - GENERAL PRINCIPLES 1.1 This contract is made between the Tranco Ltd. (hereinafter referred as Party A) and the American Pacific Aviation Technology Company (hereinafter referred as Party B), based on the principle of mutual benefit and through friendly negotiations, to purchase from Party B by Party A the equipment for the production of the contactless smart cards. 1.2 It is agreed that Party B shall provide a full set, brand new, and state-of-art production line and the complete production technology, technical information and software for the production of contactless smart cards, which shall ensure that the strength and durability of the mechanically tested cards produced by Party A meet the standards of ISO/IEC7810, ISO/IEC10536, and ISO/IEC14443. 1.3 According to the laws and rules and regulations of the People's Republic of China and based on the principle of mutual benefits, the provisions of this agreement shall become effective and shall be executed at the same time with the "Agreement of Technical Services and Licensing". CHAPTER II - PARTIES 2.1 Party A: Tranco Limited Legal Address: Unit B, 9/F Kingpower Commercial Building, 409-413 Jaffe Road, Wanchai, Hong Kong Telephone: 852-2836-3299 Fax:852-2836-3990 2.2. Party B: American Pacific Aviation & Technology Corp. Legal Address: Sansome Street, 19th Street San Francisco, CA 94104, USA Telephone: (415) 951-1078 Fax: (415) 951-1046 CHAPTER III - NAME, SPECIFICATIONS, QUANTITY, PRICE AND DELIVERY 1 OF EQUIPMENT 3.1 Party B shall provide Party A with a complete brand new and state-of-art production line (see Appendix I) and parts (see Appendix II) for the production of contactless smart cards. Said production line shall be able to produce 750-850 pieces of smart cards per hour. The total cost of the equipment shall be US$[ ] US Dollars), based on the CIF Zhu Hai Jui Zhou Port cost, which shall include the equipment, moulds, technical service, patent and licensing, and accessories. 3.2 Before packaging said production line for shipment, Party A shall send three technical staff to come to the United States to conduct preliminary inspection of the equipment. Party B shall pay for the expense of the two-way air tickets, and provide lodging and transportation in the United States for the visiting staff of Party A. Staff of Party A will stay in the United States for two weeks. 3.3 Delivery Date of the Equipment: The production line shall be delivered no later than October 15, 2001. CHAPTER IV - PAYMENT 4.1 Within 10 working days upon the effect of this agreement, Party B shall provide a guarantee letter from the bank for [ ] of the total cost of the equipment in the amount of US$[ ] US Dollars). Within three days upon receipt of the bank guarantee from Party B, Party A shall make payment to the bank of Party B through T/T. 4.2 Withn 20 working days upon the effect of this agreement, Party A shall issue a Letter of Credit at [ ] of the total amount of the agreement to Party B, which is US$[ ] US Dollars). 4.3 Upon approval of preliminary inspection made by Party A in the United States and after Party B ship the equipment, Party B shall, based on the shipment documents and preliminary inspection report, negotiate with Party A for portion of the amount of the Letter of Credit specified in 4.2, that is, [ ] of the total price of the equipment, which is US$[ ] US Dollars). 2 4.4 Upon completion of installation, test-run and acceptance, Party A shall negotiate with Party B the balance of the Letter of Credit specified in Provision 4.2, that is, [ ] of the total cost of the equipment, which is US$[ ] US Dollars). CHAPTER V - SPECIFICATIONS AND TECHNICAL CONDITIONS OF THE EQUIPMENT 5.1 The production line supplied by Party B must be brand new, complete and shall correspond to the specifications of Appendix I - "Equipment Functions and Technical Specifications". 5.2 The performance and quality of the equipment shall meet the following requirements: 5.2.1 The operation capacity of the equipment shall meet the specifications of the manual of the equipment 5.2.2 The production capacity of the equipment: 750-850 pieces/hour 5.2.3 Product Specification: Meeting the ISO standards 5.2.4 Product Quality: the strength and durability of the cards, when mechanically tested, shall meet the ISO standards, and when electronically tested, shall meet the IEC standards. 5.3 Party B shall deliver the following supplements along with the equipment: 5.3.1 Special operation tools, maintenance and repair tools and testing tools (See Appendix IV) 5.3.2 Wearing parts of equipment (enough for one year normal consumption) (See Appendix II), and special mould for the production of identification card for the Security Department. 5.3.3 Approved raw materials needed for the 56-hour production test run (Fake chips will be used for 48 hours and real chips will be used for 8 hours during the test run period. After the test run period, said chips shall be returned to Party B) 5.4 Party B shall deliver the following technical documents when packaging and shipping the equipment (See Appendix III): 3 5.4.1 Quality approval certificate and manual of the equipment 5.4.2 Packaging list of the equipment 5.4.3 Manuals of installation, testing, operation and maintenance 5.4.4 The quality assurance certificate and documentation, as specified in Chapter VII 5.4.5 Drawings of wearing parts and the list of accessories. 5.5 Upon effect of the contract, Party B shall, within 40 working days, mail a technical layout drawing and power supply information to Party A for technical design purpose. Party B shall, within 30 working days, provide Party A with the general information of suppliers of materials for production of contactless smart cards. 5.6 Party B shall, two months before the installation and test running of the equipment, mail the following documents to Party A via air mail or have staff delegated to work at Party A's place to provide instructions: 5.6.1 The installation diagram and the foundation diagram 5.6.2 The power parameters (including power, compressed air, water and stream) of the equipment, and the technical information of power supply and special shop requirements 5.7 The power utilization standards shall correspond to those of the People's Republic of China, that is, 380(+ or -)10 volts for the transformer, and 50(+ or -)5% hertz for the frequency. CHAPTER VI - INSTALLATION, TROUBLE-SHOOTING, TEST RUNNING AND RECEIPT AND ACCEPTANCE 6.1 Party B shall be responsible for installing and trouble-shooting the equipment, and training the staff of Party A, ensuring that the installation and trouble shooting of the equipment be completed within two weeks after the arrival of the equipment in the shop. Party A shall provide the necessary technical staff, workers and other necessities to accommodate the project. 6.2 The test run period shall be seven working days, at eight hours per day. The purpose of the test run is to inspect the production equipment, and to examine 4 whether the products produced meet the requirements specified in Provision 5.2. After approval of test results by Parties A and B, the receipt and acceptance certificate shall be signed. 6.3 During the test run period, if the acceptance rate of the product falls under the level of 97%, a second testing shall be made to test the equipment for another six working days, Party B shall provide the materials for the test run. 6.4 Large volume of production shall not begin until receipt and acceptance is completed. 6.5 Party B shall assume the cost of its staff during their period of working in the factory. Party A shall provide food by the factory and transportation within the city. CHAPTER VII - QUALITY INSPECTION 7.1 Party B shall guarantee that the equipment is made by top craftsmanship and of top materials. The quality, specification and performance of the equipment shall meet the requirements specified in this contract. 7.2 Before delivery, Party B shall conduct a thorough and full inspection of the quality, specification and performance, as well as the quantity/weight of the equipment, and shall provide a certificate of inspection, along with the details and results of the inspection confirming that the quality and quantity of the equipment meets the requirements of this contract. A quality and quantity inspection certificate shall be provided by Party B when the equipment is delivered to Party A. 7.3 Upon arrival of the equipment at the destination, Party A shall, in accordance to the laws and rules and regulations of the People's Republic of China, request that the Import and Export Inspection Bureau (hereinafter as Inspection Bureau) to conduct an inspection. Parties A and B shall both be present at said inspection. Party A shall notify Party B thirty days in advance about the inspection date and representative from Party B shall arrive at the inspection site of A on said inspection date. In the event Party B fails to show up on time or fails to send any representative to participate in the inspection, the Inspection Bureau shall continue inspection as scheduled and the result of which shall be notified by 5 Party A to Party B and Party B shall acknowledge the result accordingly. 7.4 In the event the inspection finds any quality or quantity error, or any missing part that does not meet the requirements of this agreement, or any damage due to packaging, Party B shall within six weeks make compensation, or shall make repairs at its own cost. In the event that any damage is caused by Party A, Party B shall replace the damaged item as soon as possible, and the cost of replacement shall be paid by Party A. 7.5 In the event the inspection finds any serious quality or quantity problem of the equipment, Party A shall have the right to return the equipment or request compensation based on the provisions of Chapter IX. 7.6 The warranty period of the equipment shall be 12 months, commencing the date when the equipment is received and accepted. During the warranty period Party B shall be responsible for repairing the equipment if the damage of the equipment is caused by the defects of the equipment. CHAPTER VIII - PACKAGING AND SHIPMENT 8.1 When packaging, Party B shall use a new and solid wood container with necessary measures taken to prevent moist, shock, rust and rough loading and unloading of the equipment to ensure that the package is suitable for long distance transportation. If the package material is the conifruticeta type, Party B shall provide proof that the material used has been fumigated. If the package material is the non-conifruticeta type, Party B shall provide description of the type of material used which will be used by Party A to report to Custom. 8.2 Packaging and Delivery Marks Party B shall mark with non-erasable paint at the four sides of the container such information as the number of the container, the size, gross weight, net weight, destination, receipt code, "face up", "handle with care", "no moist", "hoisting point" and "gravity point". The mark to be used under this agreement shall be: ZEP2001-PC001 ------------------- Zhuhai, China 6 8.3 Shipment Information 8.3.1 Within two days after shipping, Party B shall fax Party A the following information: A. Date of Shipment, B. Port of Shipment, C. Port of Destination, D. Number, Name, Quantity, Weight, Total Weight and Size of the Container. 8.3.2 Within two days after shipping, Party B shall send the following information to Party A via express mail: A. Invoice, with specification of the name and the quantity of the merchandise; B. Packaging Slip which specifies the number, size, weight of the container, and the name, quantity, net weight of the merchandise, and the date of shipment; C. Original ocean bill of lading, with specifications of the container number, the size, the weight, name of the merchandize, net weight, date of shipment, name of the vessel, mark, and the Letter of Credit number. D. Inspection certificate provided by the manufacturer, as specified in Chapter VII. E. Insurance policy CHAPTER IX - COMPENSATION AND PENALTY 9.1 In the event Party A, within 10 days upon the arrival of the equipment at the destination port, finds any disagreement of the specifications, quality and quantity of the equipment as specified in this contract, Party A shall, by presenting the inspection certificate of the Inspection Bureau, request compensation from Party B. 9.2 Party A shall assume the actual cost of overtime for any delay of installation and testing of the equipment caused by Party A. 9.3 In the event Party B fails to respond within 30 days after Party A makes its claim for compensation, it shall be considered that Party B accept the claim. In the event Party B presents a timely written dispute, both parties shall try to settle the dispute by negotiation. In the event the negotiation fails to settle the dispute, either party shall have the right, according to Article XI, request for arbitration. 7 9.4 Except for force majeure as specified in Provision 10.1, in the event the seller fails to deliver the merchandise on time according to the contract, Party A shall agree that Party B postpone delivery provided that Party B shall pay a penalty at 0.5% of the total cost for every delayed week but this penalty shall not exceed 5% of the total cost. In the event the delay of delivery exceeds ten weeks of the scheduled date, Party A shall have the right to terminate the contract and Party B shall still pay for the penalty for the actual delayed days. 9.5 Without written agreement of Party B, Party A cannot transfer the patent technology and licensing to any third party, nor Party A can duplicate the equipment of Party B. In the event Party A allows any third party to use said technology at its discretion, Party A shall pay Party B an amount of US$[ ] for violation of the contract. In the event Party A duplicates the technology of Party B, it shall pay Party B an amount of US$[ ] for defaulting the contract. Payment of this amount does not waive the right of Party B to prosecute against any third party or Party A for violation of rights. CHAPTER X - FORCE MAJEURE 10.1 During the time of manufacturing or in the process of shipping, in the event of war, fire, flood, typhoon, earthquake or other force majeure acknowledged by both parties that causes Party B fail or delay to execute the provisions of this contract as schedule, Party B shall assume no liability. In the event of force majeure, Party B shall notify Party A immediately and shall within two weeks, send, via air mail, a government issued certificate to Party A confirming said force majeure. 10.2 When the force majeure vanishes, both parties shall negotiate whether to continue executing the contract. CHAPTER XI - ARBITRATION 11.1 In the event there arises any dispute during the execution of this agreement or over this agreement and when both sides fail to settle the dispute by friendly negotiation, said dispute shall be brought for arbitration. The dispute shall be heard by the China International Economic and Foreign Trade Arbitration Committee, in Beijing, according to the procedures set by said committee. 8 11.2 The decision of the Arbitration Committee shall be final and shall have binding effect upon both parties. Arbitration fee shall be paid by the losing party. 11.3 During the period of arbitration, both parties shall continue to execute other non-disputed terms of the contract. CHAPTER XII - GOVERNING LAWS AND VALIDATY 12.1 When executing this agreement, both Parties A and B shall comply with the laws and rules and regulations of the People's Republic of China. 12.2 This agreement shall become effective upon the date signed. 12.3 After this agreement becomes effective, both Parties A and B shall, if needed, discuss revisions to accommodate the practicalities of executing this agreement. These revisions shall become effective when signed by both parties. Neither party can amend the agreement at its own discretion. CHAPTER XIII - DOCUMENTS 13.1 This agreement shall be written in Chinese. 13.2 This agreement is signed in August 2001. 13.3 This agreement contains four original copies. PARTY A: Tranco Limited. Company Representative: (signature) August 10, 2001 PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: (signature) August 10, 2001 9 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. List of Production Line Equipment and Laboratory Instruments Included in This Set of Production Line
