As filed with the Securities and Exchange Commission on June 4, 1997
Registration No. 333-18667
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 5
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-------------------------
COMPU-DAWN, INC.
(Name of Small Business Issuer in its Charter)
Delaware 7373 11-3344575
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code No.)
organization)
77 Spruce Street
Cedarhurst, New York 11516
Telephone : (516) 374-6700
Telecopier: (516) 374-9553
(Address and telephone number of principal executive
offices) (Address of principal place of business or intended
principal place of business)
-------------------------
Mark Honigsfeld
Chairman of the Board and
Chief Executive Officer
COMPU-DAWN, INC.
77 Spruce Street
Cedarhurst, New York 11516
Telephone: (516) 374-6700
Telecopier: (516) 374-9553
(Name, address and telephone number of agent for service)
-------------------------
Copies to:
Fred Skolnik, Esq. Chase A. Caro, Esq.
Gavin C. Grusd, Esq. Caro & Graifman, P.C.
Certilman Balin Adler & Hyman, LLP 60 East 42nd Street
90 Merrick Avenue New York, New York 10165
East Meadow, NY 11554 Telephone: (212) 682-6000
Telephone: (516) 296-7000 Telecopier: (212) 867-4762
Telecopier: (516) 296-7111
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of the registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o ______________
[Cover continued on next page.]
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o ____
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. o
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Amount to be Offering Price Aggregate Offering Amount of
Titles of Each Class of Securities to be Registered Registered (1) per Share (2) Price (2) Registration Fee
- ------------------------------------------------ ------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Common Shares (3) 1,380,000 $5.00 $6,900,000 $2,090.91
Underwriter's Common Share Purchase 120,000 --- $ 120 ---
Warrants (4)
Common Shares (5) 120,000 $8.25 $ 990,000 $300.00
Common Shares (6) 389,200 $5.00 $1,946,000 $589.70
Common Shares (7) 250,250 $5.00 $1,251,250 $379.17
-------------
Total Registration Fee: $3,359.78 (8)
================================================ ======================= ===================== =================== ================
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended
("Securities Act"), this Registration Statement covers such additional
indeterminate number of Common Shares underlying warrants (the "Bridge
Warrants") issued to certain bridge lenders (the "Bridge Lenders") and
Underwriter's Common Share Purchase Warrants (the "Underwriter's
Warrants") as may be issued by reason of adjustments in the number of
Common Shares pursuant to anti-dilution provisions contained in the
Bridge Warrants and Underwriter's Warrants, respectively. Because such
additional Common Shares will, if issued, be issued for no additional
consideration, no registration fee is required.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes 180,000 Common Shares subject to the Underwriter's over-
allotment option.
(4) To be issued to the Underwriter.
(5) Issuable upon exercise of the Underwriter's Warrants.
(6) Issuable upon exercise of the Bridge Warrants and registered on behalf
of the Bridge
Lenders.
(7) Registered on behalf of Selling Stockholders.
(8) Previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 4, 1997
PROSPECTUS
Compu-DAWN, Inc.
1,200,000 Shares of Common Stock, par value $.01 per share
Offering Price Per Share - $5.00
---------------
Compu-DAWN, Inc., a Delaware corporation (the "Company"), hereby offers
1,200,000 shares of Common Stock, par value $.01 per share (the "Common
Shares"). See "Risk Factors" and "Description of Securities". The "Risk Factors"
section begins on page 7 of this Prospectus.
The Company will apply for inclusion of the Common Shares on The Nasdaq
SmallCap Market, although there can be no assurances that an active trading
market will develop even if the securities are accepted for quotation. See "Risk
Factors - Lack of Prior Market for Common Shares; No Assurance of Public Trading
Market or Nasdaq SmallCap Market Listing" and "Risk Factors Penny Stock
Regulations May Impose Certain Restrictions on Marketability of Securities".
Prior to this offering (the "Offering"), there has been no public
market for the Common Shares. It is currently anticipated that the initial
public offering price will be $5.00 per Common Share. The price of the Common
Shares has been determined by negotiations between the Company and E.C. Capital,
Ltd., the underwriter of this Offering (the "Underwriter"), and does not
necessarily bear any relationship to the Company's assets, book value, net worth
or results of operations or any other established criteria of value. For
additional information regarding the factors considered in determining the
initial public offering price of the Common Shares, see "Risk Factors -
Arbitrary Offering Price; Possible Volatility of Stock Price", "Risk Factors -
Lack of Prior Market for Common Shares; No Assurance of Public Trading Market or
Nasdaq SmallCap Market Listing", "Risk Factors - Impact of Proposed Nasdaq
SmallCap Market Rules", "Description of Securities" and "Underwriting".
The registration statement of which this Prospectus forms a part also
covers the resale of an aggregate of 389,200 Common Shares (the "Warrant
Shares") underlying warrants (the "Bridge Warrants") issued to certain bridge
lenders (the "Bridge Lenders") (see "Bridge Financing") and an aggregate of
250,250 Common Shares held by certain stockholders (collectively with the Bridge
Lenders, the "Selling Stockholders"). The Company will not receive any of the
proceeds from the resale of the Common Shares by the Selling Stockholders. The
Common Shares held by the Selling Stockholders may be resold at any time
following the date of this Prospectus, subject to an agreement between the
Bridge Lenders and the Underwriter restricting the transfer of the Warrant
Shares for a period of two years. The Underwriter has agreed with the Company
not to waive the lock-up restriction. The resale of the Common Shares by the
Selling Stockholders is subject to Prospectus delivery and other requirements of
the Securities Act of 1933, as amended (the "Act"). Sales of such Common Shares
or the potential of such sales at any time may have an adverse effect on the
market price of the Common Shares offered hereby. See "Principal and Selling
Stockholders" and "Risk Factors - Shares Eligible for Future Sale May Adversely
Affect the Market".
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<PAGE>
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK
VALUE OF THE COMMON SHARES OFFERED HEREBY AND SHOULD BE
CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" AND "DILUTION".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Price Underwriting Discounts Proceeds to
to Public and Commissions (1) Company (2)
Per Share...... $5.00 $0.50 $4.50
Total (3)...... $6,000,000 $600,000 $5,400,000
(1) Does not reflect additional compensation to be received by the
Underwriter in the form of (i) a non-accountable expense allowance of
$180,000 ($207,000 if the Overallotment Option (as hereinafter defined)
is exercised in full), $50,000 of which has already been paid, (ii) a
three year financial advisory and investment banking agreement
providing for aggregate fees of $108,000 payable in advance at the
closing of this Offering, and (iii) warrants (to be purchased by the
Underwriter for one mil ($.001) per warrant) to purchase 120,000 Common
Shares (10% of the total number of Common Shares sold pursuant hereto)
(the "Underwriter's Warrants"), exercisable for a period of four years,
commencing one year from the date of this Prospectus. The Company and
the Underwriter have agreed to indemnify each other against certain
liabilities, including liabilities under the Act. The Company has been
informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is
therefore unenforceable. See "Underwriting".
(2) Before deducting expenses of the Offering payable by the Company
estimated at $700,000, including the Underwriter's non-accountable
expense allowance and financial advisory fee referred to in footnote
(1) (not assuming the exercise of the Overallotment Option),
registration fees, transfer agent fees, NASD fees, Blue Sky filing fees
and expenses, legal fees and expenses, and accounting fees and
expenses. See "Use of Proceeds" and "Underwriting".
(3) Does not include 180,000 additional Common Shares to cover
overallotments which the Underwriter has an option to purchase for 45
days from the date of this Prospectus at the initial public offering
price, less the Underwriter's discount (the "Overallotment Option"). If
the Overallotment Option is exercised in full, the total Price to
Public will be $6,900,000, Underwriting Discounts and Commissions will
be $690,000, and Proceeds to Company will be $6,210,000. See
"Underwriting."
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<PAGE>
The Common Shares are offered by the Underwriter on a "firm commitment"
basis, when, as and if delivered to and accepted by the Underwriter, and subject
to prior sale, allotment and withdrawal, modification of the offer with notice,
receipt and acceptance by the Underwriter named herein and subject to its right
to reject orders in whole or in part and to certain other conditions. It is
expected that the delivery of the certificates representing the Common Shares
and payment therefor will be made at the offices of the Underwriter on or about
June __, 1997.
E. C. CAPITAL, LTD.
The date of this Prospectus is June ___, 1997.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ SMALLCAP MARKET. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
A SIGNIFICANT PORTION OF THE COMMON SHARES TO BE SOLD IN THIS OFFERING MAY
BE SOLD TO CUSTOMERS OF THE UNDERWRITER. SUCH SALES MAY AFFECT THE MARKET FOR
AND LIQUIDITY OF THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL
BROKER-DEALERS DO NOT MAKE A MARKET IN THE COMPANY'S SECURITIES, AS TO WHICH
THERE CAN BE NO ASSURANCE. SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE COMMON SHARES THROUGH AND/OR WITH
THE UNDERWRITER.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME TO
TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE MARKET FOR THE COMMON SHARES. HOWEVER, THERE IS NO
ASSURANCE THAT THE UNDERWRITER WILL OR WILL NOT CONTINUE TO BE A DOMINATING
INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREBY MAY BE
SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE UNDERWRITER'S PARTICIPATION
IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR
FROM TIME TO TIME. SEE "RISK FACTORS - LACK OF PRIOR MARKET FOR COMMON SHARES;
NO ASSURANCE OF PUBLIC TRADING MARKET OR NASDAQ SMALLCAP MARKET LISTING".
---------------------
INVESTOR SUITABILITY REQUIREMENTS FOR CALIFORNIA OFFEREES
California offerees must meet the following suitability requirements in
order to invest in the Common Shares being offered hereby: the offeree (a) has a
minimum net worth of $250,000 and had during the last tax year, or estimates
that the offeree will have during the current tax year, gross income of $65,000,
or (b) has a minimum net worth of $500,000. Net worth shall be determined
exclusive of home, home furnishings and automobiles.
--------------------
INVESTOR SUITABILITY REQUIREMENTS FOR VIRGINIA OFFEREES
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<PAGE>
Virginia offerees must meet the following investor suitability requirements
in order to invest in the Common Shares being offered hereby: the offeree must
have (a) a net worth of at least $225,000, or (b) a net worth of at least
$60,000 and an annual income of at least $60,000. Net worth in all cases is
exclusive of home, furnishings and automobiles, in addition, an offeree may not
invest more than 10% of the offeree's readily marketable assets in this
Offering.
