-----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, H5HBXYgZenynN6TyBFna7ioJEWTWg3ZS/qz/mpc8lJBdX0Cgf8ufyv0kgaffSkjC bHmDVp9caAb5gkmfAaiFLA== 0000929313-98-000007.txt : 19981029 0000929313-98-000007.hdr.sgml : 19981029 ACCESSION NUMBER: 0000929313-98-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19981028 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALCOHOL SENSORS INTERNATIONAL LTD CENTRAL INDEX KEY: 0000929313 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 113104480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26998 FILM NUMBER: 98732454 BUSINESS ADDRESS: STREET 1: 11 OVAL DR CITY: ISLANDIA STATE: NY ZIP: 11722 MAIL ADDRESS: STREET 1: 11 OVAL DR CITY: ISLANDIA STATE: NY ZIP: 11722 10-K 1 FORM 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1997 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number: 0-26998 ALCOHOL SENSORS INTERNATIONAL, LTD. (Name of small business issuer in its charter) New York 11-3104480 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11 Oval Drive, Islandia, New York 11722 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (516) 342-1515 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.001 Class A Common Stock Purchase Warrants Class B Common Stock Purchase Warrants Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's net revenues for its most recent fiscal year: $287,556 The aggregate market value of the voting stock held by non-affiliates of the small business issuer was $1,040,096 on October 23, 1998, based on the closing sale price of the Common Stock on such date of $.125, as reported by Standard & Poor's Comstock service. As of October 26, 1998, there were a total of 9,481,778 shares of the Registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE NONE Transitional Small Business Disclosure Format (check one): Yes No X PART I Introductory Comment - Forward Looking Statements. Statements contained in this Annual Report on Form 10-KSB that are not based upon historical fact are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements included in this Form 10-KSB involve known and unknown risks, uncertainties and other factors which could cause actual results, performance (financial or operating) or achievements expressed or implied by such forward looking statements not to occur or be realized. Such forward looking statements generally are based upon the best estimates by Alcohol Sensors International, Ltd. (the "Company") of future results, performance or achievement, based upon current conditions and the most recent results of operations. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "will," "expect," "believe," "estimate," "anticipate," "continue," or similar terms, variations of those terms or the negative of those terms. Potential risks and uncertainties include, among other things, such factors as the adequacy and reliability of parts and methods used in manufacturing the Company's Sens-O-Lock devices, adequacy of the Company's dealer and distribution network, the market acceptance of the Company's current ("second generation") Sens-O-Lock devices, the extent of the establishment, if any, of insurance programs providing discounts to customers installing products such as the Company's Sens-O-Lock devices, the impact of competitive products and pricing, the Company's ability to raise additional capital, the availability of funding to purchase raw materials and manufacture finished products, the success of the Company's research and development efforts in creating additional improvements to the Sens-O-Lock product line and other products for the Company, the establishment and extent of enforcement of laws with respect to the operation of motor vehicles by alcohol impaired drivers, societal views towards individuals operating motor vehicles while impaired through the consumption of alcohol and the other factors and information disclosed and discussed in "Item 1. Description of Business," "Item 6. Management's Discussion and Analysis or Plan of Operation" and in other sections of this Form 10-KSB. Readers of this Form 10-KSB should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements. Item 1. Description of Business. General The Company designs, markets and sells electronic motor vehicle after-market safety products, including a patent-pending line of breath alcohol ignition interlock devices (each, a "BAIID") under the Sens-O-Lock brand name. The Company's Sens-O-Lock BAIID equipment is designed to detect, evaluate and assist in the prevention of an alcohol impaired driver operating a vehicle. The Company also markets and sells, under the WeatherEye brand name, a line of modular products designed to automatically engage and adjust the headlights and taillights of automobiles depending upon weather and sunlight conditions. After the Company's initial sale of approximately 700 original ("first generation") Sens-O-Lock units, the Company became aware in late Spring 1996 of inconsistencies in certain integral components manufactured for the Company and other manufacturing, design and quality control problems. As a result, in the second quarter of 1996, the Company discontinued manufacturing the first generation Sens-O-Lock product, recalled the first generation Sens-O- Lock units which had been sold, temporarily ceased marketing efforts and wrote down the Company's inventory by approximately $556,000. From that time through September 1997, the Company devoted substantially all of its resources to the research and development of new technology for and design of the second generation Sens-O-Lock product line, development of new relationships with existing and other component suppliers and manufacturers, improvement of the Company's component and manufacturing quality control procedures, enhancement of the Sens-O- Lock operating software and development of the Company's network of distributors and dealers. The Company completed final parts procurement and ordered the initial production of second generation Sens-O-Lock units during September and October 1997. In late February 1998, the Company received confirmation from an independent testing laboratory that the second generation Sens-O-Lock successfully completed testing under the National Highway Traffic Safety Administration ("NHTSA") Model Specifications for Breath Alcohol Ignition Interlock Devices (the "Model Specifications") for the battery of required tests for the 37-day calibration stability challenge protocol. The Model Specifications are utilized by the various states in their individual certification processes for use in legislative and judicial programs for supervision of persons convicted of alcohol-related motor vehicle infractions, violations and crimes ("Mandatory Programs"). The various states have differing certification processes. Some states merely require compliance with the Model Specifications while other states have much higher standards and/or a complex certification procedure. Through October 19, 1998, the Sens-O-Lock has been certified in five states. The Company anticipates seeking additional state certifications of the second generation Sens-O-Lock on state-by-state basis, with priority based, among other factors, upon the location of the Company's distributors and dealers. The Company anticipates publicizing the Model Specification testing success and applicable state certifications in promoting the Sens-O-Lock devices for markets other than for Mandatory Programs (the "Mandatory Market"), such as (a) the voluntary market, which includes parents of teenage drivers (the "Voluntary Market"), and (b) the commercial market, comprising truck, bus and taxi fleets (the "Commercial Market"). The Company believes that, for the U.S. Voluntary Market and Commercial Market, no Model Specifications testing success or applicable state certification are required, although the Company further believes that a significant portion of the Voluntary Market and Commercial Market will not purchase a BAIID without a minimum of a 37-day calibration success under the Model Specifications and applicable state certification. However, there can be no assurance given that the Model Specifications testing success or state certifications will result in any revenues to the Company or the commercial success of the second generation Sens-O-Lock product. The Company continues to evaluate other sensing technologies currently utilized by competitors within the industry, as well as sensing technologies under development by others for use in different alcohol sensing applications. The Company intends to continue to utilize its research and development efforts to provide the Company with other alternative technical options for different specified target markets, as well as to improve and enhance the Company's products. The Company intends to seek insurance discounts to help drive the Voluntary Market and Commercial Market, and to assist in the lobbying for stricter federal and state laws requiring drivers convicted of alcohol-related motor vehicle infractions, violations or crimes to install BAIID equipment in their vehicles. The Company is evaluating strategies, marketing plans and programs which the Company expects will enable the Company to work jointly with insurance companies to enhance their respective markets. However, there can be no assurance that the Company and such insurance companies will agree upon a strategy, plan or program or that any such strategy, plan or program, if adopted, or the Company's independent lobbying efforts, will result in revenues to the Company or the commercial success of its products. Recent Events The Company had limited sales of Sens-O-Lock units in 1997, primarily in the United Kingdom and elsewhere in Europe. During the second quarter of 1998, the Company sold 161 second generation Sens-O-Lock units and an additional 36 units were sold in the third quarter of 1998. There have been minimal revenues generated by the WeatherEye product line. The Company has been dependent upon loans and equity investments from the Company's officers, directors and shareholders and others to fund the Company's operations in absence of any material sales through the third quarter of 1998. The Company anticipates that it will require additional loans and/or equity investments in order to continue operations and until such time as sufficient revenues from sales of Sens-O-Lock units are generated. Management believes that the Company currently does not have sufficient working capital to continue its operations over the long-term and that cash generated from operations for the next several months will not be sufficient to meet the Company's currently anticipated liquidity and capital expenditure requirements in order to successfully market the second generation Sens-O-Lock product line and/or for the Company to continue operations. The Company has entered into discussions with a third party with respect to granting world-wide distribution/licensing rights to the Company's Sens-O-Lock and WeatherEye product lines, which is anticipated to entail the pre-payment to the Company of certain royalties. Further, the Company has continued to have discussions with one of the Company's preferred shareholders with respect to additional equity and/or debt financing. There can be no assurance, however, that the Company will enter into a formal distribution /licensing arrangement or receive additional financing from such preferred shareholder or any other party, that royalties from any such distribution /licensing arrangement and/or financing proceeds, if any, will be on terms favorable to the Company or that the Company will be successful in attaining its sales goals, nor that attaining such sales goals will have the desired effect on the Company's cash resources. The failure to receive sufficient distribution/licensing royalties and/or other equity or debt financing, as well as any failure to obtain a sufficient level of sales, may result in the Company seeking protection under the Federal Bankruptcy Laws and/or terminating operations. See "Products - Sens-O-Lock" below, "Item 6. Management's Discussion and Analysis or Plan of Operations" and "Item 12. Certain Relationships and Related Transactions." On October 1, 1998, the Company executed a Consent and Undertaking, pursuant to which the Company admitted to the failure to timely file with the Securities and Exchange Commission (the "SEC") the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 and Quarterly Reports on Form 10-QSB for the quarters ended March 31, 1998 and June 30, 1998, and Notifications of Late Filing on Form 12b-25 with respect to such Forms 10-QSB, and consented to the entry of an order (the "Order") by the Federal District Court for the District of Columbia directing the Company to file with the SEC such Form 10-KSB by October 30, 1998 and Forms 10-QSB by November 13, 1998. The failure to file such Form 10-KSB and Forms 10-QSB in accordance with the Order may result in the Company being held in contempt of court, which could have a material adverse result on the Company's business and operations. The Company believes that the filing of this Form 10-KSB satisfies a part of the Order and is endevoring to file such Forms 10-QSB by November 13, 1998. However, there can be no assurance that such Forms 10-QSB will be filed with the SEC by November 13, 1998. Principal Offices The Company's principal executive offices are located at 11 Oval Drive, Islandia, New York 11722; telephone number:(516) 342-1515. The Company maintains a website at "asil.com." Products Sens-O-Lock The Sens-O-Lock is a breath alcohol ignition interlock device intended for use in motor vehicles to assist in the prevention of a person with a breath alcohol content ("BrAC") level above a specified level from operating the motor vehicle. BAIIDs are breath alcohol sensing instruments designed to be mounted in a vehicle and connected to the ignition key and starting system in a way that prevents the vehicle from starting unless the driver first provides an acceptable breath sample. These devices contain an instrument to measure the BrAC level of a deep lung breath sample. If the measured BrAC level is at or above a set level, the vehicle's starting system is locked and the vehicle will not start. The driver of a Sens-O-Lock equipped vehicle is required to provide breath samples before and during the operation of the vehicle. This is accomplished by requiring an initial breath test (an "IBT") in order to start the vehicle, and requiring one or more subsequent breath tests (each, a "Rolling Retest") while the vehicle is being operated. The Sens-O-Lock analyzes the breath sample to determine the sample's BrAC level. If the tested BrAC level does not exceed the device's specified testing level (which is programmed at the time of manufacture), the driver will be advised of such and, in the case of an IBT, the starting system is enabled and the vehicle may then be started, or, in the case of a Rolling Retest, the vehicle may continue to be operated without entering the alarm mode. Should the driver fail the IBT, indicating the driver's breath contains a BrAC level above the device's specified testing level, the vehicle's starting system will remain disabled, thereby immobilizing the vehicle's engine. If a Rolling Retest is failed, the Sens-O-Lock is programmed to ask the driver to stop the vehicle. A sufficient amount of time is allowed for the driver to safely pull the vehicle over to the side of the road and turn the engine off. If the driver fails to stop the vehicle after a failed Rolling Retest, after issuing a repeated warning, the Sens-O-Lock will enter the alarm mode, whereby the vehicle's lights will flash and horn will sound intermittently, the intent being to bring attention to the vehicle. The Sens-O-Lock device consists of three major components which are installed in the motor vehicle: (a) a sensor head assembly, (b) the central processing unit ("CPU") and (c) the car control module ("CCM"). In most vehicles, a small light emitting diode ("LED") display will also be mounted on the dashboard. The sensor head assembly has been designed by the Company to easily fit into a driver's hand and to cause a proper breath sample to flow over a sensor. This sensor is manufactured by a third-party. When a proper breath sample is given, the sensor analyzes the breath sample for the sample's BrAC level. The results of the sensor analysis are then transmitted to the CPU which compares the analysis against pre-programmed parameters, whether state BAIID regulation, default or Company-set customized levels, and records the analysis for downloading, if required. The CPU also would cause the Sens-O-Lock to recycle for a new IBT or Rolling Retest, if an improper or insufficient breath sample or no breath sample is given. The CPU also manages the CCM, which mutes the radio, enables or disables the vehicle's starting system, engages the alarm mode, etc. The Sens-O-Lock is capable of providing voice messages in five different languages (American English, British English, French, German and Spanish), selectable at the time of installation. The messages prompt the driver through the IBT and Rolling Retest and provide other information. The Company anticipates initially marketing three Sens-O- Lock models, one for the Mandatory Market (the "Mandatory Unit"), one for the Voluntary Market (the "Voluntary Unit") and the third for the Commercial Market (the "Commercial Unit"). The features of the three models are structured to comply with the demands of the three markets, with the Mandatory Unit features structured to meet the detailed requirements of Mandatory Programs (e.g., recording, by date and time, the actual BrAC level results of each test, all attempts to start the vehicle, whether there has been a test failure, all Rolling Retests, any emergency override and whether any attempt at circumvention has occurred, etc.). Once the IBT has been passed, the driver will be able to start and operate the vehicle. If the engine stalls or is temporarily shut off, the driver may restart the engine within a pre-set time period without the need to provide a new breath sample. However, if the alarm mode is engaged, such as due to the failure of a Rolling Retest, then no restart will be allowed and the normal IBT sequence must be followed. Once the IBT has been passed, the driver will be required to pass at least one Rolling Retest while driving. The driver will have thirty seconds to provide the required Rolling Retest breath sample. Depending upon applicable state BAIID regulations, one or more Rolling Retests at random intervals may be required. For the Voluntary Unit, a Rolling Retest will occur at a random interval during the first 30 minutes of driving. The Sens-O-Lock has been designed so that the number and timing (specific or random) of Rolling Retests may be individualized to meet the requirements of the various state Mandatory Programs, or the needs of customers in the Voluntary Market and Commercial Market. To provide a breath sample, whether for an IBT or Rolling Retest, the driver would take a deep breath and place his or her lips completely around the sensor head assembly mouthpiece. The driver would then exhale a steady, forceful stream of air. As this is being done, the Sens-O-Lock will provide a steady tone and the LED, if installed, will only display a corresponding steady light. The tone and LED light indicate that the breath sample is not completed and will only discontinue when a full breath sample has been accepted. Should the driver be unable to provide a breath sample within thirty seconds, or the breath sample is insufficient to test the BrAC level, the driver will be advised that the sample was invalid and a new test will be conducted. In the case of a Rolling Retest, a second test will be conducted, but only one time. If a second invalid sample is provided during either an IBT or a Rolling Retest, or if no sample is provided, the Sens-O-Lock will advise the driver of such and, in the case of an IBT, the unit will recycle to permit a new IBT or, in the case of a Rolling Retest, direct the driver to stop the motor vehicle. The Sens-O-Lock will allow the driver sufficient time to safely pull over and turn off the ignition. However, if the driver fails to stop the vehicle, the Sens-O-Lock will enter the alarm mode until the vehicle is pulled over and the ignition key turned to the OFF position. For the Mandatory Unit, the failure of either an IBT or a Rolling Retest for any reason will be recorded in the data logger contained in the CPU. The failure of a Rolling Retest may be a violation of the terms of the driver's judicial supervision requirements and of applicable state BAIID regulations, and subject the motor vehicle to a starting system ignition lockout in accordance with applicable state regulations. In such a case, the Sens-O-Lock will provide a warning message at each motor vehicle startup following such a violation, notifying the driver that the Sens-O-Lock must be returned to an authorized dealer for service. The service, in such a case, would be the downloading of the data logger and the forwarding of the downloaded data to the appropriate authorities. All Commercial Units and Voluntary Units and, if permitted by the applicable state BAIID regulations, Mandatory Units have an emergency override, allowing the driver to start the motor vehicle upon inserting the key in the ignition without successfully completing the IBT. However, within two minutes of starting the vehicle using the emergency override, the Sens-O-Lock will request a Rolling Retest. Failing the Rolling Retest or ignoring the request to provide a breath sample will activate the alarm mode. Use of the emergency override will be recorded in a Mandatory Unit's data logger and may, if programmed, be recorded on a Voluntary Unit's or Commercial Unit's data logger. This emergency override feature is intended to be used only in the event of a life-threatening emergency, and a driver enrolled in a Mandatory Program may be required to show documentation, such as a hospital bill, etc., in order to justify its use. Depending on state law, there are various events that may result in a starting system lockout of a Mandatory Unit, such as: Failure to return for data downloading on schedule. The Mandatory Unit is programmed to provide for normal periodic downloading of information from the data logger in the CPU. The amount of time between downloading will depend on applicable state law. The Mandatory Unit is programmed for a seven-day grace period. Once the scheduled downloading date has been passed, warning messages will be heard at each startup of the motor vehicle. If the Sens-O-Lock is not downloaded at the scheduled date or within the warning period, the starting system will be locked out and the motor vehicle will not be capable of being started. It will then be necessary to have a certified Sens- O-Lock technician make a service visit to the vehicle, download the data as required by law, and re- enable the vehicle's starting system. The Company anticipates that there will be an additional charge for this re-enabling service. Failure to return for data downloading within five days of a BAIID regulations violation. Depending on applicable state law, a driver will have a specified period following a violation of a Mandatory Program's rules, such as failing or ignoring the request for a Rolling Retest, to return the motor vehicle to a certified dealer to have the data logger downloaded. Warning messages will be heard during this period whenever the vehicle is started. Since this is not a regularly scheduled download, there may be an additional charge for this downloading service. If the driver fails to have the data logger downloaded during this period, the Sens-O-Lock will lock out the starting system mechanism. It will then be necessary to have a certified technician make a service call to the vehicle, download the data as required by law, and re-enable the vehicle's starting system. The Company anticipates that there will be an additional charge for this re-enabling service. When Sens-O-Lock requests a breath sample, audio beeps come from the hand-held sensor head assembly, but the voice is routed through the vehicle's audio system speakers. (If the vehicle does not have a radio, or the speakers are inoperative or not compatible, it will be necessary to install a small speaker in order to hear the voice commands.) The Sens-O-Lock voice is self-amplified and does not require the radio to be turned on in order to be heard. If the audio system is playing, the Sens-O-Lock unit will automatically mute the radio (reduce the radio volume to zero) so that the voice commands can be heard and understood. Muting will continue through each operational sequence until completed. For example, on startup, the radio will be muted when the request to "PLEASE PROVIDE A SAMPLE" is heard and will continue to be muted until the IBT is passed and the voice reports that "YOU MAY START THE VEHICLE," after which audio output will be restored. In order to preserve battery power, Sens-O-Lock is equipped with a "sleep mode" feature that reduces power consumption when the vehicle is not in use. This is particularly important when the vehicle will be out of service for extended periods of time. Several minutes after the ignition is shut down, the Sens-O-Lock will enter the sleep mode. As soon as the key is turned to the ON position, the Sens-O-Lock will return to full operational mode. In most Sens-O-Lock installations, an LED display will be mounted on or just under the dash. Except when in sleep mode, a green LED will glow at all times, indicating the system is powered and fully operational. An amber LED flashes in synchronization with the "beeps" from the sensor head assembly, and glows steadily corresponding to the steady tone heard when providing a proper breath sample, providing visual reinforcement to the audio signals and aiding the hearing impaired. Once a breath test is passed, the amber LED will revert to green. The second generation Sens-O-Lock models are as follows: Sens-O-Lock 1100 Series - The Mandated Unit. The Sens-O-Lock 1100 limits the ability of impaired drivers to start their vehicles. This model was designed for state mandated use by those individuals convicted of alcohol-related motor vehicle infractions, violations and crimes, such as driving while intoxicated ("DWI") and driving under the influence ("DUI"). Under Mandatory Programs, such offenders are court-ordered to install a BAIID in their vehicle and have the data stored in the device downloaded at specified intervals (typically, every 30 to 60 days). More than half the states have enacted laws requiring, in certain incidences, mandated installation of a BAIID following either a DWI or DUI conviction. Sens-O-Lock 2100 Series - The Voluntary Unit. This mode l is a Variation of the 1100 Series Mandated Unit and is designed for individuals who voluntarily desire the equipment's protection. Aside from the safety and moral considerations, in the future, a Sens-O-Lock installation may afford car insurance premium discounts and the Company is evaluating marketing strategies for insurance carriers currently considering promoting discounts for drivers who install a BAIID. The main difference between the Voluntary Unit and the Mandated Unit is that the data logger and its downloading are optional in the Voluntary Unit and generally can be programmed to provide the information required by insurance carriers for their respective BAIID premium discounts, which, the Company anticipates, will be less detailed than the information required under state Mandatory Programs. Sens-O-Lock 3100 Series - The Commercial Unit. This model also varies from the 1100 Series Mandated Unit in order to meet the needs of the Commercial Market. Like the Voluntary Unit, the data logger will be programmed to record only that information required by the Commercial Market customer. WeatherEye Intelligent Headlight Management System In August, 1996, the Company entered into an agreement with Weather Eye, Inc., a corporation that is owned by Joseph M. Lively, Esq., President, Chief Operating Officer and a director of the Company. Weather Eye, Inc. is the owner, with others. of proprietary technology, invented by Mr. Lively and others, which automatically turns on the headlights of automobiles to varying capacities, such as daytime running lights, and also automatically puts the vehicle's headlights and taillights on at full capacity when the windshield wipers are turned on. The Company is marketing this technology under the name of WeatherEye Intelligent Headlight Management System or, simply, WeatherEye. Pursuant to the terms of its agreement with Weather Eye, Inc., the Company was granted, for a term expiring on December 31, 2000, the right to distribute the WeatherEye to the new and used car dealers in the United States and throughout the world, and has the right to modularize the original system. The Company has agreed to pay Weather Eye, Inc. a royalty on each modularized unit sold ranging from $0.19 to $2.00 depending on the unit sold. In September 1998, for nominal consideration, WeatherEye, Inc. assigned its ownership in the WeatherEye technology to the Company. See "Item 12. Certain Relationships and Related Transactions." Daytime running lights are believed to be an effective means in reducing accidents. A number of insurance companies now offer premium discounts to drivers whose motor vehicles are equipped with daytime running lights. In addition, many states require the headlights and taillights to be turned on when the windshield wipers are in use. WeatherEye turns these lights on automatically when the windshield wipers are turned on and reduces the headlights to daytime running lights and turns off the taillights automatically when the wipers are turned off. Additionally, since WeatherEye automatically turns off the vehicle's lights when the ignition is turned off, the motorist will not have to be concerned about discovering a dead battery as a result of leaving the vehicle's lights on. According to the American Automobile Association ("AAA"), AAA made 27.5 million service calls due to dead batteries in 1995. The WeatherEye Intelligent Headlight Management System not only provides the safety of daytime running lights in daytime, but automatically adapts the headlights and taillights to the appropriate setting for any driving condition. WeatherEye can automatically perform all the following functions: - in daylight, headlights are on at reduced power whenever the vehicle is running (in some models); - at dusk, headlights are raised to full brightness, with dash and taillights being turned on; - when wipers are switched on, headlights are raised to full brightness, dash and taillights are on; - when wipers are switched off during daylight-operation, headlights and all other lights automatically adjust to appropriate intensity; - when the ignition is turned off, all lights go off; and - at night, valet lights remain on for 45 seconds after vehicle is turned off (in some models). In its attempt to expand its market potential and acknowledging that certain features of the WeatherEye Intelligent Headlight Management System, such as daytime running lights, are included on certain new car models, the Company has modularized the various components that comprise the WeatherEye. The consumer now has the ability to purchase certain or all of the features of the WeatherEye. Intellectual Property and Other Proprietary Rights The Company believes that the Company's success depends significantly upon its proprietary technology. The Company currently relies on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions and other written materials under trade secret, patent and copyright laws to protect its proprietary technology; however, these generally afford only limited protection. The Company has registered and applied for registration for certain service marks and trademarks, and will continue to evaluate the registration of additional service marks and trademarks as appropriate. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. Monitoring and identifying unauthorized use of broadly disseminated products is difficult. The Company anticipates that it will rely upon software engineering and marketing skills to gain and, thereafter, protect the Company's market position, in addition to the copyright and trademark or trade secret protection discussed above. Because the industry in which the Company competes is characterized by technological change, the Company believes that factors such as the technological and creative skills of the Company's personnel, product enhancements, name recognition and reliable product maintenance may be as important to establishing and maintaining a technology leadership position as the various legal protections of the Company's technology. The Company currently has patent applications pending related to the sensor head assembly, breath monitoring technology and sensing technology aspects of the second generation Sens-O-Lock and WeatherEye, Inc. has obtained a patent with respect to the WeatherEye device, such patent having been assigned to the Company in September 1998. There can be no assurance that any new patent applications will be submitted, any pending applications will be approved, any such patent, if issued, and the WeatherEye patent will not be challenged by third parties or, if challenged, that any such patent will not be invalidated. In addition, there can be no assurance that any issued patent will provide the Company with any competitive advantages or will not be challenged by third parties, any of which may have a material adverse effect on the Company. The name "Sens-O-Lock" is a registered trademark of the Company in the United States and United Kingdom and the Company's ASI logo and the name "WeatherEye" are trademarks of the Company in the United States. The Company is not aware that any of its products materially infringes the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company. In 1993, the Company received correspondence from Intoximeters Inc. claiming that the Company's name infringes upon the name of a product of such entity, "Alco-Sensor." The Company believes that the Company's name does not infringe upon such other entity's product name and that the name Sens-O-Lock does not and will not cause a confusion in the marketplace between the Company's product and the product of Intoximeters Inc. However, no assurance can be given that such entity or others would not be successful in prosecuting a claim that the Company's name and/or product names infringe upon a copyright or trademark of such entity or others. Litigation may be necessary to protect the Company's proprietary technology. Any such litigation may be time-consuming and costly. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology, duplicate the Company's products or services or design around patents or other intellectual property rights of the Company. There can be no assurance that the patents or other intellectual property rights of others will not have a material adverse effect on the Company's ability to do business. Competitors and potential competitors of the Company may resort to litigation as a means of competition. Such litigation may be costly and expose the Company to new claims that the Company may not have anticipated. Although patent and intellectual property disputes in the technology area have often been settled through licensing, cross-licensing or similar arrangements, costs associated with such arrangements may be substantial, if such arrangements can be obtained at all. Any litigation involving the Company, whether as plaintiff or defendant, regardless of the outcome, including any litigation relating to claims which have been or may in the future be asserted against the Company, may result in substantial costs and expenses to the Company and significant diversion of effort by the Company's technical and management personnel. In addition, there can be no assurance that litigation, either instituted by or against the Company, will not be necessary to resolve issues that may arise from time to time in the future with other competitors. Any such litigation could have a material adverse effect upon the Company's business, operating results and financial condition. In the event of an adverse result in any such litigation, the Company could be required to expend significant resources to develop non-infringing technology, obtain licenses to the technology which is the subject of the litigation on terms not advantageous to the Company, pay damages and/or cease the use of any infringing technology. There can be no assurance that the Company would be successful in such development, that any such licenses would be available and/or that the Company would have available funds sufficient to satisfy any cash awards. Product Development The Company believes that it must continue to enhance the Company's existing products and develop new products in order to maintain the Company's competitive position. The Company anticipates that its future product research activities, if any, would include refinement and improvement of current products and the development of new product options and features. The Company also anticipates devoting additional efforts to assure the reliability of and support for the second generation Sens-O-Lock as the product is employed by end users. The Company anticipates continuing its research and development efforts, including the hiring of additional qualified engineering, production and technical personnel and enhancing the Company's research and quality control facilities. The Company spent approximately $523,000 and $913,000 during 1997 and 1996, respectively, for product development and enhancement activities. The Company anticipates that any funds for future product development and research and development will be derived from cash flow generated by sales of and/or royalties derived from the Company's products. As the Company's sales from inception through the first quarter of 1998 have been minimal, no assurance can be given that the Company will continue product development and/or other research and development projects. Production The Company believes high product quality will be an integral part of the ultimate success of the Company's products and the Company itself. The Sens-O-Lock manufacturing process consists of component assembly and systems integration of electronic and mechanical parts, which are then encased in a high impact plastic package. Most of the components of the Company's products are items manufactured by third parties and have various applications, including those applications performed in the Company's products. Component availability is subject to various lead times. The Company has also designed and developed the software necessary for the operation of the Sens-O-Lock units. The mold for manufacturing the sensor head assembly was designed by third parties in accordance with the Company's specifications and at the Company's cost. The Company currently holds all rights to this mold. The Company maintains internal product controls which consist primarily of prototype production, test engineering, materials purchasing and quality control of its prototypes and production units. The Company purchases or organizes the purchase of sensing and other components for Sens-O-Lock units from third party suppliers, then causes the materials to be forwarded to the Company's contract manufacturers, currently Intercontinental s.r.l. ("Intercontinental"), a turn-key contract manufacturer of electronic components, cable assemblies and injection molds and a provider of assembly, calibration and electronic products and component testing services located in Varese, Italy, and Flowtronics, Inc. ("Flowtronics"), a turn-key manufacturer of electronic assemblies located on Long Island, New York. Some major components are then assembled by Intercontinental and forwarded to Flowtronics for final assembly, calibration, testing and packaging. The Company has also outsourced the shipment of Sens-O-Lock units to its distributors and dealers. The Company believes that its current manufacturing, assembly, calibration, testing and shipping arrangements are sufficient to satisfy anticipated demand for the next twelve months, although the Company may elect, in the future, to retain other contract manufacturers or to contract with others to provide certain of the services presently performed by Intercontinental and/or Flowtronics. The Company previously had formed a subsidiary, Alcohol Sensors Europe, plc ("ASE"), owned 80% by the Company and 20% by Michael G. Ghazarian, a former director and officer of the Company, to perform component assembly, systems integration, quality control and shipping functions, as well as to be a distributor for the countries comprising the European Common Market. Following the resignation of Mr. Ghazarian as a director and officer of the Company and ASE, the Company determined to retain Intercontinental and Flowtronics to perform such functions (other than as an European distributor). Scarico, s.r.l. ("Scarico Italy") an entity which the Company believes to be affiliated with Intercontinental, previously performed certain of such functions for ASE. While the Company believes that Scarico Italy has had prior business transactions with Mr. Ghazarian and his affiliates, Scarico Italy and Intercontinental have represented to the Company that Mr. Ghazarian is neither an affiliate, agent, representative nor employee of Scarico Italy and holds no equity interest in or offices with either Intercontinental or Scarico Italy. See "Item 12. Certain Relationships and Related Transactions." Sales and Marketing The Company's marketing strategy initially is to concentrate on product sales to the Voluntary Market and Mandated Market. Thereafter, the Company expects to attempt to penetrate the Commercial Market. However, the Company may elect to enter the Commercial Market earlier, as market conditions and demand dictate. According to the Bureau of Judicial Statistics of the United States Department of Justice, there were approximately 1,250,000 DWI and DUI convictions in the United States during 1992, including first time convictions and repeat offenders. According to a 1996 study by NHTSA, the national re-arrest rate for DUI and DWI offenders was 31%. Recent published studies have reported an over 60% reduction in recidivism among multiple offenders required to install a BAIID in their vehicle. In addition, NHTSA has reported that there were 17,126 alcohol-related fatalities in 1996 (40.9% of the total traffic fatalities for the year), that approximately 1,400,000 drivers were arrested in 1995 for driving under the influence of alcohol or narcotics and that 32.0% of all 1996 traffic fatalities involved at least one driver or non-occupant with a BrAC level of 0.10 or greater with an additional 8.9% involved a driver or non-occupant who had been drinking but whose BrAC level was below 0.10. NHTSA also estimates that alcohol was involved in 7% of all crashes in 1996. Laws in a number of states, including Illinois, Nevada, Texas, Virginia and West Virginia, require the installation of BAIIDs under specified circumstances and other states, such as Maryland and Tennessee, are considering similar legislation. The intent of such laws is to protect the public from those previously convicted of DWI/DUI from continuing to drink and drive, to provide authorities and care providers with information concerning compliance with treatment and probation requirements, cause behavior modification in the previously convicted and to provide a method for a convicted individual to maintain his/her license and, hopefully, remain insured, thereby further protecting the public. The Company intends to market and sell the Company's products through an independent distributor, dealer and representative network, as well as through direct sales. The Company has not conducted any test marketing programs to date. The Company is currently negotiating distributor agreements with independent 12-volt automotive after-market distributor firms covering specific territories throughout the United States, which the Company believes will afford sufficient sales coverage in the states in which the Company intends to initially market the Sens-O-Lock. The distributors' responsibilities are anticipated to include appointment of dealers, including automotive chains, auto stores, repair stations, auto specialty retail stores and alarm and radio installers, all of whom would sign dealer agreements, and, thereafter, receive Company training to sell, service and install the Sens-O-Lock system in customers' motor vehicles. These agreements generally contain provisions for a one-to-three year term with annual renewals, are terminable without cause upon 30 days written notice by either party and are automatically terminable for cause if the distributor breaches various specific contract conditions. Distributors are expected to receive net commissions based upon a percentage of gross sales of all product sales made in the distributor's territory through dealers. The Company has entered into agreements with dealers in various locations throughout the United States who were recruited by a territorial distributor or the Company directly. The Company or territorial distributors are expected to train all dealers to sell, install and service the Sens-O-Locks. The Company intends to participate in trade shows, advertise in trade journals, hold seminars and prepare a variety of instructional aids to introduce the Company's products and to educate potential users, representatives and dealers. However, due to limited funds, no assurance can be given as to the level, if any, of such trade show participation, advertising or preparation of instructional aids. The Company provides a renewable one year warranty for parts and labor on all Mandatory Units. A product warranty on parts and labor for the Voluntary Units and Commercial Units markets is given for 90 days to one year from installation by an authorized dealer. Servicing of Sens-O-Locks during and beyond the warranty period is expected to be provided by the Company's authorized dealers. There is no assurance that dealers will provide satisfactory warranty, repair or other services. The Company believes that the insurance market has strong potential. To enter this market, the Company has devoted significant effort and expense in evaluating strategies, marketing plans and programs which the Company anticipates will enable the Company to work jointly with major insurance companies to enhance the market for the Sens- O-Lock product. The Company has worked with major insurance companies, including American International Insurance Company ("AIIC"), a principal shareholder of the Company, and the Independent Insurance Company, an United Kingdom Insurance Company ("Independent"), to create strategies, marketing plans and programs to enhance the Company's and such insurance companies' respective markets. The Independent and such other insurance companies are expected to provide surcharge discounts or abatements to insureds who have previously been convicted of alcohol- related driving infractions, crimes and violations, provided that such individuals install and use an approved BAIID device, such as the Sens-O-Lock, and meet certain other underwriting criteria of the respective insurance companies. A preliminary program with the Independent did not result in material sales. Installation and Service The Company is in the process of establishing a network of independent territorial distributors covering much of the United States. As of October 20, 1998, the Company had a total of four territorial distributors covering all or a portion of the following jurisdictions: Arizona, Maryland, North Carolina Virginia, Washington and the District of Columbia. The distributors generally are responsible for the recruitment and appointment of qualified authorized independent Sens-O-Lock dealers. All appointments within their territories are required to be in accordance with the Company's instructions and specifications. Each appointed dealer is required to execute an agreement with their respective distributor, which agreements are and shall continue to be in a form approved by the Company. The dealers are expected to be equipped to sell, install and service Mandatory Units, as well as Voluntary Units and Commercial Units. Some dealers will sell all three models, while others are expected to only sell Voluntary Units and/or Commercial Units. Each distributor is expected to play a key role and assume major responsibilities in maintaining communications and providing assistance to dealers and the state motor vehicle departments or other appropriate authorities in the distributor's state(s) of operation. The distributor is required to obtain, review and provide explanation of the respective state laws concerning BAIID installation and performance criteria, update data bases and keep