- -------------------------------------------------------------------------------------------- Serial Quantity Name Model Price No. of Equipment No. (in US$10,000) - -------------------------------------------------------------------------------------------- Production 1 1 Hole Punch Machine CICC-001 [ ] Line ------------------------------------------------------------------------- IC Hole Punch Machine and Parts, Easily Wearout parts ------------------------------------------------------------------------- 2 1 Pick & Place With CICC-002 [ ] Module Testing ------------------------------------------------------------------------- IC Module Pick and Place Machine with parts, easily wear- out parts, and PETG film and PVC film, total 1500 kg, for test run purpose ------------------------------------------------------------------------- 3 1 Ultrasonic Wire CICC-003 [ ] Implanting (4) ------------------------------------------------------------------------- IC Wire Implanting Machine (4) and parts, and easily wear-out parts (including full set of equipment tools) ------------------------------------------------------------------------- 4 1 Welding With Testing CICC-004 [ ] Reader ------------------------------------------------------------------------- IC Module Welding Machine and parts and easily wear-out parts ------------------------------------------------------------------------- 5 1 Bonding Re-work CICC-005 [ ] Station ------------------------------------------------------------------------- IC Module Re-work Machine ------------------------------------------------------------------------- 6 1 Tacker CICC-006 [ ] ------------------------------------------------------------------------- Tacker ------------------------------------------------------------------------- 7 1 Lamination System CICC-007 [ ] ------------------------------------------------------------------------- IC Smart Card Laminting System and parts, easily wear-out parts ------------------------------------------------------------------------- 8 1 Cooling System CICC-008 [ ] ------------------------------------------------------------------------- Cooling System and parts, easily wear-out parts ------------------------------------------------------------------------- 9 ------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Laboratory 10 1 Pull Tester MP5/230 [ ] ------------------------------------------------------------------------- Pull Tester - --------------------------------------------------------------------------------------------
13 11 1 Frequency Analyzer DEME-30 [ ] 10 ------------------------------------------------------------------------- Frequency Analyzer ------------------------------------------------------------------------- 12 1 Lab Temp Chamber CICC-112 [ ] (T:-25'C-85 C. M H:40%-95%) - -------------------------------------------------------------------------------------------- High and Low Temperature Test Chamber - -------------------------------------------------------------------------------------------- 13 1 Card Testing Machine CICC-9 [ ] - -------------------------------------------------------------------------------------------- Card Testing Machine - -------------------------------------------------------------------------------------------- Total: US$[ ]
14 EX-10 29 ex10-33.txt EXHIBIT 10.33 Exhibit 10.33 TECHNICAL SERVICES AND LICENSING AGREEMENT This agreement is made by the Tranco Ltd. (hereinafter referred as Party A) and the American Pacific Aviation & Technology Corporation (hereinafter referred as Party B), based on the principle of mutual benefits and through friendly negotiations, for the provision of technical services and licensing (patent technology) by Party B to Party A for the production of contactless smart cards. 1. Party B shall provide the full set of technology (including technical process, operation rules, maintenance rules, inspecting and testing rules, administration system and all drawings, information, software or patent technology) for the production of contactless smart cards and shall guarantee that the production equipment and products produced by Party A meet the requirements of the "Equipment Purchase Agreement". 2. The patent technology and exclusive technology provided by Party B to Party A shall not involve any industrial property right of other countries or companies and Party A shall be legally protected that it has the legal right of utilization. 3. Without written permission of Party B, Party A shall not transfer the patent technology or exclusive technology to any third party, nor Party A shall duplicate the equipment provided by Party B. Without the permission of Party B, Party A shall not allow business or technical personnel of other party to examine the production line or give any technical information from Party B to any third party. 4. Party B shall be responsible for providing all technical services of installation, trouble shooting, test running, receipt and acceptance, and shall solve all technical problems before receipt and acceptance to guarantee that the equipment will produce 750-850 pieces/hour. Party A shall provide lodging and food for technical experts of Party B and shall assign special staff to coordinate the project to ensure that installation, trouble shooting and test running go through smoothly. The period for installation and test running the equipment shall be two weeks. The travel expenses of experts from Party B shall be assumed by Party B. 5. Party B shall train the staff of Party A for a period of two weeks. Party A shall select qualified staff to receive training. In the event that members from Party A fail to master the production technology during the training period, said period can be extended to three or four weeks, the cost of such extension shall be 10 assumed by Party A. 6. Party B shall cover the cost of providing the complete technology (including the cost of providing technical details, operation rules, maintenance rules, inspection and testing rules, administration system, drawings and information and software and the compensation and travel expenses of experts from Party B coming to China) and the cost of patent technology and exclusive technology licensing, and staff training. All these costs are included in the equipment purchase cost paid by Party A. With the exception of the equipment purchase cost, Party A shall pay no additional fee. In addition, at least in the first half year after the actual production starts, Party B shall send one to three technical staff to stay in Party A's site to help Party A produce and to provide technical support. The cost of which shall be assumed by Party B. 7. Default Both parties shall execute the provisions of the agreement sincerely. In the event any party fails to execute any of the above provisions that causes the economic loss of other party, the defaulting party shall compensate the loss. Claims and penalties shall be executed according to Chapter IX of the "Equipment Purchase Agreement". 8. Settlement of Dispute Any dispute over the agreement by Parties A and B shall be settled through friendly negotiation. In the event negotiation fails to settle the dispute, it shall be arbitrated by the China Economic and Foreign Trade Arbitration Committee in Beijing. Fee for arbitration shall be paid by the losing party. 9. This agreement shall become effective on the date signed by both parties. 10. This agreement contains four original copies. 11 (This page contains no text) PARTY A: Tranco Ltd. Company Representative: (signature) August 10, 2001 PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: (signature) August 10, 2001 12 EX-10 30 ex10-34.txt EXHIBIT 10.34 Exhibit 10.34 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. EQUIPMENT PURCHASE AGREEMENT Number: TRANCO-PC002 August 2001 CHAPTER I - GENERAL PRINCIPLES 1.1 This contract is made between the Tranco Limited (hereinafter referred as Party A) and the American Pacific Aviation Technology Company (hereinafter referred as Party B), based on the principle of mutual benefit and through friendly negotiations, to purchase from Party B by Party A the equipment for the production of the contactless smart cards. 1.2 It is agreed that Party B shall provide a full set, brand new, and state-of-art production line and the complete production technology, technical information and software for the production of contactless smart cards, which shall ensure that the strength and durability of the mechanically tested cards produced by Party A meet the standards of ISO/IEC7810, ISO/IEC10536, and ISO/IEC14443. 1.3 According to the laws and rules and regulations of the People's Republic of China and based on the principle of mutual benefits, the provisions of this agreement shall become effective and shall be executed at the same time with the "Agreement of Technical Services and Licensing". CHAPTER II - PARTIES 2.1 Party A: Tranco Limited Legal Address: 9 B Kingpower Commercial Building, 409-413 Jaffe Road Wanchai, Hong Kong Telephone: 852-2836-3299 Fax: 852-2836-3990 2.2. Party B: American Pacific Aviation & Technology Corp. Legal Address: Sansome Street, 19th Street San Francisco, CA 94104, USA Telephone: (415) 951-1078 Fax: (415) 951-1046 1 CHAPTER III - NAME, SPECIFICATIONS, QUANTITY, PRICE AND DELIVERY OF EQUIPMENT 3.1 Party B shall provide Party A with a complete brand new and state-of-art production line (see Appendix I) and parts (see Appendix II) for the production of contactless smart cards. Said production line, along with the production equipment purchased earlier from Party B (contract number Tranco-PC001), shall be able to produce 2500 pieces of smart cards per hour. The total cost of the equipment shall be US$[ ] US Dollars), based on the CIF Zhu Hai Jui Zhou Port cost, which shall include the equipment, moulds, technical service, patent and licensing, and accessories. 3.2 Before packaging said production line for shipment, Party A shall send three technical staff to come to the United States to conduct preliminary inspection of the equipment. Party B shall pay for the expense of the two-way air tickets, and provide lodging and transportation in the United States for the visiting staff of Party A. Staff of Party A will stay in the United States for two weeks. 3.3 Delivery Date of the Equipment: Delivery of said production line shall be made according to the supplementary agreement. CHAPTER IV - PAYMENT 4.1 Within 10 working days upon the effect of this agreement, Party B shall provide a guarantee letter from the bank for [ %] of the total cost of the equipment in the amount of US$[ ] US Dollars). Within three days upon receipt of the bank guarantee from Party B, Party A shall make payment to the bank of Party B through T/T. 4.2 Withn 20 working days upon the effect of this agreement, Party A shall issue a Letter of Credit at [ %] of the total amount of the agreement to Party B, which is US$[ ] US Dollars). 4.3 Upon approval of preliminary inspection made by Party A in the United States and after Party B ship the equipment, Party B shall, based on the shipment documents and preliminary inspection report, negotiate with Party A for portion of the amount of the 2 Letter of Credit specified in 4.2, that is, [ %] of the total price of the equipment, which is US$[ ] US Dollars). 4.4 Upon completion of installation, test-run and acceptance, Party A shall negotiate with Party B the balance of the Letter of Credit specified in Provision 4.2, that is, [ %] of the total cost of the equipment, which is US$[ ] US Dollars). CHAPTER V - SPECIFICATIONS AND TECHNICAL CONDITIONS OF THE EQUIPMENT 5.1 The production line supplied by Party B must be brand new, complete and shall correspond to the specifications of Appendix I - "Equipment Functions and Technical Specifications". 5.2 The performance and quality of the equipment shall meet the following requirements: 5.2.1 The operation capacity of the equipment shall meet the specifications of the manual of the equipment 5.2.2 The production capacity of the equipment: When integrating with the production equipment purchased earlier from Party B, said production line can produce 2500 pieces/hour 5.2.3 Product Specification: Meeting the ISO standards 5.2.4 Product Quality: the strength and durability of the cards, when mechanically tested, shall meet the ISO standards, and when electronically tested, shall meet the IEC standards. 5.3 Party B shall deliver the following supplements along with the equipment: 5.3.1 Special operation tools, maintenance and repair tools and testing tools (See Appendix IV) 5.3.2 Wearing parts of equipment (enough for one year normal consumption) (See Appendix 2), and special mould for the production of identification card for the Security Department. 5.3.3 Approved raw materials needed for the 56-hour production test run (Fake chips will be used for 48 hours and real chips will be used for 8 3 hours during the test run period. After the test run period, said chips shall be returned to Party B) 5.4 Party B shall deliver the following technical documents when packaging and shipping the equipment (See Appendix 3): 5.4.1 Quality approval certificate and manual of the equipment 5.4.2 Packaging list of the equipment 5.4.3 Manuals of installation, testing, operation and maintenance 5.4.4 The quality assurance certificate and documentation, as specified in Chapter VII 5.4.5 Drawings of wearing parts and the list of accessories. 5.5 Upon effect of the contract, Party B shall, within 40 working days, mail a technical layout drawing and power supply information to Party A for technical design purpose. Party B shall, within 30 working days, provide Party A with the general information of suppliers of materials for production of contactless smart cards. 