--------------------
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<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information (including financial
statements and notes thereto) contained in this Prospectus and is qualified in
its entirety by the more detailed information appearing elsewhere herein. In
addition, unless otherwise indicated to the contrary, the information appearing
herein does not give effect to the issuance of (a) 180,000 Common Shares upon
exercise of the Overallotment Option; (b) 120,000 Common Shares upon exercise of
the Underwriter's Warrants; (c) 389,200 Common Shares upon the exercise of the
Bridge Warrants; or (d) 477,400 Common Shares upon the exercise of other
outstanding options and warrants. See "Bridge Financing". However, all
references to Common Shares and prices per share in this Prospectus give
retroactive effect to a 325 for 1 stock split effectuated on October 18, 1996 as
part of the Company's reincorporation in the State of Delaware. See
"Underwriting". Each prospective investor is urged to read this Prospectus in
its entirety.
The Company
Compu-DAWN, Inc. (the "Company") is primarily engaged in the business of
designing, developing, licensing, installing and servicing computer software
products and systems for law enforcement and public safety agencies. The
software systems include computer-aided dispatching, computer interfacing with
state and national crime information databases, advanced mobile on-line radio
computing, automatic vehicle location (employing dynamic map displays), records
management and photo-image database systems. Certain of these applications
utilize telecommunications and space satellite technology, and other
infrastructure, provided by third parties. The Company has developed, licensed
and installed its systems in more than 55 agencies primarily located in the
State of New York.
The Company was incorporated under the name Coastal Computer Systems, Inc.
in New York on March 31, 1983 and was reincorporated in Delaware under its
present name on October 18, 1996.
The Company's executive offices are located at 77 Spruce Street,
Cedarhurst, New York 11516 and its telephone number is (516) 374-6700.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating the Company and its business.
4
<PAGE>
The Offering
Common Shares Being
Offered ............... 1,200,000 shares
Common Shares
Outstanding
Prior to the
Offering (1)........... 1,282,700 shares
Common Shares to be
Outstanding After
the Offering (2)....... 2,482,700 shares
Use of Proceeds........ The net proceeds to the Company from the sale of the
1,200,000 Common Shares offered hereby are estimated to
be $4,700,000. The net proceeds are expected to be
applied in the following approximate percentages for
the following purposes: (i) product enhancement and
development (26.6%); (ii) repayment of indebtedness
(16.4%); (iii) marketing and advertising (13.8%); (iv)
hiring and training of additional personnel (3.2%); (v)
purchase of equipment (3.2%); and (vi) working capital
(36.8%). See "Use of Proceeds".
Risk Factors.......... An investment in the securities offered hereby involves
a high degree of risk and immediate substantial
dilution of the book value of the Common Shares, and
should be considered only by persons who can afford the
loss of their entire investment. See "Risk Factors" and
"Dilution".
Proposed Nasdaq
SmallCap Market
Symbol(3)........... "CODI"
- -----------------
(1) Gives effect to the issuance of 63,000 Common Shares upon the closing of
the Offering pursuant to the conversion, at a price of $5.00 per share, of
$200,000 in indebtedness and $100,000 in accrued and unpaid compensation
owed to Mark Honigsfeld, Chairman of the Board and Chief Executive Officer
of the Company, and $15,000 in accrued and unpaid compensation owed to Dong
W. Lew, President of the Company. See "Use of Proceeds", "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Certain Relationships and Related
Transactions".
(2) Does not give effect to the issuance of (i) 180,000 Common Shares upon
exercise of the Overallotment Option; (ii) 120,000 Common Shares upon
exercise of the Underwriter's Warrants; (iii) 389,200 Common Shares upon
the exercise of the Bridge Warrants; (iv) 156,950 Common Shares upon the
exercise of outstanding options which are currently exercisable (the
"Exercisable Options"); (v) 31,200 Common Shares upon the exercise of other
outstanding warrants (the "Other Warrants"); or (vi) 289,250 Common Shares
upon
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<PAGE>
the exercise of other outstanding options (collectively with the
Exercisable Options and the Other Warrants, the "Other Derivative
Securities"). See "Bridge Financing", "Management Stock Plans", "Certain
Relationships and Related Transactions" and "Underwriting".
(3) Although the Company will apply for inclusion of the Common Shares on The
Nasdaq SmallCap Market, there can be no assurance that the Company's
securities will be included for quotation, or, if so included, that the
Company will be able to continue to meet the requirements for continued
quotation, or that a public trading market will develop or, if such market
develops, that it will be sustained. See "Risk Factors - Lack of Prior
Market for Common Shares; No Assurance of Public Trading Market or Nasdaq
SmallCap Market Listing".
Summary Financial Information
The following summary financial information has been derived from the
financial statements of the Company included elsewhere in this Prospectus. All
amounts are in dollars except the number of Common Shares. The information
should be read in conjunction with the financial statements and the related
notes thereto. See "Financial Statements".
Statement of Operations Data
Year Ended Three Months Ended
December 31, March 31,
1995 1996 1996 1997
---- ---- ---- ----
Revenues ..................... $1,040,181 $ 477,527 $91,519 $185,801
Operating income (loss)........ 129,981 (609,493) (75,865) (453,897)
Net income (loss) ............. 78,660 (570,769) (57,261) (513,056)
Net income (loss) per share.... .05 (.34) (.03) (.31)
Weighted average number of
Common Shares outstanding..... 1,678,913 1,678,913 1,678,913 1,678,913
Balance Sheet Data
December 31, 1996 March 31, 1997
---------------- -----------------------------------
Pro Forma As
Actual Pro Forma(1) Adjusted(1)(2)
Working capital (deficit)... $ 180,236 ($148,064) $36,836 $ 4,179,204
Total assets ............... 2,433,160 2,598,812 2,668,712 5,041,662
Total liabilities .......... 1,153,459 1,457,667 1,142,667 372,667
Total stockholders' equity.. 1,279,701 1,141,145 1,526,045 4,668,995
- ---------------
6
<PAGE>
(1) Gives effect to (i) the exercise of options to purchase 233,000 Common
Shares by Mark Honigsfeld, Chairman of the Board and Chief Executive
Officer of the Company, at a price of $.30 per share, or an aggregate
of $69,900, in April 1997 (the "Honigsfeld Option Exercise"), (ii) the
conversion of $200,000 in loans made by Mr. Honigsfeld to the Company
into 40,000 Common Shares, effective upon the closing of the Offering
(the "Debt Conversion"), and (iii) the conversion of accrued and unpaid
compensation payable to Messrs. Honigsfeld and Lew in the amounts of
$100,000 and $15,000, respectively, into 20,000 and 3,000 Common
Shares, respectively, effective upon the closing of the Offering (the
"Accrued Compensation Conversion").
(2) Adjusted to give effect to the receipt and application of the net
proceeds of approximately $4,700,000 from the sale of the Common Shares
offered hereby.
RISK FACTORS
An investment in the securities offered hereby is speculative and involves
a high degree of risk and substantial dilution, and should only be purchased by
investors who can afford to lose their entire investment. Prospective
purchasers, prior to making an investment, should consider carefully the
following risks and speculative factors associated with this Offering, as well
as other information set forth elsewhere in this Prospectus, including the
information contained in the financial statements herein.
1. Dependence on Offering Proceeds; Possible Need for Additional Financing.
The Company's cash requirements have been and will continue to be significant.
The Company is dependent on the proceeds from this Offering in order to sustain
and further expand its operations. The Company believes that the net proceeds of
this Offering, together with anticipated increased revenues generated from
operations, will be sufficient to conduct the Company's operations for at least
12 months. In the event that the Company's plans change, or the costs of
operations prove greater than anticipated, the Company could be required to
curtail its expansion or seek additional financing sooner than currently
anticipated. Mark Honigsfeld, Chairman of the Board and Chief Executive Officer
of the Company, has agreed to loan to the Company up to $500,000 as and when
needed during the twenty six-month period ending July 1, 1999. Such line of
credit provides for the grant to Mr. Honigsfeld of a security interest in all of
the Company's assets to secure the repayment of up to $200,000 of such loan
proceeds. See "Use of Proceeds", "Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions".
2. Inexperience of Underwriter. This is the first offering underwritten by
the Underwriter. There can be no assurance that the Underwriter's limited
experience will not adversely affect the development of a trading market for, or
liquidity of, the Company's securities. Therefore,
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<PAGE>
purchasers of the Common Shares offered hereby may suffer a lack of liquidity in
their investment or a material diminution of the value of their investment. See
"Underwriting".
3. Downward Trend in Revenues; Current Period and Anticipated Future
Losses. For the years ended December 1996 and 1995, the Company's revenues were
$477,527 and $1,040,181, respectively. For the first quarter of 1997 and 1996,
the Company's revenues were $185,801 and $91,519, respectively. The decline in
revenues between 1995 and 1996 was primarily the result of a decrease in
software sales (i.e. fewer units sold) which occurred due to the Company's focus
on raising capital (commencing in late 1995 and continuing throughout 1996),
strategic planning, and the allocation and devotion of substantial personnel
time to the development of visual computer-aided dispatching (or V-CAD) and new
wireless mobile computing technology. Such actions diverted the Company's
resources away from sales activities. The revenue figures reflect an upturn in
sales activity commencing in early 1997. For the year ended December 31, 1996,
the Company experienced a net loss of $570,769. For the first quarter of 1997
and 1996, the Company had a net loss of $513,056 and $57,261, respectively. The
net loss figures are the result of the incurrence of significant expenses,
including, without limitation, research and development expenses, costs relating
to the enhancement and refining of the Company's current product line, marketing
costs, obligations under new key employee compensation agreements, the lease for
the Company's premises which commenced in September 1996, and general
administrative expenses. The Company believes that, for the foreseeable future,
it will be unable to achieve sufficient additional revenues to offset
anticipated significant operating costs such as the foregoing. Accordingly, the
Company anticipates that operating losses will continue at least for the next 12
months. The Company cannot predict the length of time such operating losses will
continue or the impact such operating losses will have on its financial
condition and results of operations. Additionally, the Company will experience a
nonrecurring deferred financing charge of up to approximately $1,557,050 (which
includes, among other things, the difference between (i) the fair market value,
at the time the Bridge Warrants were issued, of the Common Shares issuable upon
exercisable of the Bridge Warrants ($4.00 per share) and (ii) the original
exercise price ($.50 per share) at the time the promissory notes (the "Bridge
Notes") issued in the Company's bridge financing transaction are repaid (which
will occur on the closing date of the Offering). The Bridge Warrants are
exercisable at any time during the five year period commencing on the closing
date of the Offering at the amended exercise price of $3.00 per share. There can
be no assurance that the Company's technology and products will be able to
compete successfully in the marketplace and/or generate significant revenue, or
that the Company's business will be able to operate profitably. See "Risk
Factors - Competition", "Business - Competition", "Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Results of
Operations".