authorized dealers abreast of current information. It is anticipated that distributors will be trained by the Company's technical personnel and then have the responsibility to train all dealer/installer personnel in the knowledge, application and explanation of the Sens-O-Lock product line, applicable state laws, and the installation, downloading and servicing of Sens-O-Locks, all in accordance with the Company's guidelines and applicable state laws. Distributors are required to conduct training at their own facilities for installers and other employees of authorized dealers using a curriculum and materials developed by the Company. Distributors will be expected to initiate procedures necessary to have a Mandatory Unit installed in a motor vehicle after receiving notification from the court or probation department. These procedures will include notifying the installing dealer and the driver subject to a Mandatory Program, facilitating an appointment to install the device and train the driver(s) about the proper use of the Sens-O-Lock, notifying the Company and state authorities upon completion of installation, and keeping of accurate and permanent data records and serial numbers for each Sens-O-Lock installed within the distributor's territory. Distributors are required to collect information downloaded from the Sens-O-Lock data loggers by authorized dealers from motor vehicles within the distributor's territory and transmit such data to the appropriate state authorities. Such data is deemed confidential and is furnished only to designated state and local authorities and/or the Company's headquarters. The data is encrypted and only the Company and, in certain cases, state and local authorities, shall have translation software developed by the Company. Each distributor will be expected to maintain an inventory of spare parts, instruction and installation manuals and other applicable components required to support the dealers and anticipated installations within the distributor's territory. The Company will provide instruction and installation manuals to distributors along with specialized training equipment and proprietary information to assist the distributor in the performance of the distributor's duties. Distributors are also required to train dealers in their respective territories at the distributor's sole cost. All authorized dealer locations are selected by the distributor and certified by the Company. It is anticipated that the Company will require that each authorized dealer be financially sound and responsible with a successful history of automotive aftermarket installations. The Sens-O-Lock is required to be installed only by Company-trained and -certified installers who have completed a comprehensive course as part of their dealer agreement. The installation process, by Company-trained and -certified installers, takes approximately one hour. Authorized dealer facilities are required to be furnished with the necessary equipment to ensure proper installation and the installation area is to be secured to prevent unauthorized persons from observing or accessing secured items, such as tamper seals and installation instructions. Prior to installation, the motor vehicle is screened for mechanical and electrical conditions that may interfere with device's functioning. The installation site maintains all records of their Sens-O-Lock customers, copies of which are sent to the distributor. The Company provides support to the states and the dealer/representatives through the distributors in the following manner: - Operating a communication system via a long distance telephone carrier with a modern telephone switch network to communicate by electronic mail with the installation centers, the probation departments and others interested in the Sens-O-Lock BAIID program; - Providing educational information and documents to the courts, installers, probationers and their families and the public in general, to create awareness that a BAIID may help prevent DWI and DUI instances; - Providing probation departments with a decoding program for downloading encrypted information; and - Maintaining national toll free numbers twenty-four hours a day, seven days a week. Insurance The Company maintains liability insurance with coverage limits of $1,000,000 for each occurrence and $2,000,000 in the aggregate. Although the Company does not anticipate any liability claims, there is no assurance that claims will not arise in the future, or that any damages or costs associated with these claims will not exceed the available insurance coverage limits. The Company intends to increase the coverage under its liability policy, as appropriate. Competition The industries and markets in which the Company operates are highly competitive. Some of the Company's competitors may have substantially greater financial resources, larger research, development and sales staffs and greater name recognition than the Company, and may introduce new or improved products in the future. Market participants must compete on many fronts, including development time, engineering expertise, product quality, performance and reliability, price, name recognition, customer support and access to distribution channels. While the Company believes that it will be able to compete favorably primarily through product quality, technical excellence and customer service, there is no assurance that the Company will be able to compete successfully or develop competitive products in the future. The Company considers Guardian Interlock System, Lifesaver Interlock (and its distributor, Life Sciences) and AutoSense as the Company's primary Sens-O-Lock competition, although the Company expects that others have and will continue to enter the BAIID industry. Each technology employed by the Company's Sens-O-Lock competitors has inherent trade-offs (e.g., to gain additional accuracy, a device may require increased warm up time, which requires the driver to have to wait several minutes before providing a sample). The challenges found by BAIID providers is that, unlike evidential breath test equipment in police stations, which operate in a static environment, constant temperature and supervised testing, BAIIDs must operate in a vehicle's environment, which is subject to wide temperature and humidity swings, in an unsupervised testing environment and must protect against potential attempts at circumvention. The Company believes that the current Sens-O-Lock product is more user friendly, both in size, functionability and appearance than competitors' BAIIDs. The second generation product is small and unobtrusive (the sensor head assembly fits in the palm of one's hand, is aesthetically styled with finger grips and utilizes a snap off cap design) and is voice instructed in five currently available languages, British English, American English, German, Spanish and French, so that a driver is prompted by voice to avoid confusion while driving (e.g., a driver doesn't have to take his/her eyes off the road to view instructing lights on a panel during Rolling Re-tests). The Company incorporates sophisticated operating software that enables the sensor to be calibrated against specified set points, assists in installation and user customization, discourages circumvention attempts and datalogs driver tests. The Company believes its competitive advantage will be broadened by a strategic alliance with members of the insurance industry. The Company believes that most of the Company's competitors are focusing on the Mandatory Market in the U.S. The Company's strategy is more diverse; and while the Company intends to participate in the Mandatory Market, the Company also intends to market its products for Voluntary Market and Commercial Market, each driven by automobile insurance premium incentives. Governmental Regulation The Sens-O-Lock has successfully completed NHTSA Model Specifications for the 37- and 67- day calibration stability challenge protocols. The Company is now in the process of having the second generation Sens-O-Lock certified in states in which the Company initially intends to market the device. Through October 20, 1998, the second generation Sens-O-Lock has been certified in five states. More than 35 states, including the most populated states of California, Texas and New York, have either enacted legislation or administrative directives with respect to BAIIDs. The Company believes that the vast majority of these states rely upon successful completion of the NHTSA Model Specifications 37-Day calibration stability challenge protocol in their respective certification process. The first generation Sens-O-Lock had been certified as meeting the state standards in twelve states - California, Florida, Georgia, Kansas, Maryland, Michigan, Minnesota, Nebraska, New York, Oklahoma, Utah and Missouri. The Company's primary marketing efforts for the second generation Sens-O-Lock initially are expected to focus on Arizona, California, Illinois, Georgia, Kansas, Maryland, Michigan, Nevada, New York, North Carolina, Utah, Virginia, Washington, Wisconsin and the District of Columbia. Certification standards vary by jurisdiction and are only applicable to the products installed pursuant to court ordered installations. Employees As of December 31, 1997, the Company had approximately ten full-time employees, of whom two were in product development, two were in marketing, sales and customer support, two were in production and four were in general and administrative functions. Of the total, six employees were located in North America and four internationally. In addition, the Company utilized approximately two independent contractors in connection with the Company's product development and marketing activities. As of October 19, 1998, the Company had four full-time employees, all located in the United States. The Company has never experienced a work stoppage and believes that it has satisfactory relations with its employees. Item 2. Description of Properties. The Company's principal executive offices are located at 11 Oval Drive, Islandia, New York 11722. The Company's executive, administrative, sales, marketing and product development and support staff are primarily located at this facility. Pursuant to the lease agreement for this facility, the Company leased approximately 10,000 square feet of office and warehouse space for a five year rental term terminating on July 14, 2000. The base rent for this facility was approximately $89,000 in 1997, which base amount is scheduled to increase by approximately 5% in each remaining year of the lease term. In addition, the Company pays a proportional amount of the real estate taxes and increases in operating costs for the building in which the Company's facility is located. These additional costs were approximately $60,000 for 1997. In June 1998, the Company came to an agreement with the landlord of this facility pursuant to which the Company has consolidated its operations at this facility to approximately 2,500 square feet and the Company's base rent has been reduced to approximately $30,000 per year. Item 3. Legal Proceedings. The Company was named as a defendant in an action commenced in the United States District Court for the Eastern District of New York in July 1996 under the caption Henry Dornhuber v. Alcohol Sensors International, Ltd. The plaintiff sought $9 million in damages plus 100,000 shares of Company's stock, alleging he performed certain work for the Company as an independent contractor and was never compensated for the services he performed. This action was settled in July 1997 pursuant to which the Company issued to plaintiff and others an aggregate of 24,000 shares of Common Stock. The Company and certain of its officers were named as defendants in an action (the "Pace/Polek Lawsuit") commenced in the Supreme Court of the State of New York, Orange County, in an action captioned Albert Pace and Jan Polek v. Alcohol Sensors International, Ltd., Alcohol Sensors, Inc., Robert B. Whitney, John T. Ruocco, Michael A. Sylvester, Leon Pasqua, Steven A. Martello, George Berger, Berger and Paul and Barry Beyer, pursuant to which plaintiffs claimed an equity interest in the Company, as well as damages of $18.5 million, based upon a purported agreement with another entity, Alcohol Sensors, Inc., with which the claimants, certain former officers of the Company and others were allegedly affiliated in 1989, and a claim that one of the plaintiffs is the inventor of technology that is utilized in the Sens-O-Lock. This action was settled in February 1997, in connection with which certain present and former members of management surrendered for transfer to the plaintiffs and others an aggregate of 315,000 shares of their Common Stock to provide for the settlement. See "Item 12. Certain Relationships and Related Transactions." The Company and certain of its officers were named as defendants in an action commenced in the United States District Court for the Eastern District of New York in March 1996, under the caption Steven Eplan, individually and on behalf of Alcohol Sensors International, Ltd., v. Alcohol Sensors International, Ltd.,Steven A. Martello, Robert B. Whitney, John T. Ruocco and Michael A. Sylvester, by a shareholder seeking $2 million in damages based upon plaintiff's allegation that the Company was damaged as a result of the Company's handling of a prior lawsuit (the "Prior Lawsuit"). The Prior Lawsuit was settled for a total of $382,675. In connection therewith, certain present and former officers and directors of the Company contributed 55,672 shares of Common Stock held by such individuals along with $107,642. The current action was dismissed without prejudice in August 1997. In March 1997, the Company was served with a Demand to Arbitrate by a former employee, Charles Irwin, who sought $75,000 and options to purchase 36,000 shares of Common Stock based upon claims that the Company breached its employment agreement with this individual. In October 1997, the Company settled this matter for approximately $77,000. In Spring 1998, the Company was served with a Demand to Arbitrate by an individual, Babak Beheshti, based upon an alleged failure by the Company to comply with the settlement terms relating to a previous arbitration matter. In the former matter, this individual claimed he had not been compensated for engineering consulting services rendered to the Company and sought $650,000 and 114,449 shares of Common Stock. The Company had settled the prior arbitration matter for the issuance of 27,500 shares of Common Stock which were required to be registered under the Securities Act for resale by this individual. Such registration has not been effectuated, nor have such 27,500 shares been issued, and no assurance can be given that a registration statement with respect to said 27,500 shares will ever be made effective under the Securities Act. The Company and certain of its former officers were named as defendants in an action commenced in July 1997 in the New York State Supreme Court, New York County, in an action entitled Jack Gracian v. Alcohol Sensors International, Ltd, Robert B. Whitney and John Ruocco. Plaintiff alleges that, in July 1989, he entered into an agreement with the individual defendants and a company named "International Beverage Machine" pursuant to which plaintiff claims to have made certain payments which the individual defendants promised would be used to purchase stock in "Alcohol Sensors, Inc." which, in turn, plaintiff claims to be the predecessor to the Company. Plaintiff alleges damages of $13,500,000. The Company believes that the complaint fails to state a claim against the Company and that plaintiff has not been damaged by the Company, and, accordingly, intends to vigorously defend itself in this action. The ultimate outcome of this action is unknown at this time. The Company and certain of its former officers were named as defendants in an action commenced in September 1997 in the New York State Supreme Court, County of Nassau, captioned Guisepina Aucello v. Robert Whitney, John Ruocco and Alcohol Sensors International, Ltd. Plaintiff alleges that, in February 1990, Plaintiff entered into an exclusive "Distributor Agreement" with "Alcohol Sensors, Inc." wherein Plaintiff was granted a regional license to market, distribute and install an "automotive alcohol sensor" device to which "AS Inc." owned the patent rights. Plaintiff alleges damages of $1,000,000. The Company believes that it has no affiliation with "Alcohol Sensors, Inc.," or "AS Inc.," that the Company has no obligations under the "Distributor Agreement" referred to in the complaint and that plaintiff has not been damaged in any amount by the Company and, accordingly, intends to vigorously defend itself in the action. This action is currently in the discovery stage. The ultimate outcome of this action is unknown at this time. In February 1998, an action was commenced in the High Court of Justice, Queens Bench Division, in Oxford, United Kingdom, under the caption Scarico (UK) Limited v. Alcohol Sensors Europe plc. Scarico (UK) Limited is an entity which the Company believes is (a) not presently affiliated with Scarico Italy and (b) owned by Michael G. Ghazarian. Mr. Ghazarian is a former director and officer of the Company. Alcohol Sensors Europe plc. ("ASE") is an English corporation which, at the time of commencement of this action, was 80% owned by the Company and 20% owned by Mr. Ghazarian. In the complaint, Scarico (UK) Limited claimed that 68,321.93 (approximately $111,550, as of August 11, 1998) and $10,445 were due on invoices for services rendered to ASE between 1992 and 1997. ASE denied that any amounts were due Scarico (UK) Limited and believes that certain of the claimed services were actually performed by third parties, including Scarico Italy, and that ASE and the Company had paid such third parties directly. On August 11, 1998, the Company and ASE entered into a settlement arrangement with Scarico (UK) Limited, Digital Vehicle Security Systems ("Digital") and Mr. Ghazarian pursuant to which Scarico (UK) Limited, Digital and Mr. Ghazarian released and assigned to the Company all intellectual property, contract and other rights they may have in the technology and know-how related to the Sens-O-Lock and all claims to Sens-O-Lock units, parts and raw materials in their possession, as well as Mr. Ghazarian's 20% interest in ASE and Mr. Ghazarian surrendered an option to purchase 22,500 shares of Common Stock exercisable at $2.00 per share and expiring in June 2001; and the Company (a) paid Scarico (UK) Limited, Digital and Mr. Ghazarian an aggregate of approximately $90,000, (b) confirmed an option granted to Mr. Ghazarian in 1996 to purchase 100,000 shares of Common Stock exercisable at $3.00 per share and expiring in September 2001 and (c) deleted a provision requiring that Mr. Ghazarian be an employee of the Company in order to exercise an option to purchase 200,000 shares of Common Stock exercisable at $2.00 per share and expiring in September 2002. The parties also exchanged general releases in connection with this settlement arrangement. See "Item 12. Certain Relationships and Related Transactions." In 1993, the Company received correspondence from Intoximeters Inc. claiming that the Company's name infringes upon the name of a product of such entity, "Alco-Sensor." The Company believes that the Company's name does not infringe upon such other entity's product name and that the name Sens-O-Lock does not and will not cause a confusion in the marketplace between the Company's product and the product of Intoximeters Inc. However, no assurance can be given that such entity or others would be successful on a claim that the Company's name and/or product names infringe upon a copyright or trademark of such entity or others. Item 4. Submission of Matters to a Vote of Security Holders. On February 5, 1998, a Special Meeting of the Shareholders of the Company was held at which the Company's shareholders approved the elimination of the restriction on the number of shares of Common Stock issuable upon exercise of the Company's Series B Convertible Preferred Stock (the "Series B Preferred Stock") by the vote of 4,699,057 votes for, 278,346 votes against and 47,558 votes abstaining. PART II Item 5. Market for Common Equity and Related Stockholder Matters. (a) Market Information The Common Stock was traded on The Nasdaq SmallCap Market ("Nasdaq") under the symbol "ASIL" from August 9, 1996 through March 3, 1998. From November 9, 1995 and through August 9, 1996, the Company's "Units" traded on the Nasdaq SmallCap Market under the symbol "ASILU." Each Unit consisted of two shares of Common Stock, one Class A Common Stock Purchase Warrant (the "Class A Warrants"), and one-half of a Class B Common Stock Purchase Warrant (the "Class B Warrants"). Pursuant to the decision of a Nasdaq Listing Qualifications Panel, the Common Stock, Class A Warrants and Class B Warrants were delisted from trading on Nasdaq, effective the close of business on March 3, 1998. The cited cause of the delisting was the Panel's opinion that the Company was then currently not in compliance with the minimum net tangible assets continuing maintenance requirements of Nasdaq. The Common Stock, Class A Warrants and Class B Warrants have, since March 3, 1998, traded on the electronic bulletin board (the "OTC Bulletin Board") maintained by the National Association of Securities Dealers, Inc., under the symbols "ASIL," "ASILW" and "ASILZ," respectively. The following table sets forth the range of high and low closing bid prices for the Units and shares of Common Stock for the periods indicated, as derived from reports furnished by Nasdaq (with respect to information through March 3, 1998) and the National Quotation Bureau, LLC (with respect to information on and after March 4, 1998). The information reflects inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
UNITS - High Bid Low Bid -------- -------- Fiscal 1996 First Quarter. . . . . . . . . . . . . . $18-1/4 $ 12 Second Quarter . . . . . . . . . . . . . 20 11-3/4 Third Quarter (through August 8, 1996) . 15-3/4 8 COMMON STOCK - Fiscal 1996 Third Quarter (from August 9, 1996). . . 4-7/8 2-13/16 Fourth Quarter . . . . . . . . . . . . . 4-5/16 2-5/8 Fiscal 1997 First Quarter. . . . . . . . . . . . . . 7-1/4 3-3/8 Second Quarter . . . . . . . . . . . . . 5-3/8 2-5/16 Third Quarter. . . . . . . . . . . . . . 2-5/16 5-3/8 Fourth Quarter . . . . . . . . . . . . . 4-7/16 1 Fiscal 1998 First Quarter. . . . . . . . . . . . . . 1.375 .4375 Second Quarter . . . . . . . . . . . . . 1.4375 .65625 Third Quarter . . . . . . . . . . . . . .6875 .13 Fourth Quarter (through October 16, 1998) .21 .17
(b) Holders On October 16, 1998, there were 320 holders of Common Stock of record. The Company estimates, based upon surveys conducted by its transfer agent in connection with the Company's Special Meeting of Shareholders held on February 5, 1998, that it has approximately 3,000 beneficial shareholders. (c) Dividends The Company has never paid cash dividends on its capital stock and does not anticipate paying cash dividends in the foreseeable future. The Company currently intends to retain any future earnings for reinvestment in its business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements and other relevant factors. In addition, under the terms of the Company's Series A Cumulative Non-Redeemable Convertible Preferred Stock, par value $.001 per share (the "Series A Preferred Stock"), for so long as any shares of Series A Preferred Stock shall be outstanding, the Company shall not declare, pay or set apart for payment on any Company security junior in rank to the Series A Preferred Stock, including the Common Stock (the "Junior Stock"), any dividends whatsoever, whether in cash, property or otherwise (other than dividends payable in shares of the class or series upon which such dividends are declared or paid, or payable in shares of Common Stock with respect to any Junior Stock other than Common Stock, together with cash in lieu of fractional shares), nor shall the Company make any distribution on any Junior Stock, nor shall any Junior Stock be purchased, redeemed or otherwise acquired by the Company or any of its subsidiaries, nor shall any monies be paid or made available for a sinking fund for the purchase or redemption of any Junior Stock, in each case unless (i) all dividends to which the holders of shares of Series A Preferred Stock shall have been entitled for all previous periods shall have been paid in full and (ii) all such dividends for the immediately preceding two dividend periods shall have been paid exclusively in cash. (d) Recent Sales of Unregistered Securities The information set forth below is a list of all sales by the Company of the Company's equity securities occurring since January 1, 1997 that were not registered under the Securities Act of 1933, as amended (the "Securities Act"), and were not otherwise disclosed in the Company's Quarterly Reports on Forms 10-QSB for a quarter ended in 1997: 1. During 1997, the Company issued 40,750 shares of Common Stock upon exercise of warrants issued to securityholders in connection with the Company's private placements conducted in 1994 and 1995. The Company received gross proceeds of $53,625 from such warrant exercises. These stock issuances were transactions by the Company not involving any public offering which were exempt from the registration requirements under the Securities Act pursuant to Section 4(2) thereof. 2. In October 1997, the Company issued 24,000 shares of Common Stock, valued at $78,000, in settlement of litigation commenced against the Company. This stock issuance was a transaction by the Company not involving any public offering which was exempt from the registration requirements under the Securities Act pursuant to Section 4(2) thereof. 3. In October 1997, the Company issued 500 shares of Common Stock upon exercise of an option issued as partial consideration for services rendered in 1996. The Company received gross proceeds of $750 from such option exercise. This stock issuance was a transaction by the Company not involving any public offering which was exempt from the registration requirements under the Securities Act pursuant to Section 4(2) thereof. 4. In September 1997, the Company issued 1,000 shares of Common Stock, valued at $1,250, for consulting services rendered. This stock issuance was a transaction by the Company not involving any public offering which was exempt from the registration requirements under the Securities Act pursuant to Section 4(2) thereof. 5. As of February 1998, the Company issued 457,493 shares of Common Stock to Milbright Estates, Ltd. ("Milbright") upon Milbright's conversion of 26 shares of Series B 8% Convertible Preferred Stock, par value $.001 per share (the "Series B Preferred Stock"). This stock issuance was a transaction not including any public offering which was exempt from the registration requirements under the Securities Act pursuant to Section 4(2) thereof. 6. In August 1998, the Company issued an aggregate of 230,861 shares of Common Stock to AIIC as payment in full of $344,375 of dividends due on the 833,333 shares of Series A Preferred Stock registered in the name of AIIC. This stock issuance was a transaction not including any public offering which was exempt from the registration requirements under the Securities Act pursuant to Section 4(2) thereof. Item 6. Management's Discussion and Analysis or Plan of Operation. The following discussion should be read in conjunction with the historical financial statements, including the notes thereto, of the Company included elsewhere herein. General The Company designs, markets and sells electronic motor vehicle, after-market safety products, including a patent-pending line of BAIIDs, breath alcohol ignition interlock devices, under the Sens-O-Lock brand name. The Company's Sens-O-Lock BAIID equipment is designed to detect, evaluate and assist in the prevention of an alcohol impaired driver operating a vehicle. The Company also markets and sells, under the WeatherEye brand name, a line of modular products designed to automatically engage and adjust the headlights and taillights of automobiles depending upon weather and sunlight conditions. After the Company's initial sale of approximately 700 first generation Sens-O-Lock units, the Company became aware in late Spring 1996 of inconsistencies in certain integral components manufactured for the Company and other manufacturing, design and quality control problems. As a result, in the second quarter of 1996, the Company discontinued manufacturing the first generation Sens-O-Lock product, recalled the first generation Sens-O-Lock units which had been sold, temporarily ceased marketing efforts and wrote down the Company's inventory by approximately $556,000. From that time through September 1997, the Company devoted substantially all of its resources to the research and development of new technology for and design of the second generation Sens-O-Lock product line, development of new relationships with existing and other component suppliers and manufacturers, improvement of the Company's component and manufacturing quality control procedures, enhancement of the Sens-O-Lock operating software and development of the Company's network of distributors and dealers. The Company completed final parts procurement and ordered the initial production of second generation Sens-O-Lock units during September and October 1997. In late February 1998, the Company received confirmation from an independent testing laboratory that the second generation Sens-O-Lock successfully completed testing under the National Highway Traffic Safety Administration ("NHTSA") Model Specifications for Breath Alcohol Ignition Interlock Devices (the "Model Specifications") for the battery of required tests for the 37- and 67-day calibration stability challenge protocols. The Model Specifications are utilized by the various states in their individual certification processes for use in legislative and judicial programs for supervision of persons convicted of alcohol-related motor vehicle infractions, violations and crimes ("Mandatory Programs"). The various states have differing certification processes. Some states merely require compliance with the Model Specifications while other states have much higher standards and/or a complex certification procedure. Through October 20, 1998, the Sens-O-Lock has been certified in five states. The Company anticipates seeking additional state certifications of the second generation Sens-O-Lock on state-by-state basis, with priority based, among other factors, upon the location of the Company's distributors and dealers. The Company anticipates publicizing the Model Specification testing success and applicable state certifications in promoting the Sens-O-Lock devices for markets other than for Mandatory Programs (the "Mandatory Market"), such as (a) the voluntary market, which includes parents of teenage drivers (the "Voluntary Market"), and (b) the commercial market, comprising truck, bus and taxi fleets (the "Commercial Market"). The Company believes that, for the U.S. Voluntary Market and Commercial Market, no Model Specifications testing success or applicable state certification are required, although, the Company further believes that a significant portion of the Voluntary Market and Commercial Market will not purchase a BAIID without a minimum of a 37-day calibration success under the Model Specifications and applicable state certification. However, there can be no assurance given that the Model Specifications testing success or state certifications will result in any revenues to the Company or the commercial success of the second generation Sens-O-Lock product. The Company had limited sales of Sens-O-Lock units in 1997, primarily in the United Kingdom and elsewhere in Europe. During the second quarter of 1998, the Company sold 161 second generation Sens-O-Lock units and an additional 36 units were sold in the third quarter of 1998. There have been minimal revenues generated by the WeatherEye product line. The Company was dependent upon loans and equity investments from the Company's officers, directors and shareholders and others to fund the Company's operations in absence of any material sales through the third quarter of 1998. The Company anticipates that it will require additional loans and/or equity investments in order to continue operations and until such time as sufficient revenues from sales of Sens-O-Lock units are generated. In addition, the Company has held discussions with a third party with respect to the granting of world-wide distribution/licensing rights to the Company's Sens-O-Lock and WeatherEye product lines, which grant would require the pre-payment to the Company of certain royalties. There can be no assurance that the Company will obtain any additional loans and/or equity investments and/or enter into any such distribution/license arrangement, that any loans, equity investments and/or distribution/licensing arrangements will be on terms favorable to the Company, or that sufficient revenues, if any, will be generated through sales of Sens-O-Lock units. See "Item 12. Certain Relationships and Related Transactions." The Company continues to evaluate other sensing technologies currently utilized by competitors within the industry, as well as sensing technologies under development by others for use in different alcohol sensing applications. The Company intends to continue to utilize its research and development efforts to provide the Company with other alternative technical options for different specified target markets, as well as to improve and enhance the Company's products. The Company intends to seek insurance discounts to help drive the Voluntary Market and Commercial Market, and to assist in the lobbying for stricter federal and state laws requiring drivers convicted of alcohol-related motor vehicle infractions, violations or crimes to install BAIID equipment in their vehicles. The Company is evaluating strategies, marketing plans and programs which the Company expects will enable the Company to work jointly with insurance companies to enhance their respective markets. However, there can be no assurance that the Company and such insurance companies will agree upon a strategy, plan or program or that any such strategy, plan or program, if adopted, or the Company's independent lobbying efforts, will result in revenues to the Company or the commercial success of its products. Results of Operations Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 The Company's net sales for the year ended December 31, 1997 (the "1997 Fiscal Year") were approximately $35,000, compared to $41,000 for the year ended December 31, 1996 (the "1996 Fiscal Year"), a decrease of $5,000 or 13.0%, primarily the result of decreased sales of the Company's WeatherEye product, which more than offset sales of the second generation Sens-O-Lock. Total cost of sales for the 1997 Fiscal Year was approximately $71,000, compared to $40,000 for the 1996 Fiscal Year, an increase of $32,000 or 78.8%, primarily the result of higher costs of initial production of the second generation Sens-O-Lock units in the 1997 Fiscal Year. As a percentage of the Company's net sales, costs of sales increased to 202.5% for the 1997 Fiscal Year from 98.5% for the 1996 Fiscal Year. Research and development ("R&D") expense for the 1997 Fiscal Year was approximately $523,000, compared to $913,000 for the 1996 Fiscal Year, a decrease of $390,000 or 42.7%, primarily as a result of the finalization of the second generation Sens-O-Lock product for market having lower costs than the initial development of the product line. As a percentage of the Company's net sales, the Company's R&D expense decreased to 1482.1% for the 1997 Fiscal Year from 2250.7% for the 1996 Fiscal Year. Selling, general and administrative ("SG&A") expense for the 1997 Fiscal Year was approximately $2,987,000, compared to $3,102,000 for the 1996 Fiscal Year, a decrease of $114,000 or 3.7%, primarily the result of reduced staff in the 1997 Fiscal Year as the Company focused principally on research and development and reduced active marketing of the Sens-O-Lock line. As a percentage of the Company's net sales, the Company's SG&A expense decreased to 8460.7% for the 1997 Fiscal Year from 7642.0% for the 1996 Fiscal Year. Litigation settlement expense for the 1997 Fiscal Year was approximately $158,000, compared to $1,591,000 for the 1996 Fiscal Year, a decrease of $1,433,000 or 90.1%, primarily the result of the accrual of settlement costs in the 1996 Fiscal Year related to the settlement of the Pace/Polek Lawsuit and the Prior Lawsuit and other litigation. As a percentage of the Company's net sales, the Company's litigation settlement expense decreased to 447.7% for the 1997 Fiscal Year from 3921.3% for the 1996 Fiscal Year. The Company incurred a cost of goods sold - inventory write-off expense of $556,026 in the 1996 Fiscal Year related to the recall of the original Sens-O-Lock in the first half of 1996. There was no similar expense in the 1997 Fiscal Year. Interest income for the 1997 Fiscal Year was approximately $81,000, compared to $83,000 for the 1996 Fiscal Year, a decrease of $2,000 or 1.8%, primarily as a result of higher average loan balance in the 1996 Fiscal Year. Interest expense for the 1997 Fiscal Year was approximately $47,000, compared to $42,000 for the 1996 Fiscal Year, an increase of $5,000 or 12.9%, primarily as a result of higher average loan balances in the 1996 Fiscal Year. As a result of all of the above, the Company's net loss for the 1997 Fiscal Year was $3,670,968, compared to $6,121,143 for the 1996 Fiscal Year, a decrease of $2,450,175 or 40.0%. Liquidity and Capital Resources At December 31, 1997, the Company had working capital of approximately $890,000, a decrease of $728,000 from working capital of $1,618,000 at December 31, 1996. This decrease is primarily due to the net loss for the 1997 Fiscal Year of $3,670,968, offset in part by the net proceeds from the sale of Series B Preferred Stock discussed below. At December 31, 1997, the Company had cash and cash equivalents of approximately $1,883,000, a net decrease in cash and cash equivalents of $1,159,000 from $3,042,000 at December 31, 1996. Cash used in operating activities for the 1997 Fiscal Year was $3,784,000, a decrease of $157,000 as compared to the 1996 Fiscal Year. The major factors contributing to this decrease include the loss from operations, reduced litigation settlement costs, accounts payable and pre-paid expenses and increases to inventory in anticipation of sales of the second generation Sens-O-Lock. Cash used in investing activities for the 1997 Fiscal Year was $20,000, a decrease of $2,936,000 from cash provided by investing activities in the 1996 Fiscal Year of $2,915,000, primarily due to sales of marketable securities (offset, in part, by purchases) and a decrease in restricted cash in the 1996 Fiscal Year, the funds for such purchases and the restricted cash having been derived from the Company's initial public offering in 1995. Cash used in financing activities for the 1997 Fiscal Year was $2,645,000, a decrease of $898,000 from cash used in financing activities in the 1996 Fiscal Year of $3,543,000, primarily due to proceeds received in 1996 from the exercise of warrants sold in private placements conducted in 1993 through 1995 and the sale of notes payable. On September 26, 1997, the Company sold a total of 300 shares of Series B Preferred Stock at a price of $10,000 per share to Milbright Estates, Ltd. The net proceeds from the sale of the Series B Preferred Stock was approximately $2,675,000. The rights, preferences and privileges of the Series B Preferred Stock are set forth in amendments to the Company's Certificate of Incorporation (the "Series B Provisions") filed with the New York Secretary of State. The Series B Preferred Stock has a liquidation preference of $10,000 per share and bears cumulative dividends at a rate of eight percent (8%) per share per annum. Such dividends are payable only immediately prior to the conversion of the Series B Preferred Stock into Common Stock. The Series B Preferred Stock is currently convertible, in whole or part, at the option of the holder, into shares of Common Stock at any time. Each share of Series B Preferred Stock is convertible into that number of shares of Common Stock as is determined by dividing (i) the sum of (a) $10,000 plus (b) the amount of all accrued but unpaid or accumulated dividends on the share of Series B Preferred Stock being so converted by (ii) the Conversion Price in effect at the time of conversion. The "Conversion Price" of the Series B Preferred Stock is equal to the lower of (x) $4.03125 or (y) 82.5% of the average closing bid price of the Common Stock over the ten consecutive trading days immediately preceding the date of the conversion notice delivered to the Company. If not sooner converted, all outstanding shares of Series B Preferred Stock are subject to automatic conversion on the earlier of (i) September 26, 1999 or (ii) immediately prior to the consummation of the acquisition of the Company pursuant to a merger or consolidation or the sale of substantially all of the assets of the Company. Except in connection with such automatic conversion, in no event will a holder of Series B Preferred Stock be entitled to convert any shares of Series B Preferred Stock if such conversion would cause the sum of (i) the number of shares of Common Stock beneficially owned by the holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Series B Preferred Stock) and (ii) the number of shares Common Stock issuable upon the conversion of such shares of the Series B Preferred Stock, to result in beneficial ownership by the holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. As of February 9, 1998, Milbright converted 26 shares of Series B Preferred Stock into 457,493 shares of Common Stock. Based on the average of the closing bid prices of the Common Stock for the ten consecutive trading days preceding October 19, 1998, the currently outstanding 274 shares of Series B Preferred Stock would, if convertible, be convertible into an aggregate of 18,123,433 shares of Common Stock (without giving effect to accrued dividends). Pursuant to a letter agreement, dated August 14, 1998, between the Company and AIIC, AIIC, as the holder of the 833,333 outstanding shares of Series A Preferred Stock, agreed to accept (a) 230,861 shares of Common Stock as payment in full for all accrued and unpaid dividends on said 833,333 shares of Series A Preferred Stock for the prior dividend payment dates of June 30, 1997, December 31, 1997 and June 30, 1998 (i.e., $344,375) and (b) agreed to accept shares of Common Stock in lieu of payment of dividends on said 833,333 shares of Series A Preferred Stock due on the dividend payment dates of December 31, 1998, June 30, 1999 and December 31, 1999, such shares of Common Stock to be valued at approximately $1.487 per share (subject to adjustment). In June 1998, Milbright, the holder of all outstanding shares of Series B Preferred Stock loaned (the "June 1998 Loan") the Company $100,000, bearing interest at 11.5% per annum and maturing on July 31, 1998. In August 1998, Milbright loaned the Company (the "August 1998 Loan") an additional $40,000, bearing interest at 11.5% per annum and maturing on August 31, 1998. In September 1998, Milbright loaned the Company an additional $25,000, bearing interest at 11.5% per annum and maturing on October 31, 1998. Repayment of the June 1998 Loan and August 1998 Loan are past due, although Milbright has not made any attempt to require such repayment. In October 1998, a third party loaned the Company $30,000 with interest at 11.5% per annum and due on November 30, 1998. In October 1998, the Company received two $20,000 loans from the party negotiating a distribution agreement with the Company. These loans bear interest at 8.5% and are due on March 31, 1999 and April 6, 1999. Management believes that the Company currently does not have sufficient working capital to continue its operations over the long-term and that cash generated from operations for the next several months will not be sufficient to meet the Company's currently anticipated liquidity and capital expenditure requirements in order to successfully market the second generation Sens-O-Lock product line and/or for the Company to continue operations. The Company has entered into discussions with a third party with respect to granting world-wide distribution/licensing rights to the Company's Sens-O-Lock and WeatherEye product lines, which is anticipated to entail the pre-payment to the Company of certain royalties. Further, the Company has continued to have discussions with Milbright with respect to additional equity and/or debt financing. There can be no assurance, however, that the Company will enter into a formal distribution/licensing arrangement or receive additional financing from Milbright or any other party, that royalties from any such distribution/licensing arrangement and/or financing proceeds, if any, will be on terms favorable to the Company or that the Company will be successful in attaining its sales goals, nor that attaining such sales goals will have the desired effect on the Company's cash resources. The failure to receive sufficient distribution/licensing royalties and/or other equity or debt financing, as well as any failure to obtain a sufficient level of sales, may result in the Company seeking protection under the Federal Bankruptcy Laws and/or terminating operations. Year 2000 Compliance Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish twenty-first century dates from twentieth century dates. As a result, in less than two years, computer systems and software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. The Company is in the process of implementing a review of issues related to the Company's Year 2000 compliance. This review is intended to determine the affect of the turn of the century on the operability of the Company's products, management information systems ("MIS"), non-MIS systems the Company utilizes to conducts its business and other internal and external processes which may impact the Company's operations. In connection with this evaluation, the Company also anticipates reviewing the Company's vendors, distributors and suppliers for Year 2000 compliance and to effect changes where necessary. The Company anticipates that this review process will be conducted in three phases: the first phase is anticipated to encompass a review of all of the Company's products, internal and external systems/processes and vendors and suppliers for Year 2000 compliance; the second phase is expected to correct all items identified as non- compliant and essential to the operations of the Company; and the third phase is contemplated to be a second review to ensure Year 2000 compliance and interoperability of all systems/processes. The Company anticipates conducting its review with its current resources, but cannot assure that it has sufficient resources to complete the review process in a timely manner. The Company has not determined at this time, what total costs it will incur to conduct the review process and to implement any necessary corrections. Although the Company believes that the software utilized in the second generation Sens-O-Lock and the Company's MIS software are Year 2000 compliant and is working to ensure that the Company's products and internal systems are Year 2000 compliant, there can be no assurance that such compliance is or will be achieved. The failure to be Year 2000 compliant could have a material adverse effect on the Company's business, operating results and financial condition. Inflation The rate of inflation has had little impact on the Company's operations or financial position during the 1997 Fiscal Year and inflation is not expected to have a significant impact on the Company's operations or financial position during the year ending December 31, 1998. The Company pays a number of its suppliers, including Intercontinental and Scarico Italy, in US dollars. Therefore, fluctuations in the value of the Italian lira against the US dollar will not have an impact on the gross profit for sales of the Company's products. Item 7. Financial Statements. Set forth below is a list of the financial statements of the Company included in this Annual Report on Form 10-KSB.
Item Page* - ---- ----- Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . .F-1 Consolidated Balance Sheet as at December 31, 1997 . . . . . . . . . . . . .F-2 Consolidated Statements of Operations, for the years ended December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . .F-3 Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 1997 and 1996 . . . . . . . . . . . . . .F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . .F-5 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .F-6 - ---------- * Page F-1 follows page 38 to this Annual Report on Form 10-KSB.