5.6 Party B shall, two months before the installation and test running of the equipment, mail the following documents to Party A via air mail or have staff delegated to work at Party A's place to provide instructions: 5.6.1 The installation diagram and the foundation diagram 5.6.2 The power parameters (including power, compressed air, water and stream) of the equipment, and the technical information of power supply and special shop requirements 5.7 The power utilization standards shall correspond to those of the People's Republic of China, that is, 380(+ or -)10 volts for the transformer, and 50(+ or -)5% hertz for the frequency. CHAPTER VI - INSTALLATION, TROUBLE-SHOOTING, TEST RUNNING AND RECEIPT AND ACCEPTANCE 6.1 Party B shall be responsible for installing and trouble-shooting the equipment, and training the staff of Party A, ensuring that the installation and trouble shooting of the equipment be completed within two weeks after the arrival of the 4 equipment in the shop. Party A shall provide the necessary technical staff, workers and other necessities to accommodate the project. 6.2 The test run period shall be seven working days, at eight hours per day. The purpose of the test run is to inspect the production equipment, and to examine whether the products produced meet the requirements specified in Provision 5.2. After approval of test results by Parties A and B, the receipt and acceptance certificate shall be signed. 6.3 During the test run period, if the acceptance rate of the product falls under the level of 97%, a second testing shall be made to test the equipment for another six working days, Party B shall provide the materials for the test run. 6.4 Large volume of production shall not begin until receipt and acceptance is completed. 6.5 Party B shall assume the cost of its staff during their period of working in the factory. Party A shall provide food by the factory and transportation within the city. CHAPTER VII - QUALITY INSPECTION 7.1 Party B shall guarantee that the equipment is made by top craftsmanship and of top materials. The quality, specification and performance of the equipment shall meet the requirements specified in this contract. 7.2 Before delivery, Party B shall conduct a thorough and full inspection of the quality, specification and performance, as well as the quantity/weight of the equipment, and shall provide a certificate of inspection, along with the details and results of the inspection confirming that the quality and quantity of the equipment meets the requirements of this contract. A quality and quantity inspection certificate shall be provided by Party B when the equipment is delivered to Party A. 7.3 Upon arrival of the equipment at the destination, Party A shall, in accordance to the laws and rules and regulations of the People's Republic of China, request that the Import and Export Inspection Bureau (hereinafter as Inspection Bureau) to conduct an inspection. Parties A and B shall both be present at said inspection. 5 Party A shall notify Party B thirty days in advance about the inspection date and representative from Party B shall arrive at the inspection site of A on said inspection date. In the event Party B fails to show up on time or fails to send any representative to participate in the inspection, the Inspection Bureau shall continue inspection as scheduled and the result of which shall be notified by Party A to Party B and Party B shall acknowledge the result accordingly. 7.4 In the event the inspection finds any quality or quantity error, or any missing part that does not meet the requirements of this agreement, or any damage due to packaging, Party B shall within six weeks make compensation, or shall make repairs at its own cost. In the event that any damage is caused by Party A, Party B shall replace the damaged item as soon as possible, and the cost of replacement shall be paid by Party A. 7.5 In the event the inspection finds any serious quality or quantity problem of the equipment, Party A shall have the right to return the equipment or request compensation based on the provisions of Chapter IX. 7.6 The warranty period of the equipment shall be 12 months, commencing the date when the equipment is received and accepted. During the warranty period Party B shall be responsible for repairing the equipment if the damage of the equipment is caused by the defects of the equipment. CHAPTER VIII - PACKAGING AND SHIPMENT 8.1 When packaging, Party B shall use a new and solid wood container with necessary measures taken to prevent moist, shock, rust and rough loading and unloading of the equipment to ensure that the package is suitable for long distance transportation. If the package material is the conifruticeta type, Party B shall provide proof that the material used has been fumigated. If the package material is the non-conifruticeta type, Party B shall provide description of the type of material used which will be used by Party A to report to Custom. 8.2 Packaging and Delivery Marks Party B shall mark with non-erasable paint at the four sides of the container such information as the number of the container, the size, gross weight, net weight, destination, receipt code, "face up", "handle with care", "no moist", "hoisting point" and "gravity point". The mark to be used under this agreement shall be: 6 ZEP2001-PC002 - ------------------------------------ ZHUHAI, CHINA 8.3 Shipment Information 8.3.1 Within three days after shipping, Party B shall fax Party A the following information: A. Date of Shipment, B. Port of Shipment, C. Port of Destination, D. Number, Name, Quantity, Weight, Total Weight and Size of the Container. 8.3.2 Within five days after shipping, Party B shall send the following information to Party A via express mail: A. Invoice, with specification of the name and the quantity of the merchandise; B. Packaging Slip which specifies the number, size, weight of the container, and the name, quantity, net weight of the merchandise, and the date of shipment; C. Original ocean bill of lading, with specifications of the container number, the size, the weight, name of the merchandize, net weight, date of shipment, name of the vessel, mark, and the Letter of Credit number. D. Inspection certificate provided by the manufacturer, as specified in Chapter VII. E. Insurance policy CHAPTER IX - COMPENSATION AND PENALTY 9.1 In the event Party A, within 10 days upon the arrival of the equipment at the destination port, finds any disagreement of the specifications, quality and quantity of the equipment as specified in this contract, Party A shall, by presenting the inspection certificate of the Inspection Bureau, request compensation from Party B. 9.2 Party A shall assume the actual cost of overtime for any delay of installation and testing of the equipment caused by Party A. 9.3 In the event Party B fails to respond within 30 days after Party A makes its claim 7 for compensation, it shall be considered that Party B accept the claim. In the event Party B presents a timely written dispute, both parties shall try to settle the dispute by negotiation. In the event the negotiation fails to settle the dispute, either party shall have the right, according to Article XI, request for arbitration. 9.4 Except for force majeure as specified in Provision 10.1, in the event the seller fails to deliver the merchandise on time according to the contract, Party A shall agree that Party B postpone delivery provided that Party B shall pay a penalty at 0.5% of the total cost for every delayed week but this penalty shall not exceed 5% of the total cost. In the event the delay of delivery exceeds ten weeks of the scheduled date, Party A shall have the right to terminate the contract and Party B shall still pay for the penalty for the actual delayed days. 9.5 Without written agreement of Party B, Party A cannot transfer the patent technology and licensing to any third party, nor Party A can duplicate the equipment of Party B. In the event Party A allows any third party to use said technology at its discretion, Party A shall pay Party B an amount of US$[ ] for violation of the contract. In the event Party A duplicates the technology of Party B, it shall pay Party B an amount of US$[ ] for defaulting the contract. Payment of this amount does not waive the right of Party B to prosecute against any third party or Party A for violation of rights. CHAPTER X - FORCE MAJEURE 10.1 During the time of manufacturing or in the process of shipping, in the event of war, fire, flood, typhoon, earthquake or other force majeure acknowledged by both parties that causes Party B fail or delay to execute the provisions of this contract as schedule, Party B shall assume no liability. In the event of force majeure, Party B shall notify Party A immediately and shall within two weeks, send, via air mail, a government issued certificate to Party A confirming said force majeure. 10.2 When the force majeure vanishes, both parties shall negotiate whether to continue executing the contract. CHAPTER XI - ARBITRATION 11.1 In the event there arises any dispute during the execution of this agreement or 8 over this agreement and when both sides fail to settle the dispute by friendly negotiation, said dispute shall be brought for arbitration. The dispute shall be heard by the China International Economic and Foreign Trade Arbitration Committee, in Beijing, according to the procedures set by said committee. 11.2 The decision of the Arbitration Committee shall be final and shall have binding effect upon both parties. Arbitration fee shall be paid by the losing party. 11.3 During the period of arbitration, both parties shall continue to execute other non-disputed terms of the contract. CHAPTER XII - GOVERNING LAWS AND VALIDATY 12.1 When executing this agreement, both Parties A and B shall comply with the laws and rules and regulations of the People's Republic of China. 12.2 Effective date of this agreement: refer to appropriate provision of the supplementary agreement. 12.3 After this agreement becomes effective, both Parties A and B shall, if needed, discuss revisions to accommodate the practicalities of executing this agreement. These revisions shall become effective when signed by both parties. Neither party can amend the agreement at its own discretion. CHAPTER XIII - DOCUMENTS 13.1 This agreement shall be written in Chinese. 13.2 This agreement is signed in August 2001. 13.3 This agreement contains four original copies. PARTY A: Tranco Limited Company Representative: (signature) August 10, 2001 PARTY B: 9 The American Pacific Aviation & Technology Corporation Company Representative: (signature) August 10, 2001 10 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. List of Production Line Equipment and Laboratory Instruments Included in This Set of Production Line
- ------------------------------------------------------------------------------------------------------- Serial Quantity Name Model Price No. of Equipment No. (in US$10,000) - ------------------------------------------------------------------------------------------------------- Production 1 2 Pick & Place With Module CICC-002 [ ] Equipment Testing --------------------------------------------------------------------------------------- IC Module Pick and Place Machine with parts, easily wear-out parts, and PETG film and PVC film, total 1500 kg, for test run purpose --------------------------------------------------------------------------------------- 2 1 Ultrasonic Wire Implanting CICC-003 [ ] (4) --------------------------------------------------------------------------------------- IC Wire Implanting Machine (4) and parts, and easily wear-out parts (including full set of equipment tools) --------------------------------------------------------------------------------------- 3 2 Welding With Testing Reader CICC-004 [ ] --------------------------------------------------------------------------------------- 4 1 Tacker CICC-006 [ ] --------------------------------------------------------------------------------------- Tacker --------------------------------------------------------------------------------------- 5 2 Lamination System CICC-007 [ ] --------------------------------------------------------------------------------------- IC Smart Card Laminting System and parts, easily wear-out parts --------------------------------------------------------------------------------------- 6 2 Cooling System CICC-008 [ ] --------------------------------------------------------------------------------------- Cooling System and parts, easily wear-out parts - ------------------------------------------------------------------------------------------------------- Laboratory --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- Total: US$[ ]
14 EX-10 31 ex10-35.txt EXHIBIT 10.35 Exhibit 10.35 TECHNICAL SERVICES AND LICENSING AGREEMENT This agreement is made by the Tranco Limited (hereinafter referred as Party A) and the American Pacific Aviation & Technology Corporation (hereinafter referred as Party B), based on the principle of mutual benefits and through friendly negotiations, for the provision of technical services and licensing (patent technology) by Party B to Party A for the production of contactless smart cards. 1. Party B shall provide the full set of technology (including technical process, operation rules, maintenance rules, inspecting and testing rules, administration system and all drawings, information, software or patent technology) for the production of contactless smart cards and shall guarantee that the production equipment and products produced by Party A meet the requirements of the "Equipment Purchase Agreement". 2. The patent technology and exclusive technology provided by Party B to Party A shall not involve any industrial property right of other countries or companies and Party A shall be legally protected that it has the legal right of utilization. 3. Without written permission of Party B, Party A shall not transfer the patent technology or exclusive technology to any third party, nor Party A shall duplicate the equipment provided by Party B. Without the permission of Party B, Party A shall not allow business or technical personnel of other party to examine the production line or give any technical information from Party B to any third party. 4. Party B shall be responsible for providing all technical services of installation, trouble shooting, test running, receipt and acceptance, and shall solve all technical problems before receipt and acceptance to guarantee that the equipment will produce 2500 pieces/hour. Party A shall provide lodging and food for technical experts of Party B and shall assign special staff to coordinate the project to ensure that installation, trouble shooting and test running go through smoothly. The period for installation and test running the equipment shall be two weeks. The travel expenses of experts from Party B shall be assumed by Party B. 5. Party B shall train the staff of Party A for a period of two weeks. Party A shall select qualified staff to receive training. In the event that members from Party A fail to master the production technology during the training period, said period can be extended to three or four weeks, the cost of such extension shall be 11 assumed by Party A. 6. Party B shall cover the cost of providing the complete technology (including the cost of providing technical details, operation rules, maintenance rules, inspection and testing rules, administration system, drawings and information and software and the compensation and travel expenses of experts from Party B coming to China) and the cost of patent technology and exclusive technology licensing, and staff training. All these costs are included in the equipment purchase cost paid by Party A. With the exception of the equipment purchase cost, Party A shall pay no additional fee. In addition, at least in the first half year after the actual production starts, Party B shall send one to three technical staff to stay in Party A's site to help Party A produce and to provide technical support. The cost of which shall be assumed by Party B. 7. Default Both parties shall execute the provisions of the agreement sincerely. In the event any party fails to execute any of the above provisions that causes the economic loss of other party, the defaulting party shall compensate the loss. Claims and penalties shall be executed according to Chapter IX of the "Equipment Purchase Agreement". 