The Company's quarterly operating results have, in the past, varied and may
in the future vary significantly, depending on facts such as the size, timing
and recognition of revenue from significant software sales and system
integration activity, the time of new product releases and market acceptance of
these new releases, and increases in operating expenses. Thus, the Company's
revenues and results of operations have and may continue to vary significantly
from quarter to quarter, period to period, and year to year based upon frequency
and volume of sales and licensing
8
<PAGE>
of the Company's software applications and providing of consulting services
during such period. Due to the relatively fixed nature of certain of the
Company's costs throughout each quarterly period, including personnel and
facilities costs, the decline of revenues in any quarter typically results in
lower profitability in that quarter. There can be no assurance that the Company
will become profitable or avoid losses in any future period.
4. Immediate and Substantial Dilution; Equity Securities Previously Sold at
Below Offering Price. Upon completion of this Offering, assuming no exercise of
the Overallotment Option, and without giving effect to the exercise of the
Underwriter's Warrant, the pro forma net tangible book value per share of the
Company's Common Shares as of March 31, 1997 would have been $1.88. At the
initial public offering price of $5.00 per share, investors in this Offering
will experience an immediate dilution of approximately $3.12, or 62.4%, in net
tangible book value per share, and existing investors will experience an
increase of approximately $2.07 per share, in each case giving retroactive
effect to the Debt Conversion, the Accrued Compensation Conversion and the
Honigsfeld Option Exercise. The present stockholders of the Company have
acquired their respective equity interest at costs substantially below the
public offering price. Accordingly, to the extent that the Company incurs
losses, the public investors will bear a disproportionate risk of such losses.
See "Dilution", "Bridge Financing", "Management - Executive Compensation",
"Management - Stock Plans" and "Underwriting".
5. Evolving Market; New Product Development; Technological Obsolescence.
The markets for the Company's products are characterized by evolving industry
requirements, rapid technological change and frequent new product introductions
which may result in product or technology obsolescence. Certain companies may be
developing technologies or products of which the Company is unaware which may be
functionally similar, or superior, to some or all of those offered by the
Company. As a result, the ability of the Company to compete will depend on its
ability to adapt, enhance and improve its existing products and technology and,
if necessary, to develop and introduce new products and technology to the
marketplace in a timely and cost- competitive manner. There can be no assurance
that the Company will be able to compete successfully, that its competitors or
future competitors will not develop technologies or products that render the
Company's products or technology obsolete or less marketable, or that the
Company will be able to successfully enhance its products or technology or adapt
them satisfactorily.
New product development efforts are subject to all of the risks inherent in
the development of new technology and products including unanticipated delays,
expenses, technical problems or difficulties, as well as the possible
insufficiency of funding to complete development. There can be no assurance as
to when, or whether, new products will be successfully developed. In addition,
no assurance can be given that additional technologies can be developed within a
reasonable development schedule, if at all. Further, there can be no assurance
that the Company would have sufficient economic or human resources to complete
such development in a timely manner, or at all, or that it could enter into
economically reasonable arrangements for the completion of such products by
third parties.
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Following the development of additional products, the Company must
successfully complete a testing program for the products before they can be
marketed. Although the Company believes that its testing program is adequate,
unforeseen technical problems arising out of such testing could significantly
and adversely affect the Company's ability to produce and market a commercially
acceptable product. In addition, the Company's success will depend upon its
current and proposed technologies and products meeting acceptable cost and
performance criteria in the marketplace. There can be no assurance that the
technologies and products will meet applicable price or performance objectives
or that unanticipated technical or other problems will not occur which would
result in increased costs or material delays. Also, there can be no assurance
that new technologies will be developed in the future by the Company. If
superior technology is developed by the Company's competitors, such products may
render the Company's present products obsolete, and thus would have a materially
negative impact on the Company. See "Business".
6. Failure to Integrate Various Product Introductions and Offerings. The
Company believes that significant market opportunities exist for a provider of
fully integrated software designed for the public safety marketplace. One of the
Company's business strategies is to provide a "total solution" fully integrated
software product line used in public safety. Although the Company has had some
success in the past integrating its software products with other systems, there
can be no assurance that the Company will be able to fully integrate these
applications, or newly created applications, or that achieving such integration
will enable the Company to improve its competitive position in the software
market. Moreover, the Company's inability to further integrate its products
could have a material adverse effect on the Company's business and results of
operations. See "Business".
7. Dependence on Strategic Business Alliances and Subcontractor
Relationships. Historically, the Company's customers have been in the "small
size" and "medium size" market segments (i.e. public safety departments or
agencies with fewer than 200 sworn officers or personnel). The Company's
business strategy includes the development of systems for the "large size"
market segment. In order to enter such market, the Company, in all likelihood,
will need to establish strategic business alliances and/or subcontractor
relationships with large systems integrators and public network providers.
Business alliances have been entered into with AT&T Wireless Data, Inc. ("AT&T")
and GTE Mobilnet Service Corp. ("GTE"), and a subcontractor relationship has
been established with Data General Corporation ("Data General"). These
arrangements set forth the relationship of the parties in the event of a system
installation and do not relate to a particular customer. To date, no customers
have been secured under these arrangements, no revenues have been derived from
these arrangements and no assurances can be given that any revenues will be
derived from these arrangements in the future. The agreement between the Company
and AT&T provides, among other things, (i) minimum technical support standards
(if technical support is required in a particular project) which if not met
could result in a reduction of the amount of technical support fees paid to the
Company, and (ii) minimum revenue requirements to entitle the Company to a goal
attainment fee. Additionally, failure to meet certain minimum revenue
requirements will give AT&T the right to terminate the agreement. The agreement
between the Company and GTE provides, among other things, the GTE has the right
not to pay the Company any compensation during any period in which the Company
fails to materially perform its obligations. No assurances can be given that, in
the event any projects are undertaken under the above described agreements, that
the Company will meet any of the imposed standards, that minimum revenue levels
will be achieved, or that the Company will be able to materially perform its
obligations. If any of these standards or levels are not met, the Company's
compensation may be reduced or eliminated and possibly result in early
termination of certain of these agreements. In addition, no assurances can be
given that the Company will renew its current, or enter into any other, business
alliances or subcontractor relationships. The failure of the Company to maintain
current, or enter into such alliances or relationships would have a material
adverse effect upon the Company's ability to implement its business plan. See
"Business - Sales and Marketing".
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8. Intellectual Property Protection and Infringement. The Company's
technology is not patented and the Company has not filed any patent
applications. The Company instead currently relies on trade secrets and
copyright rights to establish and protect certain proprietary rights in its
products. These measures afford limited protection, and there can be no
assurance that the steps taken by the Company to protect these proprietary
rights will be adequate to prevent misappropriation of its technology or the
independent development by others of similar technology especially in view of
the limited resources of the Company and the potential cost of any legal action
to enforce such rights.
The Company has not obtained any copyright registrations. Registration of a
copyright with the United States copyright office is not a requirement to make a
copyright legally effective, but generally provides a rebuttable presumption of
its validity. In the absence of a registered copyright, the Company will be
unable to bring an action for copyright infringement. A copyright may be
registered at any time prior to bringing an infringement action. If the Company
registers a copyright after the infringement occurs (and prior to bringing the
infringement action), it may be limited in its ability to prove its case and
will be precluded from seeking statutory damages (in lieu of actual damages and
lost profits, and attorney's fees). The Company intends to seek registered
copyright protection under United States law with respect to some of its
software, although no assurance can be given that the Company will obtain such
protection. While the Company believes that it would be impractical and not
cost-effective for a third party to attempt to copy software such as that used
in its products, unauthorized parties, nevertheless, might attempt to copy
aspects, or reverse engineer certain, of the Company's products, or may obtain
and use information that the Company regards as proprietary. The cost of, and
time dedicated to, enforcement by the Company of its rights, if any, could be
significant. Regardless of the outcome of such enforcement proceedings, there
can be no assurance that such proceedings will be effective. In addition,
although the Company believes that there are no infringement or trade secret
misappropriation claims against the Company and no grounds for the assertion of
any such claims, the cost of responding to any such assertion, should it be
made, could be significant and there is no assurance that the Company would
prevail. See "Risk Factors - Competition", "Business Intellectual Property
Rights and Licenses" and "Business - Competition".
9. Competition. The Company's products compete with those of numerous
well-established companies, which design, sell, produce or market software
systems for public safety operations. Many of these companies have substantially
greater financial, technical and other resources than those of the Company, and
they may have established reputations for success in the development, licensing,
sale and service of their products and technology. Certain of those competitors
have the financial resources necessary to enable them to withstand substantial
price competition or downturns in the market for computer software products used
by public safety agencies and organizations. In addition, the Company
anticipates that a material portion of the sale of its products will be made
through the competitive bid process. There can be no assurance that the Company
will be able to compete effectively in such process. See "Business -
Competition" and "Business - Products and Services".
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10. Limited Sales and Marketing Experience. The Company has limited
experience in the areas of sales, marketing and distribution. The Company's
sales and marketing staff will require additional personnel in the future. There
can be no assurance that the Company will be able to build an adequate sales and
marketing staff, that establishing such a sales and marketing staff will be
cost-effective, or that the Company's sales and marketing efforts will be
successful. See "Risk Factors Challenges to Management of Growth" and "Business
- - Sales and Marketing".