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. Officers and Directors The current executive officers and directors of the Company are as follows: Positions and Director Name Age Offices with the Company Since - ---- --- ------------------------ -------- Joseph M. Lively 43 President, Chief Operating Officer and Director 1996 J. Ernest Hansen 59 Director 1996 Steven A. Martello 42 Director 1992 Michael A. Sylvester 60 Director 1992 Michael Rosenbaum 60 Director 1998 Daniel H. Pisani 40 Director 1997 The following is a brief summary of the business experience and background of the current directors of the Company, based upon information provided to the Company by such persons: Joseph M. Lively presently serves as the President (since July 1998), Chief Operating Officer (since April 1997) and a director (since December 1996) of the Company. Mr. Lively also served as Vice-President (April 1997 to July 1998) of the Company. From December 1987 to July 1998, Mr. Lively was engaged in the private practice of law. He is admitted to practice in New York and the federal courts for the Southern and Eastern Districts of New York. Mr. Lively received a BS from Long Island University in 1979 and a JD from St. John's University in 1987. Mr. Lively is the owner of WeatherEye, Inc., the licensor of the Company's WeatherEye product. (See "Item 12. Certain Relationships and Related Transactions.") J. Ernest Hansen presently serves as a director (since December 1996) of the Company. Mr. Hansen is President of American International Insurance Company (since November 1991), American International Insurance Company of California, Inc. (since August 1994), Minnesota Insurance Company (since May 1994), AIG Marketing, Inc. (since November 1991), and New Hampshire Insurance Services, Inc. (since March 1993), and has over twenty-five years of experience within the property and casualty insurance industry. Steven A. Martello presently serves as a director (since July 1992) of the Company. Mr. Martello previously served as the President (April 1997 through May 1998), Chief Executive Officer (July 1997 through May 1998), Chief Financial Officer (February through May 1998) and Chief Operating Officer (February 1992 to April 1997) of the Company. Mr. Martello was Vice President of Worldlink Information Systems, Inc. (January 1994 to November 1995), Vice President of Global Management and Technology Company, an international trading and training company (1990 to 1994), and Benefits Manager at General Mills, Inc. (Izod Division) (from February 1981 to April 1986). From 1986 to 1990, Mr. Martello was an officer of a family-owned company in the vehicle repair and refurbishing business. Concurrently with other employment, from 1984 to 1990, Mr. Martello worked with Presidential Advance Operations of the White House. Mr. Martello also served as a director of the Industry Advisory Board to the American Association of Motor Vehicle Administrators (from 1994 to 1995), assisting in liaison with Department of Motor Vehicle Commissioners and Industry. Daniel H. Pisani presently serves as a director (since November 1998) of the Company. From November 1997 to January 1998, Mr. Pisani served as the Chief Financial Officer of the Company. He has served (since February 1998 and from November 1995 through October 1997) as Chief Financial Officer of Swid Powell Design Inc., developers and marketers of tableware products. From August 1994 through August 1995, Mr. Pisani served as Chief Financial Officer of the Party Experience Inc., a retailer of party and paper goods, and, from January 1988 to August 1994, he was Chief Financial Officer of Kennedy Electrical Supply Corp. Michael Rosenbaum presently serves as a director (since January 1998) of the Company. He served as Executive Vice President and a director of Brooke Group, Ltd. from 1984 to 1992. He presently is a private investor. Mr. Rosenbaum was appointed to the Company's Board of Directors upon the exercise of the right of William Scott & Company, L.L.C., the underwriter of the Company's initial public offering in November 1995, to nominate one individual to the Company's Board. Michael A. Sylvester presently serves as a director (since February 1992) of the Company. He served as Chief Financial Officer and Treasurer of the Company from February 1992 to October 1997. Mr. Sylvester has been Chief Executive Officer, President (since 1983) and a principal stockholder of M&S Chevrolet, Inc. and Secretary/Treasurer (since 1984) of Morningstar Ford, Inc., automotive dealerships, and is senior partner (since 1983) of Perry Realty Co., a real estate holding company. Pursuant to the Company's Certificate of Incorporation, as amended to date, and a Shareholders Agreement, dated as of December 20, 1996 (the "Shareholders' Agreement"), among the Company, American International Insurance Company ("AIIC"), Messrs. Martello, Lively and Sylvester and others, for so long as at least 250,000 shares of Series A Preferred Stock are outstanding, the holders of the outstanding Series A Preferred Stock, voting separately as a class, have the special and exclusive right to elect one director to the Board of Directors. In accordance with such right, AIIC, as the holder of all of the outstanding shares of Series A Preferred Stock, has elected J. Ernest Hansen as a director of the Company. Currently, Messrs. Hansen, Pisani and Sylvester, each of whom is not an officer or employee of the Company, serve as the members of the Audit Committee and Compensation Committee of the Board of Directors. The Audit Committee recommends engagement of the Company's independent certified public accountants, and is primarily responsible for reviewing and approving the scope of the audit and other services performed by the Company's independent certified public accountants and for reviewing and evaluating the Company's accounting principles and practices, systems of internal controls, quality of financial reporting and accounting and financial staff, as well as any reports or recommendations issued by the independent accountants. The Compensation Committee generally reviews and approves of the Company's executive compensation and currently administers the Company's 1998 Stock Incentive Plan (the "1998 Plan"). Section 16(a) Beneficial Ownership Reporting Compliance Based solely upon a review of Forms 3, 4 and 5, and amendments thereto, furnished to the Company, together with written representations received by the Company from applicable parties that no Annual Statement of Beneficial Ownership of Securities on Form 5 was required to be filed by such parties for 1997 and prior years, all parties subject to the reporting requirements of Section 16(a) of the Exchange Act filed all such required reports, except that Joseph M. Lively and Michael Ghazarian each failed to timely file their Initial Statements of Beneficial Ownership of Securities on Form 3 and Joseph M. Lively failed to file a Form 5 with respect to two option grants by the Company, Steven A. Martello failed to file a Change in Beneficial Ownership Statement on Form 4 with respect to a transfer of 39,112 shares of Common Stock and a Form 5 with respect to two option grants by the Company, Michael A. Sylvester failed to file two Forms 4 with respect to a transfer of 79,822 shares of Common Stock and a contribution to capital of 13,918 shares of Common Stock and a Form 5 with respect to an option grant by the Company, Michael G. Ghazarian failed to file a Form 5 with respect to two option grants by the Company, Robert Whitney failed to file two Forms 4 with respect to a transfer of 79,822 shares of Common Stock and a contribution to capital of 13,918 shares of Common Stock and John Ruocco failed to file two Forms 4 with respect to a transfer of 79,822 shares of Common Stock and a contribution to capital of 13,918 shares of Common Stock. Item 10. Executive Compensation. The following table sets forth, for the three years ended December 31, 1997, the cash and other compensation paid to all individuals serving as the Company's Chief Executive Officer (or acting in a similar capacity) during 1997 and the one other individual serving as an executive officer of the Company on December 31, 1997 whose total salary and bonus, for services rendered to the Company during 1997, was $100,000 or more (each of such three individuals being a "Named Executive Officer").
Long-Term Compensation Annual Compensation Awards Securities All Other Annual Underlying Other Name and Principal Position Year Salary Bonus Compensation(1) Options Compensation - --------------------------- ---- ------ ----- --------------- ----------- ------------ Robert B. Whitney, 1997 $60,412 $-0- $-0- -0- $-0- Chairman of Board, 1996 99,944 -0- -0- -0- -0- Chief Executive Officer 1995 45,386 -0- -0- -0- -0- and President (2) Steven A. Martello, 1997 $ 71,226 $-0- $-0- 12,500(4) -0- Chief Executive Officer 1996 99,944 -0- -0- 100,000 -0- and President(3) 1995 -0- -0- -0- -0- Michael G. Ghazarian, 1997 $124,938 -0- -0- 222,500(6) -0-(7) Director of Production 1996 -0- -0- -0- 100,000 -0-(7) and Manufacturing and 1995 Managing Director of ASE (5) - ---------- (1) The value of all perquisites provided did not exceed the lesser of $50,000 or 10% of the officer's salary and bonus. (2) On April 17, and July 2, 1997, Mr. Whitney resigned as President and Chief Executive Officer and a director, respectively, of the Company for medical reasons. (3) On April 17, 1997, Mr. Martello was appointed President of the Company and on July 24, 1997, Mr. Martello was named Chief Executive Officer of the Company. Mr. Martello resigned as President, Chief Executive Officer and Chief Financial Officer of the Company, effective May 31, 1998. (4) Represents options granted in exchange for the cancellation of deferred salary of $25,000 due Mr. Martello. (5) Effective January 29, 1998, Mr. Ghazarian resigned all positions with the Company and ASE. (6) Includes an option to purchase 22,500 shares of Common Stock granted in exchange for the cancellation of deferred salary of $45,362 due Mr. Ghazarian. Pursuant to the Settlement Agreement, dated August 11, 1998, between the Company and Mr. Ghazarian, this option was canceled. (7) Does not include approximately $305,000 and $135,000 paid for services rendered and goods supplied in 1997 and 1996, respectively, to entities the Company believes are controlled or otherwise affiliated with Mr. Ghazarian. (See "Item 12. Certain Relationships and Related Party Transactions.")
Stock Option Grants in 1997 The following table sets forth the (a) number of shares underlying options granted to each Named Executive Officer during 1997, (b) percentage the grant represents of the total number of options granted to all Company employees during the 1997, (c) per share exercise price of each option and (d) expiration date of each option.
Number of Shares Percentage of Total Underlying Options Options Granted to Exercise Expiration Name Granted During 1997 Employees in 1997 Price Date - ---- ------------------- ------------------- -------- ---------- Robert B. Whitney. . . . . 0 -- -- -- Steven A. Martello . . . . 12,500(1) 4.1% $2.00 6/9/02 Michael G. Ghazarian . . . 22,500(1)(2) 7.4 $2.00 6/9/02 Michael G. Ghazarian . . . 200,000(3) 65.5 $2.00 9/22/02 - ----------------------------- (1) Represents options to purchase shares of Common Stock issued in exchange for accrued salary. (2) Pursuant to the Ghazarian Settlement Agreement, these options were canceled. (3) In accordance with the Ghazarian Settlement Agreement, the Company reissued this option deleting a provision restricting the right to exercise the option following Mr. Ghazarian's termination of employment with the Company.
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values Set forth in the table below is information, with respect to each of the Named Executive Officers, as to the (a) number of shares acquired during 1997 upon each exercise of options granted to such individuals, (b) aggregate value realized upon each such exercise (i.e., the difference between the market value of the shares at exercise and their exercise price), (c) total number of unexercised options held on December 31, 1997, separately identified between those exercisable and those not exercisable, and (d) aggregate value of in-the-money, unexercised options held on December 31, 1997, separately identified between those exercisable and those not exercisable.
Value of Unexercised Number of Unexercised Options* In-the-Money Options at at December 31, 1997 December 31, 1997 Shares Acquired Value Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable Robert B. Whitney . . . -0- -0- -0- -0- -0- -0- Steven A. Martello. . . -0- -0- 112,500 -0- -0- -0- Michael G. Ghazarian. . -0- -0- 300,000 -0- -0- -0-
Employment Agreements The Company currently has in effect an employment agreement (the "Lively Employment Agreement") with Joseph M. Lively. The Lively Employment Agreement, which became effective as of September 1, 1998, provides for Mr. Lively to serve as President and Chief Operating Officer of the Company for a term expiring in September 1, 2001, with an annual base salary of $150,000 (increasing to $182,500, as of January 1, 1999), subject to cost-of-living adjustments in each year of the employment term, and bonuses of (a) $50,000, should the Company report consolidated net income after taxes, excluding extraordinary items, in 1998, and (b) 4% of the Company's consolidated net income after taxes, excluding extraordinary items, in each of 1999 and 2000. Pursuant to the Lively Employment Agreement, the Company granted options to Mr. Lively to purchase an aggregate of 400,000 shares of Common Stock exercisable at $.225 per share, and has agreed to grant to Mr. Lively options to purchase 50,000 shares of Common Stock on each of September 1, 1999 and 2000 with an exercise price equal to the closing price of the Common Stock on the date of grant. The Lively Employment Agreement also provides for health and life insurance, a car allowance and other benefits and contains restrictions on Mr. Lively engaging in competition with the Company for the term thereof and for up to one year thereafter and provisions protecting the Company's proprietary rights and information. The Lively Employment Agreement also provides for the repricing of certain options to purchase an aggregate of 129,500 and 45,000 shares of Common Stock to $.225 and $.05 per share, respectively, from prices ranging from $1.06 to $3.00 per share. On the effective date of the Lively Employment Agreement, the per share closing sale price of the Common Stock was $.225. During 1996 and through June 30, 1997, Mr. Lively agreed to the deferral of a portion of his salary. As of June 10, 1997, the amount of such deferred salary and unpaid legal fees due Mr. Lively for services rendered prior to his employment by the Company was $90,000. On June 30, 1997, Mr. Lively agreed to the cancellation of such deferred salary in exchange for options to purchase 45,000 shares of Common Stock (subject to shareholder approval of the 1998 Stock Plan) at an exercise price of $2.00 per share. On June 30, 1997, the closing sale price of a share of Common Stock, as reported on The Nasdaq SmallCap Market, was $2.5625. 1998 Stock Incentive Plan On July 24, 1998, the Board of Directors of the Company adopted the 1998 Plan, subject to shareholder approval. Plan Summary The 1998 Plan authorizes the granting of awards to officers and employees of the Company, as well as to third parties providing services to the Company, e.g., independent contractors, consultants and advisors to the Company. Awards can be stock options (each, an "Option"), stock appreciation rights (each, an "SAR"), performance share awards (each, a "PSA") and/or restricted stock awards (each, an "RSA"). The 1998 Plan is administered by a committee (the "Committee") appointed by the Board of Directors and consisting of two or more members, each of whom must be a non-employee Director, or, in the absence of a committee, the Board of Directors as a whole. The Committee determines the number of shares to be covered by an award, the term and exercise price, if any, of the award and other terms and provisions of awards. The Compensation Committee of the Board of Directors of the Company has been designated to serve as the Committee and, thereby, administer the 1998 Plan. Members of the Board of Directors are eligible to receive awards under the 1998 Stock Plan. In addition, non-employee directors presently receive the non-discretionary stock option awards described below. The number and kind of shares available under the 1998 Plan are subject to adjustment in certain events. Shares relating to Options or SARs which are not exercised, shares relating to RSAs which do not vest and shares relating to PSAs which are not issued will again be available for issuance under the 1998 Plan. Awards relating to up to 3,000,000 shares of Common Stock may be granted under the 1998 Plan and the Company has reserved 3,000,000 shares of Common Stock for issuance thereunder. An Option granted under the 1998 Plan may be an incentive stock option ("ISO") or a nonqualified Option. ISOs may only be granted to employees of the Company. The exercise price for Options is to be determined by the Committee but, in the case of an ISO, is not to be less than the fair market value of the Common Stock on the date the Option is granted (110% of fair market value, in the case of an ISO granted to any person who owns more than 10% of the voting power of the Company) and, in the case of a nonqualified Option, is not to be less than 85% of the fair market value of the Common Stock on the date the Option is granted. In general, the exercise price is payable in any combination of cash, or, if authorized by the Committee, shares of Common Stock already owned by the participant for at least six months or a promissory note secured by the Common Stock issuable upon exercise. In addition, the award agreement may provide for "cashless" exercise and payment. The aggregate fair market value (determined on the date of grant) of the shares of Common Stock for which ISOs may be granted to any participant under the 1998 Stock Plan and any other plan by the Company or its affiliates which are exercisable for the first time by such participant during any calendar year may not exceed $100,000. Options granted under the 1998 Plan become exercisable in three equal annual tranches commencing one year from the date of grant, unless the Committee determines otherwise. An ISO granted to a holder (a "10% Shareholder") of more than 10% of the voting power of the Company must expire no later than five years from the date of grant. ISOs granted to persons other than a 10% Shareholder and all non-qualified Options must expire no later than ten years from the date of the grant. A director who is not also an employee of the Company will, upon appointment, election or re-election to the Board of Directors, automatically be granted a nonqualified option to purchase 25,000 shares, exercisable in three equal annual tranches commencing one year from the date of grant, at an exercise price equal to the fair market value of Common Stock on the date of grant. Options become immediately exercisable in full in the event of a disposition of all or substantially all of the assets or capital stock of the Company by means of a sale, merger, consolidation, reorganization, liquidation or otherwise, unless the Committee arranges for the optionee to receive new Options covering shares of the corporation purchasing or acquiring the assets or stock of the Company in substitution of the Options granted under the 1998 Stock Plan (which Options shall thereupon terminate). The Committee in any event may, on such terms and conditions as it deems appropriate, accelerate the exercisability of Options granted under the 1998 Plan. The Options granted under the 1998 Plan are not transferable other than by will or the laws of descent and distribution. Options which have become exercisable by the date of termination of employment or of service must be exercised within certain specified periods of time from the date of termination; the period of time to depend on the reason for termination. Such Options generally lapse three months after termination of employment other than by reason of retirement, total disability or death, in which case they generally terminate one year thereafter. If a participant is discharged for cause, all of the participant's Options will terminate immediately. Options which have not yet become exercisable on the date the participant terminates employment or service on the Company's Board of Directors for a reason other than retirement, death or total disability shall terminate on that date. An SAR is the right to receive payment based on the appreciation in the fair market value of Common Stock from the date of grant to the date of exercise. At the Committee's sole discretion, the Committee may grant an SAR concurrently with the grant of an Option. Such SAR is only exercisable at such time, and to the extent that the related Option is exercisable. Upon exercise of an SAR, the holder receives for each share with respect to which the SAR is exercised an amount equal to the difference between the exercise price under the related Option and the fair market value of a share of Common Stock on the date of exercise of the SAR. Such amount will be applied against the exercise price due in connection with the exercise of the related Option. Each SAR granted concurrently with an Option will have the same termination provisions and exercisability periods as the related Option. In its discretion, the Committee may also grant SARs independently of any Option, subject to such conditions consistent with the terms of the Plan as the Committee may provide in the award agreement. Upon the exercise of an SAR granted independently of any Option, the holder receives for each share with respect to which the SAR is exercised an amount in cash based on the percentage specified in the award agreement of the excess, if any, of fair market value of a share of Common Stock on the date of exercise over such fair market value on the date the SAR was granted. The Committee, in the Committee's sole discretion, can authorize the payment of such amount in cash, shares of Common Stock or a combination thereof. The termination provisions and exercisability periods of an SAR granted independently of any Option will be determined by the Committee. An RSA is an award of a fixed number of shares of Common Stock subject to transfer restrictions. The Committee specifies the purchase price, if any, the recipient must pay for such shares. Shares included in an RSA may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered until they have vested. The recipient is entitled to dividend and voting rights pertaining to such RSA shares even though they have not vested, so long as such shares have not been forfeited. Upon the date a participant is no longer employed by the Company for any reason, shares subject to the participant's RSAs which have not become vested by that date or shares subject to a participant's PSAs which have not been issued shall be forfeited in accordance with the terms of the related award agreements. A PSA is an award of a fixed number of shares of Common Stock, the issuance of which is contingent upon the attainment of such performance objectives, and the payment of such consideration, if any, as is specified by the Committee. The 1998 Stock Plan permits a participant to satisfy the participant's tax withholding with shares of Common Stock instead of cash, if the Committee agrees. The exercisability of all of the outstanding awards may be accelerated, subject to the discretion of the Committee, upon the occurrence of an "Event" that, as defined in the 1998 Stock Plan, includes approval by the shareholders of the dissolution on liquidation of the Company, certain mergers, consolidations, sale of substantially all of the Company's business and/or assets and a "change in control." The 1998 Stock Plan defines a change in control to have occurred (i) if a "person," as defined in Section 13(d) and 14(d) under the Exchange Act, acquires 20% or more of the voting power of the then outstanding securities of the Company or (ii) if, during any two consecutive year periods, there is a change of a majority of the members of the Board of Directors, unless the election or nomination of the new directors is approved by at least three-fourths of the members still in office from the beginning of the two year period. The 1998 Stock Plan provides for anti-dilution adjustments in the event of a reorganization, merger, combination, recapitalization, reclassification, stock dividend, stock split or reverse stock split. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company as a result of which the Company is not the surviving entity, the Plan will terminate, and any outstanding awards will terminate and be forfeited, subject to the Committee's ability to provide for (i) certain payments to participants in cash or Common Stock in lieu of such outstanding awards, (ii) the assumption by the successor corporation of either the Plan or the awards outstanding under the Plan and (iii) continuation of the Plan. The Board of Directors may, at any time, terminate or suspend the 1998 Plan. The 1998 Plan currently provides that the Board of Directors or the Committee may amend the 1998 Plan at any time without the approval of the holders of a majority of the shares of Common Stock except in certain situations enumerated in the 1998 Plan and then only to the extent such approval is required by Rule 16b-3 under the Exchange Act or Sections 162(m) or 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Federal Income Tax Consequences ISOs granted under the 1998 Plan are intended to qualify as incentive stock options in accordance with the provisions of Section 422 of the Code. All other Options granted under the 1998 Plan are non-qualified Options and not entitled to special tax treatment under Section 422 of the Code. Generally, the grant of an ISO will not result in taxable income to the recipient at the time of the grant, and the Company will not be entitled to an income tax deduction at such time. The grant of nonqualified options will not result in taxable income to the recipient at the time of the grant to the extent that it is granted at 100% of the fair market value of Common Stock at such time. So long as such Option does not result in taxable income to the recipient at the time of the grant, the Company will not be entitled to an income tax deduction. Upon the exercise of an ISO granted under the 1998 Plan, the recipient will not be treated as receiving any taxable income, and the Company will not be entitled to an income tax deduction. Upon the exercise of a nonqualified option, an employee who is not a director or officer of the Company will be treated as receiving compensation, taxable as ordinary income, in an amount equal to the excess of the fair market value of the underlying shares of the Common Stock at the time of exercise, over the exercise price. The date of recognition and determination of the ordinary compensation income attributable to shares received upon exercise of an Option by an officer of the Company, while he or she is subject to Section 16(b) of the Exchange Act, is generally delayed until six months after such exercise, unless that person elects to be taxed as of the date of exercise. The Company will receive an income tax deduction for the amount treated as compensation income to the recipient at the time and in the amount that the recipient recognizes such income. Upon subsequent disposition of the shares subject to the Option, any differences between the tax basis of the shares and the amount realized on the disposition is generally treated as long-term or short-term capital gain or loss, depending on the holding period of the shares of Common Stock; provided, that if the shares subject to an ISO are disposed of prior to the expiration of two years from the date of grant and one year from the date of exercise, the gain realized on the disposition will be treated as ordinary compensation income to the optionee. Upon any grant of restricted stock or other award under the 1998 Plan, taxable income generally will be recognized by the recipient thereof to the extent that there is no substantial risk of forfeiture thereof. The satisfaction of any of the restrictions thereon generally will result in the recipient thereof being deemed to have received taxable income to the extent of the value of such award with respect to which such restrictions have been satisfied. Options Granted Under the 1998 Stock Plan to Date The Company has granted options to purchase an aggregate 325,000 shares of Common Stock under the 1998 Stock Plan, subject to shareholder approval thereof. Indemnification Section 722 of the New York Business Corporation Law provides that indemnification of directors, officers, employees and other agents of a corporation, and persons who serve at its request as directors, officers, employees or other agents of another organization, may be provided by such corporation if such person acted in good faith, for a purpose such person reasonably believes to be in the best interest of such corporation and, in criminal proceedings, in addition, had no reasonable cause to believe such person's conduct was unlawful. The Company also maintains a directors' and officers' liability insurance policy in a coverage amount of $2,000,000. Item 11. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth the beneficial ownership of shares of voting stock of the Company, as of October 23, 1998, of (a) each person known by the Company to beneficially own 5% or more of the shares of outstanding Common Stock, based on filings with the SEC and certain other information, (b) each of the Company's executive officers and directors and (c) all of the Company's executive officers and directors as a group.
Amount and Percentage Amount and Percentage Nature of Ownership of Nature of Series Ownership Common Stock Common Stock A Preferred Stock of Series A Name and Address of Beneficially and Voting Beneficially Preferred Beneficial Owner(1) Owned(2) Power(3)(4) Owned(2) Stock(3) - ------------------- ------------ ------------ ----------------- ----------- American International Insurance Company . . . . 1,700,436(5) 15.5 833,333 100.0 American International Group, Inc. . . . . . . . 1,700,436(6) 15.5 833,333(7) 100.0 J. Ernest Hansen. . . . . . 1,700,436(8) 15.5 833,333(9) 100.0 Michael A. Sylvester. . . . 601,260(10) 6.3 -- 0 Robert B. Whitney (11). . . 566,260 6.0 -- 0 John T. Ruocco (12) . . . . 566,260 6.0 -- 0 Milbright Estates, Ltd. . . 473,140(13) 5.0 -- 0 Steven A. Martello. . . . . 420,047(14) 4.3 -- 0 Joseph M. Lively. . . . . . 214,350(15) 2.2 -- 0 Michael Rosenbaum . . . . . 77,112(16) 0.8 -- 0 Daniel H. Pisani. . . . . . 0(17) 0.0 -- 0 All officer and directors as a group (6 persons). . . 3,013,205(18) 26.6 833,333 100.0 * Less than 0.1% (1) Unless otherwise indicated, the address for each beneficial owner listed in the table is Alcohol Sensors International, Ltd., 11 Oval Drive, Islandia, New York 11722. (2) Unless otherwise indicated, the Company believes that all persons named in the security ownership table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within 60 days from the date on which beneficial ownership is to be determined upon the exercise of options, warrants or convertible securities. (3) Each beneficial owner's percentage ownership and voting power is determined by assuming that stock options and warrants and convertible securities that are held by such person (but not those held by any other person) and which are exercisable or convertible within such 60 day period, have been exercised or converted, as the case may be. (4) As of October 23, 1998, each share of Series A Preferred Stock is entitled to cast .6982915 votes on all matters subject to a vote of shareholders and, subject to applicable law, votes together with the holders of Common Stock. (5) Includes (a) the 581,909 shares of Common Stock issuable upon conversion in full of the 833,333 shares of Series A Preferred Stock held of record by American International Insurance Company ("AIIC"), a wholly owned subsidiary of American International Group, Inc. ("AIG"), which shares of Series A Preferred Stock are convertible within the next 60 days and (b) the 887,666 shares of Common Stock issuable upon exercise of warrants held of record by AIIC, which warrants are exercisable within the next 60 days. However, if Milbright were to convert in full the remaining 274 shares of Series B Preferred Stock as of October 19, 1998, the Series A Preferred Stock would be convertible into 1,519,941 shares of Common Stock and the warrants held by AIIC would entitle AIIC to purchase 2,285,415 shares of Common Stock. See Note (13) below and "Item 12. Certain Relationships and Related Transactions." (6) Represents the 1,700,436 shares of Common Stock beneficially owned by AIIC, a wholly owned subsidiary of AIG, as of the Record Date. See note (5) above. (7) Represents the 833,333 shares of Series A Preferred Stock owned of record by AIIC, a wholly owned subsidiary of AIG. (8) Includes the 1,700,436 shares of Common Stock beneficially owned by AIIC, of which Mr. Hansen is President and a director. Mr. Hansen disclaims beneficial ownership to any of the 1,700,436 shares of Common Stock beneficially owned by AIIC. Does not include 25,000 shares of Common Stock issuable upon exercise of an option granted to Mr. Hansen which was granted subject to (and not exercisable prior to) shareholder approval of the 1998 Plan. The Company anticipates that the shareholders of the Company will be asked to approve the 1998 Plan at the next Annual Meeting of Shareholders anticipated to be held more than 60 days from the date hereof. See note (5) above. (9) Includes the 833,333 shares of Series A Preferred Stock owned of record by AIIC, of which Mr. Hansen is President and a director. Mr. Hansen disclaims beneficial ownership to any of the 833,333 shares of Series A Preferred Stock held of record by AIIC. (10) Includes 35,000 shares of Common Stock issuable upon exercise of options granted to Mr. Sylvester, which option is exercisable within the next 60 days. Does not include 25,000 shares of Common Stock issuable upon exercise of an option granted to Mr. Sylvester which was granted subject to (and not exercisable prior to) shareholder approval of the 1998 Plan. The Company anticipates that the shareholders of the Company will be asked to approve the 1998 Plan at the next Annual Meeting of Shareholders anticipated to be held more than 60 days from the date hereof. (11) The address for Mr. Whitney is 42 Parkside Avenue, Miller Place, New York 11764. (12) The address for Mr. Ruocco is 26 Moriches Avenue, Mastic, New York 11950. (13) Under the Securities Purchase Agreement, dated September 24, 1997, by and between the Company and Milbright, Milbright is prohibited (the "Milbright Prohibition") from converting shares of Series B Preferred Stock that would result inMilbright and its affiliates being deemed the beneficial owner of more than 4.99% of the outstanding Common Stock. The 473,140 shares of Common Stocklisted in the above table as beneficially owned by Milbright reflects the 457,493 shares of Common Stock that Milbright acquired upon conversion of 26 shares of Series B Preferred Stock and an additional 15,647 shares of Common Stock issuable upon conversion of Series B Preferred Stock held by Milbright without violating the Milbright Prohibition. Without giving effect to the Milbright Prohibition, Milbright would be deemed to be the beneficial owner of 18,580,926 shares, or 67.3%, of the Common Stock. (14) Represents (a) 15,659 shares of Common Stock owned by a minor child of Mr. Martello (of which Mr. Martello disclaims beneficial ownership), (b) 291,888 shares of Common Stock owned by a family limited liability partnership of which Mr. Martello is the general partner and presently holds a 99% interest therein (and of which Mr. Martello disclaims beneficial ownership to all other partnership interests therein) and (c) 112,500 shares of Common Stock issuable upon exercise of options granted to Mr. Martello, which option is exercisable within the next 60 days. Does not include 25,000 shares of Common Stock issuable upon exercise of an option granted to Mr. Martello which was granted subject to (and no exercisable prior to) shareholder approval of the 1998 Plan. The shareholders of the Company will be asked to approve the 1998 Plan at the next Annual Meeting of Shareholders anticipated to be held more than 60 days from the date hereof. (15) Represents (a) 37,350 shares of Common Stock owned by the spouse of Mr. Lively (of which Mr . Lively disclaims beneficial ownership), (b) 2,500 shares of Common Stock held in a Simplified Employee Pension Plan ("SEPP") for the benefit of Mr. Lively and (c) 174,500 shares of Common Stock issuable upon exercise of options granted to Mr. Lively, which options are exercisable within the next 60 days. Does not include 200,000 shares of Common Stock issuable upon exercise of an option granted to Mr. Lively which were granted subject to (and no portion is exercisable prior to) shareholder approval of the 1998 Plan. The Company anticipates that the shareholders of the Company will be asked to approve the 1998 Plan at the next Annual Meeting of Shareholders anticipated to be held more than 60 days from the date hereof. (16) Includes (a) 60,600 shares of Common Stock issuable upon exercise of warrants held by Mr. Rosenbaum, which warrants are exercisable within the next 60 days, (b) 14,090 shares of Common Stock held by Mr. Rosenbaum's spouse (of which Mr. Rosenbaum disclaims beneficial ownership) and (c) 22 shares of Common Stock issuable upon exercise of warrants held by Mr. Rosenbaum's spouse, which warrants are exercisable within the next 60 days. Does not include 25,000 shares of Common Stock issuable upon exercise of an option granted to Mr. Rosenbaum which was granted subject to (and no exercisable prior to) shareholder approval of the 1998 Plan. The Company anticipates that the shareholders of the Company will be asked to approve the 1998 Plan at the next Annual Meeting of Shareholders anticipated to be held more than 60 days from the date hereof. (17) Does not include 25,000 shares of Common Stock issuable upon exercise of an option granted to Mr. Pisani which was granted subject to (and no exercisable prior to) shareholder approval of the 1998 Plan. The Company anticipates that the shareholders of the Company will be asked to approve the 1998 Plan at the next Annual Meeting of Shareholders anticipated to be held more than 60 days from the date hereof. (18) Includes (a) an aggregate 1,469,575 shares of Common Stock issuable upon upon conversion of the Series A Preferred Stock and the exercise of the AIIC Warrant held by AIIC, (b) the 382,622 shares of Common Stock issuable upon exercise of options and warrants held by Messrs. Lively, Martello, Rosenbaum and Sylvester and Mr. Rosenbaum's spouse, which options and warrants are exercisable within the next 60 days, and (c) the 361,487 shares of Common Stock owned by Mr. Martello's child and family liability partnership, Mr. Lively's spouse and SEPP and Mr. Rosenbaum's spouse, as discussed in notes (12) through (15) above. Does not include the 325,000 shares of Common Stock issuable upon exerciseof the options, as discussed in notes (12) through (16) above which were granted subject to (and no portions are exercisable prior to) shareholder approval of the 1998 Plan. The Company anticipates that the shareholders of the Company will be asked to approve the 1998 Plan at the 1998 Annual Meeting of Shareholders anticipated to be held more than 60 days from the date hereof.