8. Settlement of Dispute Any dispute over the agreement by Parties A and B shall be settled through friendly negotiation. In the event negotiation fails to settle the dispute, it shall be arbitrated by the China Economic and Foreign Trade Arbitration Committee in Beijing. Fee for arbitration shall be paid by the losing party. 9. This agreement shall become effective on the date signed by both parties. 10. This agreement contains four original copies. 12 (This page contains no text) PARTY A: Tranco Limited Company Representative: (signature) August 10, 2001 PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: (signature) August 10, 2001 13 EX-10 32 ex10-36.txt EXHIBIT 10.36 Exhibit 10.36 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. EQUIPMENT PURCHASE AGREEMENT CHAPTER I - GENERAL PRINCIPLES 1.1 This contract is made between the Shangdong Lu Neng Huang Tai Industrial Group Limited (hereinafter referred as Party A) and the American Pacific Aviation Technology Company (hereinafter referred as Party B), based on the principle of mutual benefit and through friendly negotiations, to purchase from Party B by Party A the equipment for the production of the contactless smartcards. 1.2 This agreement is made in accordance to the pertinent Chinese laws and rules and regulations, and based on the principle of mutual benefits, and shall become valid and be executed with the "Agreement of Technical Service and Patent Technology Licensing" at the same time. 1.3 This agreement contains the following attachments: Attachment I: List of Equipment and Technical Specifications Attachment II: List of Accessories Attachment III: List of Technical Information Attachment IV: List of Maintenance Tools CHAPTER II - PARTIES 2.1 Party A: The Shandong Lu Neng Huang Tai Industrial Group Limited (on behalf of the Shandong Lu Neng China Card Smart card Company Limited [tentative name]) Legal Address: 230 Xin Jin Qiao Road, Jin Qiao Export Processing Region, Pu Dong Xin District, Shanghai, T17-5-1 Telephone: (86) 21-68865658 Fax: (86) 21-68865258 2.2. Party B: American Pacific Aviation & Technology Corp. Legal Address 1 Sansome Street, 19th Street San Francisco, CA 94104, USA Telephone: (415) 951-1078 Fax: (415) 951-1046 10 CHAPTER III - NAME, SPECIFICATIONS, QUANTITY, PRICE AND DELIVERY OF EQUIPMENT 3.1 Party B shall provide Party A with a complete brand new, full set and state-of-art equipment and accessories for the production of contactless smart cards. Said equipment shall be able to produce 2500 pieces of smart cards per hour. 3.2 The total cost of the agreement shall be US$[ ] US Dollars), based on the CIF Shanghai cost, which shall include the equipment, moulds, technical service, patent technology licensing, and accessories. 3.3 Before packaging said production line for shipment, Party A shall send three technical staff to come to the United States to conduct preliminary inspection of the equipment. Party B shall pay for the expense of the two-way air tickets, and provide lodging and transportation in the United States for the visiting staff of Party A. Staff of Party A will stay in the United States for two weeks. 3.4 Delivery Date of the Equipment: March 1, 2002 to April 30, 2002. CHAPTER IV - PAYMENT 4.1 Within 30 working days upon the effect of this agreement, Party B shall issue a guarantee letter at [ %] of the total cost, that is, US$[ ] US Dollars) to Party A. Party A shall make payment to Party B by means of T/T. 4.2 Party A shall issue a Letter of Credit at [ %] of the total amount, that is, US$[ ] US Dollars) to Party B, two months before the delivery of the equipment. 4.3 Upon approval of preliminary inspection and before packaging for shipment, Party B shall, by presenting the signed inspection approval by Party A, the bill of lading, invoice, and quality warranty, negotiate for payment by Party A of the Letter of Credit mentioned in 4.2. 11 4.4 Upon completion of test run and acceptance and one year quality warranty, Party A shall pay the balance of [ %] of the agreement amount, that is, US$[ ] Dollars) to Party B by T/T. CHAPTER V - SPECIFICATIONS AND TECHNICAL CONDITIONS OF THE EQUIPMENT 5.1 The complete equipment supplied by Party B must be brand new, full set and shall match the details of Appendix I - "List of Equipment and Technical Specifications". 5.2 The performance and quality of the equipment shall meet the following requirements: 5.2.1 The operation capacity of the equipment shall meet the specifications of the manual of the equipment 5.2.2 The production capacity of the equipment, running at eight consecutive hours shall be 2500 pieces/hour 5.2.3 Product Specification: meeting the ISO/Mifare standards 5.2.4 Product Quality: The strength and durability of the mechanically tested card shall meet the ISO standards, and of the electrically tested card shall meet the IEC standards 5.2.5 Acceptance rate of the consecutive processed product shall be 97% or above 5.3 Party B shall deliver the following supplements along with the equipment: 5.3.1 Special operation tools, maintenance and repair tools and testing tools (See Attachment 4) 5.3.2 Wearing parts of equipment (enough for one year normal consumption) (See Attachment 2) 5.3.3 Approved raw materials needed for production test run (Fake chips that do not have the read and write functions will be used for 48 hours, and real chips will be used for 8 hours during the 56-hour test run period) (See Attachment 2). 5.4 Party B shall deliver the following technical documents when packaging and shipping the equipment (See Attachment 3): 5.4.1 The quality approval certificate and the operation manual of the equipment (including contents of equipment structure, performance, 12 installment and test run, operation, and repairs and maintenance). 5.4.2 The packaging list of the equipment 5.4.3 Manuals of installation, testing, operation and maintenance 5.4.4 The quality assurance certificate and documentation, as specified in Chapter VII 5.4.5 Drawings of wearing parts and list of accessories. 5.5 Upon effect of the contract, Party B shall, within 30 working days, mail a technical layout drawing of production area and power supply information to Party A for the purposes of technical design and equipment acquisition in China. 5.6 Party B shall, three months before the installation and test running of the equipment, mail the following documents to Party A or have staff work at Party A's place to provide instructions: 5.6.1 The installation diagram and the foundation diagram 5.6.2 The power parameters (including power, compressed air, water and stream) of the equipment, and the technical information of power supply and special shop requirements 5.7 The power utilization standards shall correspond to those of the People's Republic of China, that is, 380+-10 volts for the transformer, and 50+-5% hertz for the frequency. CHAPTER VI - INSTALLATION, TROUBLE-SHOOTING, TEST RUNNING AND RECEIPT AND ACCEPTANCE 6.1 Party B shall be responsible for installing and trouble-shooting the equipment, and training the staff of Party A, ensuring that the installation and trouble shooting of the equipment be completed within two weeks (with appropriate accommodation by Party A) after the arrival of the equipment in the shop. Party A shall provide the necessary staff, space, equipment to assist and accommodate the project. 6.2 The test run period shall be seven working days, at eight hours per day. The purpose of the test run is to inspect the production equipment, and to examine whether the products produced meet the pertinent requirements specified. After approval of test run results by both Parties A and B, the receipt and acceptance 13 paper shall be signed. 6.3 The process of accepting of the equipment, in addition to test run, shall also include verification of the required documentation, the quality and quantity of raw material accompanied with the equipment, and the conditions of the wearing part. 6.4 During the test run period, if there is any breakdown or the acceptance rate of the product falls under the level of 97%, a second testing shall be made to test the equipment for another seven working days until the acceptance standards are met (Each equipment shall be able to continue working at least six hours without any breakdown). 6.5 Large volume of production shall not begin until receipt and acceptance is completed. 6.6 Party B shall assume the cost of its staff during their period of working in the factory. Party A shall provide food by the factory and transportation within the city. CHAPTER VII - QUALITY INSPECTION 7.1 Party B shall guarantee that the equipment is made by top craftsmanship and of top materials. The quality, specification and performance of the equipment shall meet the requirements specified in this contract. 7.2 Before making delivery to Party A, Party B shall conduct a thorough and full inspection of the quality, specification and performance, as well as the quantity/weight of the equipment, and shall provide a certificate of inspection, along with the details and results of the inspection confirming that the quality and quantity of the equipment meets the requirements of this contract. A quality and quantity inspection certificate shall be provided by Party B when the equipment is delivered to Party A. 7.3 Upon arrival of the equipment at the destination, Party A shall, in accordance to the laws and rules and regulations of the People's Republic of China, request that the Import and Export Inspection Bureau (hereinafter as Inspection Bureau) to conduct an inspection. Parties A and B shall both be present at said inspection. In 14 the event Party B fails to show up on time or fails to send any representative to participate in the inspection, the Inspection Bureau shall continue inspection as scheduled and the result of which shall be notified by Party A to Party B and Party B shall acknowledge the result accordingly. 7.4 In the event the inspection finds any quality or quantity error, or any missing part that does not meet the requirements of this agreement, or any damage due to packaging, Party B shall within six weeks make repairs or replacement and shall assume all pertinent cost of damages. In the event that any damage is caused by Party A, Party B shall repair or replace the damaged item as soon as possible, and the cost of which shall be paid by Party A. 7.5 In the event the inspection finds any serious quality or quantity problem of the equipment, Party A shall have the right to request compensation, or to return the equipment and request compensation based on the provisions of Chapter IX. 7.6 The warranty period of the equipment shall be 12 months, commencing the date of acceptance of test run. During the warranty period Party B shall be responsible for repairing the equipment if the damage of the equipment is caused by the defects of the equipment. In the event the breakdown or damages of parts or accessories are caused by Party A, Party B shall provide timely repair and part service and the cost of which shall be assumed by Party A. Regardless of the reasons, Party B shall, within five days upon receipt of the notice, shall be present on site or provide resolution. CHAPTER VIII - PACKAGING AND SHIPMENT 8.1 When packaging, Party B shall use a new and solid wood container, which meets the requirements of import quarantine, with necessary measures taken to prevent moist, shock, rust and rough loading and unloading of the equipment to ensure that the package is suitable for long distance transportation. If the package material used is of the conifruticeta type, Party B shall provide proof that the material used has been fumigated. If the package material used is of the non-conifruticeta type, Party B shall provide description of the type of material used which will be used by Party A during the Custom process. 15 8.2 Packaging and Delivery Marks Party B shall mark with non-erasable paint at the four sides of the container such information as the number of the container, the size, gross weight, net weight, destination, receipt code, "face up", "handle with care", "no moist", "hoisting point" and "gravity point". 8.3 Shipment Information 8.3.1 Within three days after shipping, Party B shall fax Party A the following information: A. Date of Shipment, B. Port of Shipment, C. Port of Destination, D. Number, Name, Quantity, Weight, Total Weight and Size of the Container. 8.3.2 Within two days after shipping, Party B shall send the following information to Party A via express mail: A. Bill of Lading, and invoice, with specification of the name and the quantity of the merchandise; B. Packaging Slips (2 copies), which specify the number, size, weight of the container, and the name, quantity, net weight of the merchandise, and the date of shipment; C. Air way bill. D. The inspection certificate provided by the manufacturer, as specified in Chapter VII, and the certificate of the original manufacturing place E. Insurance policy CHAPTER IX - COMPENSATION AND PENALTY 9.1 In the event Party A, upon the arrival of the equipment at the destination port, finds any disagreement of the specifications, quality and quantity of the equipment as specified in this contract, Party A shall, by presenting the inspection certificate of the Inspection Bureau, request compensation from Party B. 9.2 Party A shall assume the actual cost of overtime for any delay of installation and testing of the equipment caused by Party A. 16 9.3 In the event Party B fails to respond within 30 days after Party A makes its claim for compensation, it shall be considered that Party B accept the claim. In the event Party B presents a timely written dispute, both parties shall try to settle the dispute by negotiation. In the event the negotiation fails to settle the dispute, either party shall have the right, according to Article XI, request for arbitration. 