11. Dependence on Significant Customers. Although the composition of the
Company's largest customers has changed from year to year, historically the
Company's revenues have been materially dependent on a limited number of
customers. Generally, the Company does not receive repeat business from its
customers for the design and installation of software systems. Further revenues
from customers to whom the Company has licensed software systems are usually
derived from maintenance and support contracts. Accordingly, the Company does
not believe that the makeup of its current customers is material to an
understanding of the Company's future business prospects. While the Company
expects its customer base to continue to expand, a limited number of large
customers may continue to account for a significant portion of the Company's
sales during any given period for the foreseeable future. As such, the Company's
financial condition and results of operations may be adversely affected by a
delay, reduction or cancellation of orders from one or more of its current or
future significant customers or the loss of one or more such customers. See
"Risk Factors - Lengthy Sales Cycle" and "Business - Customers".
12. Product Concentration. Licensing of products and the provision of
maintenance and support services to the law enforcement and public safety market
represented substantially all of the Company's revenues for the fiscal years
ended December 31, 1995 and 1996 and the first quarter of 1997, and are expected
to continue to account for all of the Company's revenues for the foreseeable
future. Any factors adversely affecting the Company's products, such as the
introduction of superior competitive products or shifts in the needs of the
marketplace, would have a material adverse effect on the Company's financial
condition and results of operations. See "Risk Factors Competition", "Business -
Products and Services" and "Business-Competition".
13. Lengthy Sales Cycle. Licensing of the Company's software products
typically involves a detailed technical evaluation and a commitment of capital,
technical, marketing and other resources, with the attendant delays frequently
associated with customers' internal procedures to approve large capital
expenditures and to test and accept new technologies that affect the customer's
operations infrastructure. For those and other reasons, the sales cycle
associated with the Company's products is typically lengthy and subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance procedure, that are beyond the Company's control. Because of
the lengthy sales cycle and the generally large size of customer orders, if
revenues forecasted from a specific customer for a particular fiscal quarter are
not realized in that quarter, the Company's operating results for that quarter
could be materially adversely affected. See "Risk Factors - Dependence on
Significant Customers".
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14. New Management Team; Dependence on Executive Management; Need to Retain
Key Personnel. The Company's executive management team, Mark Honigsfeld,
Chairman of the Board and Chief Executive Officer of the Company, Dong W. Lew,
President and Chief Operating Officer of the Company, and Louis Libin, Chief
Technology Officer of the Company, have worked together for only a brief period.
Mr. Honigsfeld was elected Chairman of the Board of the Company in August 1996
and was elected Chief Executive Officer of the Company effective as of October
1, 1996. Mr. Libin was elected as a director of the Company and became the
Company's Chief Technology Officer in January 1997 and only began serving as
Chief Technology Officer on a full-time basis in March 1997.
The Company has a three-year employment agreement with each of Messrs.
Honigsfeld, Lew and Libin, each of which includes, among other things, a
non-competition and non- solicitation provision. However, each agreement
provides that the employee can terminate his agreement with the Company at any
time upon 30 days notice for any reason. Additionally, Mr. Honigsfeld's
employment agreement allows him to devote up to 10% of his working time, and Mr.
Libin's employment agreement allows him to devote up to one day a week, to other
endeavors which are not competitive with the Company. The loss of the services
of either Mr. Honigsfeld, Mr. Lew or Mr. Libin would have a material adverse
effect on the Company's business.
The Company has obtained "key-man" life insurance policies on the lives of
Messrs. Honigsfeld and Libin, each of which provides for a death benefit to the
Company of $1,000,000. The Company has been unable to secure life insurance
coverage for Mr. Lew in light of his age and history as a smoker. With regard to
Messrs. Honigsfeld and Libin, there can be no assurance that the death benefit
would be adequate to fund the Company's needs until a replacement could be
found.
The success of the Company is also dependent upon its ability to hire and
retain additional qualified and talented executive, technical and marketing
personnel. There is always intense competition for qualified personnel in the
Company's business and its inability to recruit qualified personnel could have a
material adverse effect on its business and results of operations. There can be
no assurance that the Company will be able to retain the members of its current
management or personnel, or that it will be able to successfully attract and
retain qualified management, engineering and sales or other personnel in the
future. See "Management Employment Agreements".
15. Dependence on Licensors. The Company currently relies on operating
system software owned by certain third parties for certain software and platform
operating systems which the Company uses to create its products, and in some
cases to bundle with its own software in its products. The licenses are
perpetual in duration subject to the payment of an annual maintenance and
enhancement fee, which is based on the number of end users of such operating
system software, or a monthly sublicense fee, which is based upon the number of
customers to which the Company's products (which includes such licensed
operating system software) are licensed. Although the Company believes that
there are alternatives to the operating system software that the Company
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<PAGE>
currently uses, termination of any of these licenses could delay the Company
from producing its products for approximately three to six months as a result of
the need to revise the Company's software to make it compatible with such
alternative operating system software. Such result would have a material adverse
effect on the Company. See "Business- Intellectual Property Rights and
Licenses".
16. Challenges to Management of Growth. The Company anticipates a period of
rapid growth that is expected to place a strain on the Company's administrative,
financial and operational resources. The Company's ability to manage any growth
effectively will require it to continue to improve its operational, financial
and management controls, reporting systems and procedures, install new
management information and control systems, and train, motivate and manage its
employees. There can be no assurance that the Company will install such
management information and control systems in an efficient and timely manner or
that the new systems will be adequate to support the Company's operations.
Because of the complexity of its products, the Company has in the past
experienced, and expects in the future to experience, a time lag between the
date on which technical and sales personnel are hired and the time at which such
persons become fully productive. In addition, customer satisfaction could be
substantially affected by the quality of the Company's post-sales system
implementation process and, in many cases, its maintenance and service
capabilities. If the Company is unable to hire, train and retain qualified
personnel and consultants to implement these services or is unable to manage the
post-sales process effectively, its ability to attract repeat sales or obtain
references for new prospective sales could be adversely affected. Such result
could limit the Company's growth opportunities. Additionally, many of the
challenges of growth may be unforeseeable and beyond the control of the Company.
If the Company is unable to manage growth effectively, such that the Company's
sales and marketing efforts exceed its capacity to design, develop, install,
maintain and service its products, or if new employees are unable to achieve
adequate performance levels, the Company's business, operating results and
financial condition could be adversely affected.
17. Unascertainable Risks Related to Possible Unspecified Acquisitions. The
Company intends to explore opportunities to add, through acquisition or
licensing, technology or products to enhance or add to its current product line,
or to acquire a customer base or sales organization to augment the Company's
infrastructure. The Company is not actively seeking any acquisition at this
time. Although the Company anticipates it will follow certain general criteria
in determining whether or not to pursue any acquisition or license, management
will have sole discretion over whether or not to engage in any such transaction.
There can be no assurance that the Company will identify any acquisition or
licensing candidates or, if it does, that it will be able to reach any
agreements to acquire or license technology or products, or acquire assets, on
terms acceptable to the Company. Since the Company has not identified any
potential acquisition candidates, there is no basis for the Company to evaluate
the possible merits or risks relating to the technology or assets which may be
acquired. To the extent that the Company effects an acquisition of technology or
products in the early stage of development or growth (including technology or
products which have not been fully tested or marketed), the Company will be
subject to numerous risks inherent in developmental technology and an additional
high level of risk associated with high-technology
14
<PAGE>
industries based on innovative technologies or processes. Furthermore, future
acquisition transactions may require the Company to obtain additional financing
from banks or other financial institutions or to undertake debt or equity
financing. No assurance can be given that the Company would be able to obtain
financing upon commercially reasonable terms, or at all. Furthermore, equity
financing will result in a dilution of existing stockholders of the Company,
which may be significant. If debt financing ultimately proves to be available,
any borrowings may subject the Company to various risks traditionally associated
with the incurring of indebtedness, including the risks of interest rate
fluctuations and insufficiency of cash flow to pay principal and interest. To
the extent any such transaction involves the acquisition of a business, there
can be no assurance that the Company will successfully integrate the operations
of the acquired business with those of the Company, or that all of the benefits
expected from such integration will be realized. Any delays or unexpected costs
incurred in connection with such integration could have an adverse effect on the
combined company's business, operating results or financial condition.
Furthermore, there can be no assurance that the operations, management and
personnel of the companies will be compatible or that the Company will not
experience the loss of key personnel. The amount of net proceeds of this
Offering, if any, expended with respect to an acquisition will be determined by
the Board of Directors of the Company. In most cases each acquisition may be
consummated without seeking and obtaining stockholder approval, in which case,
the stockholders will not have an opportunity to review the financial statements
of an acquisition candidate. Although the Company will endeavor to evaluate the
risks inherent in a particular acquisition, there can be no assurance that the
Company will properly ascertain or assess such significant risk factors. See
"Risk Factors - Limited Sales and Marketing Experience", "Business - Products
and Services" and "Business - Sales and Marketing".
18. International Expansion. As part of the Company's long range marketing
plan, the Company intends, in the future, to explore opportunities to expand its
operations into international markets which could require significant management
attention and financial resources. Currently, the Company has not developed any
international marketing strategy, has not given any significant attention to
international marketing, and has no timetable in mind to implement an
international marketing plan. For the foreseeable future, the Company does not
expect international marketing activities to be material nor does it have any
current plans to devote significant capital or resources to international
marketing. There can be no assurance that the Company's efforts to develop
international sales and support channels will be successful. International sales
are subject to a number of risks, including potentially longer payment cycles,
unexpected changes in regulatory requirements, import and export restrictions
and tariffs, difficulties in staffing and managing foreign operations, the
burden of complying with a variety of foreign laws, greater difficulty in
accounts receivable collection, potentially adverse tax consequences, currency
fluctuations and potential political and economic instability. Additionally, the
protection of intellectual property may be more difficult and costly to enforce
outside of the United States. In the event that the Company is successful in
expanding its sales and operations internationally, the imposition of, or change
in, price controls or other restrictions on foreign currencies could materially
affect the Company's business, operating results and financial condition.