Item 12. Certain Relationships and Related Transactions. Certain current and former officers of the Company were named as parties to some of the litigation which have been settled or which are currently pending. See "Item 3. Legal Proceedings." The Company believes that Michael Ghazarian is the Managing Director of Digital. In October 1993, Digital was granted exclusive distribution rights to the Company's products for all of Europe. Mr. Ghazarian also was a 20% owner of ASE, a subsidiary of the Company, which had been assigned by Digital such exclusive European distribution rights, and had been granted exclusive European and non-exclusive world-wide manufacturing rights to the Company's Sens-O-Lock devices. The Company also believes that Mr. Ghazarian is a director/owner of Scarico (UK) Limited (not affiliated with Scarico Italy), which had provided certain sub-manufacturing and assembly services to the Company and ASE. In July 1996, Mr. Ghazarian was made a consultant to the Company; in September 1996, Mr. Ghazarian was appointed Managing Director of ASE; and, in September 1996, Mr. Ghazarian was elected a director of the Company. In 1996, the Company incurred charges of approximately $174,000 for molds, tooling and operating expenses from Digital and Scarico (UK) Limited. In July 1996, the Company entered into a consulting agreement with Mr. Ghazarian. The consulting agreement was for a duration of six months at a fee $100 per month, plus pre-approved expenses. Under this consulting agreement, Mr. Ghazarian assumed responsibility for building molds and tooling for the Sens-O-Lock product line and completing the Company's proprietary air tube design for the Sens-O-Lock devices. In consideration of Mr. Ghazarian's representation of the successful completion of the tasks under the consulting agreement, the Company awarded him an option (the "Consulting Agreement Option") to purchase 100,000 shares of Common Stock at an exercise price of $3.00 per share. Following the expiration of such consulting agreement, the Company retained Mr. Ghazarian as an employee at the rate of $100,000 per year. Through June 10, 1997, Mr. Ghazarian agreed to the deferral of a portion of his salary. As of June 30, 1997, the amount of such deferred salary was $45,000. On June 30, 1997, Mr. Ghazarian agreed to the cancellation of such deferred salary in exchange for an option (the "Ghazarian Deferred Compensation Option") to purchase 22,500 shares of Common Stock at an exercise price of $2.00 per share. On June 30, 1997, the closing sale price of a share of Common Stock, as reported on The Nasdaq SmallCap Market, was $2.5625. Pursuant to its arrangement with Mr. Ghazarian, Digital and Scarico UK, Ltd., in 1997, the Company paid Mr. Ghazarian, Digital and Scarico UK, Ltd. an aggregate of $428,618. Mr. Ghazarian resigned as an officer, director and employee of the Company and ASE effective January 29, 1998. In February 1998, Scarico (UK) Limited commenced litigation in the United Kingdom against the Company claiming that Scarico UK Limited was owed additional funds by ASE, which the Company disputed. In August 1998, the Company and ASE and Scarico (UK) Limited, Digital and Mr. Ghazarian (collectively, the "Ghazarian Entities"), settled this litigation, pursuant to which (a) the Company paid the Ghazarian Entities an aggregate of approximately $90,000, (b) Mr. Ghazarian made certain representations as to the Sens-O-Lock equipment and parts inventory in the possession of the Ghazarian Entities, (c) the Ghazarian Entities turned over to the Company such Sens-O-Lock equipment and parts, (d) the Ghazarian Deferred Compensation Option was canceled, (e) the Company confirmed the Consulting Agreement Option, (f) Mr. Ghazarian assigned his 20% equity interest in ASE to the Company, (g) the Company deleted a provision requiring that Mr. Ghazarian be an employee of the Company in order to exercise an option to purchase 200,000 shares of Common Stock exercisable at $2.00 per share and expiring in September 2002 and (h) the parties exchanged general releases. See "Item 3. Legal Proceedings." Joseph M. Lively, President, Chief Operating Officer and a director of the Company, is one of the inventors of the product that eventually became the Company's WeatherEye product line. Mr. Lively is the sole shareholder of Weather Eye, Inc., which holds, with one other individual, the patent rights to this product. Weather Eye, Inc. and the Company entered into an agreement in August 1996, as amended, pursuant to which the Company is obligated to pay a royalty of between $0.19 and $2.00 per unit. The Company did not pay Weather Eye, Inc. any royalties in 1996 and 1997. In September 1998, the patent and technology rights held by WeatherEye, Inc. with respect to the WeatherEye product was assigned to the Company for nominal consideration. See "Item 1. Description of Business -- Products and "Intellectual Property and Other Proprietary Rights." During 1996 and through June 30, 1997, Mr. Lively agreed to the deferral of a portion of his salary. As of June 10, 1997, the amount of such deferred salary and unpaid legal fees due Mr. Lively for services rendered prior to his employment by the Company was $90,000. On June 30, 1997, Mr. Lively agreed to the cancellation of such deferred salary in exchange for options to purchase 45,000 shares of Common Stock (subject to shareholder approval of the 1998 Stock Plan) at an exercise price of $2.00 per share. The closing sale price of a share of Common Stock, as reported on The Nasdaq SmallCap Market, on such date was $2.5625. On September 26, 1997, the Company sold a total of 300 shares of Series B Preferred Stock at a price of $10,000 per share to Milbright Estates, Ltd. The net proceeds from the sale of the Series B Preferred Stock was approximately $2,675,000. The rights, preferences and privileges of the Series B Preferred Stock are set forth in amendments to the Company's Certificate of Incorporation (the "Series B Provisions") filed with the New York Secretary of State. The Series B Preferred Stock has a liquidation preference of $10,000 per share and bears cumulative dividends at a rate of 8% per share per annum. Such dividends are payable only immediately prior to the conversion of the Series B Preferred Stock into Common Stock. The Series B Preferred Stock is currently convertible, in whole or part, at the option of the holder, into shares of Common Stock at any time. Each share of Series B Preferred Stock is convertible into that number of shares of Common Stock as is determined by dividing (i) the sum of (a) $10,000 plus (b) the amount of all accrued but unpaid or accumulated dividends on the share of Series B Preferred Stock being so converted by (ii) the Conversion Price in effect at the time of conversion. The "Conversion Price" of the Series B Preferred Stock is equal to the lower of (x) $4.03125 or (y) 82.5% of the average closing bid price of the Common Stock over the ten consecutive trading days immediately preceding the date of the conversion notice delivered to the Company. If not sooner converted, all outstanding shares of Series B Preferred Stock are subject to automatic conversion on the earlier of (i) September 26, 1999 or (ii) immediately prior to the consummation of the acquisition of the Company pursuant to a merger or consolidation or the sale of substantially all of the assets of the Company. Except in connection with such automatic conversion, in no event will a holder of Series B Preferred Stock be entitled to convert any shares of Series B Preferred Stock if such conversion would cause the sum of (i) the number of shares of Common Stock beneficially owned by the holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Series B Preferred Stock) and (ii) the number of shares Common Stock issuable upon the conversion of such shares of the Series B Preferred Stock, to result in beneficial ownership by the holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. Effective as of February 9, 1998, Milbright converted 26 shares of Series B Preferred Stock into 457,493 shares of Common Stock. Based on the average of the closing bid prices of the Common Stock for the ten consecutive trading days preceding October 19, 1998, the 274 shares of Series B Preferred Stock would convert into an aggregate of 18,123,433 shares of Common Stock (without giving effect to accrued dividends). Pursuant to a letter agreement, dated August 14, 1998, between the Company and AIIC, AIIC, as the holder of the 833,333 outstanding shares of Series A Preferred Stock, (a) agreed to accept an aggregate of 230,861 shares of Common Stock as payment in full for all accrued and unpaid dividends on said 833,333 shares of Series A Preferred Stock for the prior dividend payment dates of June 30, 1997, December 31, 1997 and June 30, 1998 (i.e., $344,375) and (b) agreed to accept shares of Common Stock in lieu of payment of dividends on said 833,333 shares of Series A Preferred Stock due on the dividend payment dates of December 31, 1998, June 30, 1999 and December 31, 1999, such shares of Common Stock to be valued at approximately $1.487 per share (subject to adjustment). In June 1998, Milbright Estates Ltd. ("Milbright"), the holder of all of the outstanding shares of Series B Preferred Stock loaned (the "June 1998 Loan") the Company $100,000, bearing interest at 11.5% per annum and maturing on July 31, 1998. In August 1998, Milbright loaned the Company (the "August 1998 Loan") an additional $40,000, bearing interest at 11.5% per annum and maturing on August 31, 1998. In September 1998, Milbright loaned the Company an additional $25,000, bearing interest at 11.5% per annum and maturing on October 31, 1998. Neither the June 1998 loan nor the August 1998 loan have been repaid, although Milbright has not taken any action to require such repayment. Set forth below are the names of the individuals, their affiliations with the Company and the number of shares transferred in February 1997 pursuant to a stipulation of Settlement, Settlement Agreement and mutual release, dated February 27, 1997, between Albert Pace and Jan Polek and the Company (see "Item 3. Legal Proceedings"), such individuals and others:
Number of Shares Name Affiliation Transferred - ---- ----------- ----------- Steven A. Martello. . Former President and Chief Executive Officer and current director . . . . . . . 39,112 John T. Ruocco. . . . Former Senior Vice President and director and current 5% shareholder. . . . 79,822 Michael A. Sylvester Former Executive Vice President of Sales, Treasurer and Chief Financial Officer and current director and 5% shareholder. . . . 79,822 Robert B. Whitney . . Former President, Chief Executive Officer and director and current 5% shareholder. . 79,822
Item 13. Exhibits and Reports on Form 8-K. (a) Exhibits. Set forth below are all exhibits to this Annual Report on Form 10-KSB: 3.1 Composite of Certificate of Incorporation of the Company, as amended to date. [(Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (Date of Report: September 26, 1997) (Commission File Number: 0-26998), filed with the Commission on October 7, 1997.)] 3.2 By-laws of the Company, as amended to date. (Incorporated by reference to Exhibit 3(c) to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on September 8, 1995.) 4.1 Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4(a) to Amendment No.2 to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on October 30, 1995.) 4.2 Specimen Redeemable Common Stock Warrant Certificate. (Incorporated by reference to Exhibit 4(b) to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on September 5, 1995.) 4.3 Underwriter's Unit Purchase Option (Form). (Incorporated by reference to Exhibit 4(c) to Amendment No. 2 to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on October 30, 1995.) 10.1 Company's 1998 Incentive Stock Plan. 10.2 Employment Agreement, dated December 31, 1995, between the Company and Steven A. Martello. (Incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.3 Employment Agreement, dated December 31, 1995, between the Company and Michael A. Sylvester. (Incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.4 Employment Agreement, dated as of September 1, 1998, between the Company and Joseph M. Lively (without exhibits). 10.5 Joint Venture Agreement, dated August 8, 1996, between the Company and Weather Eye, Inc., as amended on December 31, 1996. (Incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.6 Lease, dated August 8, 1995, between the Company and IR Realty Inc. (Incorporated by reference to Exhibit 10(f) to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on September 5, 1995.) 10.7 Warrant Agreement, dated 1995, between the Company and Continental Stock Transfer & Trust Company (Form). (Incorporated by reference to Exhibit 10(a) to Amendment No. 2 to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on October 30, 1995.) 10.8 Merger and Acquisition Agreement, dated 1995, between the Company and William Scott & Company, LLC (Form). (Incorporated by reference to Exhibit 10(c) to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on September 5, 1995.) 10.9 Financial Consulting Agreement, dated 1995, between the Company and William Scott & Company, LLC (Form). (Incorporated by reference to Exhibit 10(b) to Amendment No. 2 to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on September 5, 1995.) 10.10 Stipulation of Settlement, Settlement Agreement and Mutual General Release, dated February 27, 1997, between Albert Pace and Jan Polek and the Company, John T. Ruocco, Michael A. Sylvester, Robert B. Whitney, Steven A. Martello and Leon Pasqua. 10.11 Securities Purchase Agreement, dated September 24, 1997, by and between the Company and Milbright Estates, Ltd. (minus attachments and exhibits thereto). (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (Date of Report: September 26, 1997) (Commission File No.: 0- 26998), filed with the Commission on October 7, 1997.) 10.12 Registration Rights Agreement, dated September 24, 1997, by and between the Company and Milbright Estates, Ltd. (Incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K (Date of Report: September 26, 1997) (Commission File No. 0-26998), filed with the Commission on October 7, 1997.) 10.13 Consulting Agreement, dated as of July 1, 1996, between the Company and Digital Vehicle Security System, Inc. and Michael Ghazarian. (Incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.14 Assignment, dated as of October 30, 1996, between Digital Vehicle Security Systems Limited and Alcohol Sensors Europe, Plc, Michael Ghazarian and the Company. (Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.15 Exclusive Distributor Agreement, dated October 21, 1993, between the Company and Digital Vehicle Security Systems. (Incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.16 Contract Affirmation between Digital Vehicle Security Systems, Inc. and the Company. (Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.17 Convertible Stock and Warrant Purchase Agreement, dated December 20, 1996, between the Company and American International Insurance Company. Incorporated on reference to Exhibit 1 to the Company's Current Report on Form 8-K (Date of Report: December 20, 1996) (Commission File Number: 0-26998), filed with the Commission on January 3, 1997.) 10.18 Registration Rights Agreement, dated December 20, 1996, between the Company and American International Insurance Company. (Incorporated on reference to Exhibit 2 to the Company's Current Report on Form 8-K (Date of Report: December 20, 1996) (Commission File Number: 0-26998), filed with the Commission on January 3, 1997.) 10.19 Shareholders Agreement, dated as of December 20, 1996, among American International Insurance Company, Robert B. Whitney, John T. Ruocco, Michael A. Sylvester, Joseph M. Lively, Steven A. Martello and the Company. Incorporated on reference to Exhibit 3 to the Company's Current Report on Form 8-K (Date of Report: December 20, 1996) (Commission File Number: 0-26998), filed with the Commission on January 3, 1997.) 10.20 Consent and Amendment Agreement, dated as of April 9, 1997, among Robert B. Whitney, John T. Ruocco, Michael A. Sylvester, Joseph M. Lively, American International Insurance Company, the Company, Albert Pace, Jan Polek, Lipman Family Partners Ltd., Gerald N. Jacobowitz, David O. Gubits, John H. Thomas, Gerald A. Lennon, Peter R. Eriksen, Linda F. Madoff, Howard Protter, Donald G. Nichol, Larry Wolinsky, Robert E. Dinardo, Mark A. Krohn, J. Benjamin Gailey, Fabricant & Lipman, Jacobowitz & Gubits and Ariel Enterprises (without exhibits). 10.21 Order containing the Release and Settlement Agreement, dated August 13, 1998, among the Company, Alcohol Sensors Europe plc, Michael Ghazarian, Digital Vehicle Security Systems Ltd. and Scarico (UK) Ltd. 10.22 Warrant, dated December 20, 1996, registered in the name of American International Insurance Company. (Incorporated on reference to Exhibit 4 to the Company's Current Report on Form 8-K (Date of Report: December 20, 1996) (Commission File Number: 0-26998), filed with the Commission on January 3, 1997.) 10.23 Promissory Note, dated June 12, 1998, of the Company, in the principal amount of $100,000 payable to Milbright Estates Ltd. 10.24 Letter Agreement, dated August 14, 1998, between the Company and American International Insurance Company. 10.25 Promissory Note, dated August 13, 1998, of the Company, in the principal amount of $25,000 payable to Milbright Estates Ltd. 10.26 Patent Assignment, dated September 21, 1998, from Joseph M. Lively and WeatherEye, Inc. to the Company. 10.27 Promissory Note, dated September 4, 1998, of the Company, in the principal amount of $40,000 payable to Milbright Estates Ltd. 11 Computation of Loss Per Share. 21 Subsidiaries of the Company. 24 Powers of Attorney (set forth on the signature page of this Annual Report on Form 10-KSB). 27 Financial Data Schedule. (b) Reports on Form 8-K. On October 7, 1997, the Company filed a Current Report on Form 8-K (Date of Report: September 26, 1997) with the Commission reporting, as an Item 5 disclosure, the Company's sale of 300 shares of Series B Preferred Stock for gross proceeds of $3,000,000. There were no financial statements included in such Form 8-K. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: October 26, 1998 ALCOHOL SENSORS INTERNATIONAL, LTD. By: /s/ Joseph M. Lively Joseph M. Lively, President POWER OF ATTORNEY Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-KSB has been signed on October 26, 1998 by the following persons in the capacities indicated. Each person whose signature appears below constitutes and appoints Joseph M. Lively, with full power of substitution, his true and lawful attorney-in-fact and agent to do any and all acts and things in his name and on his behalf in his capacities indicated below which said attorney-in-fact and agent may deem necessary or advisable to enable Alcohol Sensors International, Ltd. to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-KSB, including specifically, but not limited to, power and authority to sign for him in his name in the capacities stated below, any and all amendments thereto, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or said attorney-in-fact and agent's substitute or substitutes, may lawfully do or cause to be done by virtue thereof. President, Chief Operating Officer and Director /s/Joseph M. Lively (Principal Executive and Financial Officer) Joseph M. Lively /s/ J. Ernest Hansen Director J. Ernest Hansen Director Steven A. Martello /s/ Daniel H. Pisani Director Daniel H. Pisani /s/ Michael Rosenbaum Director Michael Rosenbaum /s/ Michael Sylvester Director Michael Sylvester INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Alcohol Sensors International, Ltd. Islandia, New York We have audited the accompanying consolidated balance sheet of Alcohol Sensors International, Ltd. and subsidiary as of December 31, 1997 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended December 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Alcohol Sensors International, Ltd. and subsidiary as at December 31, 1997 and the consolidated results of their operations and their consolidated cash flows for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A, the Company expects substantial losses and has depleted its working capital and is past due on various obligations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. As described more fully in Note M[1], the Company is a defendant in litigation, the ultimate outcome of which cannot be presently determined. /s/ Richard A. Eisner & Company, LLP New York, New York August 11, 1998 With respect to the fifth paragraph in Note A and Note I[2] September 28, 1998 With respect to Note N October 15, 1998 ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Consolidated Balance Sheet December 31, 1997
ASSETS Current assets: Cash and cash equivalents (includes restricted cash of $500,000) (Notes B[1] and F) $ 1,882,994 Inventory (Note D) 693,561 Prepaid expenses 55,103 Other current assets 37,636 ------------ Total current assets 2,669,294 Fixed assets - at cost (less accumulated depreciation of $174,069) (Notes B[6] and C) 232,170 Other assets 14,166 ------------ $ 2,915,630 ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 428,087 Accrued expenses 208,242 Accrued officers salaries 83,662 Due to related party (Note I[1]) 118,315 Loans payable and accrued interest to shareholders (Note E) 145,716 Note payable (Note F) 500,000 Dividends payable 295,208 ------------ Total current liabilities 1,779,230 ------------ Accrued litigation settlement cost (Note M) 82,977 ------------ Commitments, contingencies and other matters (Notes J and M) Shareholders' equity (Notes A and G): Preferred stock: Series A, 9% cumulative: 833,333 shares authorized, 833,333 shares issued and outstanding (liquidation value $2,731,875) 2,500,000 Series B, 8% cumulative: 600 shares authorized, 300 shares issued and outstanding(liquidation value $3,063,333) 2,658,750 Common stock - $.001 par value; 25,000,000 shares authorized, 8,849,096 issued 8,849 Additional paid-in capital 13,508,950 Accumulated deficit (17,391,177) Accumulated foreign currency translation adjustment (9,261) ------------ 1,276,111 Less treasury stock, at cost, 55,672 shares of common stock (222,688) ------------ Total shareholders' equity 1,053,423 ____________ $ 2,915,630 ============ See independent auditors' report and notes to financial statements.
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Consolidated Statements of Operations
Year Ended December 31, ---------------------------- 1997 1996 ---- ---- Net sales $ 35,308 $ 40,586 Cost of goods sold 71,483 39,971 ------------ ------------ Gross profit (loss) (36,175) 615 ------------ ------------ Research and development 523,298 913,456 Selling, general and administrative 2,987,296 3,101,571 Litigation settlement expense (Note M) 158,085 1,591,496 Cost of goods sold - inventory write-off 556,026 ------------ ------------ 3,668,679 6,162,549 ------------ ------------ Loss from operations (3,704,854) (6,161,934) Interest income 81,027 82,538 Interest expense (47,141) (41,747) ------------ ------------ Net loss $(3,670,968) $(6,121,143) ============ ============ Net loss per common share - basic and diluted (Note A[8]) $ (.45) $ (.73) ============ ============ Weighted average number of shares outstanding - basic and diluted 8,756,316 8,430,960 ============ ============ See independent auditors' report and notes to financial statements.
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Consolidated Statements of Changes in Shareholders' Equity (Notes A and G)
Series A Series B Common Stock Treasury Stock Preferred Stock Preferred Stock ($.001 Par Value) At Cost ----------------- ------------------ ------------------- ------------------- Number Number Number Number of of of of Shares Shares Shares Shares Issued Amount Issued Amount Issued Amount Issued Amount ------ ------ ------ ------ ------ ------ ------ ------ Balance - January 1, 1996 8,116,870 $ 8,117 Issuance of preferred stock and warrants 833,333 $2,500,000 Issuance of compensatory stock options for services Issuance of stock for services 3,844 4 Issuance of common stock for litigation settlement 300,000 300 Exercise of warrants 355,976 356 Contribution of common stock and cash by certain officers and shareholders 55,672 $(222,688) Net loss Unrealized loss on marketable securities Accumulated foreign currency translation adjustment -------- --------- --------- ----- ------ --------- Balance - December 31, 1996 833,333 2,500,000 8,776,690 8,777 55,672 (222,688) Issuance of preferred stock and warrants (net of expenses of $315,000) 300 $2,610,000 Contribution of common stock by certain officers and shareholders Issuance of compensatory stock options for services Issuance of common stock for litigation settlement 315,000 315 Shareholders' contribution of common stock (315,000) (315) Exercise of warrants and options 41,250 41 Options issued to officers and others in lieu of payment of liabilities Issuance of common stock for litigation settlement 24,000 24 Issuance of common stock for services 7,156 7 Net loss Dividends Imputed dividend on Series B preferred stock for beneficial conversion feature Accretion on Series B preferred stock 48,750 Accumulated foreign currency translation adjustment -------- ---------- --- ---------- --------- ------- ------ ---------- Balance - December 31, 1997 833,333 $2,500,000 300 $2,658,750 8,849,096 $ 8,849 55,672 $(222,688) ======= ========== === ========== ========= ======= ====== ========= See independent auditors' report and notes to financial statements.
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Consolidated Statements of Changes in Shareholders' Equity (Notes A and G)
Unrealized Accumulated Gain (Loss) Foreign Additional on Currency Paid-in Accumulated Marketable Translation Capital Deficit Securities Adjustment Total ------------ ----------- ---------- ----------- ----- Balance - January 1, 1996 $ 9,398,354 $ (6,778,857) $ 83 $ 2,627,697 Issuance of preferred stock and warrants 2,500,000 Issuance of compensatory stock options for services 250,000 250,000 Issuance of stock for services 15,996 16,000 Issuance of common stock for litigation settlement 989,700 990,000 Exercise of warrants 435,283 435,639 Contribution of common stock and cash by certain officers and shareholders 330,150 107,462 Net loss (6,121,143) (6,121,143) Unrealized loss on marketable securities (83) (83) Accumulated foreign currency translation adjustment $ (5,633) (5,633) -------- ------------ ---- ---------- --------- Balance - December 31, 1996 11,419,483 (12,900,000) -0- (5,633) 799,939 Issuance of preferred stock and warrants (net of expenses of $315,000) 75,000 2,685,000 Contribution of common stock by certain officers and shareholders 1,143,844 1,143,844 Issuance of compensatory stock options for services 15,000 15,000 Issuance of common stock for litigation settlement 1,143,529 1,143,844 Shareholders' contribution of common stock (1,143,529) (1,143,844) Exercise of warrants and options 54,334 54,375 Options issued to officers and others in lieu of payment of liabilities 235,000 235,000 Issuance of common stock for litigation settlement 77,976 78,000 Issuance of common stock for services 12,063 12,070 Net loss (3,670,968) (3,670,968) Dividends (295,209) (295,209) Imputed dividend on Series B preferred stock for beneficial conversion feature 525,000 (525,000) Accretion on Series B preferred stock (48,750) Accumulated foreign currency translation adjustment (3,628) (3,628) ------------ ------------- ------ ---------- ------------- Balance - December 31, 1997 $ 13,508,950 $(17,391,177) $ -0- $ (9,261) $ 1,053,423 ============ ============= ====== ========== ============= See independent auditors' report and notes to financial statements.
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Consolidated Statements of Cash Flows
Year Ended December 31, ---------------------------------- 1997 1996 ---- ---- Cash flows from operating activities: Net loss $(3,670,968) $(6,121,143) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 82,148 82,147 Fixed assets written off 73,494 Common stock issued for services 12,070 16,000 Common stock issued for litigation settlement 78,000 990,000 Warrants issued for services 250,000 Options issued for services 15,000 Other (3,628) (5,633) Changes in: Accounts receivable 16,392 (16,392) Inventory (406,099) (144,572) Prepaid expenses and other assets 54,474 51,404 Accounts payable (275,868) 473,346 Accrued expenses and interest to shareholders 184,499 150,755 Accrued officers salaries 83,662 Due to related party (35,198) 153,513 Accrued litigation settlement cost 18,008 218,813 Deposits (10,000) (39,036) ------------ ------------ Net cash used in operating activities (3,784,014) (3,940,798) ------------ ------------ Cash flows from investing activities: Acquisition of fixed assets (20,194) (82,101) Purchases of marketable securities (2,324,101) Sales of marketable securities 4,304,402 Decrease in restricted cash 1,017,317 ------------ ------------ Net cash (used in) provided by investing activities (20,194) 2,915,517 ------------ ------------ Cash flows from financing activities: Net proceeds from sale of preferred stock and warrants 2,685,000 2,500,000 Proceeds from exercise of warrants and options 54,375 435,639 Payment of loans and accrued interest to officers/shareholders (94,224) Contribution of capital by certain shareholders 107,462 Proceeds from notes payable 1,000,000 Payments of notes payable (500,000) ------------ ------------ Net cash provided by financing activities 2,645,151 3,543,101 ------------ ------------ Net (decrease) increase in cash and cash equivalents (1,159,057) 2,517,820 Cash and equivalents - beginning of year 3,042,051 524,231 ------------ ------------ Cash and cash equivalents - end of year $ 1,882,994 $ 3,042,051 ============ ============ Supplemental disclosure of cash flow information: Interest paid during the year $ 57,601 $ 37,594
Supplemental schedules of noncash financing activities: In February 1997, certain officers and members of management contributed 315,000 shares of common stock to the Company to settle litigation that had been accrued for as of December 31, 1997 in the amount of $1,143,844. In June 1997, certain officers and others received options to purchase 117,500 shares of the Company's common stock in cancellation of $235,000 of liabilities due to them. As of December 31, 1997, the Company had accrued $295,209 in accrued dividends on the Company's Series A, 9% cumulative preferred stock and Series B, 8% cumulative preferred stock. As of December 31, 1997, the Company recorded $525,000 as an imputed dividend on its Series B, 8% cumulative preferred stock for a beneficial conversion feature. As of December 31, 1997, the accompanying financial statements reflect an adjustment on the Series B preferred stock in the amount of $48,750 for the accretion towards the liquidation value. During 1996, certain officers/shareholders contributed 55,672 shares of common stock to the Company valued at $222,688 and are held in treasury. See independent auditors' report and notes to financial statements. ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 Note A - The Company and Basis of Presentation Alcohol Sensors International, Ltd. (the "Company") was formed for the development and commercial exploitation of a breath alcohol ignition interlock device ("SENS-O-LOCK"). In October 1996, the Company incorporated a subsidiary in the United Kingdom ("UK"), Alcohol Sensors Europe, PLC ("ASE"), of which it owned, as of December 31, 1997, 80% of the outstanding common stock (see Note M). The consolidated financial statements include the accounts of the Company and ASE. Significant intercompany balances and transactions have been eliminated in consolidation. During the first quarter of 1996 when the Company commenced shipping SENS-O-LOCK, the Company determined that it was no longer a development stage company. During the second quarter of 1996, the Company caused the returns of its product due to manufacturing, design and quality control difficulties. As a result, the Company suspended manufacturing and resumed its research and development on a new design and other technology. Research and development on the new design and other technology was completed in 1997 and there was limited manufacturing. The product is available in the voluntary market and commercial market. There is no assurance that the product will be successful or that the Company will be able to market its product. The Company's inventory as of December 31, 1997 consists of components and finished SENS-O-LOCK products and there is an uncertainty whether the Company can realize the value of its inventory because the Company needs to raise additional capital to complete the manufacturing and assembly of its product and to market it. There is no assurance that the product will have any commercial success. Although the Company had working capital as of December 31, 1997, the Company has utilized substantially all of its working capital in operations, since December 31, 1997. The Company is past due on its obligations to its vendors and other creditors and is past due on payments required for loans obtained after December 31, 1997. The Company has also suspended its operations in the UK. The Company has taken steps to reduce its operating costs and postpone cash outflow. However, the Company anticipates that losses will continue at least until significant shipment of its product and maybe thereafter. The Company has received subsequent loans (see Note N) and is seeking additional financing from one of its preferred shareholders. In addition, on September 28, 1998, in connection with negotiating a distribution agreement, the Company signed a nonbinding preliminary term sheet and expects advance royalties from the distribution agreement. The Company received a loan of $40,000 in connection therewith and is continuing to negotiate a definitive agreement. There can be no assurance that such agreement will be consummated on terms acceptable to the Company, if at all. If the Company is unable to obtain additional financing or consummate a distribution agreement, it may seek protection under Federal Bankruptcy Law. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Note B - Summary of Significant Accounting Policies [1] Cash equivalents: The Company considers all highly liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 Note B - Summary of Significant Accounting Policies (continued) [2] Marketable securities: Securities classified as available-for-sale are carried at market value with unrealized gains or losses reported as a separate component of shareholders' equity. Securities classified as held-to-maturity are carried at amortized cost. [3] Inventory: Inventory is stated at the lower of cost (first-in, first-out basis) or market (see Note A). [4] Patent costs: Patent application costs are charged to expense as incurred. [5] Research and development: Research and development costs are charged to expense as incurred. [6] Depreciation: Fixed assets are recorded at cost. Depreciation is provided on the straight-line method over the estimated useful lives from three to five years of the depreciable assets. Molds and tooling are depreciated on the straight-line basis over the shorter of three years or the estimated units of production. Amortization of leasehold improvements is provided over the shorter of the lease term or the estimated useful life of the asset. [7] 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. Management's estimate of the realization of the carrying amount of the Company's inventory is particularly sensitive and is dependent on estimates of selling price which is to be determined prospectively. Actual results could differ from those estimates. [8] Loss per share of common stock: The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") in the year ended December 31, 1997 and has retroactively applied the affects thereof to the year ended December 31, 1996. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Basic loss per share is computed based upon the weighted average number of common shares outstanding during each year and dividends accumulated for the year are added to the net loss for the year. Stock options, warrants and convertible preferred stock (Note G) did not have an effect on the computation of diluted earnings per share in 1997 and 1996 since they were anti-dilutive. ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 Note B - Summary of Significant Accounting Policies (continued) [9] Fair value of financial instruments: The Company considers its financial instrument obligations, which are carried at cost, to approximate fair value due to the near term repayment due dates. [10] Accumulated foreign currency translation adjustment: Assets and liabilities are translated to United States dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the period of operations of ASE. Gains or losses from translation adjustments are accumulated in a separate component of shareholders' equity. Condensed financial information of the Company's UK subsidiary is as follows:
December 31, 1997 1996 Assets $ 924,531 $ 53,281 Liabilities 1,747,787 195,506 Shareholders' deficiency (823,256) (142,225) Revenue 381 0 Net loss (78,149) (156,592)
In 1998, the Company suspended its UK operations and transferred the remaining assets, consisting primarily of cash and inventory, back to the United States. [11] Revenue recognition: The Company recognizes revenue when a product is shipped. [12] Advertising and promotion costs: Advertising and promotion costs are expensed as incurred. These costs amounted to approximately $263,000 and $337,000 for the years ended December 31, 1997 and 1996, respectively. [13] Recently issued accounting pronouncements: In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company is in the process of determining its preferred format. The adoption of SFAS No. 130 will have no impact on the Company's consolidated results of operations, financial position or cash flows. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosures for prior periods are required to be ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 restated. The Company is in the process of evaluating the disclosure requirements. The adoption of SFAS No. 131 will have no impact on the Company's consolidated results of operations, financial position or cash flows. Note C - Fixed Assets
Fixed assets as of December 31, 1997 consists of the following: Furniture and fixtures $ 153,749 Equipment 126,616 Leasehold improvements 120,974 Molds and tooling 4,900 --------- 406,239 Less accumulated depreciation 174,069 --------- $ 232,170 =========
Note D - Inventory
Inventory consists of the following as of December 31, 1997: Components $ 594,842 Finished products 98,719 --------- $ 693,561 =========
Note E - Loans Payable to Shareholders Loans payable to shareholders of $63,307 as of December 31, 1997 bear interest at 10% per annum and are due on demand. Interest accrued on such loans aggregated $82,409 as of December 31, 1997. Loans due to shareholders include amounts for prior services rendered to the Company. Interest expense on these obligations for the years ended December 31, 1997 and 1996 was $12,060 and $12,091, respectively. Note F - Note Payable The Company has a credit facility of $500,000 with a bank and the note was due in May 1998. The loan bears interest at 5.25% and is collateralized by the Company's $500,000 certificate of deposit. In June 1998, the Company used the funds from the certificate of deposit to pay off the note to the bank. ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 Note G - Shareholders' Equity [1] The Company issued common stock in connection with services rendered and settlement of litigation as follows:
Number Fair Value of of Shares Issued Accrued Year Ended Shares for General and Litigation December 31, Issued Administration Settlement Total 1996 303,844 $ 16,000 $ 990,000 $ 1,006,000 1997 7,156 $ 12,070 $ 12,070
The Company valued such shares at fair value which was determined by the market price of the Company's common stock with a 30% discount taken for the accrued litigation settlement. [2] In September 1996, the Company issued 213,500 options to purchase the Company's stock as compensation for consulting and legal services. The options are exercisable at $3.00 and expire in September 2001. The Company recorded an expense of $250,000 in connection with the issuance of these options. [3] In connection with a litigation settlement (see Note M[2]) in October 1996, certain officers and shareholders contributed approximately $108,000 in cash and 55,672 shares of common stock to the Company. The shares are held in treasury as of December 31, 1997. [4] In December 1996, the Company was authorized to issue 3,000,000 shares of Series A nonredeemable, cumulative preferred stock. In December 1996, the Company issued 833,333 shares of nonredeemable, 9% Cumulative Series A preferred stock and warrants, expiring in December 1998, to purchase 833,333 shares of common stock at an exercise price of $5.50 per share (subject to adjustment) for an aggregate of $2,500,000. The Series A preferred stock is convertible into 613,457 shares ($4.46 per share) of common stock as of December 31, 1997 and contain anti-dilution provisions. Dividends accrue on the Series A nonredeemable, cumulative preferred stock at 9% per annum (compounded semi-annually on any accrued and unpaid dividends). The Company accrued dividends of $231,875 as of December 31, 1997. In August 1998, the holder of the outstanding Series A non- redeemable, 9% cumulative preferred stock agreed to accept shares of common stock in lieu of cash for all dividends due through December 1999. [5] In February 1997, certain officers and members of management contributed 315,000 shares of common stock to the Company to settle litigation that had been accrued for as of December 31, 1997 in the amount of $1,143,844. [6] On September 26, 1997, the Company sold a total of 300 shares of Series B preferred stock at a price of $10,000 per share and, in connection there- with, warrants to purchase 150,000 shares (which includes warrants to purchase 100,000 shares of the Company's common stock issued to third parties as a finder fee) of the Company's common stock at $4.27 per share (subject to adjustment) expiring on September 24, 2002. The net proceeds from the sale of the Series B preferred stock was $2,685,000 including $340,000 for the value of the warrants. The Series B preferred stock has a liquidation preference of $10,000 per share and bears cumulative dividends at a rate of eight percent (8%) per share per annum. Such dividends are payable only immediately prior to the conversion of the Series B preferred stock into common stock. The Series B preferred stock is convertible, in whole or part, at the option of the holder, into shares of common stock at any time. Each share of Series B preferred stock is convertible into that number of shares of common stock as is determined by dividing (i) the sum of (a) $10,000 plus (b) the amount of all accrued but unpaid or accumulated dividends on the share of Series B preferred stock being so converted by (ii) the Conversion Price in effect at the time of conversion. The "Conversion Price" of the Series B preferred stock is equal to the lower of (x) $4.03125 or (y) 82.5% of the average closing bid price of the common stock over the ten consecutive trading days immediately preceding the date of the conversion notice delivered to the Company. If not sooner converted, all outstanding shares of Series B preferred stock are subject to automatic conversion on the earlier of (i) September 26, 1999 or (ii) immediately prior to the consummation of the acquisition of the Company pursuant to a merger or consolidation or the sale of substantially all of the assets of the Company. Except in connection with such automatic conversion, in no event will a holder of ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 Series B preferred stock be entitled to convert any shares of Series B preferred stock if such conversion would cause the sum of (i) the number of shares of common stock and (ii) the number of shares of common stock issuable upon the conversion of such shares of the Series B preferred stock, to result in ownership by the holder of more than 4.99% of the outstanding shares of common stock. In February 1999, the holder of the Series B preferred stock converted 26 shares into 457,493 shares of common stock. As of December 31, 1997, the 300 shares of Series B preferred stock, if converted, would convert into 2,985,227 shares of common stock. The Company accrued dividends of $63,333 as of December 31, 1997. [7] The Company has the following warrants outstanding as of December 31, 1997:
Exercise Description Shares Price Expiration Date Warrants issued in connection with debt 96,000(a) $ 1.50 June 30, 2000 Warrants issued in connection with debt 443,100(a) 1.50 July 31, 1999 Warrants issued in connection with debt 290,000(a) 1.50 May 31, 2000 Warrants issued in connection with debt 70,676(a) 1.50 May 1, 1999 Compensatory warrants 150,000(b) 1.00 December 2000 Class A warrants 1,150,000(c) 3.75 November 2000 Class B warrants 575,000(c) 5.00 November 9, 2000 Warrants issued with Series A preferred stock 833,333(d) 5.50 December 19, 1998 Warrants issued with Series B preferred stock 150,000(e) 4.27 September 24, 2002 (a) Issued in connection with the Company's private placements of debt. (b) Issued to consultants for services rendered in 1995 and valued by the Company at $238,800. (c) Issued in connection with the Company's initial public offering in November and December 1995. (d) Issued in connection with the sale of the Series A nonredeemable, 9% cumulative preferred stock in December 1996. (e) Issued in connection with the sale of the Series B nonredeemable, 8% cumulative preferred stock in September 1997.
[8] The Company granted to the underwriter of the Company's initial public offering an option to purchase 100,000 units at $10.00 per unit expiring on November 9, 1999 for $100. Each unit consists of two shares of common stock, one Class A warrant and Class B warrant. The terms of the warrants are described in Note G[7]. Note H - Stock Options [1] 1998 Stock Incentive Plan: In July 1998, the Board of Directors approved the 1998 Stock Incentive Plan ("1998 Plan"), subject to shareholders approval, to issue up to 3,000,000 options to directors, officers, employees and consultants to purchase the Company's common stock. The 1998 Plan provides for options, options that have stock appreciation rights, performance share awards or restricted stock awards. The compensation committee determines the option, the term and exercise price, if any, of the award and other terms and provisions of awards. An option under the 1998 Plan may be an incentive ("ISO") or nonqualified option. The exercise price for ISO is not to be less than 100% of the fair market value at the date of grant and the exercise price for ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 nonqualified options is not to be less than 85% of the fair market value at the date of grant. The aggregate fair market value of the common stock for which ISOs may be granted may not exceed $100,000 during any calendar year. Options granted under the 1998 Plan become exercisable in three equal tranches commencing one year for the date of grant, unless the compensation committee determines otherwise. An ISO granted to a 10% or more voting shareholder must expire no later than five years from the date of grant and for less than a 10% stockholder and all nonqualified options, the option expire no later than 10 years from the date of grant. A director who is not an employee of the Company will, upon appointment, election or re-election of the Board of Directors, automatically be granted a nonqualified option to purchase 25,000 shares, exercisable in three equal tranches commencing one year from the date of grant at an exercise price equal to the fair market value. The Company has granted options to purchase 525,000 shares under the 1998 Plan subject to shareholder approval. [2] Other options: The Company granted an aggregate of 460,647 options under a 1995 Incentive Stock Option Plan. This 1995 Plan was never approved by the shareholders of the Company. On July 24, 1998, the Company ratified such options outside the 1998 Plan. During 1997, the Company granted to a former officer, options to purchase the Company's common stock at $2.00 expiring in September 2002. Pursuant to a settlement agreement with such former officer, the Company deleted the provision that the option expires when he is no longer an employee. The fair value of the option at the settlement date was approximately $8,000 (see Note M[2]). [3] A summary of the status of the Company's stock options as of December 31, 1997 and 1996 are as follows:
1997 1996 ---------------------- ----------------------- Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price -------- --------- ------- --------- Outstanding at beginning of year 504,250 $ 1.89 180,000 $ 1.89 Granted 336,397 2.08 324,250 3.00 Cancelled (150,000) (2.00) --------- ------- ------- ------ Outstanding at end of year 690,647 2.48 504,250 2.60 --------- ------- ------- ------ Options exercisable at end of year 690,647 2.48 504,250 2.60 ========= =======
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 The following table summarizes information about stock options outstanding as of December 31, 1997:
Options Outstanding Options Exercisable ---------------------------------------- ------------------------ Weighted- Average Remaining Weighted- Weighted- Range of Number of Contract Average Average Exercise Options Life Exercise Number Exercise Price Outstanding (in Years) Price Exercisable Price --------- ------------ ---------- ---------- ----------- --------- $ 1.00 25,000 2.9 $ 1.00 25,000 $ 1.00 $ 2.00 - 3.40 663,649 4.1 2.78 663,649 2.52 $ 6.12 - 6.40 999 4.8 6.22 999 6.22 $10.12 -10.40 999 4.8 10.22 999 10.22 ------- ------- 690,647 3.6 2.68 690,647 2.48 ======= =======
The Company applies APB No. 25 "Accounting for Stock Issued to Employees", and related interpretations in accounting for its options. Accordingly, no compensation cost has been recognized for its stock option grants to employees and directors. Had compensation cost for the Company's stock option grants been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123 "Accounting for Stock-Based Compensation", the Company's net loss and loss per share would have been as indicated below. The effects of applying SFAS No. 123 in this pro forma disclosure are not necessarily indicative of future amounts.