9.4 Except for force majeure as specified in Provision 10.1, in the event the seller fails to deliver the merchandise on time according to the contract, Party A shall agree that Party B postpone delivery provided that Party B shall pay a penalty at 0.5% of the total cost for every delayed week but this penalty shall not exceed 5% of the total cost. In the event the delay of delivery exceeds ten weeks of the scheduled date, Party A shall have the right to terminate the contract and Party B shall still pay for the penalty for the actual delayed days, and shall return the amount paid by Party A. 9.5 Without written agreement of Party B, Party A cannot transfer the patent technology and licensing pertinent to the equipment provided by Party B to any third party. In the event Party A allows any third party to use said technology or to duplicate the equipment of Party B at its discretion, Party A shall pay Party B 5% default penalty in the amount of US$[ ] US Dollars). Payment of this amount by Party A does not waive the right of Party B making claim against any third party or Party A for violation of rights. In the event disclosure of confidential information is caused by staff who has left the company, said individual shall be liable to said disclosure. CHAPTER X - FORCE MAJEURE 10.1 During the time of manufacturing or in the process of shipping, in the event of war, fire, flood, typhoon, earthquake or other force majeure acknowledged by both parties that causes Party B fail or delay to execute the provisions of this contract as schedule, Party B shall assume no liability. In the event of force majeure, Party B shall notify Party A immediately and shall within two weeks, send, via air mail, a government issued certificate to Party A confirming said force majeure. 10.2 When the force majeure vanishes, both parties shall negotiate whether to continue executing the contract. 17 CHAPTER XI - ARBITRATION 11.1 In the event there arises any dispute during the execution of this agreement or over this agreement and when both sides fail to settle the dispute by friendly negotiation, said dispute shall be brought for arbitration. The dispute shall be heard by the China International Economic and Foreign Trade Arbitration Committee, in Beijing, according to the procedures set by said committee. 11.2 The decision of the Arbitration Committee shall be final and shall have binding effect upon both parties. Arbitration fee shall be paid by the losing party. 11.3 During the period of arbitration, both parties shall continue to execute other non-disputed terms of the contract. CHAPTER XII - GOVERNING LAWS AND VALIDATY 12.1 When executing this agreement, both Parties A and B shall comply with the laws and rules and regulations of the People's Republic of China. 12.2 This agreement shall become effective upon the date signed by both Parties A and B. 12.3 After this agreement becomes effective, both Parties A and B shall, if needed, discuss revisions to accommodate the practicalities of executing this agreement. These revisions shall become effective when signed by both parties. Neither party can amend the agreement on its own. CHAPTER XIII - DOCUMENTS 13.1 This agreement shall be written in Chinese. 13.2 This agreement contains four original copies, with each party holding two copies, and six duplicates, with each party holding three copies. All copies bear equal validity. PARTY A: Shandong Lu Neng Huang Tai Industial Group (on behalf of the Shanghai Lu Neng 18 China Card Smartcard Company Limited [tentative name]) Company Representative: (signature) PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: (signature) DATE SIGNED: September 6, 2001, at Pu Dong, Shanghai 19 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. ATTACHMENT 1: List of Equipment and Technical Specifications This agreement shall include the following production equipment and laboratory instruments:
- ------------------------------------------------------------------------------------------------------- Serial Quantity Name Model Price No. of Equipment No. (in US$10,000) - ------------------------------------------------------------------------------------------------------- Production 1 1 Hole Punch Machine CICC-001 [ ] Equipment ------------------------------------------------------------------------------------------ 2 3 Pick & Place With Module CICC-002 [ ] Testing ------------------------------------------------------------------------------------------ 3 2 Ultrasonic Wire Implanting CICC-003 [ ] (4) ------------------------------------------------------------------------------------------ 4 3 Welding With Testing Reader CICC-004 [ ] ------------------------------------------------------------------------------------------ 5 2 Bonding Re-work Station CICC-005 [ ] ------------------------------------------------------------------------------------------ 6 2 Tacker CICC-006 [ ] ------------------------------------------------------------------------------------------ 7 3 Lamination System CICC-007 [ ] ------------------------------------------------------------------------------------------ 8 3 Cooling System CICC-008 [ ] ------------------------------------------------------------------------------------------ 9 1 Card Punching Machine CICC-009 [ ] - ------------------------------------------------------------------------------------------------------- Laboratory 10 1 Flexion & Torsion Test System OASYS [ ] Instruments ------------------------------------------------------------------------------------------ 11 1 Pull Tester MP5/230 [ ] ------------------------------------------------------------------------------------------ 12 1 Frequency Analyzer DEME-3010, [ ] DEWE-3010 - ------------------------------------------------------------------------------------------------------- 13 2 Microscope System [ ] - ------------------------------------------------------------------------------------------------------- Parts and others accompanied with the equipment (see list for details) [ ] - ------------------------------------------------------------------------------------------------------- Backup parts for one year (to be delivered in March-April 2003) [ ] - ------------------------------------------------------------------------------------------------------- TOTAL [ ] - -------------------------------------------------------------------------------------------------------
22 HOLE PUNCH MACHINE FUNCTION: Working with varied moulds, able to hole punch the [ ] PC, PVC and PETG films into varied location holes and module holes based on varied specifications, to be used for follow-up process. With automatic protection device that will automatically stop during exceptional cases. SYSTEM SET: Three high precision moulds (to hole punch [ ] materials and to position the hole location), safety protection device, hole punch time controller. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] PRODUCTION CAPACITY: [ ] cards/hour SYSTEM PARAMETERS: - -------------------------------------------------------------------------------------- Hole punch pressure [ ] - -------------------------------------------------------------------------------------- Punching process [ ] - -------------------------------------------------------------------------------------- Punching Mould Foundation [ ] - -------------------------------------------------------------------------------------- Effective punching and area [ ] - -------------------------------------------------------------------------------------- Punching precision [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Electrical Machinery [ ] - -------------------------------------------------------------------------------------- Hydraulic Pressure Oil Capacity [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
23 PICK AND PLACE FUNCTION: Pick and place the moulds into corresponding holes of the PC, PVC, PET and PETG films. The placement position can be adjusted and fixed by adhesives. With automatic protection device that can automatically turn off the machine in exceptional cases. SYSTEM SET: Chip punched moulds, chip recognition sensor, high precision gluing system, Adept robot, P4 computer, LCD Monitor, interchangable drawer, safety protection device. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] CONSUMPTION MATERIALS: Adhesives, [ ] cards/tube PRODUCTION CAPACITY: [ ] cards/hour/set (based on three rows of the module tapes) SYSTEM PARAMETERS: - -------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------- Weight [ ] - -------------------------------------------------------------------------------------- Placement Area [ ] - -------------------------------------------------------------------------------------- Placement Precision [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
24 WIRE IMPLANTING MACHINE FUNCTIONS: Said machine uses the [ ] directional movement [ ] ultrasound wire implanting head to implant the enamel-insulated wire accurately into the PC, PVC, PET and PETG and coil into a wire coil. The position, size, shape, and the circles of coil can be set up by the computer. With automatic protection device that can automatically turn off the machine in exceptional cases. SYSTEM SET: Second generation ultrasound wire implant head (with four implanting heads in each station), Adept robot, Pentium 4 computer, LCD monitor, interchangable drawer, safety protection device. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] PRODUCTION CAPACITY: [ ] cards/hour/set. CONSUMPTION MATERIALS: Ultrasound head: [ ] cards/head Wire: [ ] cards/spool SYSTEM PARAEMTERS: - -------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------- Weight [ ] - -------------------------------------------------------------------------------------- Implanting Area [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
25 WELDING MACHINE FUNCTIONS: Using the hot pressure welding method to weld the coil end enamel- insulated wire with the module chips. Outputs of the welding machine include constant power, constant electric current and constant voltage, with automatic compensation adjustment function. Adept robot can perform welding in any set position within the operation area. Welding strength normally should exceed 100 grams, and minimum should be no less than [ ]. With automatic function of polishing the chips. With automatic protection device. Able to turn off the machine automatically in exceptional cases. SYSTEM SET: High precision electric current generator, Adept robot and its Vision System, hydraulic (illegible) system, P4 Computer, LCD Monitor, interchangable drawer, safety protection device. MATERIAL SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] CONSUMPTION MATERIALS: Thermode: [ ] cards/piece PRODUCTION CAPACITY: [ ] cards/hour/station SYSTEM PARAMETERS: - -------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------- Weight [ ] - -------------------------------------------------------------------------------------- Welding Area [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
26 BONDING RE-WORK STATION FUNCTIONS: Reworking the problematic pieces from the welding machine. SYSTEM SET: High precision current generator. SYSTEM PARAMETERS: - -------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------- Weight [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
27 TACKER FUNCTIONS: Using eight hot pressure heads hot pressing edges of materials of varied thickness in layers together so that they will not be intricate against each other. SYSTEM SET: Eight automatic temperature adjustment hot pressure heads, humidity controller, and time controller. MATERIALS SPECIFICATIONS: Length x Width: [ ] Thickness of Material: [ ] PRODUCTION CAPACITY: [ ] cards/hour/station SYSTEM PARAMETERS: - -------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------- Tacking Area [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
28 LAMINATING MACHINE FUNCTION: Able to laminate all card producing materials such as PC, PVC, PET and PETG. The temperature can be adjusted by the PLC controller, which can control different segments in different time. With zero pressure control system. The minimum pressure is [ ]. With automatic protection device that can turn off the machine in exceptional cases. SYSTEM SET: Cooling system, three separating rooms/stations, power heater, PLC control and display system, safety protection, over pressure and low pressure safety protection devices. With six laminating boxes, 12 laminating pads, and 66 laminating boards. MATERIAL SPECIFICATIONS: Length x Width: [ ] Scope of Thickness: [ ] PRODUCTION CAPAICTY: [ ] cards/hour/station. SYSTEM PARAMETERS: - ------------------------------------------------------------------------------------------ Width [ ] - ------------------------------------------------------------------------------------------ Thickness [ ] - ------------------------------------------------------------------------------------------ Height [ ] - ------------------------------------------------------------------------------------------ Weight [ ] - ------------------------------------------------------------------------------------------ Size of Laminating Board [ ] - ------------------------------------------------------------------------------------------ Laminating Area [ ] - ------------------------------------------------------------------------------------------ Power Supply [ ] - ------------------------------------------------------------------------------------------ Maximum Electric Current [ ] - ------------------------------------------------------------------------------------------ Power [ ] - ------------------------------------------------------------------------------------------ Frequency [ ] - ------------------------------------------------------------------------------------------ Pressure [ ] - ------------------------------------------------------------------------------------------ Pressure Precision [ ] - ------------------------------------------------------------------------------------------ Maximum Temperature [ ] - ------------------------------------------------------------------------------------------ Temperature Control Precision [ ] - ------------------------------------------------------------------------------------------ Heater Board Thickness [ ] - ------------------------------------------------------------------------------------------ Heater Board Separation Distance1 [ ] - ------------------------------------------------------------------------------------------ Stabilizing Board Surface Temperature Distribution [ ] - ------------------------------------------------------------------------------------------ Condensed Air Pressure [ ] - ------------------------------------------------------------------------------------------ Condensed Air Flow [ ] - ------------------------------------------------------------------------------------------ Condensed Air Conditions [ ] - ------------------------------------------------------------------------------------------
29 COOLING SYSTEM FUNCTION: Working with the laminating machine to form a closed cooling system for the provision of cooling effect. SYSTEM SET: Low water level alarm device, constant temperature control pump. SYSTEM PARAMETERS: - -------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------- Weight [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Water Flow Volume [ ] - -------------------------------------------------------------------------------------- Buffer Tank Volume [ ] - -------------------------------------------------------------------------------------- Cooling Water Temperature [ ] - --------------------------------------------------------------------------------------