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<PAGE>
19. Control by Existing Management and Stockholders; Effect of Certain
Anti- Takeover Considerations. Upon completion of the Offering, the Company's
directors, executive officers and certain principal stockholders and their
affiliates will own beneficially approximately 39.3% of the Common Shares
(giving effect to the exercise of the Bridge Warrants and sales of Common Shares
by the Selling Stockholders, and without giving effect to the exercise of the
Overallotment Option). Accordingly, such holders, if acting together, will have
the ability to exert significant influence over the election of the Company's
Board of Directors and other matters submitted to the Company's stockholders for
approval. The voting power of these holders may discourage or prevent any
proposed takeover of the Company unless the terms thereof are approved by such
holders. Pursuant to the Company's Certificate of Incorporation, Preferred
Shares may be issued by the Company in the future without stockholder approval
and upon such terms as the Board of Directors may determine. The rights of the
holders of Common Shares will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Shares that may be issued in the
future. The issuance of Preferred Shares could have the effect of discouraging a
third party from acquiring a majority of the outstanding Common Shares of the
Company and preventing stockholders from realizing a premium on their Common
Shares. The Certificate of Incorporation also provides for staggered terms for
the members of the Board of Directors. A staggered Board of Directors, and
certain provisions of the Company's by-laws and of Delaware law applicable to
the Company (which law prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless it is approved in a prescribed manner), could delay or make
more difficult a merger, tender offer or proxy contest involving the Company.
See "Management", "Principal and Selling Stockholders" and "Description of
Securities".
20. Broad Discretion in Application of Proceeds; Repayment of Indebtedness.
While the Company intends to use the net proceeds of this Offering as described
in the "Use of Proceeds" section of this Prospectus, the Company has broad
discretion to adjust the application and allocation of such net proceeds in
order to address changed circumstances and opportunities. In addition, a
significant portion of the net proceeds of the Offering (36.8%) is allocated for
working capital purposes. As a result of the foregoing, the success of the
Company will be substantially dependent upon the discretion and judgment of its
management with respect to the application and allocation of the net proceeds of
this Offering. Pending use of the proceeds, the funds will be invested in
certificates of deposit, high grade commercial paper and government securities
or other low risk investments. See "Use of Proceeds".
The Company intends to utilize an aggregate of $770,000, or approximately
16.4% of the net proceeds of this Offering, to repay promissory notes issued in
connection with the Company's bridge financing transaction in October 1996. As a
result, these proceeds will not be available to fund future business activities.
See "Use of Proceeds", "Bridge Financing" and "Management".
21. Lack of Prior Market for Common Shares; No Assurance of Public Trading
Market or Nasdaq SmallCap Market Listing. Prior to this Offering, no public
trading market
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existed for the Common Shares. There can be no assurances that a public trading
market for the Common Shares will develop or that a public trading market, if
developed, will be sustained. Although the Company anticipates that, upon
completion of this Offering, the Common Shares will be eligible for inclusion on
The Nasdaq SmallCap Market, no assurance can be given that the Common Shares
will be listed thereon. Under prevailing rules of The Nasdaq Stock Market, Inc.,
in order to qualify for initial quotation of securities on The Nasdaq SmallCap
Market, a company, among other things, must have at least $4,000,000 in total
assets, $2,000,000 in total capital and surplus, $1,000,000 in market value of
public float and a minimum bid price of $3.00 per share. Although the Company
may, upon the completion of this Offering, qualify for initial quotation of the
Common Shares on The Nasdaq SmallCap Market, in order for the Common Shares to
continue to be listed thereon, the Company, among other things, generally must
have $2,000,000 in total assets, $1,000,000 in total capital and surplus,
$1,000,000 in market value of public float and a minimum bid price of $1.00 per
share.
Although it has no legal obligation to do so, the Underwriter may from time
to time act as a market maker and may otherwise effect and influence
transactions in the Company's securities. However, there is no assurance that
the Underwriter will continue to effect and influence transactions in the
Company's securities. The prices and liquidity of the Company's Common Shares
may be significantly affected by the degree, if any, of the Underwriter's
participation in the market. The Underwriter may voluntarily discontinue such
participation at any time. Further, the market for, and liquidity of, the
Company's Common Shares may be materially adversely affected by the fact that a
significant portion of the Common Shares may be sold to customers of the
Underwriter. See "Risk Factors - Inexperience of Underwriter", "Risk Factors -
Impact of Proposed Nasdaq SmallCap Market Rules", "Risk Factors - 'Penny Stock'
Regulations May Impose Certain Restrictions on Marketability of Securities" and
"Underwriting".
22. Impact of Proposed Nasdaq SmallCap Market Rules. The Nasdaq Stock
Market, Inc. has proposed a rule change which, if adopted, would impose
substantially more stringent criteria for the initial and continued listing of
securities on The Nasdaq SmallCap Market. The proposed new rules provide that,
for initial listing on The Nasdaq SmallCap Market, a company would need to have,
among other things, (i) either net tangible assets (i.e., net of goodwill) of
$4,000,000, a market capitalization of $50,000,000 or net income for two of the
last three fiscal years of $750,000, (ii) a minimum market value of public float
of $5,000,000, (iii) a minimum bid price of $4.00 per share, and (iv) either one
year of operating history or a market capitalization of $50,000,000. For
continued listing on The Nasdaq SmallCap Market, a company would need to have,
among other things, (i) either net tangible assets of $2,000,000, a market
capitalization of $35,000,000, or net income for two of the last three fiscal
years of $500,000, and (ii) a minimum market value of public float of
$1,000,000. Additionally, for both initial listing and continued listing on The
Nasdaq SmallCap Market, companies would be required to have at least two
independent directors, and an Audit Committee, a majority of the members of
which would need to be independent directors.
If the Company is unable to satisfy the requirements for quotation on The
Nasdaq SmallCap Market, trading, if any, in the Common Shares offered hereby
would be conducted in the
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over-the-counter market in what is commonly referred to as the "pink sheets" or
on the NASD OTC Electronic Bulletin Board. As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the securities offered hereby. The above-described rules may adversely
affect the liquidity of the market for the Company's securities. If a trading
market does in fact develop for the Common Shares offered hereby, there can be
no assurance that it will be maintained. In any event, because certain
restrictions may be placed upon the sale of securities at prices under $5.00 per
share, if the price of the Common Shares falls below such threshold, unless such
Common Shares qualify for an exemption from the "penny stock" rules, such as a
listing on The Nasdaq SmallCap Market, some brokerage firms will not effect
transactions in the Company's securities and it is unlikely that any bank or
financial institution will accept such securities as collateral. Such factors
could have a material adverse affect in developing or sustaining any market for
the Common Shares. See "Risk Factors - Lack of Prior Market for Common Shares;
No Assurance of Public Trading or Nasdaq SmallCap Market Listing".
23. Arbitrary Offering Price; Possible Volatility of Stock Price. The
initial public offering price of the Common Shares was determined by negotiation
between the Company and the Underwriter, may not be indicative of the market
price for such securities in the future, and does not necessarily bear any
relationship to the Company's assets, book value, net worth or results of
operations of the Company or any other established criteria of value. Among the
factors considered in determining the price of the Common Shares were the
history of, and prospects for, the industry in which the Company operates,
estimates of the business potential of the Company, the present state of the
development of the Company's business, the Company's financial condition, an
assessment of the Company's management, the general condition of the securities
markets at the time of this Offering, and the demand for similar securities of
comparable companies. It should be noted that the stock market in recent years
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of many smaller companies. Frequently, such
fluctuations have been unrelated or disproportionate to the operating
performance of such companies. These fluctuations, as well as general economic
and market conditions, may have a material adverse effect on the market price of
the Common Shares. See "Underwriting", "Description of Securities" and
"Financial Statements".
24. "Penny Stock" Regulations May Impose Certain Restrictions on
Marketability of Securities. The Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. If, as anticipated,
the Common Shares offered hereby are authorized for quotation on The Nasdaq
SmallCap Market upon the completion of this Offering, such securities will
initially be exempt from the definition of "penny stock". If the Common Shares
offered hereby are removed from listing on The Nasdaq SmallCap Market at any
time, the Company's Common Shares may become subject to rules that impose
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent
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to the transaction prior to the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the rules require the delivery, prior to
the transaction, of a risk disclosure document mandated by the Commission
relating to the penny stock market. The broker-dealer must also disclose the
commission payable to both the broker-dealer and the registered representative,
current quotations for the securities and, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Consequently, the "penny
stock" rules may restrict the ability of broker-dealers to sell the Company's
Common Shares and may affect the ability of purchasers in this Offering to sell
the Company's Common Shares in the secondary market as well as the price at
which such purchasers can sell any such Common Shares.
25. No Dividends. The Company has never paid any dividends on its Common
Shares and does not intend to pay dividends on its Common Shares in the
foreseeable future. Any earnings which the Company may realize in the
foreseeable future are anticipated to be retained to finance the growth of the
Company. See "Dividend Policy" and "Description of Securities".
26. Shares Eligible for Future Sale May Adversely Affect the Market. All of
the Company's outstanding Common Shares are "restricted securities" and, in the
future, may be sold upon compliance with Rule 144 or pursuant to registration
under the Act (see discussion below with respect to the registration of Common
Shares held by certain stockholders of the Company and underlying the Bridge
Warrants held by the Bridge Lenders). Rule 144 currently provides, in essence,
that a person holding "restricted securities" for a period of one year may sell
an amount every three months up to the greater of (a) 1% of the Company's issued
and outstanding securities of that class of securities or (b) the average weekly
volume of sales of such securities during the four calendar weeks preceding the
sale if there is adequate current public information available concerning the
Company. Additionally, non-affiliates (who have not been affiliates of the
Company for at least three months) may sell their "restricted securities" in
compliance with Rule 144 without volume limitations after they have held such
securities for a period of two years. An aggregate of 406,250 Common Shares have
been owned by Mr. Lew for more than one year. However, such shares are subject
to an agreement with the Underwriter restricting the public sale thereof for a
period of one year without the Underwriter's consent.
The Company is registering for resale 250,250 Common Shares held by certain
stockholders. In addition, the Company is registering for resale the 389,200
Common Shares underlying the Bridge Warrants. Such Common Shares may be resold
at any time following the date of this Prospectus, subject to an agreement
between each of the Bridge Lenders and the Underwriter restricting the
transferability of the Warrant Shares for a period of two years. Prospective
investors should be aware that the possibility of resales by the Selling
Stockholders, as well as other stockholders of the Company, may have a material
depressive effect on the market price of the Company's Common Shares in any
market which may develop. See "Bridge Financing", "Principal and Selling
Stockholders" and "Underwriting".
19
<PAGE>
27. Limitations on Director Liability. The Company's Certificate of
Incorporation provides, pursuant to Delaware law, that a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, with certain exceptions.