1997 1996 ------------- ------------- Net loss As reported $ (3,670,968) $ (6,121,143) Pro forma (4,186,301) (6,246,974) Net loss per share As reported (.45) (.73) Pro forma (.48) (.74)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997 and 1996: dividend yield of zero percent (0%) in 1997 and 1996; expected volatility of seventy percent (70%) in 1997 and 1996, respectively, risk-free interest rates of 5.85% - 6.43% in 1997 and 6.50% in 1996 and expected life of 5 years in 1997 and 1996. The weighted-average fair value of options granted in 1997 and 1996 are estimated at $1.42 and $1.17, respectively. Note I - Related Party Transaction [1] In October 1993, the Company entered into an exclusive distribution agreement with Digital Vehicle Security Systems Limited ("Digital") to sell SENS-O-LOCK's purchased from the Company in certain European territories. This contract was assigned to ASE by Digital in October 1996. In 1997 and 1996, the Company was charged approximately $200,000, in each year, for molds, tooling, and operating expenses from Digital and Scarico UK, Ltd., electronic consumer goods manufacturers, whose managing director was a 20% owner in ASE and a member of the Company's Board of Directors. See Note M [2] ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 [2] In August 1996, the Company entered into a royalty agreement with a company which is owned by the Company's current President and a member of the Board of Directors. The Company was granted an exclusive right to distribute WeatherEye Intelligent Headlight Management Systems ("WeatherEye") in the United States as well as the nonexclusive right to distribute in other worldwide markets. The Company is obligated to pay a royalty of between $.19 and $2.00 per unit sold. The Company had insignificant revenues from WeatherEye and no royalty expense was provided for the year ended December 31, 1997. In September 1998, for nominal consideration, Weather Eye, Inc. assigned the WeatherEye technology to the Company. Note J - Commitments, Contingencies and Other Matters [1] In 1995, the Company entered into a Marketing Agreement with Texas Interlock Corporation ("TIC") whereby the Company granted TIC the right to develop, market, sell and distribute its SENS-O-LOCK device in the state of Texas. TIC agreed to use its best efforts to assist in the certification process of the SENS-O-LOCK device in Texas and to prepare a strategy to obtain legislative support for statutes creating a mandated market for the Company's product. The Company agreed to compensate TIC at the rate of $100 for each SENS-O-LOCK device leased from the Company during the term of the agreement. No revenues were recorded in connection with such agreement. [2] Employment contracts: The Company has employment contracts with two officers for aggregate annual salaries of $200,000 which expires through December 31, 1998. The agreements provide for annual bonuses at the discretion of the Board of Directors. Such officers resigned in 1998. Effective September 1, 1998, the Company entered into an employment agreement with its President and Chief Operating Officer expiring on September 1, 2001 with annual base salary of $150,000 ($182,500, as of January 1, 1999), subject to cost-of-living adjustments in each year and bonuses of $50,000 based upon financial results defined in the contract. The agreement provides that the Company grant options to its President to purchase an aggregate of 400,000 shares of the Company's common stock exercisable at $.225 per share; and to grant options to purchase 50,000 shares of the Company's common stock on each of September 1, 1999 and 2000 with an exercise price equal to the closing price of the Company's common stock on the date of grant. Additionally, the agreement provides for certain options to be repriced to purchase an aggregate of 129,500 and 45,000 shares of the Company's stock to $.225 and $.05 per share from prices ranging from $1.06 to $3.00 per share. The Company has an employment contract with an engineer for an annual salary of approximately $75,000 which expires in September 1998 and is automatically renewed. The Company is obligated to pay a royalty of $1.00 per unit sold for certain technology as determined in the contract. ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 [3] Purchase commitments: The Company has $250,000 of purchase inventory commitments as of December 31, 1997. [4] Leases: The Company has an operating lease for office space. The following is the future annual rental payments:
Year Ending December 31, 1998 $ 131,000 1999 136,000 2000 62,000 --------- $ 329,000 ---------
Rent expense was approximately $136,000 and $100,000 for 1997 and 1996, respectively. [5] Securities and Exchange Commission inquiry: In November 1996, the Company received a letter of inquiry from the Securities and Exchange Commission, Division of Enforcement (the "SEC") requesting that the Company voluntarily provide certain information. In December 1996, the Company responded to the SEC and has not received any further comments or a response. [6] Forms 10-KSB and 10-QSB filings: The Company is late with the filing of its required reports with the Securities and Exchange Commission on Forms 10-KSB and 10-QSB. There could be adverse consequences as a result of the Company's late filings. [7] NASDAQ delisting: On March 3, 1998, the Company was delisted from NASDAQ. [8] Year 2000 issue (unaudited): Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish twenty-first century dates from twentieth century dates. As a result, in less than two years, computer systems and software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. The Company is in the process of implementing a review of issues related to the Company's Year 2000 compliance. This review is intended to determine the affect of the turn of the century on the operability of the Company's products, management information systems ("MIS"), non-MIS systems the Company utilizes to conduct its business and other internal and external processes which may impact the Company's operations. In connection with this evaluation, the Company also anticipates reviewing the Company's vendors and suppliers for Year 2000 compliance and to effect changes where necessary. The Company anticipates that this review process will be conducted in three phases: the first phase is anticipated to encompass a review of all of the Company's products, internal and external systems/processes and vendors, distributors and suppliers for Year 2000 compliance; the second phase is expected to correct all items identified as non-compliant and essential to the operations of the Company; and the third phase is contemplated to be a second review to ensure Year 2000 compliance and interoperability of all systems/processes. ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 The Company anticipates conducting its review with its current resources, but cannot assure that it has sufficient resources to complete the review process in a timely manner. The Company has not determined at this time, what total costs it will incur to conduct the review process and to implement any necessary corrections. Although the Company believes that the software utilized in the second generation Sens-O-Lock and the Company's MIS software are Year 2000 compliant and is working to ensure that the Company's products and internal systems are Year 2000 compliant, there can be no assurance that such compliance is or will be achieved. The failure to be Year 2000 compliant could have a material adverse effect on the Company's business, operating results and financial condition. Note K - Income Taxes [1] The Company has United States and state net operating loss carryforwards of approximately $14,000,000 and a research tax credit carryforward of approximately $140,000. The net operating loss carryforward expires from 2007 to 2012. No tax benefit has been provided for the losses of the Company's subsidiary located in the United Kingdom. The tax benefits of these deferred tax assets are fully reserved for since the likelihood of realization of the benefit cannot be established. The Tax Reform Act of 1986 contains provisions which limits the net operating loss carryforwards available for use in any given year should certain events occur, including significant changes in ownership interests. As a result of the Company's initial public offering, as well as other previous ownership changes, the net operating loss carryover will be subject to these annual limitations until the net operating loss is utilized or expires. [2] The tax effects of principal temporary differences and net operating losses are as follows as of December 31, 1997:
Asset: Inventory $ 52,000 Accrued expense and compensatory stock options and warrants 364,000 Federal and state operating loss carryforwards 5,726,000 Valuation allowance (6,142,000) ------------ Net deferred tax asset $ 0 ------------
The change in the valuation allowance as of December 31, 1997 was approximately $1,231,000. [3] The Company's losses are as follows:
Year Ended December 31, --------------------------- 1997 1996 ---- ---- Net loss: United States $(2,992,819) $(5,964,551) Foreign (678,149) (156,592) ------------ ------------ $(3,670,968) $(6,121,143) ------------ ------------
[4] The differences between the statutory Federal income tax rate of 34% are as follows:
December 31, 1997 1996 Statutory rate benefit (34.0)% (34.0)% Nondeductible expenses .1 Valuation allowance 34.0 33.9 ------- ------- Effective tax rate 0% 0% ------- -------
Note L - Concentration of Credit Risks [1] Cash and cash equivalents: The Company places its cash and cash equivalents at various financial institutions. At times, such amounts might be in excess of the FDIC insurance limit. ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 [2] Vendors: The Company uses a limited number of third party vendors to manufacture and assemble the Company's products. Note M - Litigation [1] Pending litigation: The Company and certain of its former officers were named as defendants in an action commenced in July 1997 in the New York State Supreme Court, New York County. Plaintiff alleges that, in July 1989, he entered into an agreement with the individual defendants and a company named "International Beverage Machine" pursuant to which plaintiff claims to have made certain payments which the individual defendants promised would be used to purchase stock in "Alcohol Sensors, Inc." which, in turn, plaintiff claims to be the predecessor to the Company. Plaintiff alleges damages of $13,500,000. The Company believes that the complaint fails to state a claim against the Company and that plaintiff has not been damaged by the Company, and, accordingly, intends to vigorously defend itself in this action. The ultimate outcome of this action is unknown at this time and the Company has not made any provision in the accompanying financial statements. The Company and certain of its former officers were named as defendants in an action commenced in September 1997 in the New York State Supreme Court, County of Nassau. Plaintiff alleges that, in February 1990, plaintiff entered into an exclusive "Distributor Agreement" with "Alcohol Sensors, Inc." wherein plaintiff was granted a regional license to market, distribute and install an "automotive alcohol sensor" device to which "AS Inc." owned the patent rights. Plaintiff alleges damages of $1,000,000. The Company believes that it has no affiliation with "Alcohol Sensors, Inc.," or "AS Inc.," that the Company has no obligations under the "Distributor Agreement" referred to in the complaint and that plaintiff has not been damaged in any amount by the Company and, accordingly, intends to vigorously defend itself in the action. This action is currently in the discovery stage. The ultimate outcome of this action is unknown at this time and the Company has not made any provision in the accompanying financial statements. In 1993, the Company received correspondence from Intoximeters Inc. claiming that the Company's name infringes upon the name of a product of such entity, "Alco-Sensor." The Company believes that the Company's name does not infringe upon such other entity's product name and that the name SENS-O-LOCK does not and will not cause a confusion in the marketplace between the Company's product and the product of Intoximeters Inc. However, no assurance can be given that such entity or others would be successful on a claim that the Company's name and/or product names infringe upon a copyright or trademark of such entity or others. The Company was served with a Demand to Arbitrate and a Statement of Claim by a former individual who had performed engineering services for the Company on a consulting basis. Claimant was seeking $650,000 and 114,449 shares of stock in damages. The Company settled this matter in an Arbitration Conference and has agreed to transfer to Claimant 27,500 shares of stock in full satisfaction of all claims in this action. This matter was settled in April 1997 and the Company has accrued $65,000 as of December 31, 1996. In 1998, the Company was served with a Demand to Arbitrate by an individual based upon an alleged failure by the Company to comply with the settlement terms of the aforemention arbitration. At this time, it is too early to determine the outcome of this action and therefore, the Company has not made any additional provision in the accompanying financial statements. [2] Settled litigation: The Company was named as a defendant in an action commenced in the United States District Court for the Eastern District of New York in July 1996. The plaintiff was seeking $9 million plus 100,000 shares of the Company's common stock, alleging he performed certain work for the Company as an independent contractor and was never compensated for the services he performed. This action was settled in July 1997 pursuant to which the Company issued an aggregate of 24,000 shares of the Company's common stock. The Company recorded an expense of $78,000. The Company was served with a Demand to Arbitrate by a former employee. Claimant was seeking $75,000 and approximately 36,000 stock options as damages. In October 1997, the Company settled this matter for approximately ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 $77,000 of which approximately $59,000 was paid during the year ended December 31, 1997 and the balance of approximately $18,000 was accrued as of December 31, 1997. The Company and certain of its officers were named as defendants in an action commenced in the United States District Court for the Eastern District of New York in March 1996, by a stockholder seeking $2 million in alleged damages as a result of the Company's handling of a prior action, Barry Beyer, et al. v. Alcohol Sensors International, Ltd., et al. This previous action was settled for a total of $382,675. In connection therewith, certain members of management donated 55,672 of their private shares and cash of $107,642 to the Company. This current action was dismissed without prejudice in August 1997. The Company and certain of its former officers were named as defendants in an action commenced in the Supreme Court of the State of New York, Orange County, by two individuals claiming an equity interest in the Company, as well as damages of $18.5 million, based upon a purported agreement with another company, Alcohol Sensors, Inc. with which the claimants, certain former officers of the Company and others were affiliated in 1989, and a claim that one of the individuals is the inventor of the technology that the Company is using. This action was settled in February 1997. Certain former and current members of management donated 315,000 of their private shares to provide for the settlement. As of December 31, 1996, the Company accrued $1,144,000 in connection with this settlement. In February 1998, an action was commenced in the High Court of Justice, Queens Bench Division, in Oxford, United Kingdom, under the caption "Scarico (UK) Limited v. Alcohol Sensors Europe plc." Scarico (UK) Limited is an entity which the Company believes is (a) not presently affiliated with any current supplier to the Company and (b) owned by Michael G. Ghazarian. Mr. Ghazarian is a former director and officer of the Company. Alcohol Sensors Europe plc. ("ASE") is an English corporation which, at the time of commencement of this action, was 80% owned by the Company and 20% owned by Mr. Ghazarian. In the complaint, Scarico (UK) Limited claimed that BP68,321.93 ($113,000, as of December 31, 1997) and $10,445 were due on invoices for services rendered to ASE between 1992 and 1997. ASE denied that any amounts were due Scarico (UK) Limited and that certain claimed services were actually performed by third parties, including a current supplier to the Company, and that ASE and the Company had paid such third parties directly. On August 11, 1998, the Company and ASE entered into a settlement arrangement with Scarico (UK) Limited, Digital Vehicle Security Systems ("Digital") and Mr. Ghazarian pursuant to which Scarico (UK) Limited, Digital and Mr. Ghazarian released to the Company all intellectual property, contract and other rights they may have in the technology and know-how related to the SENS-O-LOCK and all claims to Sens-O-Lock units, parts and raw materials in their possession, as well as the assignment to the Company of Mr. Ghazarian's 20% interest in ASE, Mr. Ghazarian surrendered an option to purchase 22,500 shares of Common Stock exercisable at $2.00 per share and expiring in June 2001 and the Company (a) paid Scarico (UK) Limited, Digital and Mr. Ghazarian an aggregate of approximately $90,000, (b) confirmed an option granted to Mr. Ghazarian in 1996 to purchase 100,000 shares of Common Stock exercisable at $3.00 per share and expiring in September 2001 and (c) deleted a provision requiring that Mr. Ghazarian be an employee of the Company in order to exercise an option to purchase 200,000 shares of Common Stock exercisable at $2.00 per share and expiring in September 2002. The parties also exchanged general releases in connection with this settlement arrangement. ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 Note N - Subsequent Events In June 1998, the holder of the Series B Preferred Stock ("Series B") loaned (the "June 1998 Loan") the Company $100,000 with interest at 11.5% per annum and due on July 31, 1998. In August 1998 (the "August 1998 Loan"), the holder of the Series B Preferred Stock loaned the Company an additional $40,000 with interest at 11.5% per annum and due on August 31, 1998. On September 4 1998, the holder of the Series B Preferred Stock loaned the Company an additional $25,000 with interest at 11.5% per annum and due on August 31, 1998. On September 4, 1998, the holder of the Series B Preferred Stock loaned the Company an additional $25,000 with interest at 11.5% per annum and due on October 31, 1998. On October 15, 1998, a third party agreed to loan the Company $30,000 with interest at 11.5% per annum and due on November 30, 1998. On September 30, 1998 and October 6, 1998, the Company received two $20,000 loans from the party negotiating a distribution agreement with the Company (Note A). These loans bear interest at 8.5% per annum and are due on March 31, 1999 and April 6, 1999. ALCOHOL SENSORS INTERNATIONAL, LTD. ANNUAL REPORT ON FORM 10-K Fiscal Year Ended December 31, 1997 EXHIBIT INDEX Set forth below are all exhibits to this Annual Report on Form 10-KSB: 3.1 Composite of Certificate of Incorporation of the Company, as amended to date. [(Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (Date of Report: September 26, 1997) (Commission File Number: 0-26998), filed with the Commission on October 7, 1997.)] 3.2 By-laws of the Company, as amended to date. (Incorporated by reference to Exhibit 3(c) to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on September 8, 1995.) 4.1 Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4(a) to Amendment No.2 to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on October 30, 1995.) 4.2 Specimen Redeemable Common Stock Warrant Certificate. (Incorporated by reference to Exhibit 4(b) to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on September 5, 1995.) 4.3 Underwriter's Unit Purchase Option (Form). (Incorporated by reference to Exhibit 4(c) to Amendment No. 2 to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on October 30, 1995.) 10.1 Company's 1998 Incentive Stock Plan. 10.2 Employment Agreement, dated December 31, 1995, between the Company and Steven A. Martello. (Incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.3 Employment Agreement, dated December 31, 1995, between the Company and Michael A. Sylvester. (Incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.4 Employment Agreement, dated as of September 1, 1998, between the Company and Joseph M. Lively (without exhibits). 10.5 Joint Venture Agreement, dated August 8, 1996, between the Company and Weather Eye, Inc., as amended on December 31, 1996. (Incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.6 Lease, dated August 8, 1995, between the Company and IR Realty Inc. (Incorporated by reference to Exhibit 10(f) to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on September 5, 1995.) 10.7 Warrant Agreement, dated 1995, between the Company and Continental Stock Transfer & Trust Company (Form). (Incorporated by reference to Exhibit 10(a) to Amendment No. 2 to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on October 30, 1995.) 10.8 Merger and Acquisition Agreement, dated 1995, between the Company and William Scott & Company, LLC (Form). (Incorporated by reference to Exhibit 10(c) to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on September 5, 1995.) 10.9 Financial Consulting Agreement, dated 1995, between the Company and William Scott & Company, LLC (Form). (Incorporated by reference to Exhibit 10(b) to Amendment No. 2 to the Company's Registration Statement on Form SB-2 (Registration Number: 33-96752), filed with the Commission on September 5, 1995.) 10.10 Stipulation of Settlement, Settlement Agreement and Mutual General Release, dated February 27, 1997, between Albert Pace and Jan Polek and the Company, John T. Ruocco, Michael A. Sylvester, Robert B. Whitney, Steven A. Martello and Leon Pasqua. 10.11 Securities Purchase Agreement, dated September 24, 1997, by and between the Company and Milbright Estates, Ltd. (minus attachments and exhibits thereto). (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (Date of Report: September 26, 1997) (Commission File No.: 0- 26998), filed with the Commission on October 7, 1997.) 10.12 Registration Rights Agreement, dated September 24, 1997, by and between the Company and Milbright Estates, Ltd. (Incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K (Date of Report: September 26, 1997) (Commission File No. 0-26998), filed with the Commission on October 7, 1997.) 10.13 Consulting Agreement, dated as of July 1, 1996, between the Company and Digital Vehicle Security System, Inc. and Michael Ghazarian. (Incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.14 Assignment, dated as of October 30, 1996, between Digital Vehicle Security Systems Limited and Alcohol Sensors Europe, Plc, Michael Ghazarian and the Company. (Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.15 Exclusive Distributor Agreement, dated October 21, 1993, between the Company and Digital Vehicle Security Systems. (Incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.16 Contract Affirmation between Digital Vehicle Security Systems, Inc. and the Company. (Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A (Commission File Number: 0-26998), filed with the Commission on April 28, 1997.) 10.17 Convertible Stock and Warrant Purchase Agreement, dated December 20, 1996, between the Company and American International Insurance Company. Incorporated on reference to Exhibit 1 to the Company's Current Report on Form 8-K (Date of Report: December 20, 1996) (Commission File Number: 0-26998), filed with the Commission on January 3, 1997.) 10.18 Registration Rights Agreement, dated December 20, 1996, between the Company and American International Insurance Company. (Incorporated on reference to Exhibit 2 to the Company's Current Report on Form 8-K (Date of Report: December 20, 1996) (Commission File Number: 0-26998), filed with the Commission on January 3, 1997.) 10.19 Shareholders Agreement, dated as of December 20, 1996, among American International Insurance Company, Robert B. Whitney, John T. Ruocco, Michael A. Sylvester, Joseph M. Lively, Steven A. Martello and the Company. Incorporated on reference to Exhibit 3 to the Company's Current Report on Form 8-K (Date of Report: December 20, 1996) (Commission File Number: 0-26998), filed with the Commission on January 3, 1997.) 10.20 Consent and Amendment Agreement, dated as of April 9, 1997, among Robert B. Whitney, John T. Ruocco, Michael A. Sylvester, Joseph M. Lively, American International Insurance Company, the Company, Albert Pace, Jan Polek, Lipman Family Partners Ltd., Gerald N. Jacobowitz, David O. Gubits, John H. Thomas, Gerald A. Lennon, Peter R. Eriksen, Linda F. Madoff, Howard Protter, Donald G. Nichol, Larry Wolinsky, Robert E. Dinardo, Mark A. Krohn, J. Benjamin Gailey, Fabricant & Lipman, Jacobowitz & Gubits and Ariel Enterprises (without exhibits). 10.21 Order containing the Release and Settlement Agreement, dated August 13, 1998, among the Company, Alcohol Sensors Europe plc, Michael Ghazarian, Digital Vehicle Security Systems Ltd. and Scarico (UK) Ltd. 10.22 Warrant, dated December 20, 1996, registered in the name of American International Insurance Company. (Incorporated on reference to Exhibit 4 to the Company's Current Report on Form 8-K (Date of Report: December 20, 1996) (Commission File Number: 0-26998), filed with the Commission on January 3, 1997.) 10.23 Promissory Note, dated June 12, 1998, of the Company, in the principal amount of $100,000 payable to Milbright Estates Ltd. 10.24 Letter Agreement, dated August 14, 1998, between the Company and American International Insurance Company. 10.25 Promissory Note, dated August 13, 1998, of the Company, in the principal amount of $25,000 payable to Milbright Estates Ltd. 10.26 Patent Assignment, dated September 21, 1998, from Joseph M. Lively and WeatherEye, Inc. to the Company. 10.27 Promissory Note, dated September 4, 1998, of the Company, in the principal amount of $40,000 payable to Milbright Estates Ltd. 11 Computation of Loss Per Share. 21 Subsidiaries of the Company. 24 Powers of Attorney (set forth on the signature page of this Annual Report on Form 10-KSB). 27 Financial Data Schedule. EX-10 2 EXHIBIT 10.01 ALCOHOL SENSORS INTERNATIONAL, INC. 1998 Stock Incentive Plan I. DEFINITIONS. 1.1 Definitions. As used herein, capitalized terms not otherwise defined shall have the meanings assigned to them in this Section 1.1. (a) "Award" shall mean an Option (which may be designated as a Nonqualified Stock Option or an Incentive Stock Option), Stock Appreciation Right, Restricted Stock Award or Performance Share Award, in each case granted under this Plan. (b) "Award Agreement" shall mean a written agreement setting forth the terms of an Award. (c) "Award Date" shall mean the date upon which the Committee took the action granting an Award or such later date as is prescribed by the Committee. (d) "Award Period" shall mean the period beginning on an Award Date and ending on the expiration date of such Award. (e) "Beneficiary" shall mean the person(s), trust(s) or other entity(ies) entitled by will or the laws of descent and distribution to receive the benefits specified under this Plan in the event of a Participant's death. (f) "Board" shall mean the Board of Directors of the Corporation. (g) A "Change in Control" shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding securities or (B) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Corporation's shareholders, of each new Board member was approved by a vote of at least three-fourths of the Board members then still in office who were Board members at the beginning of such period. (h) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (i) "Commission" shall mean the Securities and Exchange Commission. (j) "Committee" shall mean either a committee appointed by the Board to administer the Plan and consisting of two or more members, each of whom is a Non-Employee Director, or the entire Board. If there are two or more members of the Board who are "outside directors" within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder, then the Committee shall consist only of such members. (k) "Common Stock" shall mean the Common Stock, par value $.001 per share of the Corporation. (l) "Company" shall mean, collectively, the Corporation and its Subsidiaries. (m) "Corporation" shall mean Alcohol Sensors International, Ltd., a New York corporation, and its successors. (n) "Eligible Person" shall mean an employee, director or officer of the Company or any other person or entity who, in the opinion of the Committee, is rendering valuable services to the Company, including, without limitation, an independent contractor, outside consultant or advisor to the Company. (o) "Event" shall mean any of the following: (i) Approval by the shareholders of the Corporation of the dissolution or liquidation of the Corporation; (ii) Approval by the shareholders of the Corporation of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities which are not Subsidiaries, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Corporation; (iii) Approval by the shareholders of the Corporation of the sale of substantially all of the Corporation's business and/or assets to a person or entity which is not a Subsidiary; or (iv) The occurrence of a Change in Control. (p) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (q) "Fair Market Value" shall mean: (i) if the stock is listed or admitted to trade on a national securities exchange, the closing price of the stock on the Composite Tape, as published in The Wall Street Journal, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such date, or, if there is no trading of the stock on such date, then the closing price of the stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares; (ii) if the stock is not listed or admitted to trade on a national securities exchange but is listed and quoted on The Nasdaq Stock Market ("Nasdaq"), the last sale price for the stock on such date as reported by Nasdaq, or, if there is no reported trading of the stock on such date, then the last sale price for the stock on the next preceding date on which there was trading in the stock; (iii) if the stock is not listed or admitted to trade on a national securities exchange and is not listed and quoted on Nasdaq, the mean between the closing bid and asked price for the stock on such date, as furnished by the National Association of Securities Dealers, Inc. ("NASD") or similar organization; or (iv) if the stock is not listed or admitted to trade on a national securities exchange, not listed and quoted on Nasdaq and if bid and asked prices for the stock are not furnished by the NASD or a similar organization, the value established in good faith by the Committee in the Committee's sole discretion. (r) "Incentive Stock Option" shall mean an Option which is designated as an Incentive Stock Option, the Award of which contains such provisions as are necessary to comply with Section 422 of the Code. (s) "Non-Employee Director" shall mean a Non-Employee Director within the meaning of the applicable regulatory requirement promulgated under Section 16 of the Exchange Act. (t) "Nonqualified Stock Option" shall mean an Option which is not an Incentive Stock Option. (u) "Option" shall mean an option to purchase Common Stock granted under this Plan. (v) "Participant" shall mean an Eligible Person, who has been granted an Award. (w) "Performance Share Award" shall mean an Award of shares of Common Stock, the issuance of such shares being contingent upon attainment of performance objectives specified by the Committee. (x) "Personal Representative" shall mean the person or persons who, upon the disability or incompetence of a Participant, shall have acquired on behalf of the Participant by legal proceeding or otherwise the power to exercise the rights and receive the benefits specified in this Plan. (y) "Plan" shall mean this Alcohol Sensors International, Ltd. 1998 Stock Incentive Plan. (z) "Restricted Stock" shall mean those shares of Common Stock issued pursuant to a Restricted Stock Award which are subject to the restrictions set forth in the related Award Agreement. (aa) "Restricted Stock Award" shall mean an award of a fixed number of shares of Common Stock to the Participant subject, however, to payment of such consideration, if any, and such forfeiture provisions, as are set forth in the Award Agreement. (bb) "Retirement" shall mean termination of employment with the Company pursuant to the Company's retirement policy, as in effect from time to time, or otherwise with the consent of the Company. (cc) "Securities Act" shall mean the Securities Act of 1933, as amended. (dd) "Stock Appreciation Right" shall mean a right to receive a number of shares of Common Stock or an amount of cash, or a combination of shares and cash, determined as provided in Section 4.3(a). (ee) "Subsidiary" shall mean any corporation or other entity a majority or more of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. (ff) "Tax-Offset Bonus" shall mean a bonus payable pursuant to a disqualifying disposition of Common Stock acquired pursuant to the exercise of an Incentive Stock Option, determined as provided in Section 3.6. (gg) "Total Disability" shall mean a "permanent and total disability" within the meaning of Section 22 (e)(3) of the Code. II. THE PLAN. 2.1 Purpose. The purpose of this Plan is to promote the success of the Company by providing an additional means to attract and retain directors, officers, employees, consultants and other persons and entities through added long-term incentives and for significant efforts to improve the financial performance of the Company by granting Awards. 2.2 Administration. (a) This Plan shall be administered by the Committee. Action of the Committee with respect to the administration of this Plan shall be taken pursuant to a majority vote or the written consent of a majority of its members. In the event action by the Committee is taken by written consent, the action shall be deemed to have been taken at the time specified in the consent or, if none is specified, at the time of the last signature. The Committee may delegate administrative functions (other than functions which are required to be performed by the Committee pursuant to requirements promulgated under Section 16 of the Exchange Act and Section 162(m) of the Code) to individuals who are officers or employees of the Company. (b) Subject to the express provisions of this Plan, the Committee shall have the authority to construe and interpret this Plan and any agreements defining the rights and obligations of the Company and Participants under this Plan, to further define the terms used in this Plan, to prescribe, amend and rescind rules and regulations relating to the administration of this Plan, to determine the duration and purposes of leaves of absence which may be granted to Participants without constituting a termination of their employment for purposes of this Plan and to make all other determinations necessary or advisable for the administration of this Plan. The determinations of the Committee on the foregoing matters shall be conclusive and binding upon all persons. (c) Any action taken by, or inaction of, the Corporation, any Subsidiary, the Board or the Committee relating to this Plan shall be within the absolute discretion of that entity or body and shall be conclusive and binding upon all persons. No member of the Board or Committee, or officer of the Corporation or Subsidiary, shall be liable for any such action or inaction of the entity or body, of another person or, except in circumstances involving bad faith, of himself or herself. Subject only to compliance with the express provisions hereof, the Board and Committee may act in their absolute discretion in matters related to this Plan. (d) Subject to the requirements of Section 1.1 (j), the Board, at any time it so desires, may increase or decrease the number of members of the Committee, may remove from membership on the Committee all or any portion of its members, and may appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether caused by removal, resignation or otherwise. 2.3 Participation. Awards may be granted only to Eligible Persons. An Eligible Person who has been granted an Award may, if otherwise eligible, be granted additional Awards if the Committee shall so determine. 2.4 Stock Subject to the Plan. The stock to be offered under this Plan shall be shares of the Corporation's authorized but unissued Common Stock. The aggregate amount of the Common Stock that may be issued or transferred pursuant to Awards granted under this Plan shall not exceed 3,000,000 shares, subject to adjustment as set forth in Section 7.2; provided that any Stock Appreciation Rights granted concurrently in accordance with Section 4.1 are not subject to the foregoing limitation. If an Option and any Stock Appreciation Right shall lapse or terminate without having been exercised in full, or any Common Stock subject to a Restricted Stock Award shall not vest or any Common Stock subject to a Performance Share Award shall not have been transferred, the unpurchased or nontransferred shares subject thereto shall again be available for purposes of this Plan; provided, however, that the counting of shares subject to Awards granted under the Plan against the number of shares available for further Awards shall in all cases conform to the requirements of Rule 16b-3 under the Exchange Act; and provided, further, that, with respect to any Option and any Stock Appreciation Right granted to any Eligible Person who is a "covered employee" as defined in Section 162(m) of the Code and the regulations promulgated thereunder that is canceled, the number of shares subject to such Option and Stock Appreciation Right shall continue to count against the maximum number of shares which may be the subject of Options and Stock Appreciation Rights granted to such Eligible Person. For purposes of the preceding sentence, if, after grant, the exercise price of an Option and/or the base amount of any Stock Appreciation Right is reduced, such reduction shall be treated as a cancellation of such Option and/or Stock Appreciation Right and the grant of a new Option and/or Stock Appreciation Right (if any), and both the cancellation of the Option and/or Stock Appreciation Right and the new Option and/or Stock Appreciation Right shall reduce the maximum number of shares for which Options and Stock Appreciation Rights may be granted to the holder of such Option and/or Stock Appreciation Right to the extent required by Section 162(m) of the Code and the regulations promulgated thereunder. 2.5 Grant of Awards. Subject to the express provisions of the Plan, the Committee shall determine from the class of Eligible Persons those individuals and entities to whom Awards under the Plan shall be granted, the terms of Awards (which need not be identical) and the number of shares of Common Stock subject to each Award; provided, however, that no Eligible Person may be granted Options and Stock Appreciation Rights relating in the aggregate to more than 250,000 shares of Common Stock (subject to adjustment as provided in Section 7.2) in any calendar year; and provided, further, that any shares of Common Stock relating to Stock Appreciation Rights granted concurrently with one or more Options in accordance with Section 4.1 shall only be counted once for purposes of such limit. Each Award shall be subject to the terms and conditions set forth in the Plan and such other terms and conditions established by the Committee as are not inconsistent with the purpose and provisions of the Plan. 2.6 Exercise of Awards. An Option or Stock Appreciation Right shall be deemed to be exercised when the Secretary of the Corporation, or such other person(s) designated by Committee, receives written notice of such exercise from the Participant, together with payment of the exercise price made in accordance with Subsection 3.1(b) or 3.2(b), as the case may be, except to the extent payment may be permitted to be made following delivery of written notice of exercise in accordance with Subsection 3.1(b) or 3.2(b), as the case may be. Notwithstanding any other provision of this Plan, the Committee may impose, by rule and/or in Award Agreements, such conditions upon the exercise of Awards (including, without limitation, conditions limiting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements, including, without limitation, Rule 16b-3 (or any successor rule) promulgated under the Exchange Act or for any other reason in the sole discretion of the Committee. III. OPTIONS. 3.1 Grants. (a) One or more Options may be granted to any Eligible Person. Except for Options granted pursuant to Subsection 3.1(b), all Options granted to members of the Committee must be ratified by a majority of the members of the Board. Unless specifically designated by the Committee as an Incentive Stock Option, each Option granted under the Plan shall be a Nonqualified Stock Option. Notwithstanding any designation as an Incentive Stock Option, an Option (or portion thereof) not qualifying as an Incentive Stock Option under Section 422 of the Code, shall be deemed a Nonqualified Stock Option. (b) Notwithstanding any other provision of the Plan, effective on the date of the approval of the Plan by the shareholders of the Corporation and on each subsequent date a director who is not also an employee of the Company is appointed, elected or, commencing in 1999, re-elected to the Board, such director will automatically be granted a Nonqualified Stock Option to purchase 25,000 shares of Common Stock at an exercise price per share equal to the Fair Market Value of the Common Stock on the date of grant, such Nonqualified Stock Options to have a duration of ten years and to become exercisable in equal tranches of one-third (1/3) of such shares on each of the first three anniversaries of the date of grant. The exercise price of any shares purchased pursuant to the exercise of an Option granted pursuant to this Section 3.2(b) shall be paid in full at the time of each purchase in one or a combination of the following methods: (i) cash; (ii) check (subject to collection); or (iii) in the discretion of the Committee, by (A) delivery to the Company of a promissory note containing such terms and conditions determined by the Committee, in the Committee's sole discretion, but at a rate of interest at least equal to the imputed interest specified under Section 483 or Section 1274, whichever is applicable, of the Code, and secured by the Common Stock issuable upon exercise of the Option for which the promissory note is being delivered and otherwise in compliance with applicable law (including, without limitation, state corporate law and federal margin requirements), (B) assignment to the Corporation of the net proceeds (to the extent necessary to pay such exercise price) to be received from a registered broker upon the sale of the shares or assignment of the net proceeds (to the extent necessary to pay such exercise price) of a loan from such broker in such amount or (C) such other consideration and method of payment for the issuance of stock to the extent permitted under New York law and satisfying the requirements of Rule 16b-3 promulgated pursuant to the Exchange Act. Notwithstanding anything to the contrary contained in Section 7.2 or 7.4, each such Option shall be adjusted and shall accelerate, respectively, in the following events: (i) If the outstanding shares of Common Stock are increased, decreased or changed into, or exchanged for, a different number or kind of shares or securities of the Corporation through a reorganization or merger in which the Corporation is the surviving entity, or through a combination, recapitalization, reclassification, stock split, stock dividend, stock consolidation or otherwise, an appropriate adjustment shall be made in the number and kind of shares that may be issued pursuant to each such Option; provided, however, that any such adjustment shall be made without change in the total payment, if any, applicable to the portion of such Option not exercised but with a corresponding adjustment in the price for each share; (ii) Upon the dissolution or liquidation of the Corporation, or upon a reorganization, merger or consolidation of the Corporation with one or more corporations as a result of which the Corporation is not the surviving corporation, any such Option then outstanding shall terminate and be forfeited; provided, however, that in the event any such Option terminates as aforesaid in connection with such a dissolution, liquidation, reorganization, merger or consolidation, the holder of any such Option shall be entitled to receive from the Corporation cash in an amount equal to the excess of (A) the Fair Market Value (determined on the basis of the amount received by shareholders in connection with such transaction) of the shares of Common Stock subject to the portion of such Option not theretofore exercised (whether or not such Option is then exercisable pursuant to its terms or otherwise), over (B) the aggregate exercise price which would be payable for such shares upon the exercise of such Option; (iii) In adjusting such Options to reflect the changes described in this Section 3.1(b) or in determining that no such adjustment is necessary, the Committee shall make only such adjustment as shall be necessary to maintain the proportionate interest of the holder and preserve the value of the respective Option and may rely upon the advice of independent counsel and accountants of the Corporation, and the determination of the Committee shall be conclusive; (iv) No fractional shares of stock shall be issued under this Plan on account of any such adjustment; and (v) Upon the occurrence of an Event, each such Option shall become immediately exercisable to the full extent theretofore not exercisable; provided, however, that such acceleration shall comply with applicable regulatory requirements, including without limitation Rule 16b-3 promulgated by the Commission pursuant to the Exchange Act. All or any part of any remaining unexercised Options granted pursuant to this Section 3.1(b) may be exercised (after approval of the Plan by shareholders of the Corporation, but in no event during the six-month period commencing on the later of the date of grant or the date of such shareholder approval, unless such exercise complies with applicable regulatory requirements) in the event of the holder's cessation of service as a director of the Company due to the holder's death, during the period beginning on the date of death and ending twelve months thereafter, but in no event after the expiration of the term of the Option. Any Option granted pursuant to this Section 3.1(b), to the extent unexercised, shall terminate immediately upon the holder's ceasing to serve as a director of the Company due to Total Disability, except that the holder or the holder's Personal Representative shall have twelve months following such cessation of service to exercise any unexercised Option that the holder could have exercised on the day on which such service terminated; provided that such exercise must be accomplished prior to the expiration of the term of such Option. Any Option granted pursuant to this Subsection 3.1(b), to the extent unexercised, shall terminate immediately upon the holder's ceasing to serve as a director of the Company (for reasons other than Total Disability or death), except that the holder shall have three months from the date of such cessation of service to exercise any unexercised Option that he or she could have exercised on the day on which such service terminated; provided that such exercise must be accomplished prior to the expiration of the term of such Option. Notwithstanding the preceding, if the service as a director of any holder of an Option granted pursuant to this Subsection 3.1(b) shall be terminated because of the holder's (i) fraud or intentional misrepresentation or (ii) embezzlement, misappropriation or conversion of assets or opportunities of the Company, then all such unexercised Options of the holder shall terminate immediately upon such holder's ceasing to serve as a director. Subject to the limitations of Section 7.7, the award formula in this Subsection 3.1(b) may be amended from time to time by the Board with respect to timing and amount; provided that the provisions of this Subsection 3.1(b) shall not be amended more than once every six months, other than to comport with changes in the Code or the Employee Retirement Income Security Act of 1974, as amended (and to such extent, if any, as it may be applicable to the Plan) or the rules and regulations thereunder. 