30 CARD CUTTING MACHINE FUNCTION: Automatically completing the location, cutting long pieces and punching cards. Based on different needs, able to punch white cards or printed cards. With the ability to correct deviation, placement error within the scope. With automatic protection device that will turn off the machine in exceptional cases. SYSTEM SET: Automatic feeding system, touch screen, cutter knife, single card punching mould, safety protection device. MATERIAL SPECIFICATIONS: Standard Board Size: [ ] Thickness of Material: [ ] PRODUCTION CAPACITY: [ ] cards/hour/station SYSTEM PARAEMTERS - -------------------------------------------------------------------------------------- Width [ ] - -------------------------------------------------------------------------------------- Thickness [ ] - -------------------------------------------------------------------------------------- Height [ ] - -------------------------------------------------------------------------------------- Weight [ ] - -------------------------------------------------------------------------------------- Power Supply [ ] - -------------------------------------------------------------------------------------- Maximum Electric Current [ ] - -------------------------------------------------------------------------------------- Power [ ] - -------------------------------------------------------------------------------------- Frequency [ ] - -------------------------------------------------------------------------------------- Hole Punch Area [ ] - -------------------------------------------------------------------------------------- Card Punching Location Precision [ ] - -------------------------------------------------------------------------------------- Condensed Air Pressure [ ] - -------------------------------------------------------------------------------------- Condensed Air Flow [ ] - -------------------------------------------------------------------------------------- Condensed Air Conditions [ ] - --------------------------------------------------------------------------------------
31 ATTACHMENT 2: LIST OF PARTS CARD PUNCHING MACHINE
- --------------------------------------------------------------------------------------------------------- Price -------------------- NO. QTY. Name Unit Total - --------------------------------------------------------------------------------------------------------- 1 1 [ ] - --------------------------------------------------------------------------------------------------------- 2 1 [ ] - --------------------------------------------------------------------------------------------------------- 3 1 [ ] - --------------------------------------------------------------------------------------------------------- 4 1 [ ] - --------------------------------------------------------------------------------------------------------- 5 1 [ ] - --------------------------------------------------------------------------------------------------------- 6 1 [ ] - --------------------------------------------------------------------------------------------------------- 7 1 [ ] - --------------------------------------------------------------------------------------------------------- 8 1 [ ] - --------------------------------------------------------------------------------------------------------- 9 1 [ ] - --------------------------------------------------------------------------------------------------------- 10 2 [ ] - --------------------------------------------------------------------------------------------------------- 11 1 [ ] - ---------------------------------------------------------------------------------------------------------
32 MODULE PLACEMENT MACHINE
- --------------------------------------------------------------------------------------------------------- Price -------------------- NO. QTY. Name Unit Total - --------------------------------------------------------------------------------------------------------- 1 24 [ ] - --------------------------------------------------------------------------------------------------------- 2 30 [ ] - --------------------------------------------------------------------------------------------------------- 3 3 [ ] - --------------------------------------------------------------------------------------------------------- 4 3 [ ] - --------------------------------------------------------------------------------------------------------- 5 18 [ ] - --------------------------------------------------------------------------------------------------------- 6 3 [ ] - --------------------------------------------------------------------------------------------------------- 7 3 [ ] - --------------------------------------------------------------------------------------------------------- 8 3 [ ] - --------------------------------------------------------------------------------------------------------- 9 12 [ ] - --------------------------------------------------------------------------------------------------------- 10 3 [ ] - --------------------------------------------------------------------------------------------------------- 11 3 [ ] - --------------------------------------------------------------------------------------------------------- 12 3 [ ] - --------------------------------------------------------------------------------------------------------- 13 3 [ ] - --------------------------------------------------------------------------------------------------------- 14 3 [ ] - --------------------------------------------------------------------------------------------------------- 15 9 [ ] - --------------------------------------------------------------------------------------------------------- 16 3 [ ] - --------------------------------------------------------------------------------------------------------- 17 9 [ ] - --------------------------------------------------------------------------------------------------------- 18 3 [ ] - --------------------------------------------------------------------------------------------------------- 19 3 [ ] - --------------------------------------------------------------------------------------------------------- 20 3 [ ] - --------------------------------------------------------------------------------------------------------- 21 3 [ ] - --------------------------------------------------------------------------------------------------------- 22 3 [ ] - --------------------------------------------------------------------------------------------------------- 23 3 [ ] - --------------------------------------------------------------------------------------------------------- 24 3 [ ] - --------------------------------------------------------------------------------------------------------- 25 3 [ ] - --------------------------------------------------------------------------------------------------------- 26 3 [ ] - --------------------------------------------------------------------------------------------------------- 27 3 [ ] - --------------------------------------------------------------------------------------------------------- 28 60 [ ] - ---------------------------------------------------------------------------------------------------------
33 WIRE IMPLANTING MACHINE
- --------------------------------------------------------------------------------------------------------- Price -------------------- NO. QTY. Name Unit Total - --------------------------------------------------------------------------------------------------------- 1 12 [ ] - --------------------------------------------------------------------------------------------------------- 2 20 [ ] - --------------------------------------------------------------------------------------------------------- 3 2 [ ] - --------------------------------------------------------------------------------------------------------- 4 2 [ ] - --------------------------------------------------------------------------------------------------------- 5 2 [ ] - --------------------------------------------------------------------------------------------------------- 6 2 [ ] - --------------------------------------------------------------------------------------------------------- 7 2 [ ] - --------------------------------------------------------------------------------------------------------- 8 2 [ ] - --------------------------------------------------------------------------------------------------------- 9 6 [ ] - --------------------------------------------------------------------------------------------------------- 10 2 [ ] - --------------------------------------------------------------------------------------------------------- 11 2 [ ] - --------------------------------------------------------------------------------------------------------- 12 80 [ ] - --------------------------------------------------------------------------------------------------------- 13 36 [ ] - --------------------------------------------------------------------------------------------------------- 14 2 [ ] - --------------------------------------------------------------------------------------------------------- 15 2 [ ] - --------------------------------------------------------------------------------------------------------- 16 4 [ ] - --------------------------------------------------------------------------------------------------------- 17 2 [ ] - --------------------------------------------------------------------------------------------------------- 18 2 [ ] - --------------------------------------------------------------------------------------------------------- 19 2 [ ] - --------------------------------------------------------------------------------------------------------- 20 2 [ ] - --------------------------------------------------------------------------------------------------------- 21 16 [ ] - --------------------------------------------------------------------------------------------------------- 22 5 [ ] - ---------------------------------------------------------------------------------------------------------
34 WELDING AND REW0RKING MACHINE
- --------------------------------------------------------------------------------------------------------- Price -------------------- NO. QTY. Name Unit Total - --------------------------------------------------------------------------------------------------------- 1 24 [ ] - --------------------------------------------------------------------------------------------------------- 2 30 [ ] - --------------------------------------------------------------------------------------------------------- 3 3 [ ] - --------------------------------------------------------------------------------------------------------- 4 3 [ ] - --------------------------------------------------------------------------------------------------------- 5 18 [ ] - --------------------------------------------------------------------------------------------------------- 6 3 [ ] - --------------------------------------------------------------------------------------------------------- 7 3 [ ] - --------------------------------------------------------------------------------------------------------- 8 3 [ ] - --------------------------------------------------------------------------------------------------------- 9 12 [ ] - --------------------------------------------------------------------------------------------------------- 10 3 [ ] - --------------------------------------------------------------------------------------------------------- 11 3 [ ] - --------------------------------------------------------------------------------------------------------- 12 3 [ ] - --------------------------------------------------------------------------------------------------------- 13 18 [ ] - --------------------------------------------------------------------------------------------------------- 14 9 [ ] - --------------------------------------------------------------------------------------------------------- 15 3 [ ] - --------------------------------------------------------------------------------------------------------- 16 3 [ ] - --------------------------------------------------------------------------------------------------------- 17 180 [ ] - --------------------------------------------------------------------------------------------------------- 18 18 [ ] - --------------------------------------------------------------------------------------------------------- 19 3 [ ] - --------------------------------------------------------------------------------------------------------- 20 3 [ ] - --------------------------------------------------------------------------------------------------------- 21 300 [ ] - ---------------------------------------------------------------------------------------------------------
35 LAMINATING MACHINE AND COOLING SYSTEM
- --------------------------------------------------------------------------------------------------------- Price -------------------- NO. QTY. Name Unit Total - --------------------------------------------------------------------------------------------------------- 1 99+ [ ] 3*66 - --------------------------------------------------------------------------------------------------------- 2 18+ [ ] 3*12 - --------------------------------------------------------------------------------------------------------- 3 9+ [ ] 3*6 - --------------------------------------------------------------------------------------------------------- 4 3 [ ] - --------------------------------------------------------------------------------------------------------- 5 45 [ ] - --------------------------------------------------------------------------------------------------------- 6 27 [ ] - --------------------------------------------------------------------------------------------------------- 7 3 [ ] - --------------------------------------------------------------------------------------------------------- 8 3 [ ] - --------------------------------------------------------------------------------------------------------- 9 3 [ ] - --------------------------------------------------------------------------------------------------------- 10 9 [ ] - --------------------------------------------------------------------------------------------------------- 11 15 [ ] - --------------------------------------------------------------------------------------------------------- 12 30 [ ] - --------------------------------------------------------------------------------------------------------- 13 30 [ ] - --------------------------------------------------------------------------------------------------------- 14 15 [ ] - --------------------------------------------------------------------------------------------------------- 15 3 [ ] - --------------------------------------------------------------------------------------------------------- 16 3 [ ] - --------------------------------------------------------------------------------------------------------- 17 6 [ ] - --------------------------------------------------------------------------------------------------------- 18 3 [ ] - --------------------------------------------------------------------------------------------------------- 19 12 [ ] - --------------------------------------------------------------------------------------------------------- 20 3 [ ] - --------------------------------------------------------------------------------------------------------- 21 30 m [ ] - --------------------------------------------------------------------------------------------------------- 22 3 [ ] - --------------------------------------------------------------------------------------------------------- 23 3 [ ] - --------------------------------------------------------------------------------------------------------- 24 1500 kg [ ] - ---------------------------------------------------------------------------------------------------------