These provisions may discourage stockholders from bringing suit against a
director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by stockholders on behalf of the Company against
any director. In addition, the Company's Certificate of Incorporation provides
for mandatory indemnification of directors and officers to the fullest extent
permitted or not prohibited by Delaware law. See "Description of Securities
Limitation on Liability of Directors; Indemnification".
28. Impact of Inflation and Changing Interest Rates. Since the inception of
operations, inflation has not significantly affected the operating results of
the Company. However, inflation and changing interest rates have a significant
effect on the economy in general and, therefore, could affect the operating
results of the Company in the future.
29. Outstanding Options and Warrants. As of the date of this Prospectus,
there are outstanding options and warrants for the purchase of 866,600 Common
Shares at exercise prices ranging from $.30 to $5.00 per share. In addition, the
Underwriter will receive warrants for the purchase of up to 120,000 Common
Shares at an exercise price of $8.25 per share. For the life of the options and
warrants, the holders thereof will have the opportunity to profit from a rise in
the market price of the Company's Common Shares with a resulting dilution in the
interests of other stockholders. The Company may find it more difficult to raise
capital for its business if the need should arise while the options and warrants
are outstanding. At any time when the holders of the options and warrants might
be expected to exercise them, the Company would probably be able to obtain
additional capital on more favorable terms. See "Management - Stock Plans",
"Certain Relationships and Related Transactions" and "Underwriting".
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,200,000 Common
Shares offered hereby are estimated to be $4,700,000 (after deducting
underwriting discounts of $600,000 and other expenses of this Offering estimated
to be $700,000, including the Underwriter's non-accountable expense allowance in
the amount of 3% of the gross proceeds of the Offering, and a $108,000 financial
consulting fee payable to the Underwriter at the closing) (but not considering
any exercise of the Overallotment Option or the Underwriter's Warrants). The
Company, based upon all currently available information, intends to utilize such
net proceeds approximately as follows:
Approximate Approximate
Amount of Percentage
Net Proceeds of Net Proceeds
Product enhancement and development(1) 1,250,000 26.6%
Repayment of indebtedness (2) 770,000 16.4%
Marketing and advertising (3) 650,000 13.8%
Hiring and training of additional personnel 150,000 3.2%
Purchase of equipment 150,000 3.2%
Working capital (4) 1,730,000 36.8%
----------- ------
Total $ 4,700,000 100.0%
=========== ======
(1) Includes, without limitation, costs to develop a radio modem to be used in
connection with mobile computing software systems. See "Business -
Products".
20
<PAGE>
(2) Represents the repayment of the Bridge Notes in the aggregate principal
amount of $770,000 issued in connection with the Company's bridge financing
transaction in October 1996. The Bridge Notes are due and payable upon the
closing of the Offering. If such closing occurs on or before September 15,
1997, no interest will be payable on the Bridge Notes. If the Offering
closes after such date, interest shall accrue on the principal of the
Bridge Notes, from the date such Bridge Notes were issued, at the rate of
12% per annum. See "Risk Factors - Broad Discretion in Application of
Proceeds; Repayment of Indebtedness" and "Bridge Financing".
(3) See "Business - Sales and Marketing".
(4) To be used for general operating and overhead expenses. Additionally, the
Company may use a portion of the proceeds of this Offering allocated to
working capital to acquire technology or assets to expand or enhance its
product line and business. At present, the Company has not identified any
acquisition candidates, nor can it predict that it will identify any
appropriate acquisition candidates in the future. The Company is not
actively seeking any acquisition candidates at this time. See "Risk Factors
- Unascertainable Risks Related to Possible Unspecified Acquisitions" and
"Business - Products and Services".
The amounts set forth above are estimates. Should a reapportionment or
redirection of funds be determined to be in the best interests of the Company,
the actual amount expended to finance any category of expenses may be increased
or decreased by the Company's management, at its discretion.
The Company believes that the proceeds of this Offering will enable the
Company to expand its business, which the Company anticipates, but cannot
assure, will result in an increase in annual revenues. The Company believes that
the net proceeds of this Offering, together with anticipated increased revenues
generated from operations, will be sufficient to conduct the Company's
operations for at least 12 months. See "Risk Factors - Dependence on Offering
Proceeds; Possible Need for Additional Financing".
It is anticipated that, to the extent that the Company's expenditures are
less than projected and/or the proceeds of this Offering increase as a result of
the exercise by the Underwriter of its Overallotment Option, the resulting
balances will be retained and used for general working capital purposes.
Conversely, to the extent that such expenditures require the utilization of
funds in excess of the amounts anticipated, additional financing may be sought
from other sources, including Mr. Honigsfeld pursuant to the line of credit
discussed under "Certain Relationships and Related Transactions". There can be
no assurance that any additional financing will be available on terms acceptable
to the Company or otherwise. See "Risk Factors - Dependence on Offering
Proceeds; Possible Need for Additional Financing" and "Risk Factors - Risks
Attendant to Expansion".
Pending use of the proceeds, the funds will be invested in certificates of
deposit, high grade commercial paper and government securities, or other low
risk investments.
21
<PAGE>
DILUTION
All references herein to net tangible book value, net tangible book value
per Common Share and the number of Common Shares outstanding assume no exercise
of the Underwriter's Overallotment Option or the Underwriter's Warrants. See
"Underwriting".
As of March 31, 1997, the Company had an aggregate of 986,700 Common Shares
outstanding and a net tangible book value (deficit) of ($628,273), or ($.64) per
share. After giving retroactive effect to the Debt Conversion, the Accrued
Compensation Conversion, and the Honigsfeld Option Exercise (collectively the
"Pro Forma Transactions"), the Company's net tangible book value (deficit) as of
March 31, 1997 would have decreased by $384,900 to ($243,373) and its net
tangible book value (deficit) per share as of March 31, 1997 would have
decreased by $.45 per share to $(.19) per share. Net tangible book value per
share represents the total amount of the Company's tangible assets, less the
total amount of its liabilities, divided by the total number of Common Shares
outstanding.
After giving retroactive effect to the Pro Forma Transactions, and the sale
of 1,200,000 Common Shares by the Company at the Offering price of $5.00 per
Common Share, with net proceeds of $4,700,000, the net tangible book value of
the Company as of March 31, 1997 would have been $4,668,995, or $1.88 per Common
Share. This amount represents an immediate dilution (the difference between the
price per Common Share to purchasers in this Offering and the pro forma net
tangible book value per Common Share as of March 31, 1997, after giving
retroactive effect to the Pro Forma Transactions and the issuance of the
1,200,000 Common Shares) of approximately $3.12, or 62.4%, per Common Share to
new investors and an immediate increase (the difference between the pro forma
net tangible book value per Common Share as of March 31, 1997, after giving
effect to the issuance of the 1,200,000 Common Shares, and the pro forma net
tangible book value per Common Share as of March 31, 1997, before giving effect
to the Offering), in each case giving retroactive effect to the Pro Forma
Transactions of approximately $2.07, or 41.4%, per Common Share to the Company's
current stockholders. Such increase to the Company's current stockholders is
solely attributable to the cash price paid by purchasers of the Common Shares
offered for sale by the Company.
22
<PAGE>
<TABLE>
The following table illustrates the per share dilution as of March 31, 1997:
<S> <C> <C>
Public offering price per share (1)......................... $5.00
Net tangible book value (deficit) per share
historical at March 31, 1997.............................. ($.64)
Increase per share attributable to the
Pro Forma Transactions(2)................................ .45
-----
Net tangible book value per share (deficit) before
giving effect to the Offering(2)......................... (.19)
Increase per share attributable to the sale of the
Common Shares offered hereby ............................. 2.07
-----
Pro forma net tangible book value per share after the
Offering (2) (3) ......................................... 1.88
----
Dilution per share to purchasers in the Offering (4) ....... $3.12
====
</TABLE>
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(2) Gives effect to the Debt Conversion, and the Accrued Compensation
Conversion and the Honigsfeld Option Exercise.
(3) After deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(4) Does not give effect to the exercise of the Underwriter's Overallotment
Option, the Underwriter's Warrants, the Bridge Warrants, or the Other
Derivative Securities for the purchase of 477,400 Common Shares of the
Company. See "Bridge Financing", "Management - Stock Option Plan", "Certain
Relationships and Related Transactions", "Description of Securities -
Common Shares" and "Underwriting".
The following table sets forth the relative cost and ownership percentage
of the Common Shares offered hereby as compared to the Common Shares outstanding
immediately prior to the Offering.
<TABLE>
<CAPTION>
Common Shares Average
Acquired Total Consideration Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Current Stockholders........ 1,282,700(1) 51.7% $ 553,325 8.4% $.43
Purchasers of Common
Shares in the Offering... 1,200,000(2) 48.3% $6,000,000 91.6% $5.00
--------- ------ --------- -----
Total............... 2,482,700(1)(2) 100.0% $6,553,325 100.0%
========= ===== ========= =====
</TABLE>
23
<PAGE>
(1) Gives effect to the issuance of 63,000 Common Shares upon the closing of
the Offering pursuant to the Debt Conversion and the Accrued Compensation
Conversion. Does not give effect to the exercise of the Bridge Warrants or
the Other Derivative Securities. See "Bridge Financing", "Management -
Stock Plans", "Certain Relationships and Related Transactions" and
"Description of Securities - Common Shares".
(2) Assumes no exercise of the Underwriter's Overallotment Option. See
"Underwriting".
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 and as adjusted to give effect to the issuance and sale of the
1,200,000 Common Shares offered by the Company at $5.00 per Common Share, and
the application of net proceeds of approximately $4,700,000 therefrom. This
table should be read in conjunction with the financial statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
>
<TABLE>
<CAPTION>
March 31, 1997
Pro Forma
Actual Pro Forma (1) As Adjusted(2)(3)
<S> <C> <C> <C>
Long-Term Debt................................................. $ 1,024,291 $824,291 $ 54,291
--------- ------- -------
Stockholders' Equity:
Preferred Shares, $.01 par value, 1,000,000
shares authorized, none issued................................ - - -
Common Shares, $.01 par value, 20,000,000 shares authorized,
986,700 shares issued and outstanding (actual), 1,282,700
shares issued and outstanding (pro forma)(1) and 2,482,700
shares issued and outstanding (pro forma, as adjusted)(1)(2).. 9,867 12,827 24,827
Additional paid-in capital...................................... 2,044,758 2,426,698 7,114,698
Retained earnings (Deficit)..................................... (913,480) (913,480) (2,470,530)
------- ------- ---------
Total Stockholders' Equity...................................... 1,141,145 1,526,045 4,668,995
--------- ---------- ---------
Total Capitalization............................................ $2,165,436 $2,350,336 $4,723,286
========== ========== =========
</TABLE>
(1) Gives retroactive effect to the Honigsfeld Option Exercise in April 1997,
the Debt Conversion and Accrued Compensation Conversion. See
"Management-Stock Plans" and "Certain Relationships and Related
Transactions".