3.2 Option Price. (a) The exercise price per share of the Common Stock covered by each Option shall be determined by the Committee but, in the case of Incentive Stock Options, shall not be less than 100% (110% in the case of a Participant who owns more than 10% of the total combined voting power of all classes of stock of the Company) of the Fair Market Value of the Common Stock on the date the Incentive Stock Option is granted and, in the case of Nonqualified Stock Options, shall not be less than 85% of the Fair Market Value of the Common Stock on the date the Nonqualified Stock Option is granted. (b) The exercise price of any shares purchased pursuant to an Option granted pursuant to the Plan, other than an Option granted under Subsection 3(b), shall be paid in full at the time of each purchase in one or a combination of the following methods: (i) cash; (ii) check (subject to collection); (iii) in the discretion of the Committee, surrender to the Company of other shares of Common Stock owned by the Optionee which (A) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the shares as to which the Option shall be exercised and (B) have been owned of record by the Participant exercising the Option for at least six months; (iv) commencing three years from the Date of Grant, in the discretion of the Committee, by "cashless exercise," by means of exercising the Option in full and receiving such number of shares of Common Stock having a Fair Market Value on the date of such cashless exercise equal to the difference between (A) the Fair Market Value of the shares issuable upon exercise of the Option in full on the date of such cashless exercise and (B) the exercise price of the Option multiplied by the number of shares issuable upon exercise of the Option in full; or (v) in the discretion of the Committee, by (A) delivery to the Company of a promissory note containing such terms and conditions determined by the Committee, in the Committee's sole discretion, but at a rate of interest at least equal to the imputed interest specified under Section 483 or Section 1274, whichever is applicable, of the Code, and secured by the Common Stock issuable upon exercise of the Option for which the promissory note is being delivered and otherwise in compliance with applicable law (including, without limitation, state corporate law and federal margin requirements), (B) assignment to the Corporation of the net proceeds (to the extent necessary to pay such exercise price) to be received from a registered broker upon the sale of the shares or assignment of the net proceeds (to the extent necessary to pay such exercise price) of a loan from such broker in such amount or (C) such other consideration and method of payment for the issuance of stock to the extent permitted under New York law and satisfying the requirements of Rule 16b-3 promulgated pursuant to the Exchange Act. The Committee, in the Committee's sole discretion, may impose additional requirements with respect to any of the above-stated methods of payment of the exercise price of an Option. 3.3 Option Period. Each Option and all rights or obligations thereunder shall expire on such date as shall be determined by the Committee, but not later than ten years after the Award Date of an Incentive Stock Option or ten years and one day after the Award Date of a Nonqualified Stock Option, and shall be subject to earlier termination as hereinafter provided. 3.4 Exercise of Options. Except as otherwise provided in Section 7.4, an Option may become exercisable, in whole or in part, on the date or dates specified in the Award Agreement, and thereafter shall remain exercisable until the expiration or earlier termination of such Option. Unless otherwise determined by the Committee and reflected in the Award Agreement with respect to the Option, each Option shall become exercisable in equal tranches of one-third (1/3) of the shares of Common Stock subject to such Option on each of the first three anniversaries of the date of grant of such Option. The Committee may, at any time after grant of the Option and from time to time increase the number of shares purchasable at any time so long as the total number of shares subject to the Option is not increased. No Option shall be exercisable except in respect of whole shares, and fractional share interests shall be disregarded. Not less than 100 shares of Common Stock may be purchased at one time unless the number purchased is the total number at the time available for purchase under the terms of the Option. 3.5 Limitations on Grant of Incentive Stock Options. (a) The aggregate Fair Market Value (determined as of the Award Date) of the Common Stock for which Incentive Stock Options may first become exercisable by any Participant during any calendar year under this Plan (other than as a result of acceleration pursuant to Section 7.2 or 7.4), together with that of common stock subject to incentive stock options first exercisable by such Participant under any other plan of the Company, shall not exceed $100,000; to the extent such limitation is exceeded for any reason, including as a result of acceleration, such Option(s) shall be treated as Nonqualified Stock Option(s). (b) There shall be imposed in the Award Agreement relating to Incentive Stock Options such terms and conditions as are required in order that the Option qualify as an "incentive stock option" as that term is defined in Section 422 of the Code. (c) No Incentive Stock Option may be granted to any person who, at the time the Incentive Stock Option is granted, owns securities possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or any Subsidiary, unless the exercise price of such Option is at least 110% of the Fair Market Value of the stock subject to the Option and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. (d) No Incentive Stock Option may be granted to any person who is not an employee of the Company. 3.6 Additional Rights. In its discretion the Committee may, in the Award Agreement, provide for a Tax-Offset Bonus to any Participant who elects to make a disqualifying disposition (as defined in Section 422(a)(1) of the Code) of Common Stock acquired pursuant to the exercise of an Incentive Stock Option. The Tax-Offset Bonus shall be in the form of a cash payment equal to a percentage of the difference between the exercise price and the lesser of (a) the Fair Market Value on the date of exercise of the Common Stock with respect to which the disqualifying disposition occurs or (b) the amount realized from such disqualifying disposition. Such percentage shall be set out in the Award Agreement and shall be designed to offset the impact of additional taxes which result from the disqualifying disposition. Notwithstanding the preceding sentence, the Committee may reserve the right to from time to time change the percentage applicable with respect to the Award Agreement. IV. STOCK APPRECIATION RIGHTS. 4.1 Grants. In its discretion, the Committee may grant Stock Appreciation Rights concurrently with the grant of Options. A Stock Appreciation Right shall extend to all or a portion of the shares covered by the related Option. A Stock Appreciation Right shall entitle the Participant who holds the related Option, upon exercise of the Stock Appreciation Right and surrender of the related Option, or portion thereof, to the extent the Stock Appreciation Right and related Option each were previously unexercised, to receive payment of an amount determined pursuant to Section 4.3. Any Stock Appreciation Right granted in connection with an Incentive Stock Option shall contain such terms as may be required to comply with the provisions of Section 422 of the Code and the regulations promulgated thereunder. In its discretion, the Committee may also grant Stock Appreciation Rights independently of any Option subject to such conditions as the Committee may, in the Committee's sole discretion, provide. 4.2 Exercise of Stock Appreciation Rights. (a) A Stock Appreciation Right granted concurrently with an Option shall be exercisable only at such time or times, and to the extent, that the related Option shall be exercisable and only when the Fair Market Value of the stock subject to the related Option exceeds the exercise price of the related Option. (b) In the event that a Stock Appreciation Right granted concurrently with an Option is exercised, the number of shares of Common Stock subject to the related Option shall be charged against the maximum amount of Common Stock that may be issued or transferred pursuant to Awards under this Plan. The number of shares subject to the Stock Appreciation Right and the related Option of the Participant shall be reduced by such number of shares. (c) If a Stock Appreciation Right granted concurrently with an Option extends to less than all the shares covered by the related Option and if a portion of the related Option is thereafter exercised, the number of shares subject to the unexercised Stock Appreciation Right shall be reduced only if and to the extent that the remaining number of shares covered by such related Option is less than the remaining number of shares subject to such Stock Appreciation Right. The number of shares subject to unexercised Stock Appreciation Rights may also be reduced proportionately. (d) A Stock Appreciation Right granted independently of any Option shall be exercisable pursuant to the terms of the Award Agreement with respect to such Stock Appreciation Right. (e) In order to achieve the Plan's objective of encouraging ownership of the Common Stock, the Committee may require that Stock Appreciation Rights can only be exercised if the Participant uses all or a portion of any cash received upon exercise of the Stock Appreciation Right to concurrently exercise all or a portion of the Option the Participant holds. 4.3 Payment. (a) Upon exercise of a Stock Appreciation Right and surrender of an exercisable portion of the related Option, the Participant shall be entitled to receive payment of an amount determined by multiplying (i) the difference obtained by (A) subtracting the exercise price per share of Common Stock under the related Option from (B) the Fair Market Value of a share of Common Stock on the date of exercise of the Stock Appreciation Right, by (ii) the number of shares with respect to which the Stock Appreciation Right shall have been exercised. (b) The Committee, in its sole discretion, may settle the amount determined under Subsection 4.3(a) solely in cash, solely in shares of Common Stock (valued at Fair Market Value on the date of exercise of the Stock Appreciation Right), or partly in such shares and partly in cash, provided that the Committee shall have determined that such exercise and payment are consistent with applicable law. In any event, cash shall be paid in lieu of fractional shares. Absent a determination to the contrary, all Stock Appreciation Rights shall be settled in cash as soon as practicable after exercise. Notwithstanding the foregoing, the Committee may, in the Award Agreement, determine the maximum amount of cash or stock or a combination thereof which may be delivered upon exercise of a Stock Appreciation Right. (c) Upon exercise of a Stock Appreciation Right granted independently of any Option, the Participant shall be entitled to receive payment in cash of an amount based on a percentage, specified in the Award Agreement, of the difference obtained by subtracting the Fair Market Value per share of Common Stock on the Award Date from the Fair Market Value per share of Common Stock on the date of exercise of the Stock Appreciation Right. V. RESTRICTED STOCK AWARDS. 5.1 Grants. Subject to Section 2.4, the Committee may, in its discretion, grant one or more Restricted Stock Awards to any Eligible Person. Each Restricted Stock Award Agreement shall specify the number of shares of Common Stock to be issued to the Participant, the date of such issuance, the price, if any, to be paid for such shares by the Participant and the restrictions imposed on such shares. Shares of Restricted Stock shall be evidenced by a stock certificate registered only in the name of the Participant, which stock certificate shall bear a legend making appropriate reference to the restrictions imposed and shall be held by the Corporation until the restrictions on such shares shall have lapsed and those shares shall have thereby vested. 5.2 Restrictions. (a) Shares of Common Stock included in Restricted Stock Awards may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered, either voluntarily or involuntarily, until such shares have vested. (b) Participants receiving Restricted Stock shall be entitled to voting and dividend rights for the shares issued even though they are not vested; provided that any dividends declared and paid on the shares issued but not yet vested shall be returned to the Corporation immediately as to any forfeited Restricted Stock. (c) In the event that the Participant shall have paid cash in connection with the Restricted Stock Award, the Award Agreement shall specify whether and to what extent such cash shall be returned upon a forfeiture (with or without an earnings factor). VI. PERFORMANCE SHARE AWARDS. 6.1 Grants. The Committee may, in its discretion, grant Performance Share Awards to Eligible Persons based upon such factors as the Committee shall determine. A Performance Share Award Agreement shall specify the number of shares of Common Stock subject to the Performance Share Award, the price, if any, to be paid for such shares by the Participant and the conditions upon which issuance to the Participant shall be based. VII. OTHER PROVISIONS. 7.1 Rights of Eligible Persons, Participants and Beneficiaries. (a) Status as an Eligible Person shall not be construed as a commitment that any Award will be made under this Plan to an Eligible Person or to Eligible Persons generally. (b) Nothing contained in this Plan (or in Award Agreements or in any other documents related to this Plan or to Awards) shall confer upon any Eligible Person or Participant any right to continue in the employ of the Company or constitute any contract or agreement of employment, or interfere in any way with the right of the Company to reduce such person's compensation or to terminate the employment of such Eligible Person or Participant, with or without cause, but nothing contained in this Plan or any document related thereto shall affect any other contractual right of any Eligible Person or Participant. (c) Amounts payable pursuant to an Award shall be paid only to the Participant or, in the event of the Participant's death, to the Participant's Beneficiary or, in the event of the Participant's Total Disability, to the Participant's Personal Representative or, if there is none, to the Participant. Other than by will or the laws of descent and distribution, or pursuant to a "qualified domestic relations order" as defined by the Code, no benefit payable under, or interest in, the Plan or in any Award shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge and any such attempted action shall be void and no such benefit or interest shall be, in any manner, liable for or subject to, debts, contracts, liabilities, engagements or torts of any Eligible Person, Participant or Beneficiary. The Committee shall disregard any attempted transfer, assignment or other alienation prohibited by the preceding sentence and shall pay or deliver such cash or shares of Common Stock in accordance with the provisions of the Plan. (d) No Participant, Beneficiary or other person shall have any right, title or interest in any fund or in any specific asset (including shares of Common Stock) of the Company by reason of any Award granted hereunder. Neither the provisions of the Plan (or of any documents related hereto), nor the creation or adoption of the Plan, nor any action taken pursuant to the provisions of the Plan shall create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any Participant, Beneficiary or other person. To the extent that a Participant, Beneficiary or other person acquires a right to receive an Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company. 7.2 Adjustments upon Changes in Capitalization. (a) If the outstanding shares of Common Stock are increased, decreased or changed into, or exchanged for, a different number or kind of shares or securities of the Corporation through a reorganization or merger in which the Corporation is the surviving entity, or through a combination, recapitalization, reclassification, stock split, stock dividend, stock consolidation or otherwise, an appropriate adjustment shall be made in the number and kind of shares that may be issued pursuant to Awards. A corresponding adjustment to the consideration payable with respect to Awards granted prior to any such change and to the price, if any, paid in connection with Restricted Stock Awards or Performance Share Awards shall also be made. Any such adjustment, however, shall be made without change in the total payment, if any, applicable to the portion of the Award not exercised but with a corresponding adjustment in the price for each share. Corresponding adjustments shall be made with respect to Stock Appreciation Rights based upon the adjustments made to the Options to which they are related or, in the case of Stock Appreciation Rights granted independently of any Option, based upon the adjustments made to Common Stock. Corresponding adjustments may also be made in particular stock grants with respect to extraordinary cash dividends. (b) Upon the dissolution or liquidation of the Corporation, or upon a reorganization, merger or consolidation of the Corporation with one or more corporations as a result of which the Corporation is not the surviving corporation, the Plan shall terminate, and any outstanding Awards shall terminate and be forfeited. Notwithstanding the foregoing, the Committee may provide in writing in connection with, or in contemplation of, any such transaction for any or all of the following alternatives (separately or in combinations): (i) for the assumption by the successor corporation of the Awards theretofore granted or the substitution by such corporation for such Awards of awards covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (ii) for the continuance of the Plan by such successor corporation in which event the Plan and the Awards shall continue in the manner and under the terms so provided; or (iii) for the payment in cash or shares of Common Stock in lieu of and in complete satisfaction of such Awards. (c) In adjusting Awards to reflect the changes described in this Section 7.2, or in determining that no such adjustment is necessary, the Committee may rely upon the advice of independent counsel and accountants of the Corporation, and the determination of the Committee shall be conclusive. No fractional shares of stock shall be issued under this Plan on account of any such adjustment. 7.3 Termination of Employment. (a) Unless otherwise determined by the Committee and reflected in the Award Agreement with respect to an Option, if the Participant's employment by the Company terminates for any reason other than Retirement, death or Total Disability, the Participant shall have, subject to earlier termination pursuant to or as contemplated by Section 3.3, three months (or up to one year, if so determined by the Committee in the grant or otherwise) from the date of termination of employment to exercise any Option to the extent such Option shall have become exercisable on such date, and any Option (or portion thereof) not exercisable on such date shall terminate. Notwithstanding the preceding sentence, in the event the Participant is discharged for cause as determined by the Committee, in the Committee's sole discretion, all Options granted to such Participant shall lapse immediately upon such termination of employment. (b) Unless otherwise determined by the Committee and reflected in the Award Agreement with respect to an Option, if the Participant's employment by the Company terminates as a result of Retirement or Total Disability, the Participant or Participant's Personal Representative, as the case may be, shall have, subject to earlier termination pursuant to or as contemplated by Section 3.3, twelve months from the date of termination of employment (or three months from the date of termination of employment as a result of Retirement, with respect to an Incentive Stock Option) to exercise any Option to the extent such Option shall have become exercisable by such date, and any Option (or portion thereof) not exercisable on such date shall terminate. (c) Unless otherwise determined by the Committee and reflected in the Award Agreement with respect of an Option, if the Participant's employment by the Company terminates as a result of death while the Participant is employed by the Company or during the twelve-month period referred to in Subsection 7.3(b) above, the Participant's Option shall be exercisable by the Participant's Beneficiary, subject to earlier termination pursuant to or as contemplated by Section 3.3, during the twelve-month period or such shorter period as is provided in the Award Agreement following the Participant's death, to the extent such Option shall have become exercisable by such date, and any Option (or portion thereof) not exercisable on such date shall terminate. (d) Each Stock Appreciation Right granted concurrently with an Option shall have the same termination provisions and exercisability periods as the Option to which it relates. The termination provisions and exercisability periods of any Stock Appreciation Right granted independently of an Option shall be established in accordance with Subsection 4.2(d). The exercisability period of a Stock Appreciation Right shall not exceed that provided in Section 3.3 or in the related Award Agreement, and the Stock Appreciation Right shall expire at the end of such exercisability period. (e) In the event of termination of employment with the Company for any reason, (i) shares of Common Stock subject to the Participant's Restricted Stock Award shall be forfeited in accordance with the provisions of the related Award Agreement to the extent such shares have not become vested on such date and (ii) shares of Common Stock subject to the Participant's Performance Share Award shall be forfeited in accordance with the provisions of the related Award Agreement to the extent such shares have not been issued or become issuable on such date. (f) In the event of termination of employment with the Company for any reason, other than discharge for cause, the Committee may, in its discretion, increase the portion of the Participant's Award available to the Participant, or Participant's Beneficiary or Personal Representative, as the case may be, upon such terms as the Committee, in the Committee's sole discretion, shall determine. (g) If an entity ceases to be a Subsidiary, such action shall be deemed for purposes of this Section 7.3 to be a termination of employment of each employee of that Subsidiary. (h) Upon forfeiture of a Restricted Stock Award pursuant to this Section 7.3, the Participant, or the Participant's Beneficiary or Personal Representative, as the case may be, shall transfer to the Corporation the portion of the Restricted Stock Award not vested at the date of termination of employment, without payment of any consideration by the Company for such transfer unless the Participant paid an exercise price, in which event, repayment, if any, of that price shall be governed by the Award Agreement. Notwithstanding any such transfer to the Corporation, or failure, refusal or neglect to transfer, by the Participant, or the Participant's Beneficiary or Personal Representative, as the case may be, such nonvested portion of any Restricted Stock Award shall be deemed transferred automatically to the Corporation on the date of termination of employment. The Participant's original acceptance of the Restricted Stock Award shall constitute the Participant's appointment of the Corporation and each of the Corporation's authorized representatives as attorney(s)-in-fact to effect such transfer and to execute such documents as the Corporation or such representatives deem necessary or advisable in connection with such transfer. 7.4 Acceleration of Awards. Unless prior to an Event the Committee determines that, upon the Event's occurrence, there shall be no acceleration of Awards or determines those Awards which shall be accelerated and the extent to which they shall be accelerated, upon the occurrence of an Event (a) each Option and each Stock Appreciation Right shall become immediately exercisable to the full extent theretofore not exercisable, (b) Restricted Stock shall immediately vest free of restrictions and (c) the number of shares covered by each Performance Share Award shall be issued to the Participant. Acceleration of Awards shall comply with applicable regulatory requirements, including, without limitation, Rule 16b-3 promulgated under the Exchange Act and Section 422 of the Code. 7.5 Government Regulations. The Plan, the granting of Awards under the Plan and the issuance or transfer of shares of Common Stock (and/or the payment of money) pursuant thereto are subject to all applicable federal and state laws, rules and regulations and to such approvals by any regulatory or governmental agency (including, without limitation, interpretive letters of the Commission) which may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Without limiting the generality of the foregoing, no Awards may be granted under the Plan, and no shares shall be issued by the Corporation, or cash payments made by the Corporation, pursuant to or in connection with any such Award, unless and until, in each such case, all legal requirements applicable to the issuance or payment have, in the opinion of counsel to the Corporation, been complied with. In connection with any stock issuance or transfer, the person acquiring the shares shall, if requested by the Corporation, give assurances satisfactory to counsel to the Corporation in respect of such matters as the Corporation may deem desirable to assure compliance with all applicable legal requirements. 7.6 Tax Withholding. (a) Upon the disposition by a Participant or other person of shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option prior to satisfaction of the holding period requirements of Section 422 of the Code, or upon the exercise of a Nonqualified Stock Option or a Stock Appreciation Right, the vesting of a Restricted Stock Award, the payment of a Performance Share Award, payment pursuant to a Stock Appreciation Right or payment of a Tax-Offset Bonus, the Company shall have the right to (i) require such Participant or other person to pay the Company, by cash or certified or cashier's check payable to the Company, the amount of any taxes which the Company may be required to withhold with respect to such transactions or (ii) deduct from amounts payable to such Participant in cash the amount of any taxes which the Company may be required to withhold with respect to such cash amounts. The above notwithstanding, in any case where a tax is required to be withheld in connection with the issuance or transfer of shares of Common Stock under this Plan, the Participant may elect, pursuant to such rules as the Committee may establish, to have the Company reduce the number of such shares issued or transferred by the appropriate number of shares to accomplish such withholding; provided that the Committee may impose such conditions on the payment of any withholding obligation as may be required to satisfy applicable regulatory requirements, including, without limitation, Rule 16b-3 promulgated under the Exchange Act. (b) The Committee may, in its discretion, permit a loan from the Company to a Participant (other than a member of the Committee) in the amount of any taxes which the Company may be required to withhold with respect to shares of Common Stock received pursuant to a transaction described in Subsection 7.6(a). Such a loan will be for a term, at a rate of interest and pursuant to such other terms and rules as the Committee may establish. 7.7 Amendment, Termination and Suspension. (a) The Board may, at any time, terminate or, from time to time, amend, modify or suspend the Plan (or any part hereof). In addition, the Committee may, from time to time, amend or modify any provision of the Plan and, with the consent of the Participant, make such modifications of the terms and conditions of such Participant's Award as the Committee shall deem advisable. The Committee, with the consent of the Participant, may also amend the terms of any Option to provide that the exercise price of the shares remaining subject to the original Award shall be reestablished at a price not less than 100% of the Fair Market Value of the Common Stock on the effective date of such amendment. No modification of any other term or provision of any Option which is amended in accordance with the foregoing shall be required, although the Committee may, in its discretion, make such further modifications of any such Option as are not inconsistent with or prohibited by the Plan. No Awards may be granted during any suspension of the Plan or after the Plan's termination. (b) If an amendment would (i) materially increase the benefits accruing to Participants within the meaning of Rule 16b-3(a) promulgated under the Exchange Act or any successor thereto, (ii) increase the aggregate number of shares which may be issued under the Plan or to any individual, (iii) modify the requirements of eligibility for participation in the Plan or (iv) require shareholder approval in order to qualify Options and Stock Appreciation Rights as "performance-based compensation," within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder, the amendment shall be approved by the Board or the Committee and holders of a majority of the voting securities of the Company. If the provisions of Rule 16b-3 promulgated under the Exchange Act or any successor thereto or Section 162(m) of the Code regulations promulgated thereunder permit the amendment of stock options plans without compliance with the shareholder approval requirements then set forth therein, the foregoing restrictions on the ability of the Board and the Committee to amend the Plan shall terminate to the extent such approval is not required thereunder (or under any other applicable law or regulation), and the Board and the Committee shall be empowered to amend the Plan without regard to the terminated restrictions in appropriate circumstances. (c) In the case of Awards issued before the effective date of any amendment, suspension or termination of this Plan, such amendment, suspension or termination of the Plan shall not, without specific action of the Board or the Committee and the consent of the Participant, in any way modify, amend, alter or impair any rights or obligations under any Award previously granted under the Plan. 7.8 Privileges of Stock Ownership, Nondistributive Intent. A Participant, and any Participant's Personal Representative, heirs, beneficiaries and successors, shall not be entitled to the privilege of stock ownership as to any shares of Common Stock not actually issued to the Participant or such person or entity. Upon the issuance and transfer of shares to the Participant, unless a registration statement is in effect under the Securities Act, relating to such issued and transferred Common Stock and there is available for delivery a prospectus meeting the requirements of Section 10 of the Securities Act, the Common Stock may be issued and transferred to the Participant only if the Participant represents and warrants in writing to the Corporation that the shares are being acquired for investment and not with a view to the resale or distribution thereof. No shares shall be issued and transferred unless and until there shall have been full compliance with any then applicable regulatory requirements (including those of exchanges upon which the Common Stock may be listed). 7.9 Effective Date of the Plan. The Plan is conditioned upon its approval by the securityholders of the Corporation on or before May 24, 1999 by the vote of the holders of a majority of the securities of the Corporation entitled to and voting at a meeting of such holders, either in person or by proxy; except that the Plan is adopted and approved by the Board effective May 24, 1998 to permit the grant of Awards prior to the approval of the Plan by the securityholders as aforesaid. Any Awards granted prior to such securityholder approval shall not vest or become exercisable prior to such approval. In the event that the Plan is not approved by such securityholders of the Corporation as aforesaid, the Plan and any Awards granted hereunder shall be void and of no force or effect. 7.10 Term of the Plan. Unless previously terminated by the Board, the Plan shall terminate at the close of business on May 23, 2008, and no Awards shall be granted under the Plan thereafter, but such termination shall not affect any Award theretofore granted. 7.11 Governing Law. This Plan and the documents evidencing Awards and all other related documents shall be governed by, and construed in accordance with, the laws of the State of New York. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of the Plan shall continue to be fully effective. EX-10 3 EXHIBIT 10.04 EXECUTIVE EMPLOYMENT AGREEMENT BETWEEN ALCOHOL SENSORS INTERNATIONAL, LTD. AND JOSEPH M. LIVELY This EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is dated as of September 1, 1998 (the "Effective Date"), between ALCOHOL SENSORS INTERNATIONAL, LTD., a New York corporation (the "Corporation"), and JOSEPH M. LIVELY (the "Executive"). WHEREAS, the Corporation desires to employ Executive as the Corporation's President and Chief Operating Officer, upon the terms and conditions as hereinafter set forth; and WHEREAS, Executive desires to accept such employment with the Corporation upon such terms and conditions. NOW, THEREFORE, in consideration of the mutual covenants and obligations set forth herein and other good and valuable consideration, the receipt and adequacy is hereby acknowledged, the parties hereto agree as follows: 1. Employment and Duties. (a) The Corporation hereby employs Executive and Executive accepts the employment with the Corporation in the positions of President and Chief Operating Officer of the Corporation. (b) As President and Chief Operating Officer of the Corporation, Executive shall perform such duties and services, consistent with such positions, as may be assigned to Executive from time to time by the Board of Directors of the Corporation (the "Board") or the Board's designee. (c) Executive covenants and agrees to perform faithfully and to the best of Executive's abilities such duties and other reasonable executive duties and responsibilities assigned to Executive from time to time by the Board or the Board's designee. (d) The Corporation hereby covenants and agrees that, for the term of this Agreement, the Board will nominate and use the Board's best efforts to cause the election of Executive as a member of the Board. 2. Term of Agreement. (a) Subject to the terms and conditions set forth in this Agreement, the term of Executive's employment by the Corporation and this Agreement shall commence on the Effective Date and shall terminate on the third anniversary of the Effective Date (the "Initial Term"). (b) The term of employment of Executive and this Agreement, as set forth in Paragraph 2(a) above, shall automatically be extended, without any further action by the Corporation or Executive, for successive one year periods (each, an "Option Term" and, collectively with the Initial Term, the "Term of this Agreement"), on the same terms and conditions as set forth in this Agreement. If either party shall desire to terminate Executive's employment by the Corporation or this Agreement, at the end of the Initial Term or any Option Term, such party shall give written notice of such desire to the other party at least 90 days prior to the expiration of the Initial Term or such Option Term, as the case may be. At the expiration of the Initial Term or then existing Option Term, as the case may be, the Corporation shall have no further obligation to Executive, and Executive shall have no further obligation to Corporation, except with respect to (i) Executive's obligations to the Corporation pursuant to Sections 7, 8 and 10, (ii) the Corporation's obligations to Executive pursuant to Section 5 and (iii) any other obligations the Corporation may have to Executive and/or Executive may have to the Corporation under applicable law governing the relationship of an employer to an employee and/or an employee to an employer upon and following termination of such relationship. 3. Time to be Devoted to Employment. Executive agrees to devote Executive's full time, attention, efforts, loyalties and energies to the business and affairs of the Corporation. Notwithstanding the immediately preceding sentence, Executive shall be permitted to devote a reasonable amount of time, attention and energies to reasonable community activities and public affairs, provided such engagement shall not in any way conflict with the business of any of the Companies (as such term is defined in Section 4). 4. Restriction on Other Employment; Relationship of Corporation to Parent and the Companies. (a) During the term of employment and the term of this Agreement, Executive agrees that, without the prior approval of the Board, Executive shall not accept a membership on or otherwise become a member of a board of directors, act as an officer, employee or consultant or engage in any other business activity, whether or not such other business is a similar or competing business with the Corporation or any subsidiary (each, a "Company" and, together with the Corporation, the "Companies") or parent ("Parent") of the Corporation, whether presently existing or hereafter created or acquired, that would in any way conflict with the business of any of the Companies or the time required by Executive to perform Executive's duties to the Corporation. It is expressly acknowledged by the Corporation that Executive is a director of Medibasics Technologies, Inc. and the Corporation agrees to permit Executive to continue in such capacity, provided that such entity does not enter a business which is similar or competing with the Companies or Parent or the time which Executive is required to devote to such entity would conflict with the time required by Executive to perform Executives' duties to the Companies. (b) It is expressly understood that the Corporation may require Executive to devote Executive's efforts and be assigned duties relating to the operations of any or all of the Companies, without further compensation from the Corporation or any of the Companies. It is understood and agreed that Executive will hold the same offices with all of the Companies as Executive shall hold under this Agreement, unless the Board, in the Board's sole discretion, shall determine otherwise. 5. Compensation; Reimbursement. (a) Commencing as of the Effective Date, the Corporation shall pay to Executive an annual base salary (the "Base Salary") of $150,000 ($182,500, as of January 1, 1999), payable in equal weekly installments or in the manner and on the timetable which the Corporation's payroll is customarily handled or at such intervals as the Corporation and Executive may hereafter agree to from time to time. Commencing with the first anniversary of the Effective Date and on each anniversary thereafter during the Term of this Agreement (each, a "Base Salary Adjustment Date"), the Base Salary shall be subject to a cost of living adjustment equal to the Base Salary as in effect on such Base Salary Adjustment Date multiplied by a fraction, the numerator of which shall be the Consumer Price Index for the New York/New Jersey Metropolitan Area (All Employees) as published by the Bureau of Labor Statistics of the United States Department of Labor (the "COLA Index") in effect on such Base Salary Adjustment Date and the denominator of which shall be the COLA Index in effect on the later of the Effective Date or the immediately preceding Base Salary Adjustment Date. In any year in which the COLA Index is not available, the Board shall, in the Board's reasonable discretion, find and use a similar governmental publication or similar criteria for the COLA Index to be used for the numerator for the purposes of this Paragraph 5(a) and shall, retroactively, establish the COLA Index to be used for the denominator for the purposes of this Paragraph 5(a) using such similar publication or criteria. Executive's Base Salary may, but is not required to, be increased from time to time, based upon Executive's performance and other relevant factors, as the Board may deem appropriate, without affecting any other provisions of this Agreement. Once so increased in accordance with the immediately preceding sentence, the Base Salary may not be thereafter decreased without the prior written consent of Executive. (b) In addition to receiving the Base Salary provided for in Paragraph 5(a), Employee shall be entitled to receive the following incentive compensation (the "Incentive Compensation") based upon the annual Discretionary Income (as hereinafter defined) of the Companies on a consolidated basis: (i) Executive shall be entitled to receive Incentive Compensation in the amount of $50,000 if the Discretionary Income for the 1998 calendar year shall equal or exceed $1, payable no later than April 30, 1999; (ii) Executive shall be entitled to receive Incentive Compensation in the amount equal to 4% of all Discretionary Income for the 1999 calendar year, payable no later than April 30, 2000; (iii) Executive shall be entitled to receive Incentive Compensation in the amount equal to 4% of all Discretionary Income for the 2000 calendar year, payable no later than April 30, 2001; and (iv) Executive shall be entitled to receive Incentive Compensation in the amount equal to 4% of all Discretionary Income for each of the 2001 calendar year and each calendar year thereafter, provided that this Agreement shall be in effect on the last day of such calendar year. Each such Incentive Compensation amounts to be payable no later than April 30th of the calendar year following the calendar year in which the Discretionary Income is applicable. Along with a check in the amount of the Incentive Compensation, Executive shall receive a schedule, prepared by the Chief Financial Officer of the Corporation, setting forth the amount of the Incentive Compensation and a description of the manner in which it was calculated. For purposes of this Agreement, "Discretionary Income" shall mean the annual net consolidated income after taxes of the Companies, determined by the certified public accounting firm of the Corporation or Parent, if Parent shall then be in existence, calculated in accordance with generally accepted accounting principles, minus all Incentive Compensation payments due or owing pursuant to this Paragraph 5(b) and all extraordinary items. The calculation of Discretionary Income for purposes of this Paragraph 5(b) shall not include any transactions between or among the Companies. (c) In addition to receiving the Base Salary provided for in Paragraph 5(a) and the Incentive Compensation, if any, provided for in Paragraph 5(b), during the Term of this Agreement, Employee shall be entitled to receive a car allowance (the "Car Allowance") of $600 per month, payable in advance, commencing as of the first day of the first calendar month following the Effective Date. It is agreed by the parties hereto that the payment of the Car Allowance is in lieu of any right of Executive to reimbursement of costs related the use by Executive of Executive's personal motor vehicle, including, but not limited to, insurance, repair, maintenance, mileage charges and fuel costs, but does not include parking and toll charges (the "Other Car Expenses") reasonably incurred on the Corporation's behalf, such Other Car Expenses to be reimbursed by the Corporation upon submission of a detailed accounting for such Other Car Expenses by Executive to the Corporation. Commencing with the first anniversary of the Effective Date and on each anniversary thereafter during the Term of this Agreement (each, a "Car Allowance Adjustment Date"), the Car Allowance shall be subject to a cost of living adjustment equal to the Car Allowance as in effect on such Car Allowance Adjustment Date multiplied by a fraction, the numerator of which shall be the COLA Index in effect on such Car Allowance Adjustment Date and the denominator of which shall be the COLA Index in effect on the later of the Effective Date or the immediately preceding Car Allowance Adjustment Date. In any year in which the COLA Index is not available, the Board shall, in the Board's reasonable discretion, find and use a similar governmental publication or similar criteria for the COLA Index to be used for the numerator for the purposes of this Paragraph 5(c) and shall, retroactively, establish the COLA Index to be used for the denominator for the purposes of this Paragraph 5(c) using such similar publication or criteria. Executive's Car Allowance may, but is not required to, be increased from time to time, based upon Executive's performance and other relevant factors, as the Board may deem appropriate, without affecting any other provisions of this Agreement. Once so increased in accordance with the immediately preceding sentence, the Car Allowance may not be thereafter decreased without the prior written consent of Executive. (d) During the Term of this Agreement, Executive shall be entitled to such fringe benefits, including, but not limited to, medical, health, disability and other insurance benefits, as are made available from time to time to other executive officers of the Corporation or any of the Companies. Whether or not available to others, Executive and Executive's immediate family shall specifically be entitled to medical insurance coverage, paid for by the Corporation, provided that Executive and Executive's immediate family shall qualify for such coverage. For purposes of this Agreement, the term "Executive's immediate family" shall mean Executive's spouse and minor children. (e) The Corporation shall reimburse the Executive, in accordance with the practice followed from time to time for other officers of the Corporation, for all reasonable and necessary business and traveling expenses, except as provided in Paragraph 5(c) above, and other disbursements incurred by Executive for or on behalf of the Corporation in the performance of Executive's duties hereunder upon presentation by the Executive to the Corporation of an appropriate detailed accounting of such expenses and disbursements. (f) In addition to receiving the Base Salary provided for in Paragraph 5(a) and the Incentive Compensation, if any, provided for in Paragraph 5(b), (i) upon the execution of this Agreement and the surrender by Executive of options to purchase an aggregate 174,500 shares of the common stock, par value $.001 per share (the "Common Stock"), of the Corporation, the Corporation shall grant to Executive options to purchase 25,000, 104,500, 45,000 and 200,000 shares of Common Stock, evidenced by option agreements, to be delivered to Executive at such execution and surrender, substantially in the forms annexed to this Agreement as Exhibits A, B, C and D, respectively, (ii) upon the execution of this Agreement, the Corporation shall grant to Executive, under the Corporation's 1998 Stock Incentive Plan, an option to purchase 200,000 shares of Common Stock, evidenced by an option agreement, to be delivered at such execution, substantially in the form annexed to this Agreement as Exhibit E, and (iii) on each anniversary of the Effective Date occurring during the Term of this Agreement, the Corporation shall grant to Executive, under the Corporation's 1998 Stock Incentive Plan (or successor plan), options to purchase 50,000 shares of Common Stock, at an exercise price equal to the per share last sale price of the Common Stock on such anniversary date evidenced by option agreements, to be delivered on such anniversary date, substantially in the form annexed to this Agreement as Exhibit F. (g) Executive shall use Executive's best efforts to obtain and maintain for the Term of this Agreement "key man" term life insurance on the life of Executive in the amount of $2,000,000, the first $1,000,000 of which shall be payable to the Corporation as beneficiary and the second $1,000,000 of which shall be payable to Executive's designee(s). Executive shall have the right to change Executive's designee(s), at Executive's sole discretion, subject to the provisions of the applicable insurance policy. The entire premium expense for such life insurance shall be paid by the Corporation. 