36 CARD PUNCHING MACHINE
- --------------------------------------------------------------------------------------------------------- Price -------------------- NO. QTY. Name Unit Total - --------------------------------------------------------------------------------------------------------- 1 1 [ ] - --------------------------------------------------------------------------------------------------------- 2 1 [ ] - --------------------------------------------------------------------------------------------------------- 3 1 [ ] - --------------------------------------------------------------------------------------------------------- 4 1 [ ] - --------------------------------------------------------------------------------------------------------- 5 3 [ ] - --------------------------------------------------------------------------------------------------------- 6 1 set [ ] - --------------------------------------------------------------------------------------------------------- 7 1 set [ ] - --------------------------------------------------------------------------------------------------------- 8 5 m [ ] - --------------------------------------------------------------------------------------------------------- 9 1 set [ ] - --------------------------------------------------------------------------------------------------------- 10 1 set [ ] - --------------------------------------------------------------------------------------------------------- 11 1 set [ ] - --------------------------------------------------------------------------------------------------------- 12 1 [ ] - --------------------------------------------------------------------------------------------------------- 13 1 [ ] - --------------------------------------------------------------------------------------------------------- 14 1 [ ] - --------------------------------------------------------------------------------------------------------- 15 1 [ ] - --------------------------------------------------------------------------------------------------------- 16 1 set [ ] - ---------------------------------------------------------------------------------------------------------
ATTACHMENT 3: TECHNICAL DOCUMENTATION LIST 1. Equipment Approval Certificate and Quality Certificate 2. Approval Certificate of All Materials 3. Operation Manuals of Each Equipment (including laboratory instruments) (including such contents as structure, performance, installation and test run, operation, and repair and maintenance) 4. Technical Layout Information and Power Supply Information (including equipment base installation diagram) 5. Assembly Illustrations of Equipment 6. Theoretical Illustration and Wiring Illustration of the Electric System 7. Theoretical Illustration of Gas Control 8. Illustrations of Wearing Parts of the Equipment (including processing illustrations 37 of all moulds) 9. Packing Slips of Equipment 10. List of Equipment Parts (including name of supplier and price quote) 11. List of Tools 12. Backup copies of software accompanied the equipment 13. Backup copies of PLC programs 38 ATTACHMENT 4: LIST OF MAINTENANCE TOOLS
- --------------------------------------------------------------------------------------------------------- Price -------------------- NO. QTY. Name Unit Total - --------------------------------------------------------------------------------------------------------- 1. 1 [ ] - --------------------------------------------------------------------------------------------------------- 2. 1 set [ ] - --------------------------------------------------------------------------------------------------------- 3. 1 [ ] - --------------------------------------------------------------------------------------------------------- 4. 1 set [ ] - --------------------------------------------------------------------------------------------------------- 5. 1 [ ] - --------------------------------------------------------------------------------------------------------- 6. 1 [ ] - --------------------------------------------------------------------------------------------------------- 7. 1 set [ ] - --------------------------------------------------------------------------------------------------------- 8. 1 set [ ] - --------------------------------------------------------------------------------------------------------- 9. 1 set [ ] - --------------------------------------------------------------------------------------------------------- 10. 1 [ ] - --------------------------------------------------------------------------------------------------------- 11. 1 set [ ] - --------------------------------------------------------------------------------------------------------- 12. 1 [ ] - --------------------------------------------------------------------------------------------------------- 13. 1 [ ] - --------------------------------------------------------------------------------------------------------- 14. 6 [ ] - --------------------------------------------------------------------------------------------------------- 15. 1 set [ ] - --------------------------------------------------------------------------------------------------------- 16. 1 [ ] - --------------------------------------------------------------------------------------------------------- 17. 39 [ ] - --------------------------------------------------------------------------------------------------------- 18. 2 [ ] - --------------------------------------------------------------------------------------------------------- 19. 10 [ ] - --------------------------------------------------------------------------------------------------------- 20. 7 [ ] - --------------------------------------------------------------------------------------------------------- 21. 5 [ ] - --------------------------------------------------------------------------------------------------------- 22. 1 [ ] - --------------------------------------------------------------------------------------------------------- 23. 20 [ ] - --------------------------------------------------------------------------------------------------------- 24. 6 [ ] - --------------------------------------------------------------------------------------------------------- 25. 1 [ ] - --------------------------------------------------------------------------------------------------------- 26. 1 [ ] - --------------------------------------------------------------------------------------------------------- 27. 3 [ ] - --------------------------------------------------------------------------------------------------------- 28. 3 [ ] - --------------------------------------------------------------------------------------------------------- 29. 3 [ ] - --------------------------------------------------------------------------------------------------------- 30. 3 [ ] - --------------------------------------------------------------------------------------------------------- 31. 1 [ ] - --------------------------------------------------------------------------------------------------------- 32. 1 [ ] - --------------------------------------------------------------------------------------------------------- 33. 6 [ ] - --------------------------------------------------------------------------------------------------------- 34. 1 [ ] - --------------------------------------------------------------------------------------------------------- 35. 2 [ ] - --------------------------------------------------------------------------------------------------------- 36. 1 [ ] - --------------------------------------------------------------------------------------------------------- 37. 2 [ ] - --------------------------------------------------------------------------------------------------------- 38. 1 [ ] - --------------------------------------------------------------------------------------------------------- 39. 1 [ ] - --------------------------------------------------------------------------------------------------------- 40. 1 [ ] - --------------------------------------------------------------------------------------------------------- 41. 1 [ ] - ---------------------------------------------------------------------------------------------------------
39 SUPPLEMENTARY AGREEMENT ON PROVISION OF SPARE PARTS FOR THE PRODUCTION LINE OF SMART CARDS An agreement was signed by the China Card Smart Card (Shanghai) Company Limited and the American Aviation and Technology Inc. in April 2000 for the provision of an equipment for the production of smart cards. Production has begun since December 2000. To meet the production needs and based on the utilization of the production line, after negotiations by both parties, it was agreed that the easily worn parts in the following table shall be provided:
- --------------------------------------------------------------------------------------------------------- No. Qty. Name Remarks - --------------------------------------------------------------------------------------------------------- Pick and Place 1. 1 [ ] - --------------------------------------------------------------------------------------------------------- 2. 2 [ ] - --------------------------------------------------------------------------------------------------------- 3. 2 [ ] - --------------------------------------------------------------------------------------------------------- 4. 2 [ ] - --------------------------------------------------------------------------------------------------------- 5. 2 [ ] - --------------------------------------------------------------------------------------------------------- Embedder 6. 20 [ ] - --------------------------------------------------------------------------------------------------------- 7. 4 [ ] - --------------------------------------------------------------------------------------------------------- 8. 2 [ ] - --------------------------------------------------------------------------------------------------------- 9. 4 [ ] - --------------------------------------------------------------------------------------------------------- 10. 4 [ ] - --------------------------------------------------------------------------------------------------------- 11. 4 [ ] - --------------------------------------------------------------------------------------------------------- 12. 4 [ ] - --------------------------------------------------------------------------------------------------------- 13. 4 [ ] - --------------------------------------------------------------------------------------------------------- 14. 4 [ ] - --------------------------------------------------------------------------------------------------------- 15. 4 [ ] - --------------------------------------------------------------------------------------------------------- Welder 16. 2 [ ] - --------------------------------------------------------------------------------------------------------- 17. 18 [ ] - --------------------------------------------------------------------------------------------------------- 18. 2 [ ] - --------------------------------------------------------------------------------------------------------- 19. 2 [ ] - --------------------------------------------------------------------------------------------------------- 20. 50 [ ] - --------------------------------------------------------------------------------------------------------- 21. 2 [ ] - --------------------------------------------------------------------------------------------------------- Welder 22. 15 [ ] - --------------------------------------------------------------------------------------------------------- 23. 2 [ ] - --------------------------------------------------------------------------------------------------------- 24. 2 [ ] - --------------------------------------------------------------------------------------------------------- 25. 6 [ ] - --------------------------------------------------------------------------------------------------------- Laminator and 26. 6 [ ] Colling System - --------------------------------------------------------------------------------------------------------- 27. 3 [ ] - --------------------------------------------------------------------------------------------------------- 28. 2 [ ] - --------------------------------------------------------------------------------------------------------- 29. 2 [ ] - --------------------------------------------------------------------------------------------------------- 30. 2 [ ] - --------------------------------------------------------------------------------------------------------- 31. 2 [ ] - --------------------------------------------------------------------------------------------------------- Checker 32. 18 [ ] - ---------------------------------------------------------------------------------------------------------
40 - --------------------------------------------------------------------------------------------------------- 33. 8 [ ] - --------------------------------------------------------------------------------------------------------- Hole Puncher 34. 1 [ ] - --------------------------------------------------------------------------------------------------------- 35. 10m [ ] - --------------------------------------------------------------------------------------------------------- General Spare 36. 8 [ ] Parts - --------------------------------------------------------------------------------------------------------- 37. 8 [ ] - --------------------------------------------------------------------------------------------------------- 38. 30 [ ] - --------------------------------------------------------------------------------------------------------- 39. 8 [ ] - --------------------------------------------------------------------------------------------------------- 40. 24 [ ] - ---------------------------------------------------------------------------------------------------------