24
<PAGE>
(2) Reflects the issuance of the 1,200,000 Common Shares of the Company offered
hereby, and the anticipated application of the net proceeds of $4,700,000
therefrom, after deducting underwriting discounts and commissions and
estimated expenses of the Offering.
(3) Reflects, a nonrecurring deferred financing charge of $1,557,050 (which
includes, among other things, the difference between the fair market value,
at the time the Bridge Warrants were issued, of the Common Shares issuable
upon exercise of the Bridge Warrants ($4.00 per share) and (ii) the
original exercise price of ($.50 per share) at the time the Bridge Notes
are repaid. See "Financial Statements, Note 7".
DIVIDEND POLICY
Holders of the Company's Common Shares are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company has not declared or paid any dividends in the past and
does not currently anticipate declaring or paying any dividends in the
foreseeable future. The Company intends to retain earnings, if any, to finance
the development and expansion of its business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent upon
future earnings, if any, the Company's financial condition, capital
requirements, general business conditions, and other factors. Therefore, there
can be no assurance that any dividends of any kind will ever be paid.
BRIDGE FINANCING
In October 1996, the Company borrowed an aggregate of $770,000 from 22
lenders (the "Bridge Lenders") in a financing (the "Bridge Financing
Transaction") in which the Underwriter acted as the placement agent. In
consideration for making the loans to the Company, each Bridge Lender received,
for each $10,000 loaned, (i) a promissory note in the principal amount of
$10,000 (each a "Bridge Note") and (ii) five year warrants for the purchase of
5,600 Common Shares of the Company at an exercise price of $.50 per share (the
"Bridge Warrants"). Among the Bridge Lenders were Dong W. Lew ($70,000),
President of the Company, Mark Honigsfeld ($60,000), Chairman of the Board and
Chief Executive Officer of the Company, Murray Gross ($50,000), a principal
stockholder of the Company (Mr. Gross subsequently transferred all his Common
Shares in the Company to his affiliate, About Face, Ltd.), Robert H. Solomon
($45,000), a principal stockholder of the Company, and John P. Hefferon
($10,000), Executive Vice President - Sales and Marketing of the Company.
Subsequent to the closing of the Bridge Financing Transaction, two of the Bridge
Lenders agreed to cancel their Bridge Warrants for the purchase of an aggregate
of 42,000 Common Shares (including Mr. Lew who agreed to cancel his Bridge
Warrant for the purchase of 39,200 Common Shares). In addition, subsequent to
such closing, the Company and the Bridge Lenders agreed that the exercise price
of the Bridge Warrants would be $3.00 per share. Also subsequent to such
closing, the Company, the Underwriter and the Bridge Lenders agreed that the
sale, exercise, pledge or other transfer of the Bridge Warrants and the sale,
pledge or other transfer of the Common Shares issuable upon the exercise of the
Bridge Warrants, shall be restricted for two years commencing on the effective
date of the Registration Statement of which this Prospectus forms a
25
<PAGE>
part. See "Management", "Principal and Selling Stockholders", "Certain
Relationships and Related Transactions" and "Underwriting".
Each of the Bridge Notes is due and payable upon the closing of the
Offering of the Company's securities described in this Prospectus, or over a 120
month period commencing on September 15, 1999 if the Offering does not close by
then. In the event such closing occurs on or before September 15, 1997, no
interest will be payable on the Bridge Notes. If the Offering closes after
September 15, 1997 but before September 15, 1999, interest shall accrue on the
principal of the Bridge Notes, from the date such Bridge Notes were issued at
the rate of 8% per annum. If the Offering closes after September 15, 1999,
interest shall accrue on the principal of such Bridge Notes, from the date such
Bridge Notes were issued, at the rate of 12% per annum until such date, and the
Bridge Notes shall be payable in 120 equal monthly installments with interest
accruing at the rate of 8% per annum. The Company intends to use a portion of
the proceeds of this Offering to repay the Bridge Lenders in full. See "Risk
Factors - Broad Discretion in Application of Proceeds; Repayment of
Indebtedness" and "Use of Proceeds".
The Company entered into the Bridge Financing Transaction because it
required additional financing to fund costs and expenses relating to this
Offering, for certain Common Share repurchases that occurred upon the closing of
the Bridge Financing Transaction, to recruit additional personnel and training
costs, to fund product development costs, to relocate and expand its facilities,
and for working capital, and no other sources of financing were available to the
Company at that time. As part of the Bridge Financing Transaction, the Company
agreed to register, and has included in the Registration Statement of which this
Prospectus forms a part, the Common Shares underlying the Bridge Warrants issued
to the Bridge Lenders for resale under the Act. See "Principal and Selling
Stockholders" and "Underwriting".
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The Company was incorporated in the State of New York on March 31, 1983
under the name of Coastal Computer Systems, Inc. The Company was reincorporated
in the State of Delaware under its present name Compu-DAWN, Inc. on October 18,
1996. The Company is engaged in the business of designing, developing,
licensing, installing and servicing computer software products and systems for
the law enforcement and public safety industry.
The Company generates revenues from the granting of non-exclusive,
non-transferable and non-assignable licenses to use software it has developed,
through fixed price contracts. Revenues from such fixed price contracts are
recognized using the percentage of completion method of accounting. The Company
retains title to the software and warrants that it will provide technical
support and repair any defects in the software at no charge. The warranty period
for each contract
26
<PAGE>
is negotiated individually, with the periods ranging from 90 days to three
years. To date, repair costs have been minimal and, therefore, the Company has
not had to establish a reserve for warranty costs.
The Company also provides post-contract, customer support to licensees of
its software. Revenues from such services are recognized ratably over the period
of performance. Fees billed and/or received prior to performance of services are
reflected as deferred revenues.
The Company's revenues, expenses and operating results have varied
considerably in the past and are likely to vary in the future. Fluctuations in
revenues depend on a number of factors, some of which are beyond the Company's
control. These factors include, among other things, the timing of contracts,
delays in customer acceptance of the Company's software products, and
competition. See "Risk Factors - Lengthy Sales Cycle".
Historically, the Company's products were marketed primarily in the State
of New York.
Results of Operations
Three Months Ended March 31, 1997 versus 1996 (unaudited)
Revenues
Total revenues for the three months ended March 31, 1997 were $185,801 as
compared to $91,519 for the corresponding period of the prior year, an increase
of $94,282 or 103%. The revenue results reflect an upturn in software sales
activity while maintenance income remained relatively stable.
The Company expects that it will be successful in obtaining maintenance
contracts for any new systems sold in the future and, therefore, deferred
maintenance revenues may vary accordingly.
There is no assurance that the Company will be able to generate significant
revenues in future periods. In fact, for the foreseeable future, inherent with
the typical length in the sales cycle for the licensing of the Company's
software products, and with the in-process development of new products which
have not been brought to the market, the Company believes that it may experience
difficulties in generating increased revenues from new sales. However,
management of the Company believes that through the use of the proceeds of this
Offering for, among other things, product enhancement, marketing, and the
introduction of new products to the market, the Company will be able to increase
revenues over the long-term.
Costs and Expenses
Total costs for the three month periods ended March 31, 1997, as compared
to 1996, increased to $639,698 from $167,384. This increase was primarily the
result of the costs relating to the enhancement and refining of the Company's
current product line, marketing costs, obligations
27
<PAGE>
under new key employee compensation agreements, and the lease for the Company's
new premises. In addition, research and development costs increased to $47,913
from $30,914 when comparing the three months ended March 31, 1997 to 1996.
Income (Loss)
For the three months ended March 31, 1997, the Company had a net loss of
$513,056, or $.31 per share. For the three months ended March 31, 1996, the
Company had a net loss of $57,261, or $.03 per share. The increased loss was due
to the increased costs, as described above, as well as the effect of the
amortization of the deferred financing costs which were recognized in connection
with the Bridge Financing Transaction. Additionally, the Company will experience
a deferred financing charge of up to approximately $1,557,050 at the time the
Bridge Notes are repaid. See "Financial Statements, Note 7".
Year Ended December 31, 1996 versus 1995
Revenues
Total revenues for the year ended December 31, 1996 were $477,527 as
compared to $1,040,181 for the prior year, a decrease of $562,654 or 54.1%. This
decrease was primarily a result of the decrease in software sales (due to fewer
units sold). Such decrease occurred due to the Company's focus on raising
capital (since late 1995 and throughout the year ended December 31, 1996) and
developing new technology, which diverted the Company's resources away from
sales activities. Such development includes, among other things, the revising of
computer-aided dispatching (CAD) and visual computer-aided dispatching (V-CAD)
(which provides for visual graphic interface), and new wireless mobile computing
technology. The decision to focus on development activities rather than sales of
existing product was made in furtherance of the Company's long-term interest and
future competitiveness rather than to satisfy short-term goals. The Company
believes that the development of enhanced and improved technology will allow the
Company to move away from customer specific one-time sales and enable it to mass
market certain of its products. Management does not believe that acceptance of
the Company's products or timing of contracts significantly contributed to the
decline in revenues during 1996. In addition, management of the Company does not
believe that product obsolescence is a significant factor in the Company's
business since it is continually updating and enhancing its software products.
As a result of the new systems licensed during 1995, maintenance income for the
year ended December 31, 1996 increased by approximately $52,000, from $222,910
to $275,016, when compared to the year ended December 31, 1995.
Costs and Expenses
Total costs increased from $910,200 to $1,087,020 when comparing the years
ended December 31, 1995 to 1996.
28
<PAGE>
Programming costs decreased from $404,165 for the year ended December 31,
1995 to $268,915 for the year ended December 31, 1996. These costs decreased as
a direct result of the decrease in software sales and primarily encompassed
salaries and wages and license fees for the Company's main computer operating
system. General and administrative expenses increased from $365,760 for 1995 to
$660,006 for 1996. This increase was primarily a result of increased payroll due
to new hires for management and marketing. Research and development costs
increased from $140,275 to $158,099 when comparing 1995 to 1996. This increase
of 12.7% was due to increased payroll and related costs.