6. Termination of Employment. (a) Executive's employment by the Corporation and this Agreement shall terminate in the event of the death of Executive. (b) The Corporation may terminate this Agreement and Executive's employment for cause, and, in such an event, the Corporation shall only be obligated to pay Executive the Base Salary through the date of such termination. Prior to any termination pursuant to this Paragraph 6(b), the Corporation must give Executive reasonable written notice and adequate opportunity to respond to the reasons for such termination or, where applicable, cure. For purposes of this Paragraph 6(b), "cause" shall mean that the Board has made a reasonable determination that Executive has: (i) committed a fraud against any of the Companies, (ii) misappropriated or done material, intentional damage to the property of any of the Companies, (iii) been convicted of a felony involving personal dishonesty, moral turpitude, or willfully violent conduct, (iv) engaged in gross business misconduct, (v) engaged in gross malfeasance of Executive's duties, (vi) materially breached any provision of this Agreement, or (vii) failed, on account of a medical disability, to substantially perform Executive's duties of employment for a period of 180 consecutive calendar days and the finding by the Board, in the exercise of the Board's reasonable discretion, that Executive will not be able to substantially perform Executive's duties for the shorter of (A) at least a period of an additional 180 calendar days during the Term of this Agreement or (B) for the remainder of the Term of this Agreement. For purposes of a determination by the Board pursuant to this Paragraph 6(b), Executive agrees to abstain from voting on any motion for termination for cause by the Board. (c) If, for any reason, Executive's employment is terminated under Paragraph 6(a) or clause (vii) of Paragraph 6(b), any compensation payable under Paragraphs 5(a) and 5(b) which shall have been earned but not yet paid shall be paid by the Corporation to Executive or Executive's estate, guardian or custodian, as the case may be. In the case of Incentive Compensation payable under Paragraph 5(b), such amounts shall be deemed earned each day during the year in which Executive is employed pursuant to this Agreement and any payment of such Incentive Compensation made after termination shall be equal to the entire Incentive Compensation for the year times a fraction, the numerator of which is equal to the number of days of the year in which Executive was employed and the denominator of which is 365. 7. Disclosure of Information. Executive agrees that Executive will not, at any time during or after the Term of this Agreement, disclose, reproduce, assign or transfer to any person, firm, corporation or other business entity, except as required by law, any non-public information concerning the business, clients, affairs, business plans, strategies, compounds, formulations, methods, devices, apparatus, preparations, results from ongoing investigations by others, and present and future plans of the Corporation, any subsidiary or affiliate thereof or any company formed or funded by the Corporation ("Confidential Information") for any reason or purpose whatsoever, without the Corporation's written consent; nor shall Executive make use of any of such Confidential Information for Executive's own purpose or for the benefit of any person, firm, corporation or other business entity, except the Corporation or any subsidiary or affiliate thereof. 8. Restrictive Covenants. (a) Executive hereby acknowledges and recognizes that during the term of employment by the Corporation, Executive will be privy to trade secrets and confidential proprietary information critical to the Corporation's business and Executive further acknowledges and recognizes that the Corporation would find it extremely difficult or impossible to replace Executive and accordingly Executive agrees that, in consideration of the premises contained herein and, the consideration to be received by the Executive hereunder, Executive will not, from the date hereof through the end of the Term of this Agreement and for a one year period thereafter, (i) directly or indirectly engage in, represent in any way, or be connected with, any business or activity (such business or activity being hereinafter called a "Competing Business"), in competition with the Corporation or any Subsidiary in any location throughout the world, at the time of Executive's termination of employment with the Corporation, whether such engagement shall be as an officer, director, owner, employee, partner, affiliate or other participant in any Competing Business, (ii) assist others in engaging in any Competing Business in the manner described in the foregoing clause (i) of this Paragraph 8(a) or (iii) induce other employees of any of the Companies to terminate such employee's employment with any of the Companies, or engage in any Competing Business. In the event that termination of Executive is without cause under Paragraph 6(b), then the restrictions specified above shall be applicable for the period of time Executive continues to receive compensation from the Corporation pursuant to this Agreement, but in no event for less than six months from the date of such termination without cause. (b) Executive understands that the restrictions contained in Paragraph 8(a) may limit Executive's ability to earn a livelihood in a business similar to the businesses of any of the Companies, but Executive nevertheless believes that Executive will receive sufficient consideration hereunder and as an employee of the Corporation and as otherwise provided hereunder clearly to justify such restrictions which, in any event (given Executive's education, skills and ability), Executive does not believe would prevent Executive from earning a living. (c) Executive represents and warrants that: (i) Executive is familiar with the covenants not to compete as set forth in Paragraph 8(a) of this Agreement; (ii) Executive has had the opportunity to discuss the provisions of the covenants as set forth this Section 8 with Executive's personal attorney and has concluded that such provisions (including, without limitation, the right of equitable relief and the length of time provided for herein) are fair, reasonable and just under the circumstances; (iii) Executive is fully aware of the obligations, limitations and liabilities included in the covenants as set forth in Paragraph 8(a) of this Agreement; (iv) the scope of activities covered as set forth in Paragraph 8(a) of this Agreement is substantially similar to those activities to be performed by Executive pursuant to this Agreement; (v) the duration of covenants as set forth in Paragraph 8(a) of this Agreement have been agreed upon as a reasonable restriction, giving consideration to the following factors: (A) Executive and the Corporation reasonably anticipate that this Agreement, although terminable in accordance with Section 6 or otherwise, may continue in effect for sufficient duration to allow Executive to attain superior bargaining strength and an ability for unfair competition with respect to the customers of the Companies and (B) the duration of the covenants as set forth in Paragraph 8(a) of this Agreement is a reasonably necessary period to allow the Companies to restore the Companies' position of equivalent bargaining strength and fair competition with respect to such customers; (vi) the geographical territory covered hereby has been agreed upon as a reasonable geographical restriction; and (vii) the Corporation is relying upon the representations, warranties and covenants of Executive contained in this Section 8 in entering into this Agreement and, without such representations, warranties and covenants, the Corporation would not enter into this Agreement. 9. Corporation's Right to Inventions and Work Product. Executive shall promptly disclose, grant and assign to the Corporation for the Corporation's sole use and benefit any and all inventions, improvements, technical information and suggestions relating in any way to the business of any of the Companies, which Executive may develop or acquire during the term of employment with the Corporation (whether or not during normal working hours), together with all patent applications, letters, patents, copyrights and reissues thereof that may at any time be granted for or upon any such invention, improvement or technical information. In connection therewith: (a) Executive shall without charge, but at the expense of the Corporation, promptly at all times hereafter execute and deliver to the Corporation and/or the Companies such applications, assignments, descriptions and other instruments as may be necessary or proper in the opinion of the Corporation to vest title to any such inventions, improvements, technical information, patent applications, patents, copyrights or reissues thereof in the Corporation and/or the Companies and to enable the Corporation and/or the Companies to obtain and maintain the entire right and title thereto throughout the world; and (b) Executive shall render to the Corporation and/or the Companies at the Corporation's and/or the Companies' expense (including a reasonable payment for the time involved in case Executive is not then in the Corporation's employ) all such assistance as the Corporation and/or the Companies may require in the prosecution of applications for said patents or copyrights or reissues thereof, in the prosecution or defense of interferences which may be declared involving any of said applications, patents or copyrights and in any litigation in which the Corporation and/or the Companies may be involved relating to any such patents, inventions, improvements or technical information. 10. Enforcement. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, to the extent that a restriction contained in this Agreement is more restrictive than permitted by the laws of any jurisdiction where this Agreement may be subject to review and interpretation, the terms of such restriction, for the purpose only of the operation of such restriction in such jurisdiction, shall be the maximum restriction allowed by the laws of such jurisdiction and such restriction shall be deemed to have been revised accordingly herein. 11. Representations, Warranties, and Covenants of the Executive. Executive hereby represents, warrants and covenants to the Corporation that Executive has the capacity to enter into this Agreement, and the execution, delivery and performance of this Agreement and compliance with the provisions hereof by Executive will not conflict with or result in any breach of any of the terms, conditions, covenants or provisions of, or constitute a default under, any note, mortgage, agreement, contract or instrument to which Executive is a party or which Executive may be bound or affected. 12. Remedies; Survival. (a) Executive acknowledges and understands that the provisions of this Agreement are of a special and unique nature, the loss of which cannot be accurately compensated for in damages by an action at law, and that the breach or threatened breach of the provisions of this Agreement would cause the Corporation irreparable harm. In the event of a breach or threatened breach by the Executive of any of the provisions of Sections 7, 8 and 9 hereof, the Corporation shall be entitled to an injunction restraining Executive from such breach. Nothing herein contained shall be construed as prohibiting the Corporation from pursuing any other remedies available for any breach or threatened breach of this Agreement. (b) Notwithstanding anything contained in this Agreement to the contrary, the provisions of Sections 7, 8 and 9 shall survive the expiration or other termination of this Agreement until, by their terms, such provisions are no longer operative. 13. Notices. All requests, demands, notices and other communications required or otherwise given under this Agreement shall be sufficiently given if (a) delivered by hand against written receipt therefor, (b) forwarded by overnight courier or (c) mailed by registered or certified mail, postage prepaid, addressed as follows: If to the Corporation, to: Alcohol Sensors International, Ltd. 11 Oval Drive Islandia, New York 11722 Attention: Corporate Secretary; with a copy to: Kaufman & Associates, LLC 50 Charles Lindbergh Blvd. Mitchel Field, NY 11553 Attention: Keith S. Braun, Esq. If to Executive, to: Joseph M. Lively 10 Willard Avenue Farmingdale, New York 11735 or, in the case of any of the parties hereto, at such other address as such party shall have furnished in writing, in accordance with this Section 13, to the other party hereto. Each such request, demand, notice or other communication shall be deemed given (a) on the date of delivery by hand, (b) on the first business day following the date of delivery to an overnight courier or (c) three business days following mailing by registered or certified mail. 14. Indemnification. The Corporation agrees to indemnify Executive and hold Executive harmless against any and all losses, claims, damages, liabilities and costs (and all actions in respect thereof and any legal or other expenses in giving testimony or furnishing documents in response to a subpoena or otherwise), including, without limitation, the costs of investigating, preparing or defending any such action or claim, whether or not in connection with litigation in which Executive is a party, as and when incurred, directly or indirectly caused by, relating to, based upon or arising out of any work performed by Executive in connection with this Agreement to the full extent permitted by the New York Business Corporation Law and by the Certificate of Incorporation and Bylaws of the Corporation, as may be amended from time to time. The indemnification provision of this Section 14 shall be in addition to any liability which the Corporation may otherwise have to Executive. If any action, proceeding or investigation is commenced as to which Executive proposes to demand such indemnification, Executive shall notify the Corporation with reasonable promptness. Executive shall have the right to retain counsel of Executive's own choice to represent Executive and the Corporation shall pay all reasonable fees and expenses of such counsel; and such counsel shall, to the fullest extent consistent with such counsel's professional responsibilities, cooperate with the Corporation and any counsel designated by the Corporation. The Corporation shall be liable for any settlement of any claim against Executive made with the Corporation's written consent, which consent shall not be unreasonably withheld, to the fullest extent permitted by the New York Business Corporation Law and the Certificate of Incorporation and Bylaws of the Corporation, as may be amended from time to time. 15. Prior Agreements/Oral Modification. This Agreement supersedes all prior agreements and constitutes the entire Agreement and understanding between parties. This Agreement may not be amended, modified in any manner or terminated orally; and no amendment, modification, termination or attempted waiver of any of the provisions hereof shall be binding unless in writing and signed by the parties against whom the same is sought to be enforced; provided, however, that Executive's compensation may be increased at any time by the Corporation without in any way affecting any of the other terms and conditions of this Agreement which in all other respects shall remain in full force and effect. 16. Attorney's Fees. In the event of any litigation between the parties to this Agreement, or any of them, concerning this Agreement, the prevailing party shall be entitled to recover the prevailing party's reasonable attorney's fees, including, but not limited to, the prevailing party's reasonable attorney's fees for services rendered on appeal, as determined by a court of competent jurisdiction. 17. Binding Agreement; Benefit. The provisions of this Agreement will be binding upon, and will inure to the benefit of, the respective heirs, legal representatives and successors of the parties hereto. 18. Governing Law. This Agreement will be governed by, and construed and enforced in accordance with the laws of the State of New York. 19. Arbitration. (a) Any dispute arising between the parties to this Agreement, including, but not limited to, those pertaining to the formation, validity, interpretation, effect or alleged breach of this Agreement ("Arbitrable Dispute") will be submitted to arbitration in New York, New York, before an experienced employment arbitrator and selected in accordance with the rules of the American Arbitration Association labor tribunal. Each party shall pay the fees of their respective attorneys, the expenses of their witnesses and any other expenses connected with presenting their claim. Other costs of the arbitration, including the fees of the arbitrator, cost of any record or transcript of the arbitration, administrative fees, and other fees and costs shall be borne equally by the parties hereto. (b) Should any party to this Agreement hereafter institute any legal action or administrative proceedings against another party with respect to any claim waived by this Agreement or pursue any other Arbitrable Dispute by any method other than said arbitration, the responding party shall be entitled to recover from the initiating party all damages, costs, expenses and attorney's fees incurred as a result of such action. 20. Proper Construction. (a) The language of all parts of this Agreement shall in all cases be construed as a whole according to its fair meaning, and not strictly for or against any of the parties. (b) As used in this Agreement, the term "or" shall be deemed to include the term "and/or" and the singular or plural number shall be deemed to include the other whenever the context so indicates or requires. 21. Waiver of Breach. The waiver by either party of a breach of any provision of this Agreement by the other party must be in writing and shall not operate or be construed as a waiver of any subsequent breach by such other party. 22. Entire Agreement; Amendments. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements or understandings among the parties with respect thereto. This Agreement may be amended only by an agreement in writing signed by the parties hereto. 23. Headings. The Section and Paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 24. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 25. Assignment. This Agreement is personal in its nature and the parties hereto shall not, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided, however, that the provisions hereof shall inure to the benefit of, and be binding upon, each successor of the Corporation whether by merger, consolidation, transfer of all or substantially all assets, or otherwise. 26. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. EXECUTIVE: CORPORATION: JOSEPH M. LIVELY ALCOHOL SENSORS INTERNATIONAL, LTD. /s/ Joseph M. Lively By: /s/ Keith S. Braun Name: Keith S. Braun Title: Secretary WITNESS: WITNESS: /s/ Neil M. Kaufman /s/ Neil M. Kaufman Name: Name: EX-10 4 EXHIBIT 10.10 STIPULATION OF SETTLEMENT, SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE This Stipulation of Settlement, Settlement Agreement and Mutual General Release ("Agreement") executed as of the 27th day of February, 1997 by and between Albert Pace and Jan Polek (sometimes hereinafter referred to as "Releasors"), and Alcohol Sensors International Ltd. ("ASI"), John T. Ruocco ("Ruocco"), Michael A. Sylvester ("Sylvester"), Robert B. Whitney ("Whitney") Steven A. Martello ("Martello"), Leon Pasqua, ("Pasqua"), and (sometimes hereinafter collectively referred to as "Releasees"), both Releasors and Releasees collectively referred to as the "Parties" and individually as a "Party". W I T N E S S E T H: WHEREAS, Releasors filed a complaint for damages against Alcohol Sensors International, Ltd., Whitney, Ruocco, Sylvester, Martello and Pasqua currently pending in the Federal District Court for the Southern District of New York under Index No. 96 Civ. 5867 (hereinafter the "Action"); and WHEREAS, all Parties desire that the Action be settled, discontinued and dismissed, that all matters at issue be settled, and that the Parties release and fully discharge each other of and from any and all claims, suits, or causes of action arising from, and all acts, actions, and transactions between the Parties, or in any way connected with, the facts and circumstances surrounding the Action on the terms and conditions set forth herein; NOW, THEREFORE, for and in consideration of the premises, and the mutual releases set forth herein, and the payment of shares of stock in Alcohol Sensors International, Ltd. in accordance with the provisions of paragraph "1" hereof, to be paid by Releasees to Releasors (or their designees) in accordance with the terms and subject to the conditions hereinafter set forth, the receipt and sufficiency of which is hereby expressly acknowledged, the Parties hereby agree as follows: 1.a. Releasees will take all necessary action to issue transfer and deliver to the Releasors, or their designees, 315,000 fully-paid, non-assessable shares of the common stock of Alcohol Sensors International, Ltd., a New York corporation within thirty (30) days of the date this Agreement is fully executed. Releasors acknowledge that the shares to be issued, transferred and delivered pursuant to this paragraph "1.a." are subject to contractual "lock-up" provisions and a shareholder agreement between the Releasees and American International Insurance Company ("AIIC") respectively. Notwithstanding the terms of such lock-up provisions, Releasees warrant, represent and agree that with respect to 50,000 of the shares to be issued transferred and delivered pursuant to this Stipulation and Settlement Agreement, that the Releasors will take all necessary and appropriate action to have these shares issued transferred and delivered to Jacobowitz & Gubitz as attorneys, free of such contractual lock-up restrictions provided, however, that Jacobowitz and Gubitz shall have signed an escrow agreement which will restrict the sale of these 50,000 shares to no more than 12,500 shares in each of the four (4) calendar months commencing April 1, 1997. Releasors and their attorneys agree further that any such sales of these securities shall be made only through the brokerage facilities of William Scott & Company, LLC provided, however, that William Scott will have agreed, in writing, to afford Jacobowitz & Gubitz in respect of any such sales, the same prices and terms available to the general public. b. With respect to the remainder of the shares issuable hereunder (265,000), Releasors agree, for themselves, their heirs, attorneys, assignees, and designees to be bound by the terms of a certain agreement between AIIC and the Releasees (the "AIIC Agreement) including, without limitation, provisions relating to restrictions on sale of the securities to be issued hereunder. Releasors acknowledge that they have received a copy of the AIIC Agreement and that no representation has been made as to the content, meaning, or significance of the terms thereof other than has been stated therein. Releasors further agree to execute, if required by AIIC, a separate agreement, in form and substance agreeable to AIIC or its counsel, memorializing the substantive terms of this paragraph "1.b." c. The Releasees warrant and represent that ASI's Employee Stock Option Plan provides for the issuance of no more than 600,000 shares of ASI's common stock on exercise of such options, and that 300,000 of these options are issuable only to outside consultants and outside advisors to the Company. d. The Releasees warrant and represent that neither ASI nor its Board of Directors has taken any action prior to the execution of this Agreement, and further warrant and represent that they will take no action subsequent to the execution of this Agreement and prior to the issuance and delivery of 315,000 shares pursuant to paragraph "1.a." hereof, and/or any judgment authorized herein has been satisfied, to effect any stock split or stock dividend of or on any of the outstanding capital stock of the Company. e. In order to effectuate the issuance, transfer and delivery of shares contemplated by paragraph "1.a." hereof, the Releasees warrant and represent that they will in good faith and without delay take the following actions: i. Deliver share certificates, stock powers, and letters of authorization to its Transfer Agent, Continental Stock Transfer, within three (3) business days of receipt of written instructions from Releasors as to the identity, social security number, and address of the individuals/entities to whom shares are to be issued, transferred and delivered; ii. Secure and deliver to the Transfer Agent such other documentation as may be required by the Transfer Agent to effect the transfers and deliveries contemplated hereby including, without limitation, waivers and consents of AIIC, consents of William Scott & Co., LLC, opinion(s) of counsel, and the consents of any others whose consents may be necessary to cause the transfers and deliveries contemplated hereby. Any additional documentation requested or required by the Transfer Agent will be delivered to the Transfer Agent by overnight courier no later than the next business day after receipt of same by the Releasees or any of them. f. In order to effectuate the issuance of shares contemplated by paragraph "1.a.", the Releasors agree to execute any and all documentation required by the Transfer Agent, AIIC, or William Scott & Company, LLC, including, without limitation, agreements necessary to enforce the terms of paragraph "1.b." and the AIIC lock-up provisions; agreements necessary to enforce the provisions restricting sales through William Scott & Company, LLC as set forth in paragraph "1.a."; any additional documentation reasonably requested and necessary to effect the transfers contemplated, all of which shall be subject to approval of counsel to the Releasors. 2. Assuming successful completion of the delivery of shares pursuant to paragraphs "1.a." and "b.", Albert Pace and Jan Polek hereby FULLY RELEASES, ACQUITS and FOREVER DISCHARGE ASI, Whitney, Ruocco, Sylvester, Martello, and Pasqua, their executors, administrators, predecessors and successors in interest, shareholders, directors, former directors, officers, former officers, partners, assigns, attorneys, agents, employees, and former employees, parents, subsidiaries, affiliates, any company affiliated with, controlled by, or having a contractual relationship with the Releasees, personal representatives, of and from any and all actions, suits, liens, claims, counterclaims, losses, rights, demands, debts, costs, accounts, contracts, agreements, promises, options, liabilities, obligations, damages, controversies, causes of action, loss of services, expenses and compensation, of any kind or nature whatsoever, known or unknown, suspected or unsuspected, fixed or contingent, whether in contract or in tort, at law or in equity, including without limitation, attorneys' fees and costs (and appellate fees and costs), which Releasors, their executors, administrators, predecessors and successors in interest, assigns, attorneys, agents, employees, parent subsidiaries, affiliates, and/or personal representatives, may have had or claim to have had, or now have or claim to have or hereafter may have or assert to have on account of, or by reason of, or in any way growing out of or resulting from the Action, or relating to any of the facts, theories, causes or action or circumstances forming the basis of the Action, or in any way connected with the transactions giving rise to the Action, or otherwise. 3. Assuming successful completion of the delivery of shares pursuant to paragraphs "1.a." and "b.", ASI, Whitney, Ruocco, Sylvester, Martello, and Pasqua hereby FULLY RELEASE, ACQUIT and FOREVER DISCHARGE, Releasors and their executors, administrators, predecessors and successors in interest, assigns, attorneys, agents, employees, affiliates, any company affiliated with, controlled by, or having a contractual relationship with the Releasors and/or personal representatives, of and from any and all actions, suits, liens, claims, counterclaims, losses, rights, demands, debts, costs, accounts, contracts, agreements, promises, options, liabilities, obligations, damages, controversies, causes of action, loss of services, expenses and compensation, of any kind or nature whatsoever, known or unknown, suspected or unsuspected, fixed or contingent, whether in contract or in tort, at law or in equity, including without limitation, attorneys fees and costs (and appellate fees and costs), which its executors, administrators, predecessors and successors, in interest, shareholders, directors, former directors, officers, former officers, partners, assigns, attorneys, agents, employees, parents, subsidiaries, affiliates, and/or personal representatives, may have had or claim to have had, on account of, or by reason of, or in any way growing out of or resulting from the Action, or relating to any of the facts, theories, causes of action or circumstances forming the basis of the Action, or in any way connected with the transactions giving rise to the Action, or otherwise. 4. Each party expressly understands and acknowledges that it is possible that unknown losses or claims exist, whether or not said claims or causes, or the predicate acts of such claims or causes have been enumerated in the Action, or that present losses may have been underestimated in amount or severity, and each Party represents and warrants that this uncertainty was taken into account in determining the consideration to be paid for the making of this Agreement, and that a portion of the consideration has been bargained for between the Parties with the knowledge of the possibility of such unknown claims and that said consideration was given in exchange for full accord, satisfaction and discharge of all such claims including claims and counterclaims that could have been made in the Action. 5. It is agreed and understood that the consideration for this Agreement is contractual and not a mere recital. This Agreement is a compromise settlement agreement and is entered into by the Releasees in order to settle disputed claims, to avoid the expense of litigation, and to achieve peace. The Releasees deny that they or any of their agents, representatives, corporate parents, affiliates, subsidiaries, divisions, officers, directors, shareholders, employees, attorneys, heirs, survivors, executors, administrators, and/or assigns have ever had any liability to the Releasors. Nothing in this Agreement shall be interpreted as an admission of liability by the Releasees. 6. Each Party acknowledges that it is fully and completely informed of the facts relating to the subject matter of this Agreement and of the rights and liabilities of each of the Parties; that each Party enters into this Agreement voluntarily after having given careful and mature consideration to the making of this Agreement; that each Party has carefully read this instrument; that each Party has discussed the provisions of this Agreement with an attorney of its choice and has executed it in reliance upon its own judgment and the advice of its attorneys; that this Agreement represents the entire agreement between the Parties; that each Party is legally competent to execute this Agreement; that each Party fully understands and intends that this Agreement will be a full, final and complete release of all matters described herein between the Parties. 7. The Releasors and their agents, representatives, survivors, heirs, successors, assigns, executors, and administrators further covenant that they will refrain from commencing any action, suit, arbitration, or administrative proceeding, or prosecuting any pending action, suit, arbitration, or administrative proceeding, in law or in equity, against the Releasees or their agents, representatives, corporate parents, affiliates, subsidiaries, divisions, officers, directors, shareholders, employees, attorneys, heirs, survivors, executors, administrators, successors, or assigns, concerning any causes of action, claims, or demands released in this Agreement. The Releasors further represent and warrant that they will not in the future, aid, assist, or instigate any person, firm, business entity or corporation to bring any claim, action, arbitration, or other proceeding against any of the other parties hereto. 8. This Agreement and its terms are CONFIDENTIAL and neither the Releasors nor their attorneys, agents, representatives, survivors, heirs, successors, assigns, executors, or administrators shall disclose this Agreement or any of its terms to any other person or entity except as otherwise required by law. If the Releasors or their attorneys, agents, representatives, survivors, heirs, successors, assigns, executors, or administrators disclose this Agreement or any of its terms to any other person except as otherwise required by law, then the Releasors (a) shall be liable for all damages arising from that breach, (b) shall indemnify the Releasees and their agents and affiliates for and from any and all liability, loss, cost or expense (including but not limited to reasonable attorneys' fees) resulting from the breach, and (c) shall forfeit any moneys and shares that have been, or will be, received pursuant to this Agreement. The parties hereby stipulate that the above provisions of this paragraph do not constitute a penalty and waive any right to make such a claim. If any of the persons or entities bound by this paragraph discloses this Agreement or any of its terms to any other person as required by law, then the person or entity making the disclosure shall inform the other person to whom the information was disclosed that the Agreement and its terms are confidential and must not be disclosed by the other person. 9. The Releasors make the following warranties and covenants concerning their right to settle and release their claims: the Releasors warrant that they have not voluntarily or involuntarily transferred, conveyed, pledged, assigned, or made any other disposition of the rights, claims, interests, actions, causes of action, obligations, or any other matter being released by this Agreement, and that they have the full power and right to accept the consideration for this Agreement and to give the releases and agreements set forth herein. The Releasors represent and warrant that there are no other persons or entities, including but not limited to former or existing spouses of the Releasors, who possess any potential claim for damages against the Releasees or their agents, representatives, corporate parents, affiliates, subsidiaries, divisions, officers, directors, shareholders, employees, attorneys, heirs, survivors, executors, administrators, successors, and assigns, arising out of or relating to the causes of action, claims, or demands released in this Agreement, or who must sign, approve, or consent to this Agreement in order for the Releasees to obtain complete releases from the claims as stated above. 10. In connection with this Settlement and Release, the Parties each acknowledge that additional facts may be discovered later, but that it is the intention of each Party to fully, finally and forever settle and release all matters and any related claims, known or unknown, suspected or unsuspected, which now exist, may exist, or formerly have existed between Parties. The Parties acknowledge that this Agreement shall and will remain in effect as a full and complete general release of all matters, notwithstanding the discovery or existence of any additional or different facts. The Releasors acknowledge that they assume the risk of any mistake of fact or law with regard to all aspects of this Agreement and any asserted rights released by this Agreement. RELEASORS AND RELEASEES ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT, AND THAT THEY FULLY KNOW, UNDERSTAND AND APPRECIATE ITS CONTENTS AND THAT THEY EXECUTE THE SAME AND MAKE THE SETTLEMENT PROVIDED FOR HEREIN VOLUNTARILY AND OF THEIR OWN FREE WILL. 11. This Settlement Agreement shall be governed by, subject to, and construed in accordance with the internal laws of the State of New York without regard to its choice of law or conflicts rules or provisions. 12. The Parties acknowledge that this Agreement is the entire agreement between and among them and that there are no terms, agreements, representations, warranties, promises, inducements, or understandings, oral or otherwise, except as expressly stated herein; that this Agreement contains the entire agreement between the Releasors and the Releasees and that the terms of the Release are contractual and not mere recitals; and that this Agreement may not be amended or modified in any respect except by a written instrument duly executed by all the parties to this Agreement. 13. If any portion or term of this Agreement is held unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall not be effected and shall remain fully in force and enforceable. 14. This Agreement may be pleaded as a full and complete defense to any action, suit, arbitration, or other proceeding that may be instituted, prosecuted, or attempted with respect to any of the claims released hereby. The Releasors agree that any such proceeding would cause irreparable injury to the Releasees and that any court of competent jurisdiction may enter an injunction restraining prosecution thereof. The Releasors further agree that this Agreement may be pleaded as necessary for the purpose of enforcing this Agreement in court. 15. The Parties consent to have any dispute concerning this Agreement heard in the Federal District Court for the Southern District of New York located in the County of Westchester, State of New York. 16. This Agreement may be executed in one or more counterparts and by telecopier and shall be effective as between the parties when so executed provided that the party executing this stipulation by telecopier agrees to provide the others with signed counterpart by overnight courier. A set of counterpart copies which collectively contains the signature and acknowledgment of all parties shall constitute an original. 17. The parties through counsel agree to execute stipulations of discontinuance with prejudice and without costs necessary to effect a dismissal of the Action. 18. This Stipulation may be, but shall not be required to be submitted to the court to be "so ordered", but whether or not "so ordered" by the court shall be deemed to constitute and have the effect of an order in this proceeding as between the parties, and shall be enforceable as such. 19. The shares to be delivered to the Releasees are to be issued out of the shares of stock currently held by John T. Ruocco, Michael T. Sylvester, Robert B. Whitney, Steven A. Martello and Leon Pasqua and others. 20. This Agreement shall be held in escrow and not be delivered and effective until Releasors have delivered share certificates, stock powers, letter of authorization, the consents of AIC and the underwriter, opinions of counsel and such other documentation necessary to deliver to the Escrow Agent share certificates in good deliverable form necessary to effectuate the transfer, issuance and delivery contemplated under paragraph "1.a" and "1.b". IN WITNESS WHEREOF, this Agreement is executed as follows: /s/ Albert Pace ALBERT PACE State of New York ) )ss.: County of Orange ) Before me personally appeared Albert Pace known to me to be the person whose name is subscribed to the foregoing instrument and he acknowledged to me that he executed the same. Sworn and subscribed before me this 27th day of February, 1997. /s/ Howard Protter Notary Public /s/ Jan Polek JAN POLEK State of New Jersey ) )ss.: County of Morris ) Before me personally appeared Jan Polek known to me to be the person whose name is subscribed to the foregoing instrument and he acknowledged to me that he executed the same. Sworn and subscribed before me this 27th day of February, 1997. /s/ Mariann G. Werp Notary Public ALCOHOL SENSORS INTERNATIONAL, LTD. By /s/ Robert B. Whitney Robert B. Whitney, its President State of New York ) )ss.: County of Nassau ) Before me personally appeared Robert B. Whitney known to me to be the person whose name is subscribed and acknowledged to me that the same was an act of Alcohol Sensors International, Ltd., a New York corporation, and that he executed the same for the purposes and consideration therein expressed as the act and deed of said corporation, and that he is authorized to execute same by order of the Board of Directors of said corporation. Sworn and subscribed before me this 27th day of February, 1997. /s/ Joseph M. Lively Notary Public /s/ John T.Ruocco JOHN T. RUOCCO State of New York ) )ss.: County of Nassau ) Before me personally appeared John T. Ruocco known to me to be the person whose name is subscribed to the foregoing instrument and he acknowledged to me that he executed the same. Sworn and subscribed before me this 27th day of February, 1997. /s/ Joseph M. Lively Notary Public /s/ Michael A. Sylvester MICHAEL A. SYLVESTER State of New York ) )ss.: County of Nassau ) Before me personally appeared Michael A. Sylvester known to me to be the person whose name is subscribed to the foregoing instrument and he acknowledged to me that he executed the same. Sworn and subscribed before me this 27th day of February, 1997. /s/ Joseph M. Lively Notary Public /s/ Robert B. Whitney ROBERT B. WHITNEY State of New York ) )ss.: County of Nassau ) Before me personally appeared Robert B. Whitney known to me to be the person whose name is subscribed to the foregoing instrument and he acknowledged to me that he executed the same. Sworn and subscribed before me this 27th day of February, 1997. /s/ Joseph M. Lively Notary Public /s/ Steven A. Martello STEVEN A. MARTELLO State of New York ) )ss.: County of Nassau ) Before me personally appeared Steven A. Martello known to me to be the person whose name is subscribed to the foregoing instrument and he acknowledged to me that he executed the same. Sworn and subscribed before me this 27th day of February, 1997. /s/ Joseph M. Lively Notary Public /s/ Leon Pasqua LEON PASQUA State of New York ) )ss.: County of Suffolk ) Before me personally appeared Leon Pasqua known to me to be the person whose name is subscribed to the foregoing instrument and he acknowledged to me that he executed the same. Sworn and subscribed before me this 27th day of February, 1997. /s/ Joseph M. Lively Notary Public EX-10 5 EXHIBIT 10.20 CONSENT AND AMENDMENT AGREEMENT CONSENT AND AMENDMENT AGREEMENT (this "Agreement") dated as of April 9, 1997 among: I. ROBERT B. WHITNEY ("Whitney"), STEVEN A. MARTELLO ("Martello"), JOHN T. RUOCCO ("Ruocco"), MICHAEL A. SYLVESTER ("Sylvester") and JOSEPH M. LIVELY ("Lively"; and each, an "Existing Shareholder" and, collectively, the "Existing Shareholders"); II. AMERICAN INTERNATIONAL INSURANCE COMPANY, a New York corporation (the "Investor"); III. ALCOHOL SENSORS INTERNATIONAL, LTD., a New York corporation (the "Company"); IV. ALBERT PACE ("PACE"), JAN POLEK ("POLEK"), LIPMAN FAMILY PARTNERS LTD. ("LFP"), GERALD N. JACOBOWITZ, DAVID B. GUBITS, JOHN H. THOMAS, GERALD A. LENNON, PETER R. ERIKSEN, LINDA F. MADOFF, HOWARD PROTTER, DONALD G. NICHOL, LARRY WOLINSKY, ROBERT E. DINARDO, MARK A. KROHN and J. BENJAMIN GAILEY (each, a "Releasor" and, collectively, the "Releasors"); V. FABRICANT & LIPMAN ("F&L") and JACOBOWITZ & GUBITS ("J&G"); and VI. ARIEL ENTERPRISES, a trust ("Ariel"). RECITALS: A. The Existing Shareholders, the Investor and the Company are parties to a Shareholders Agreement dated as of December 20, 1996 (the "Shareholders Agreement"; capitalized terms used herein and not otherwise defined shall have the meaning given to such terms in the Shareholders Agreement), a copy of which is attached hereto as Exhibit A. B. Pursuant to (i) a Stipulation of Settlement, Settlement Agreement and Mutual General Release dated as of February 27, 1997 among Pace, Polek, the Company, Ruocco, Sylvester, Whitney, Martello and Leon Pasqua ("Pasqua"), a copy of which is attached hereto as Exhibit B (the "Release"), and (ii) an Escrow Agreement dated as of February 27, 1997 among the Company, Whitney, Ruocco, Sylvester, Martello, Pasqua, John Walz ("Walz"), Anthony Kearney ("Kearney"), John Lawlor, Esq., J&G, F&L and the Releasors, a copy of which is attached hereto as Exhibit C (the "Escrow Agreement"), certain of the Existing Shareholders, Pasqua, Walz and Kearney have agreed to Transfer to J&G as Escrow Agent (in such capacity, the "Escrow Agent") for the account of the Releasors, F&L and J&G an aggregate of 315,000 shares of Common Stock (the "Subject Shares"), as more particularly described in the Release and the Escrow Agreement. C. Of the Subject Shares 278,578 shares (the "Existing Shareholder Subject Shares") are to be delivered by Whitney, Ruocco, Sylvester and Martello, as more particularly described in Section 1 hereof, and the balance of such Subject Shares are to be delivered by Pasqua, Walz and Kearney. D. An aggregate of 265,000 shares of the Subject Shares (the "Releasors' Shares"), are to be released from escrow and Transferred to the appropriate Releasors upon consummation of the Release, as more particularly described in the Release, the Escrow Agreement and Section 1 of this Agreement. E. An aggregate of 50,000 shares of the Subject Shares (the "Escrow Shares") are to be released from escrow and Transferred to Pace, Polek, F&L and J&G over a period commencing April 1, 1997 and ending July 31, 1997, as more particularly described in the Release, Section 5(b) of the Escrow Agreement and Section 3 of this Agreement. F. The parties hereto desire to set forth their agreement that, subject to the terms and conditions hereof (i) the Transfer of the Existing Shareholder Subject Shares by certain of the Existing Shareholders pursuant to the Release and the Escrow Agreement, and the Transfer of the Subject Shares by the Escrow Agent to the Releasors, F&L and J&G, shall be permitted notwithstanding the provisions of the Shareholders Agreement to the contrary, (ii) the Releasors shall become parties to and shall be bound by the Shareholders Agreement with respect to the Releasors' Shares, (iii) Ariel shall become a party to and shall be bound by the Shareholders Agreement for all purposes as an Existing Shareholder thereunder and (iv) in connection with the Transfers of the Subject Shares described herein, certain provisions of the Shareholders Agreement shall be amended. NOW, THEREFORE, the parties hereto, intending legally to be bound, hereby agree as follows: 1. Pursuant to the Release and the Escrow Agreement, the Existing Shareholders identified below shall be entitled to Transfer the number of Existing Shareholder Subject Shares specified with respect to such Existing Shareholder to the Escrow Agent:
Number of Existing Shareholder Existing Shareholder Subject Shares Ruocco 79,822 Sylvester 79,822 Whitney 79,822 Martello 39,112
Pursuant to the Release and the Escrow Agreement, the Escrow Agent shall be entitled upon consummation of the Release to release from escrow and to Transfer the number of Releasors' Shares specified below to the Releasor specified:
Number of Releasor Releasors' Shares Pace 127,000 Polek 31,800 LFP 53,100 Gerald N. Jacobowitz 5,734 David B. Gubits 4,567 John H. Thomas 4,567 Gerald A. Lennon 4,567 Peter R. Eriksen 4,567 Linda F. Madoff 4,567 Howard Protter 4,567 Donald G. Nichol 4,567 Larry Wolinsky 4,567 Robert E. Dinardo 3,610 Mark A. Krohn 3,610 J. Benjamin Gailey 3,610
2. Effective as of the date of this Agreement, each Releasor (i) hereby severally agrees to become a party to the Shareholders Agreement and to be bound by the terms thereof with respect to the Releasors' Shares acquired by such Releasor pursuant to the Release and the Escrow Agreement (as more particularly described in Section 1 hereof), (ii) shall be a Shareholder under the Shareholders Agreement (provided that, notwithstanding any provision of the Shareholders Agreement to the contrary, no Releasor shall be entitled to any of the rights of a Shareholder specified in Section 5.1.2, 5.1.3 or 5.1.4 thereof) and (iii) hereby severally makes the representations and warranties set forth in Sections 4.2 and 4.3 of the Shareholders Agreement to each other party hereto as if such representations and warranties were set forth herein in their entirety. 3. The Escrow Agent shall be entitled to release from escrow and to Transfer the Escrow Shares to Pace, Polek, F&L and J&G at the times and in the manner provided in the Release and in Section 5(b) of the Escrow Agreement. In connection with such Transfer of the Escrow Shares, each of Pace, Polek, F&L and J&G hereby severally agrees that any Transfer by such Person of any of the Escrow Shares from April 1 , 1997 through July 31, 1997 shall be made only through the brokerage facilities of William Scott & Company, LLC (the "Broker"), provided that the Broker shall have agreed, in writing, to afford such Person the same prices and terms in relation to such Transfers as are generally made available to the general public. Subject to the foregoing, the Escrow Shares shall not be subject to the Shareholders Agreement. 4. Effective as of the date of this Agreement, Ariel agrees to be bound by the terms of the Shareholders Agreement and to be deemed for all purposes an Existing Shareholder thereunder. 5. (a) In connection with the Transfers of the Subject Shares described herein, the definition of Related Transferee in the Shareholders Agreement is hereby deleted in its entirety and replaced with the following: ""Related Transferee": as to any Existing Shareholder or any Releasor, a Transferee that (i) has purchased or otherwise acquired shares of Capital Stock of the Company from such Existing Shareholder or Releasor, as the case may be, and (ii) is a spouse, parent, sibling, child, stepchild or grandchild of such Existing Shareholder or Releasor, as the case may be, or a trust which is for the benefit of such a Person or Persons, or is an Affiliate of such Existing Shareholder or Releasor, as the case may be." (b) In connection with the Transfers of the Subject Shares described herein, Sections 3.1(a) and (b) of the Shareholders Agreement are hereby deleted in their entirety and replaced with the following paragraphs: "(a) For the period from (and including) April 9, 1997 through (and including) December 20, 1998 (the "Restricted Period"), the Existing Shareholders and the Releasors severally agree with the Company, the Investor and with each other Shareholder that they will not, directly or indirectly, Transfer any Capital Stock of the Company (or any interest therein), now or hereafter at any time owned by them (excluding in the case of Pace and Polek the Escrow Shares acquired by such Persons, respectively, pursuant to the Release and the Escrow Agreement (the "Excluded Shares")), except that, upon written notice to the Company, the Investor and each other Shareholder, in accordance with applicable law: (i) each Existing Shareholder (other than Ariel) and each Releasor (other than LFP) may Transfer any Common Stock pursuant to an Involuntary Transfer (for such purpose, the reference to "Existing Shareholder" in the definition of Involuntary Transfer in the Shareholders Agreement shall be deemed a reference to "Existing Shareholder or a Releasor"); (ii) each Existing Shareholder (other than Ariel) and each Releasor (other than LFP) may Transfer any Common Stock for estate planning purposes to such Existing Shareholder's or Releasor's spouse, parents, siblings, children, stepchildren or grandchildren or to a trust which is for the benefit of such Existing Shareholder or Releasor or such Existing Shareholder's or Releasor's spouse, parents, siblings, children, stepchildren or grandchildren; (iii) during the period from (and including) April 9, 1997 through (but excluding) April 9, 1998 (the "Initial Period"), Lively and Ariel, respectively, may Transfer any Common Stock which, when combined with all other Transfers of Common Stock by such Person during the Initial Period, does not exceed 7,000 shares of Common Stock for Lively and 14,000 shares of Common Stock for Ariel; and (iv) during the period from (and including) the last day of the initial Period through (and including) the last day of the Restricted Period (the "Second Period"), Ruocco, Sylvester, Whitney, Lively and Ariel, respectively, may Transfer any Common Stock which, when combined with all other Transfers of Common Stock by such Person during the Second Period, does not exceed the number of shares of Common Stock specified with respect to such Person below:
Number of Shares of Common Stock Which May Be Transferred in the Shareholder Second Period Ruocco 49,394 Sylvester 49,394 Whitney 49,394 Lively 21,000 Ariel 42,000
; provided, however, that, in connection with any Transfer permitted under this Section 3.1(a), prior to such Transfer, such Existing Shareholder or such Releasor, as the case may be, shall comply with Section 3.1(b) hereof. (b) Any Transfer of Capital Stock of the Company (excluding in the case of Pace and Polek, the Excluded Shares) by any Existing Shareholder or any Releasor during the Restricted Period, or at any time thereafter to a Related Transferee, shall not relieve the transferor of its obligations hereunder and shall only be valid if the Person to whom such Capital Stock is Transferred (a "Transferee"), prior to the Transfer, agrees in writing to be bound by the terms of this Agreement as and to the same extent that the transferor was bound by this Agreement immediately prior to such Transfer. Any such Transferee that agrees to be bound by the terms of this Agreement as provided in this paragraph (b) shall be deemed, upon execution and delivery of such agreement, to be a Shareholder hereunder. For purposes of Sections 3.1(a)(iii) and (iv) hereof, references to a Person shall be deemed to be references to that Person and each Transferee of that Person on a collective basis. Each such Transferee shall be entitled to all of the rights under this Agreement to which the transferor was entitled immediately prior to such Transfer. Any purported Transfer without obtaining this agreement by the Transferee shall be deemed void and of no further effect and shall be governed by the provisions of paragraph (c) below. The provisions of this paragraph (b) shall not apply in connection with a Public Transfer by an Existing Shareholder or a Releasor." 6. Each of the Existing Shareholders, each Releasor, F&L and J&G hereby severally represents and warrants to, and covenants with, each of the other parties hereto that the Transfers contemplated hereby and by the Release and the Escrow Agreement will be made in compliance with all applicable laws, including securities laws. In addition, each of the Existing Shareholders and Ariel hereby severally represents and warrants to each of the other parties hereto with respect to himself or itself only that he or it has not Transferred and Capital Stock of the Company (or any interest therein) from December 20, 1996 through the date hereof. 7. Schedule I to the Shareholders Agreement is hereby deleted in its entirety and replaced with Schedule I attached hereto. Each Existing Shareholder (with respect to himself or itself only) and the Company severally makes the representations and warranties set forth in Section 4.1(f) of the Shareholders Agreement as if such representations and warranties were set forth herein in their entirety (except that references therein to (i) the Effective Date shall be deemed to be references to the date of this Agreement (after accounting for the Transfers described herein, including the Transfers permitted pursuant to Section hereof), and (ii) in the case of the representation and warranty by the Company, (x) Existing Shareholders shall be deemed to be references to Shareholders (other than the Investor) and (y) an individual shall be deemed to be references to a Person). Each Shareholder (other than the Existing Shareholders and the Investor) severally represents and warrants to the other parties hereto that, as of the date hereof (after accounting for the Transfers described herein, including the Transfers permitted pursuant to Section 3 hereof), such Person owns all right, title and interest in and to the number of shares of Common Stock specified with respect to such Person on Schedule I attached hereto, free and clear of all liens, claims, charges, security interests and other encumbrances. The parties to the Shareholders Agreement hereby acknowledge and agree that the 39,850 shares of Common Stock presently owned by Lively shall not be subject to the Shareholders Agreement, provided that, within sixty (60) days from the date hereof, Lively shall Transfer such shares of Common Stock as follows: (i) 2,500 shares of Common Stock shall be Transferred to a retirement account in Lively's name and (ii) 37,350 shares of Common Stock shall be Transferred to Lively's wife, Kathleen Lively. 8. Notwithstanding anything to the contrary contained in the Release or the Escrow Agreement, the Company and each of the Shareholders (other than the Investor) severally agree that they will not enter into any amendment of or agree to waive any of the provisions of the Release relating to the Subject Shares or of the Escrow Agreement without the prior written consent of the Investor, and any such amendment or waiver entered into or agreed to without such consent shall be deemed void for all purposes hereof and the Shareholders Agreement. 9. All notices, demands and other communications under the Shareholders Agreement with respect to the following Persons shall be addressed as specified below: Releasors: c/o Jacobowitz & Gubits 158 Orange Avenue Walden, New York 12586 Fax: (914) 778-5173 with a copy to: Fabricant & Lipman One Hurriman Square Goshen, New York 10924 Ariel: c/o Joseph M. Lively Alcohol Sensors International Ltd. 11 Oval Drive Islandia, New York 11722 Fax: (516) 342-1550 or to such other address as any such Person shall designate in writing to the other parties to the Shareholders Agreement. 10. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. 11. The rights and obligations of the parties under this Agreement may not be assigned or otherwise transferred to any other Person, except with the prior written consent of the other parties hereto. Except as expressly provided in this Agreement, this Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors, permitted assigns, heirs and personal representatives. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, permitted assigns, heirs and personal representatives. Except as otherwise expressly amended hereby, the Shareholders Agreement shall remain in full force and effect. 12. This Agreement shall be deemed to be a contract made under and shall be governed by and construed in accordance with the internal laws of the State of New York without reference to the principles of conflict of laws. In the event of any conflict between this Agreement, on the one hand, and the Release or the Escrow Agreement, on the other hand, the provisions of this Agreement shall prevail as between the parties hereto. 13. Each of the parties hereto shall execute and deliver such documents, instruments and agreements and take such further actions as may be reasonably required or desirable to carry out the provisions of this Agreement and the transactions contemplated hereby, and each of the parties hereto shall cooperate with each other in connection with the foregoing. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement or caused this Agreement to be duly executed by their respective officers or representatives thereunto duly authorized as of the day and year first written above. /s/ Robert B. Whitney ROBERT B. WHITNEY /s/ Steven A. Martello STEVEN A. MARTELLO /s/ John T. Ruocco JOHN T. RUOCCO /s/ Michael A. Sylvester MICHAEL A. SYLVESTER /s/ Joseph M. Lively JOSEPH M. LIVELY AMERICAN INTERNATIONAL INSURANCE COMPANY By: /s/ J. Ernest Hansen Name: J. Ernest Hansen Title: President ALCOHOL SENSORS INTERNATIONAL, LTD. By: /s/ Robert B. Whitney Name: Title: /s/ Albert Pace ALBERT PACE /s/ Jan Polek JAN POLEK FABRICANT & LIPMAN By: /s/ Alan S. Lipman Name: Alan S. Lipman Title: Owner JACOBOWITZ & GUBITS By: /s/ Howard Protter Name: Howard Protter Title: Partner LIPMAN FAMILY PARTNERS LTD. By: /s/ Alan S. Lipman Name: Alan S. Lipman Title: General Partner /s/ Gerald N. Jacobowitz GERALD N. JACOBOWITZ /s/ David B. Gubits DAVID B. GUBITS /s/ John H. Thomas JOHN H. THOMAS /s/ Gerald A. Lennon GERALD A. LENNON /s/ Peter R. Eriksen PETER R. ERIKSEN /s/ Linda F. Madoff LINDA F. MADOFF /s/ Howard Protter HOWARD PROTTER /s/ Donald G. Nichol DONALD G. NICHOL /s/ Larry Wolinsky LARRY WOLINSKY /s/ Robert E. Denardo ROBERT E. DENARDO /s/ Mark A. Krohn MARK A. KROHN /s/ J. Benjamin Gailey J. BENJAMIN GAILEY ARIEL ENTERPRISES By: /s/ Joseph M. Lively Name: JOSEPH M. LIVELY Title: Trustee SCHEDULE I SHAREHOLDERS' OWNERSHIP OF COMMON STOCK
Percentage No. of Shares of Ownership of All Options of the Company's No. of Shares Exercisable for Capital Stock of Common Common Stock (on a Fully Name of Shareholder Stock Owned Owned Diluted Basis) Robert B. Whitney 566,260 3.83% Steven A. Martello 110,888 0.75% John T. Ruocco 566,260 3.83% Michael A. Sylvester 566,260 3.83% Joseph M. Lively 0 140,000 0.95% Ariel Enterprises 180,000 100,000 1.89% Albert Pace 150,600 1.02% Jan Polek 37,700 0.26% Fabricant & Lipman 10,000 0.07% Jacobowitz & Gubits 10,500 0.07% Lipman Family Partners Ltd. 53,100 0.36% Gerald N. Jacobowitz 5,734 0.04% David B. Gubits 4,567 0.03% John H. Thomas 4,567 0.03% Gerald A. Lennon 4,567 0.03% Peter R. Eriksen 4,567 0.03% Linda F. Madoff 4,567 0.03% Howard Protter 4,567 0.03% Donald G. Nichol 4,567 0.03% Larry Wolinsky 4,567 0.03% Robert E. Dinardo 3,610 0.02% Mark A. Krohn 3,610 0.02% J. Benjamin Gaily 3,610 0.02%
EXHIBIT A: SHAREHOLDERS AGREEMENT EXHIBIT B: RELEASE EXHIBIT C: ESCROW AGREEMENT EX-10 6 EXHIBIT 10.21 IN THE HIGH COURT OF JUSTICE Case No. 1998 S No. 162 QUEENS BENCH DIVISION IN THE OXFORD DISTRICT REGISTRY BETWEEN:- SCARICO (UK) LIMITED Plaintiff AND ALCOHOL SENSORS EUROPE PLC Defendant ORDER UPON an Application made by the parties Solicitors AND UPON the Plaintiff and Defendants agreeing to the terms of compromise set forth in the Schedule hereto and consenting to this Order IT IS ORDERED that all further proceedings in this action be stayed save for the purpose of carrying out this Order and the said terms into effect and for that purpose the parties are at liberty to apply. THE SCHEDULE 1.1 In this Schedule where the context so admits the following expression shall bear the following meanings: Scarico (UK) Ltd means the Plaintiff Alcohol Sensors Europe PLC means the Defendant Mr Ghazarian means Mr. Michael Ghazarian of Unit 1B Saxeway Business Centre, Chesham, Bucks HPS 2SH ASI means Alcohol Sensors International, Ltd of 11 Oval Drive, Islandia, New York 11722, USA Share Options means share options to be allocated and issued by ASI to Mr. Ghazarian as set out in the Schedule attached to this Order Baker Tilley means the auditors of ASE DVSS means Digital Vehicle Security Systems Ltd 1.2 Upon receipt of a sealed copy of this Order the parties agree that- 1.3 The Defendant agrees to make payment on August 11th 1998 in accordance with and provided that the arrangements herein have been complied with to the Plaintiff and Mr. Ghazarian (via their solicitors) in the total sum of US$75,000.00 to be paid in UK Pound Sterling (to be converted using the exchange rate of Lloyds Bank Plc as at 11th August 1998) and to be paid by the Defendants solicitors to the Plaintiffs solicitors by telegraphic transfer. 1.4 In respect of the Sens-O-Lock finished goods held by the Plaintiff, the Plaintiff Michael Ghazarian and DVSS have not harmed or damaged and will not interfere with, or harm or damage the finished goods, which have been sealed by the Defendants appointed representative, in the Plaintiff, Mr Ghazarian or DVSS possession as at 24th June 1998, the date of the said inspection, and the Plaintiff, Mr. Ghazarian and DVSS jointly and severally represent that the Sens-O-Lock finished goods are still in good working order. 1.5 In respect of the Sens-O-Lock inventory of parts and WeatherEye inventory of parts and finished goods, the Plaintiff, Michael Ghazarian and DVSS represent they are as received form the manufacturer and/or distributor and where the Plaintiff, Mr Ghazarain or DVSS were the manufacturer or distributor then as received from the manufacturer or distributor immediately proceeding them, and that no harm has been caused to any of the finished goods and/or parts with intention of causing the said parts to fail and the said finished goods and parts are still in good working order. 2. Mr Ghazarian represents that he has no knowledge of the fate or whereabouts of any alleged missing items of equipment, including the facsimile machine, copier, printer, scanner and computer. 3. The Plaintiff, Mr Ghazarian, DVSS, ASI and ASE agree to deliver executed General Releases forthwith, in the form of the Release and Settlement Agreement and Supplemental Release Agreement as attached to this Order. 4. Mr Ghazarian will transfer all 10,000 shares in ASE originally issued to him and does represent that he has the legal capacity to sell or assign them free and clear of all liens and encumbrances and agrees to execute a Stock Transfer Form and a share certificate in respect of this shareholding. In consideration of which the Defendant agrees to pay Mr Ghazarian the sum of BP2,500.00 to be paid by the Defendants solicitors immediately to Mr Ghazarian's solicitors on receipt of the Stock Transfer Form and share certificate, each duly executed, as full and final settlement of any and all claims relating to Mr. Ghazarian's shareholding in the Defendant. 5. The Plaintiff, Mr Ghazarian and DVSS will release to ASE or its agent or appointed representative or authorized carrier all ASE's products as held by any of them, including but not limited to WeatherEye and Sens-O-Lock finished goods and inventory subject to clause 1.4 and 1.5 hereof. 6. The Plaintiff and DVSS, agree that payment of US $10,000.00 from the payment referred to in clause 1.3 herein, be in full and final settlement of any and all causes of action which the Plaintiff and DVSS may have against ASE or ASI or any of its Directors, Officers, Employees, Consultants, Agents, Shareholders, past or present of ASE or ASI, whether in the UK, USA or anywhere in the world. 7. Mr Ghazarian agrees that payment of US $65,000.00 from the payment referred to in clause 1.3 herein, be in full and final settlement of any and all causes of action which Mr Ghazarian may have against the Defendant, ASI or any of its Directors, Officers, Employees, Consultants, Agents, Shareholders, past or present of ASE or ASI, whether in the UK, USA or anywhere in the world. 8. The Defendant, ASI and their Directors agree that the payments referred to in clauses 6. and 7. herein, will be in full and final settlement of any and all causes of action which they may have against the Plaintiff, Mr. Ghazarian, DVSS or any of the Directors, Officers, Employees, Consultants, Agents, Shareholders, past or present of the Plaintiff or DVSS whether in the United Kingdom, USA or anywhere in the world. 9. The Plaintiff, Mr Ghazarian and DVSS will assign all worldwide intellectual property and patent rights with respect to and including but not limited to the Sens-O-Lock trade mark to ASI forthwith. 10. ASI will provide an executed Share Option Agreement for the provision of an additional 200,000 share options in ASI, to Mr Ghazarian forthwith, in the form provided as attached to this Order. 11. ASI agrees to make payment forthwith to Mr Ghazarian, the sum of US $5,000.00 (via his solicitor) as payment in lieu of 22,500 shares of common stock in ASI owed to Mr. Ghazarian by ASI for services rendered and agrees to the cancellation forthwith of 22,500 options to purchase ASI Common Stock relating thereto. 12. Mr Ghazarian agrees to provide reasonable assistance to Baker Tilley during a period of 10 working days during the period that the audit of the Defendant is carried out, immediately after the entry of the Order herein. 13. The Plaintiff, Mr Ghazarian and DVSS agree to deliver up all books and records, relating to ASI or the Defendant, in their possession, custody or control, to ASI's duly appointed representative. They further represent that they have no knowledge of books or records of the Defendant or ASI in the possession, custody or control of any other person or entity. 14. Each party do represent that they have the legal authority to enter into this Agreement. 15. Mr Ghazarian agrees that he will not compete nor act as a representative, distributor, agent, employee or become a director, officer or consultant, partner or 10% equity holder in any company which shall compete or attempt to compete with ASI or ASE, in the manufacture or sale of the products of ASI or ASE ie. Breath Alcohol Ignition Interlock devices and vehicle headlight management systems without limitation or similar products in the UK or throughout the world for a period of three years from January 1, 1998. 16. Mr Ghazarian, the Plaintiff, DVSS, ASE, ASI the Directors of the Plaintiff and DVSS and the Directors of ASI agree that the terms of this Order should be regarded as confidential between the parties, save for such disclosure as may be necessary to government agencies or government regulated bodies of ASI or ASE so as to permit proper and due disclosure of information necessary to the proper regulation and records of these companies. 17. All arrangements are to completed hereunder no later that by the close of business on 13th August 1998. 18. There be liberty for either party to apply for further Order. 19. The Defendant agrees to pay the Plaintiff, Mr Ghazarian and DVSS (via their solicitors) the total sum of BP3,000.00 forthwith, as contribution towards the Plaintiff's costs and payment shal be in full and final settlement of any such claim for costs. Dated the 11th day of August 1998 Signed /s/ Brethertons Auld & Jardine Signed /s/ Doberman Horsman BRETHERTONS AULD & JARDINE DOBERMAN HORSMAN 30 High Street College Chambers Banbury 92/94 Borough Road Oxon OX16 8ER Middlesborough TS1 2HL For and on behalf of the For and on behalf of Plaintiff, DVSS and the Defendant, ASI and the Mr. Ghazarian Directors of ASI RELEASE AND SETTLEMENT AGREEMENT This Release and Settlement Agreement ("Agreement") is entered as of 13 August, 1998, by and between ALCOHOL SENSORS INTERNATIONAL LTD. and ALCOHOL SENSORS EUROPE PLC, the Defendant herein, and their Directors, Officers and Affiliates, and all others, whether a party to the action herein or not and including those recited in the terms of the Tomlin Order of the Court entered on the 13th day of August, 1998 and MICHAEL GHAZARIAN, DIGITAL VEHICLE SECURITY SYSTEMS LTD. and SCARICO (UK) Ltd the Plaintiff herein, and their Directors, Officers and Affiliates, to include but not limited to, Michael Ghazarian, Digital Vehicle Security Systems and any others. RECITALS 1. SCARICO (UK) LTD. is the Plaintiff in an action against Alcohol Sensors Europe PLC, which action is currently pending before the Court. 2. The parties hereto wish mutually to compromise, resolve and settle their disputes and claims raised in the Action and generally to effect a dismissal of the said Action, without the necessity of incurring the extensive costs of trial, and to do so without making any admission as to the truth, or lack thereof, of any allegation of any party in the Action and without making any admission whatsoever of liability on the part of either party hereto or any other individuals or corporations in whatsoever capacity, and which liability is expressly denied. NOW, THEREFORE, in consideration of the mutual promises set forth in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Dismissal of Action. Upon receipt by the Defendant's Solicitors of this Agreement and the Supplemental Release signed by all parties thereto, and upon receipt by SCARICO (UK) LTD. DVSS and MICHAEL GHAZARIAN'S solicitors of the payment of US $75,000.00, and other payments, pursuant to the Tomlin Order herein, the parties shall forthwith cause to be submitted to the Court for approval and entry, a dismissal of the said Action with costs agreed under the terms of the Order herein. 2. Releases. (a) SCARICO (UK) LTD., the Plaintiff herein, together with Michael Ghazarian, Digital Vehicle Security Systems Ltd and all Directors, Officers, Agents and Employees of SCARICO (UK) LTD. and/or Digital Vehicle Security Systems Ltd hereby release forever Alcohol Sensors (Europe) PLC, Alcohol Sensors International, Ltd., any and all Directors, Officers, Agents, Employees, Consultants or Shareholders past or present, in whatsoever capacity and wheresoever performed against all of the foregoing from any and all claims, demands, actions, causes of action and/or claims for relief of any and all kinds whatsoever which ever had, now has, may have and/or claim or may claim to have, whether known or unknown and/or whether ascertainable at this time, except for any and all obligations of the parties in the performance of their obligations under the Tomlin Order herein and under this Agreement and Supplemental Release, and this Release shall be unlimited in time from the beginning of the world to the date of this Release. (b) ALCOHOL SENSORS EUROPE PLC, the Defendant herein, together with Alcohol Sensors International, Ltd. and all Directors, Officers, Agents and Employees of ALCOHOL SENSORS EUROPE PLC and/or Alcohol Sensors International, Ltd, hereby release forever Scarico (UK) Ltd, Michael Ghazarian and Digital Vehicle Security Systems Ltd., any and all Directors, Officers, Agents and Employees, past or present, in whatsoever capacity and wheresoever performed against all of the foregoing from any and all claims, demands, actions, causes of action and/or claims for relief of any and all kinds whatsoever which ever had, now has, may have and/or claim or may claim to have, whether known or unknown and/or whether ascertainable at this time, except for any and all obligations of the parties in the performance of their obligations under the Tomlin Order herein and under this Agreement and Supplemental Release, and this Release shall be unlimited in time from the beginning of the world to the date of this Release. 3. Survival. The obligations and agreements of the parties hereto in and/or under this Agreement shall survive the execution of this Agreement. 4. Amendment. This Agreement may be amended, altered or terminated in whole or in part only by a writing signed by all of the parties hereto. 5. Heirs and Successors. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, representatives, successors and assigns. Other than expressly provided for in this Agreement, There shall be no third-party beneficiaries of this Agreement. The parties hereto agree for themselves and for their respective heirs, executors, administrators, representatives, successors and assigns, to execute and deliver any and all documents and/or instruments and/or to do any and all other acts and/or deeds which may be necessary or convenient to carry out the purpose and intent of this Agreement. 6. Entire Agreement. This Agreement in conjunction with the Supplemental Release and the Tomlin Order embodies the entire understanding of the parties hereto with respect to the subject matter set forth herein. There are no promises, terms, conditions or obligations other than those expressly contained herein, furthermore, this Agreement shall supersede all previous communications, representation or agreements, either verbal or written, between the parties regarding the subject matter set forth herein. Without limiting the foregoing, no letter, telegram, or other communication passing between the parties hereto concerning any matter during the negotiation of this Agreement, shall be deemed to be a part of this Agreement, nor shall it have the effect of modifying or adding to this Agreement. 7. Notices. Any and all notices and other communications necessary or desirable to be served hereunder shall be either personally delivered or sent by telecopy, prepaid same-day or overnight delivery service, proof of delivery requested, or registered mail, postage prepaid, addressed as follows: a. If to Michael Ghazarian, or Digital Vehicle Security Systems Ltd., or Scarico (UK) Ltd, any Directors, Officers, Employers, or Agents thereof Scarico (UK) Ltd Saxeway Business Centre Chartridge Lane Chesham, Bucks HP5 2SH With a copy to: Brethertons, Auld and Jardine 30 High Street Banbury, Oxon OX16 8ER b. If to Alcohol Sensors Europe PLC, Alcohol Sensors International Ltd., any Directors, Officers, Employees or Agents thereof: Alcohol Sensors International Ltd. 11 Oval Drive Islandia, NY 11722 USA With a copy to: Walter and Haverfield, P.L.L. 1300 Terminal Tower Cleveland, Ohio 44113 USA Attention: David Silk With a copy to: Doberman Horsman College Chambers 92/94 Borough Road Middlesborough, UK or to such address or addresses as any party may designate from time to time in a written notice served upon the other parties in accordance herewith. Any notice sent as hereinabove provided shall be deemed delivered upon receipt or refusal of delivery, except in the case of registered mail which shall be deemed delivered on the third (3rd) business day next following the postmark date which it bears. 8. Incorporation of Recitals and Preamble. The preamble and the Recitals set forth above are hereby incorporated herein as though the same were fully set forth herein. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties as of the date and at the place first set forth. /s/ Michael Ghazarian Michael Ghazarian for an on behalf of SCARICO (UK) ------------------------------------------ Corporate Seal of SCARICO (UK) LTD /s/ Michael Ghazarian Michael Ghazarian for an on behalf of Digital Vehicle Security Systems Ltd. ------------------------------------------ Corporate Seal of Digital Vehicle Security Systems Ltd. /s/ Michael Ghazarian Michael Ghazarian /s/ Joseph Lively Joseph Lively for and on behalf of Alcohol Sensors Europe PLC ------------------------------------------ Corporate Seal of Alcohol Sensors Europe PLC /s/ Joseph Lively Joseph Lively for and on behalf of Alcohol Sensors International Ltd. ------------------------------------------ Corporate Seal of Alcohol Sensors International Ltd. EX-10 7 EXHIBIT 10.23 PROMISSORY NOTE $100,000 June 12, 1998 FOR VALUE RECEIVED, the undersigned ("Payor") promises to pay to MILBRIGHT ESTATES LTD. ("Payee") the principal sum of One Hundred Thousand and 00/100 ($100,000) Dollars, together with interest at the rate of 11.5% per annum, on July 31, 1998. Payment of this note shall be made in lawful money of the United States of America at 319 Fifth Avenue, New York, New York 10016, or at such address or commercial bank within the United States of America as any holder of this Note may designate by notice to Payor not less than five (5) days prior to the date when this Note is due and payable. This Note may be prepaid. The occurrence of any one or more of the following events shall constitute an Event of Default hereunder: (A) The Payor shall fail to pay when due the principal or interest payable hereunder. (B) The undersigned hereby forever waives presentment, demand, protest, and/or notice of dishonor of the within note and the undersigned, and each of them, guarantees the payment of the said note at maturity and consents, without notice, to any and all extensions of time and/or terms of payment made by the holder of said note. In the event this right is exercised and this note is collected by suit or attorney, the maker and endorsers hereof agree to pay, in addition to the amount due, a sum equal to fifteen (15%) percent as collection and/or legal fees. (C) The Payor shall admit to its creditors its inability to pay its debts as they mature, or shall make an assignment for the benefit of its creditors. (D) Proceedings in bankruptcy, or for reorganization of the Payor, or for the readjustment of any of its debts, under the Bankruptcy Code, as amended, or any part thereof, or under any other Laws, whether state or federal, for the relief of debtors, now or hereafter existing, shall be commenced by the Payor; or shall be commenced against the Payor and shall not be discharged within ninety (90) days of their commencement. (E) A receiver or trustee shall be appointed for the Payor or for any substantial part of its respective assets, or any proceedings shall be liquidated for the dissolution or the full or partial liquidation of the Payor and such receiver or trustee shall not be discharged within ninety (90) days of his appointment, or such proceedings shall not be discharged within thirty (30) days of their commencement, or the Payor shall discontinue its business or materially change the nature of its business. (F) The Payor shall suffer final judgments for payment of money aggregating in excess of $100,000 and shall not discharge the same within a period of thirty (30) days unless, pending further proceedings, execution has not been commenced or if commenced has been effectively stayed. (G) If any payment due hereunder remains unpaid more than fifteen (15) days after the due date thereof, Payor shall pay to Payee a late charge equal to four (4%) percent of such overdue payment. IN WITNESS WHEREOF, this Note has been duly executed and delivered by duly authorized officers of the Payor. ALCOHOL SENSORS INTERNATIONAL LTD. By:/s/ Joseph M. Lively Its C.O.O. ATTEST: /s/ Janet DiBenedetto EX-10 8 EXHIBIT 10.24 ALCOHOL SENSORS INTERNATIONAL, LTD. 11 Oval Drive Islandia, New York 11722 August 14, 1998 J. Ernest Hansen, President American International Insurance Company 70 Pine Street New York, New York 10270 Re: Series A Cumulative Non-Redeemable Convertible Preferred Stock Dear Mr. Hansen: This letter will serve to confirm and memorialize the agreement between American International Insurance Company ("AIIC") and Alcohol Sensors International, Ltd. (ASI") that, notwithstanding the terms and provisions of the Certificate of Incorporation of ASI, as amended to date (the "Charter"), that certain Convertible Preferred Stock and Warrant Purchase Agreement, dated as of December 20, 1996 (the "Purchase Agreement"), between ASI and AIIC, and that certain Registration Rights Agreement, dated as of December 20, 1996 (the "Registration Rights Agreement"), between ASI and AIIC, AIIC, as the registered and beneficial owner of all of the 833,333 shares (the "Preferred Shares") of the Series A Cumulative Non-redeemable Convertible Preferred Stock, par value $.001 per share, of ASI currently authorized and outstanding, has agreed to accept the following number of shares (the "Shares") of the common stock, par value $.001 per share (the "Common Stock"), of ASI, in full and complete satisfaction of all dividend payments due AIIC with respect to the Preferred Shares for the Dividend Payment Dates (the singular of term as defined in the Charter) of June 30, 1997, December 31, 1997, June 30, 1998, December 31, 1998, June 30, 1999 and December 31, 1999: (a) 79,583 shares of Common Stock with respect to the Dividend Payment Date of June 30, 1997, determined by multiplying the amount of dividends due on said Dividend Payment Date (i.e., $119,375), by a fraction, the numerator of which is $3.00 and the denominator of which is $4.50; (b) 75,639 shares of Common Stock with respect to the Dividend Payment Date of December 31, 1997, determined by multiplying the amount of dividends due on said Dividend Payment Date (i.e., $112,500), by a fraction, the numerator of which is $3.00 and the denominator of which is $4.462; (c) 75,639 shares of Common Stock with respect to the Dividend Payment Date of June 30, 1998, determined by multiplying the amount of dividends due on said Dividend Payment Date (i.e., $112,500), by a fraction, the numerator of which is $3.00 and the denominator of which is $4.462; (d) such number of shares of Common Stock as shall equal the amount of dividends due on December 31, 1998, multiplied by a fraction, the numerator of which shall be $3.00 and the denominator of which shall be the Conversion Price (as such term is defined in the Charter) as then in effect, with respect to such Dividend Payment Date; (e) such number of shares of Common Stock as shall equal the amount of dividends due on June 30, 1999, multiplied by a fraction, the numerator of which shall be $3.00 and the denominator of which shall be the Conversion Price as then in effect, with respect to such Dividend Payment Date; and (f) such number of shares of Common Stock as shall equal the amount of dividends due on December 31, 1999, multiplied by a fraction, the numerator of which shall be $3.00 and the denominator of which shall be the Conversion Price as then in effect, with respect to such Dividend Payment date. In addition, each and all of the Shares shall be deemed "Registrable Securities" under, and shall be subject to, the Registration Rights Agreement for all purposes contained therein. Except as modified by the matters set forth herein, the terms and condition of the Charter, Purchase Agreement and Registration Rights Agreement shall remain in full force and effect. If the foregoing accurately reflects your understanding of our agreement with respect to the foregoing matters, kindly acknowledge and agree to such by executing the duplicate copy of this letter in the space indicated for such below. Very truly yours, Alcohol Sensors International, Ltd. By: /s/ Joseph M. Lively Joseph M. Lively, President Accepted and Agreed to: American International Insurance Company By: /s/ J. Ernest Hansen J. Ernest Hansen, President EX-10 9 EXHIBIT 10.25 PROMISSORY NOTE $40,000 August 13, 1998 FOR VALUE RECEIVED, the undersigned ("Payor") promises to pay to MILBRIGHT ESTATES LTD. ("Payee") the principal sum of Forty Thousand and 00/100 ($40,000) Dollars, together with interest at the rate of 11.5% per annum, on August 31, 1998. Payment of this note shall be made in lawful money of the United States of America at 319 Fifth Avenue, New York, New York 10016, or at such address or commercial bank within the United States of America as any holder of this Note may designate by notice to Payor not less than five (5) days prior to the date when this Note is due and payable. This Note may be prepaid. The occurrence of any one or more of the following events shall constitute an Event of Default hereunder: (A) The Payor shall fail to pay when due the principal or interest payable hereunder. (B) The undersigned hereby forever waives presentment, demand, protest, and/or notice of dishonor of the within note and the undersigned, and each of them, guarantees the payment of the said note at maturity and consents, without notice, to any and all extensions of time and/or terms of payment made by the holder of said note. In the event this right is exercised and this note is collected by suit or attorney, the maker and endorsers hereof agree to pay, in addition to the amount due, a sum equal to fifteen (15%) percent as collection and/or legal fees. (C) The Payor shall admit to its creditors its inability to pay its debts as they mature, or shall make an assignment for the benefit of its creditors. (D) Proceedings in bankruptcy, or for reorganization of the Payor, or for the readjustment of any of its debts, under the Bankruptcy Code, as amended, or any part thereof, or under any other Laws, whether state or federal, for the relief of debtors, now or hereafter existing, shall be commenced by the Payor; or shall be commenced against the Payor and shall not be discharged within ninety (90) days of their commencement. (E) A receiver or trustee shall be appointed for the Payor or for any substantial part of its respective assets, or any proceedings shall be liquidated for the dissolution or the full or partial liquidation of the Payor and such receiver or trustee shall not be discharged within ninety (90) days of his appointment, or such proceedings shall not be discharged within thirty (30) days of their commencement, or the Payor shall discontinue its business or materially change the nature of its business. (F) The Payor shall suffer final judgments for payment of money aggregating in excess of $100,000 and shall not discharge the same within a period of thirty (30) days unless, pending further proceedings, execution has not been commenced or if commenced has been effectively stayed. (G) If any payment due hereunder remains unpaid more than fifteen (15) days after the due date thereof, Payor shall pay to Payee a late charge equal to four (4%) percent of such overdue payment. (H) A default in that certain Promissory Note dated June 11, 1998 in the principal amount of $100,000 made by Payor to Milbright Estates Ltd. IN WITNESS WHEREOF, this Note has been duly executed and delivered by duly authorized officers of the Payor. ALCOHOL SENSORS INTERNATIONAL LTD. By:/s/ Joseph M. Lively Its C.O.O. ATTEST: /s/ Janet DiBenedetto EX-10 10 EXHIBIT 10.26 PATENT ASSIGNMENT For valuable consideration, the receipt of which is acknowledged, Joseph M. Lively and WeatherEye of 110 Willard Avenue, Farmingdale, New York 11735, HEREBY assigns, transfers and sets over to Alcohol Sensors International, Ltd., of 11 Oval Drive, Islandia, New York 11772, all right title and interest in and to Patent Number 5780973 dated July 14, 1998, any and all inventions relating to a headlight management system, including but not limited to all drawings, schematics, plans, prototypes and any and all patents relating thereto all inventions disclosed therein, and all counterpart patent applications, patents and rights to the invention throughout the world, and with the right to sue for past infringement and collect all damages therefor. Dated 21st day of September, 1998. For and on behalf of Joseph M. Lively /s/Joseph M. Lively For and on behalf of WEATHEREYE, INC. /s/Joseph M. Lively Name: Joseph M. Lively EX-10 11 EXHIBIT 10.27 PROMISSORY NOTE $25,000 September 4, 1998 FOR VALUE RECEIVED, the undersigned ("Payor") promises to pay to MILBRIGHT ESTATES LTD. ("Payee") the principal sum of Twenty-Five Thousand and 00/100 ($25,000) Dollars, together with interest at the rate of 11.5% per annum, on October 31, 1998. Payment of this note shall be made in lawful money of the United States of America at 319 Fifth Avenue, New York, New York 10016, or at such address or commercial bank within the United States of America as any holder of this Note may designate by notice to Payor not less than five (5) days prior to the date when this Note is due and payable. This Note may be prepaid. The occurrence of any one or more of the following events shall constitute an Event of Default hereunder: (A) The Payor shall fail to pay when due the principal or interest payable hereunder. (B) The undersigned hereby forever waives presentment, demand, protest, and/or notice of dishonor of the within note and the undersigned, and each of them, guarantees the payment of the said note at maturity and consents, without notice, to any and all extensions of time and/or terms of payment made by the holder of said note. In the event this right is exercised and this note is collected by suit or attorney, the maker and endorsers hereof agree to pay, in addition to the amount due, a sum equal to fifteen (15%) percent as collection and/or legal fees. (C) The Payor shall admit to its creditors its inability to pay its debts as they mature, or shall make an assignment for the benefit of its creditors. (D) Proceedings in bankruptcy, or for reorganization of the Payor, or for the readjustment of any of its debts, under the Bankruptcy Code, as amended, or any part thereof, or under any other Laws, whether state or federal, for the relief of debtors, now or hereafter existing, shall be commenced by the Payor; or shall be commenced against the Payor and shall not be discharged within ninety (90) days of their commencement. (E) A receiver or trustee shall be appointed for the Payor or for any substantial part of its respective assets, or any proceedings shall be liquidated for the dissolution or the full or partial liquidation of the Payor and such receiver or trustee shall not be discharged within ninety (90) days of his appointment, or such proceedings shall not be discharged within thirty (30) days of their commencement, or the Payor shall discontinue its business or materially change the nature of its business. (F) The Payor shall suffer final judgments for payment of money aggregating in excess of $100,000 and shall not discharge the same within a period of thirty (30) days unless, pending further proceedings, execution has not been commenced or if commenced has been effectively stayed. (G) If any payment due hereunder remains unpaid more than fifteen (15) days after the due date thereof, Payor shall pay to Payee a late charge equal to four (4%) percent of such overdue payment. (H) A default in that certain Promissory Note dated June 11, 1998 in the principal amount of $100,000 made by Payor to Milbright Estates Ltd. (I) A default in that certain Promissory Note dated August 13, 1998 in the principal amount of $40,000 made by Payor to Milbright Estates Ltd. IN WITNESS WHEREOF, this Note has been duly executed and delivered by duly authorized officers of the Payor. ALCOHOL SENSORS INTERNATIONAL LTD. By:/s/ Joseph M. Lively Its C.O.O. ATTEST: /s/ Janet DiBenedetto EX-11 12 EXHIBIT 11 Computation of Loss Per Share
December 31, ------------------------------------- 1997 1996 ---- ---- Net loss $ (3,670,968) $ (6,121,143) Cumulative dividend on Series A and B preferred stock (288,333) (6,875) ------------- -------------- Net loss attributable to common stockholder $ (3,959,301) $ (6,128,018) ============= ============== Shares: Weighted-average number of common shares outstanding 8,756,316 8,430,960 ============= ============== Loss per common share $ (.45) $ (.73) ============= ==============
EX-21 13 EXHIBIT 21 ALCOHOL SENSORS INTERNATIONAL, LTD. List of Subsidiaries State or Other Jurisdiction of Name Incorporation or Organization Alcohol Sensors Europe plc.. . . . . . . . . . . . . . . . . . . . . . . England EX-27 14 EXHIBIT 27
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. Year Dec-31-1997 Jan-01-1997 Dec-31-1997 1,882,994 0 0 0 693,561 2,669,294 406,239 174,069 2,915,630 1,779,230 0 0 5,158,750 8,849 (4,114,176) 2,915,630 35,308 35,308 71,483 71,483 681,383 0 47,141 (3,670,968) 0 (3,670,968) 0 0 0 (3,670,968) (.45) (.45)
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