Party A: China Card Smart Card (Shanghai) Company Limited Company Representative: (signature) Party B: American Pacific Aviation & Technology Inc. Company Representative: (signature) Date Signed: September 6, 2001, at Pu Dong, Shanghai 41 EX-10 33 ex10-37.txt EXHIBIT 10.37 EXHIBIT 10.37 TECHNICAL SERVICES AND LICENSING AGREEMENT 2001 Technical Services and Licensing Agreement This agreement is made by the Shandong Lu Neng Huang Tai Industrial Group (hereinafter referred as Party A) and the American Pacific Aviation & Technology Corporation (hereinafter referred as Party B), based on the principle of mutual benefits and through friendly negotiations, and in accordance to the Equipment Purchase Agreement, for the provision of patent technology and technical services) by Party B to Party A for the production of contactless smart cards. 1. Party B shall provide the full set of technology (including technical process, operation rules, maintenance rules, inspecting and testing rules, management system and all drawings, information, software or patent technology) for the production of contactless smart cards and shall guarantee that the production equipment and products produced by Party A meet the requirements of the "Agreement for Purchase of Equipment". 2. Without the written permission of Party B, Party A shall not give the patent technology to any third party or shall not allow any third party to duplicate the equipment of Party B. 3. Party B shall be liable to any claim brought forth by any third party against Party A for the legitimate use of the patent technology. 4. Party B shall be responsible for providing all technical services of installation, trouble shooting, test running, receipt and acceptance, and shall solve all technical problems before receipt and acceptance to guarantee that the entire equipment set will produce 2500 pieces/hour. Party A shall provide lodging and food for technical experts of Party B and shall assign special staff to coordinate the project to ensure that installation, trouble shooting and test running go through smoothly. The period for installation and test running the equipment shall be two weeks. Expense of experts of Party B shall be assumed by Party B. Meal inside the factory and transportation within the city shall be provided by Party A. 5. Party B shall train the staff of Party A for a period of two weeks. Party A shall select qualified staff to receive training. In the event that members from Party A fail to master the production technology during the training period, said period 20 can be extended to three or four weeks, the cost of such extension shall be assumed by Party A. 6. Party B shall provide two technical staff to help Party A produce and provide technical support for six months when actual production begins. Expense of which shall be assumed by Party B. 7. Any expense involved in this agreement shall be included in the cost of purchasing the equipment. This agreement shall become effective at the same time with the "Equipment Purchase Agreement" and its supplementaries. 8. Default Both parties shall execute the provisions of the agreement sincerely. In the event any party fails to execute any of the above provisions that causes the economic loss of other party, the defaulting party shall compensate the loss. Claims and penalties shall be executed according to Chapter IX of the "Agreement for Purchase of Equipment". 9. Settlement of Dispute Any dispute over the agreement by Parties A and B shall be settled through friendly negotiation. In the event negotiation fails to settle the dispute, it shall be arbitrated by the China Economic and Foreign Trade Arbitration Committee in Beijing. Fee for arbitration shall be paid by the losing party. 10. This agreement shall contain four original copies, with each party holding two copies; and six copies of duplicates, with each party holding three copies. All copies bear equal validity. PARTY A: Shandong Lu Neng Huang Tai Industial Group (on behalf of the Shanghai Lu Neng China Card Smartcard Company Limited [tentative name]) Company Representative: (signature) PARTY B: The American Pacific Aviation & Technology Corporation Company Representative: (signature) DATE SIGNED: September 6, 2001, at Pu Dong, Shanghai 21 STATEMENT OF DIFFERENCES ------------------------- The degree symbol shall be expressed as........................... [d] The plus minus sign shall be expressed as......................... +- EX-10 34 ex10-38.txt EXHIBIT 10.38 Exhibit 10.38 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. AGREEMENT OF TRANSFER OF SHARES - 01 Party A: Shandong Lu Neng Huang Tai Industrial Group Company Limited Address: 172, Industry Road North, Jinan, Shandong Legal Representative: (signature) Nationality: Chinese Title: General Manager Party B: American Pacific Aviation and Technology Inc. Address: One Sansome Street, 19th Floor Legal Representative: (signature) Nationality: US Title: President The China Card Smart Card (Shanghai) Company Limited is a joint venture established and registered on March 21, 2000, by the Shandong Huang Tai Industrial Group Corporation (approved by local Industry and Commerce Administration and other agencies to rename as Shandong Lu Neng Huang Tai Industrial Group Company Limited on August 31, 2001). The registered capital of the joint venture shall be RMB$[ ], of which Party A shall contribute in form of cash, in the amount of RMB$[ ], and Party B shall contribute in form of equipment, equivalent to the amount of RMB$[ ]. After review by the Board of Directors of the China Card Smart Card (Shanghai) Company, it was agreed that the American Pacific Aviation & Technology Inc. transfer 50% of its shares of the China Card Smart Card (Shanghai) Company, in the amount of RMB$[ ], to Shandong Lu Neng Huang Tai Industrial Group Company Limited, Shandong Lu Neng Huang Tai Industrial Group Material Trading Company, and the United Power (USA), Inc. Parties A and B agree to the following: 1. Party A shall pay RMB$[ ] (if payment to be made in US currency, the foreign exchange rate of which shall be 8.27) to buy 12% of the shares of the China Card Company owned by Party B. After acquisition, the total shares owned by Party A shall be 62% of the registered capital of the company. 2. Payment method of transfer of shares: Method 1, Party A shall pay to the China Card Company, which will then pay Party B; Method 2, Party A shall pay the amount directly to Party B. 3 3. Payment Deadline: Within two months after the share transfer agreement become valid. 4. Process of share transfer shall be handled by the China Card Company. 5. After transfer of shares, Party B shall hold no interest in the joint venture, and shall not be liable to any liabilities and indebtedness of the joint venture. 6. The making, validity, interpretation, execution and settlement of dispute of this agreement shall be governed by the laws of the People's Republic of China. 7. Any dispute over the share transfer agreement shall be settled by friendly negotiations. In the event negotiations fail to solve the dispute, it shall be brought to arbitration by the China International Economic and Trade Arbitration Committee, based on the rules and regulations of said committee. The decision of the Committee shall be final and shall have binding effect on all parties. 8. This agreement shall become effective when signed by all parties, beginning the date when it is approved by pertinent government agency. 9. This agreement shall cease effective when the process of share transfer is completed. 10. Original shareholders agree to the above terms and conditions of share transfer. Signatures of Original Shareholders: (signatures) Date Signed: September 6, 2001 4 EX-10 35 ex10-39.txt EXHIBIT 10.39 Exhibit 10.39 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. AGREEMENT OF TRANSFER OF SHARES - 2 Party A: Shandong Lu Neng Huang Tai Industrial Group Company Limited Address: 172, Industry Road North, Jinan, Shandong Legal Representative: (signature) Nationality: Chinese Title: General Manager Party B: American Pacific Aviation and Technology Inc. Address: One Sansome Street, 19th Floor Legal Representative: (signature) Nationality: US Title: President The China Card Smart Card (Shanghai) Company Limited is a joint venture established and registered on March 21, 2000, by the Shandong Huang Tai Industrial Group Corporation (approved by local Industry and Commerce Administration and other agencies to rename as Shandong Lu Neng Huang Tai Industrial Group Company Limited on August 31, 2001). The registered capital of the joint venture shall be RMB$[ ], of which Party A shall contribute in form of cash, in the amount of RMB$[ ], and Party B shall contribute in form of equipment, equivalent to the amount of RMB$[ ]. After review by the Board of Directors of the China Card Smart Card (Shanghai) Company, it was agreed that the American Pacific Aviation & Technology Inc. transfer 50% of its shares of the China Card Smart Card (Shanghai) Company, in the amount of RMB$[ ], to Shandong Lu Neng Huang Tai Industrial Group Company Limited, Shandong Lu Neng Huang Tai Industrial Group Material Trading Company, and the United Power (USA), Inc. Parties A and B agree to the following: 1. Party B shall sell 13% of its shares of the China Card Smart Card (Shanghai) Company Limited to Party A in the amount of RMB$[ ] (if payment to be made in US currency, the foreign exchange rate of which shall be 8.27). Party A shall, based on the ratio of contribution to funding, entitle corresponding rights and duties. 2. Payment method of transfer of shares: Method 1, Party A shall pay to the China Card Company, which will then pay Party B; Method 2, Party A shall pay the amount directly to Party B. 5 3. Payment Deadline: Within two months after the share transfer agreement become valid. 4. Process of share transfer shall be handled by the China Card Company. 5. After transfer of shares, Party B shall hold no interest in the joint venture, and shall not be liable to any liabilities and indebtedness of the joint venture. 6. The making, validity, interpretation, execution and settlement of dispute of this agreement shall be governed by the laws of the People's Republic of China. 7. Any dispute over the share transfer agreement shall be settled by friendly negotiations. In the event negotiations fail to solve the dispute, it shall be brought to arbitration by the China International Economic and Trade Arbitration Committee, based on the rules and regulations of said committee. The decision of the Committee shall be final and shall have binding effect on all parties. 8. This agreement shall become effective when signed by all parties, beginning the date when it is approved by pertinent government agency. 9. This agreement shall cease effective when the process of share transfer is completed. 10. Original shareholders agree to the above terms and conditions of share transfer. Signatures of Original Shareholders: (signatures) Date Signed: September 6, 2001 6 EX-10 36 ex10-40.txt EXHIBIT 10.40 Exhibit 10.40 Certain portions of this Exhibit have been omitted pursuant to a request for "Confidential Treatment" under Rule 24b-2 of the Securities and Exchange Commission. Such portions have been redacted and bracketed in the request and appear as [ ] in the text of this Exhibit. The omitted confidential information has been filed with the Securities and Exchange Commission. AGREEMENT OF TRANSFER OF SHARES - 3 Party A: United Power (USA), Inc. Address: Legal Representative: (signature) Nationality: Chinese Title: President Party B: American Pacific Aviation and Technology Inc. Address: One Sansome Street, 19th Floor Legal Representative: (signature) Nationality: US Title: President The China Card Smart Card (Shanghai) Company Limited is a joint venture established and registered on March 21, 2000, by the Shandong Huang Tai Industrial Group Corporation (approved by local Industry and Commerce Administration and other agencies to rename as Shandong Lu Neng Huang Tai Industrial Group Company Limited on August 31, 2001). The registered capital of the joint venture shall be RMB$[ ], of which Party A shall contribute in form of cash, in the amount of RMB$[ ], and Party B shall contribute in form of equipment, equivalent to the amount of RMB$[ ]. After review by the Board of Directors of the China Card Smart Card (Shanghai) Company, it was agreed that the American Pacific Aviation & Technology Inc. transfer 50% of its shares of the China Card Smart Card (Shanghai) Company, in the amount of RMB$[ ], to Shandong Lu Neng Huang Tai Industrial Group Company Limited, Shandong Lu Neng Huang Tai Industrial Group Material Trading Company, and the United Power (USA), Inc. Parties A and B agree to the following: 1. Party B shall sell 25% of its shares of the China Card Smart Card (Shanghai) Company Limited to Party A in the amount of RMB$[ ] (if payment to be made in US currency, the foreign exchange rate of which shall be 8.27). Party A shall, based on the ratio of contribution to funding, entitle corresponding rights and duties. 2. Payment method of transfer of shares: Method 1, Party A shall pay to the China Card Company, which will then pay Party B; Method 2, Party A shall pay the amount directly to Party B. 7 3. Payment Deadline: Within two months after the share transfer agreement become valid. 4. Process of share transfer shall be handled by the China Card Company. 5. After transfer of shares, Party B shall hold no interest in the joint venture, and shall not be liable to any liabilities and indebtedness of the joint venture. 6. The making, validity, interpretation, execution and settlement of dispute of this agreement shall be governed by the laws of the People's Republic of China. 7. Any dispute over the share transfer agreement shall be settled by friendly negotiations. In the event negotiations fail to solve the dispute, it shall be brought to arbitration by the China International Economic and Trade Arbitration Committee, based on the rules and regulations of said committee. The decision of the Committee shall be final and shall have binding effect on all parties. 8. This agreement shall become effective when signed by all parties, beginning the date when it is approved by pertinent government agency. 9. This agreement shall cease effective when the process of share transfer is completed. 10. Original shareholders agree to the above terms and conditions of share transfer. Signatures of Original Shareholders: (signatures) Date Signed: September 6, 2001 8 EQUIPMENT PURCHASE AGREEMENT Number:2001CHINACARD Party A: Shandong Lu Neng Huang Tai Industrial Group Limited Party B: American Pacific Aviation and Technology Company Limited Date: September 2001 9 EX-23 37 ex23-2.txt EXHIBIT 23.2 Exhibit 23.2 Consent of Independent Certified Public Accountants Board of Directors Chipcards, Inc. San Francisco, California We hereby consent to the use in the Prospectus constituting a part of Amendment 1 to this Registration Statement of our report dated February 9, 2001, except for Note 13 which is as of May 11, 2001, relating to the combined 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 November 12, 2001 EX-23 38 ex23-3.txt EXHIBIT 23.3 Exhibit 23.3 Consent Ross Mandell I hereby consent to being named in the registration statement on Form SB-2 of Chipcards, Inc. as a nominee to serve as a director upon the completion of the initial public offering of Chipcards, Inc. /s/ Ross Mandell New York, New York November 12, 2001 EX-23 39 ex23-4.txt EXHIBIT 23.4 Exhibit 23.4 Consent Scott Ziegler I hereby consent to being named in the registration statement on Form SB-2 of Chipcards, Inc. as a nominee to serve as a director upon the completion of the initial public offering of Chipcards, Inc. /s/ Scott Ziegler New York, New York November 12, 2001 EX-23 40 ex23-5.txt EXHIBIT 23.5 Exhibit 23.5 Consent Paul Amadeo I hereby consent to being named in the registration statement on Form SB-2 of Chipcards, Inc. as a nominee to serve as a director upon the completion of the initial public offering of Chipcards, Inc. /s/ Paul Amadeo San Diego, California November 12, 2001 -----END PRIVACY-ENHANCED MESSAGE-----