Income (Loss)
For the year ended December 31, 1996, the Company had a net loss of
$570,769, or $.34 per share. For the year ended December 31, 1995, the Company
had net income of $78,660, or $.05 per share. The principal reason for this
decrease in earnings is the 54.1% decrease in revenues as discussed above and
the amortization of the deferred financing costs which were recognized in
connection with the Bridge Financing Transaction. Additionally, the Company will
experience a deferred financing charge of up to approximately $1,557,050 at the
time the Bridge Notes are repaid. See "Financial Statements, Note 7".
Liquidity and Capital Resources
At March 31, 1997, the Company had cash of $30,016, accounts receivable of
$197,011, a current ratio of .7:1 and a net worth of $1,141,145. At December 31,
1996, the Company had cash of $286,497, accounts receivable of $100,010, a
current ratio of 1.5:1 and net worth of $1,279,701. Management of the Company
attributes the decline in its financial position to the net loss during the
three month period ended March 31, 1997.
In August 1996, the Company sold 480,300 of its Common Shares for aggregate
proceeds of $144,090. Payment for these shares was held in escrow until the
consummation of the Bridge Financing Transaction which was completed in October
1996 (as discussed below).
In October 1996, in the Bridge Financing Transaction, the Company
successfully completed the sale of 77 units, each unit consisting of a $10,000
Bridge Note and a Bridge Warrant to acquire 5,600 Common Shares of the Company
(Bridge Warrants to acquire 42,000 Common Shares were canceled subsequent to the
closing of the Bridge Financing Transaction as discussed under "Bridge
Financing"). The Bridge Warrants are exercisable only upon the successful
completion of an initial public offering of the Company's Common Shares ,
subject to an agreement restricting the exercise of the Bridge Warrants for two
years following the effective date of the Registration Statement which this
Prospectus forms a part. Each of the Bridge Notes is due and payable upon the
closing of the Offering. In the event such closing occurs on or before September
15, 1997, no interest will be payable on the Bridge Notes. See "Use of Proceeds"
and "Bridge Financing".
29
<PAGE>
In January 1997, the Company entered into a secured credit facility loan
agreement (the "Credit Agreement") with Mark Honigsfeld, the Chairman of the
Board and Chief Executive Officer of the Company. Pursuant to the Credit
Agreement, the Company borrowed $200,000, all of which is currently outstanding.
The Company and Mr. Honigsfeld have agreed to convert the outstanding loan into
40,000 Common Shares (an effective conversion price of $5.00 per share) upon the
closing of the Offering. In April 1997, the Company and Mr. Honigsfeld amended
the Credit Agreement to provide for an additional line of credit of $500,000. In
May 1997, the Company borrowed an additional $200,000 under the Credit
Agreement. The repayment of up to $200,000 under the Credit Agreement is secured
by a first priority security interest in all the assets owned by the Company.
See "Certain Relationships and Related Transactions".
A portion of the net proceeds of approximately $4,700,000 from the Offering
will be used for product enhancement and development, to repay the Bridge Notes,
for marketing and advertising, for hiring and training of additional personnel
and for the purchase of equipment. See "Use of Proceeds".
Even though revenues declined substantially during 1996, in such year, the
Company moved its facilities to new and more costly space (see "Business -
Facilities" and "Financial Statements, Note 12a") and signed new compensation
agreements with certain key employees (see "Management - Employment Agreements"
and "Financial Statements, Note 12d"). Both the new space and the continued
employment of these key individuals are needed in order for the Company to
develop new, and enhance existing, products and to grow in the future. There can
be no assurance, however, that either of these commitments will result in
increased revenues and earnings. Until such time that the Company significantly
increases revenues, the new lease and compensation agreements are likely to
result in continuing operating losses.
The Company currently has no planned capital commitments.
Cash Flows - Three Months Ended March 31, 1997 versus 1996 (Unaudited)
For the three months ended March 31, 1997, cash utilized by operating
activities was $359,898 as compared to $27,998 of cash provided by operating
activities for the three months ended March 31, 1996. This is primarily a result
of the increased operating costs incurred during the three months ended March
31, 1997.
For the three months ended March 31, 1997, $12,617 was provided by
investing activities, primarily from the purchase by Mr. Honigsfeld from the
Company of the promissory note of Dong Lew (as described under "Certain
Relationships and Related Transactions"), net of fixed asset purchases. For the
three months ended March 31, 1996, no funds were provided or utilized by
investing activities.
For the three months ended March 31, 1997, cash provided by financing
activities aggregated $90,800 due to the Company borrowing $200,000 from Mr.
Honigsfeld under the Credit Agreement,
30
<PAGE>
net of certain equity purchases and expenses in connection with the Offering.
The Company utilized cash of $10,774 in financing activities for the three
months ended March 31, 1996 primarily due to certain equity transactions.
Cash Flows - Year Ended December 31, 1996 versus 1995
For the year ended December 31, 1996, cash utilized by operating activities
was $289,383 as compared to $50,654 of cash provided by operating activities for
the prior year. This is primarily a result of higher software sales generated in
1995 as compared to 1996 thereby generating more receipts from customers.
For the year ended December 31, 1995, $32,712 was utilized by investing
activities, primarily for the purchase of fixed assets. For the year ended
December 31, 1996, $176,609 was utilized by investing activities primarily for
purchases of fixed assets and for a loan to an officer.
For the year ended December 31, 1996, cash provided by financing activities
aggregated $646,527, primarily due to the completion of the Bridge Financing
Transaction in October 1996 in the amount of $770,000. The Company utilized cash
of $98,063 in financing activities for the year ended December 31, 1995
primarily due to payments of debt and the repurchase of Common Shares from
former shareholders.
Other
The Company believes that the cash it generates from operations, and the
expected net proceeds from the Offering, will be sufficient for at least the
ensuing 12 month period.
Forward Looking Statements
Except for historical information contained herein, the matters set forth
above contain forward looking statements that involve certain risks and
uncertainties that could cause actual results to differ from those in the
forward looking statements. Potential risks and uncertainties include such
factors as the level of spending by law enforcement and public safety agencies
for computer application software and hardware, the competitive environment
within the industry, the ability of the Company to expand its operations, the
competency required, and experience, of management to effectuate the Company's
business plan, the level of costs incurred in connection with the Company's
planned expansion efforts, economic conditions in the industry and the financial
strength of the Company's customers and suppliers.
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BUSINESS
Introduction
The Company is primarily engaged in the business of designing, developing,
licensing, installing and servicing computer application software systems for
law enforcement and public safety agencies. The Company's software systems
include computer-aided dispatching ("CAD"), computer interfacing with local,
state and national crime information databases, advanced wireless mobile on-line
communications computing ("AMO") (utilizing radio frequency), automatic vehicle
location ("AVL") (employing dynamic map displays), records management, and
photo-imaging database systems. These modules may be integrated and licensed as
a package, or may be licensed individually.
Certain of these applications utilize telecommunications and space
satellite technology, other infrastructure, and hardware provided by third
parties. The third party providers of such technology and infrastructure, with
respect to a particular customer's system, vary depending on the location of the
customer and whether or not the customer has a business relationship with a
third party provider. Accordingly, the Company is not dependent on any
particular third party's technology or infrastructure for its software systems
to function. These third parties are typically major CDPDs (cellular digital
packet data providers) such as AT&T, Bell Atlantic Corporation ("Bell
Atlantic"), NYNEX Corp. ("NYNEX"), and GTE, or dedicated radio frequency data
network providers such as RAM Mobile Data USA Limited Partnership ("RAM Mobile
Data") and Motorola Inc. ("Motorola"). The Company's AMO system requires
computer hardware and services from third party providers, and interfaces with
dedicated radio frequencies owned by the Company's customers which require
special radio equipment provided by companies such as Motorola and Dataradio
Corp. The Company's customers may purchase such technology, infrastructure,
services and hardware directly from these providers, and, with respect to radio
equipment, through authorized dealers as well.
The Company's software is compatible with virtually all operating systems.
The Company has installed its systems in more than 55 agencies, primarily law
enforcement agencies located in the state of New York. The Company provides a
full range of product support and maintenance services, both on-site and by
remote connection.
Industry Background
The goal of law enforcement and public safety agencies is to maximize the
safety and improve the quality of life of people and communities. The
effectiveness of a law enforcement or public safety agency is dependent on its
personnel and resources. Such effectiveness is enhanced by maximizing the patrol
time of agency personnel, and the availability of timely, accurate and reliable
information. This allows services to be provided in an efficient, cost-effective
manner. Computer technology is an important tool for providing information to
law enforcement and public
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safety personnel, reducing administrative time and streamlining procedures, to
support an agency's strategic and operational goals.
Generally, a law enforcement or public safety agency's strategy is not
geared to one overall plan for an entire community, but is based on several
individual plans addressing the unique needs of the neighborhoods that comprise
that community. Agencies need the ability to maximize their resources, customize
information, analyze crime information by sector, district and area, and analyze
repeat call areas that tax agencies' resources. Additionally, agencies have a
need to respond to incidents and 911 calls as rapidly, efficiently and cost
effectively as possible.
Computer technology has been developed for the public safety market to
address these needs. CAD systems, integrated with enhanced 911 ("E911") systems,
allow a dispatcher to retrieve information about the 911 caller, and the
location and the individuals involved in the incident being reported. Mobile
wireless communication systems in vehicles provide agency personnel in the field
with the ability to receive information regarding an incident and the people
involved, such as location, "mug shots" and photographs, and arrest and booking
data. Such systems also enable such personnel to go "on-line" with the agency's
database, and with other vehicles, in real time. Wireless communication systems
also provide personnel with the capability to file reports from their vehicles
instead of having to return to the station. This increases personnel time and
visibility in the community. AVL system technology provides a dispatcher with
the capability of immediately identifying the location of the most appropriate
vehicle to investigate an incident, significantly shortening response time.
Without an AVL system, a dispatcher has to alert the vehicles in the field of an
incident and then wait, as they report their location and/or availability,
before determining which vehicle would be the most appropriate to respond to an
incident. Information sharing technology allows agencies to link their databases
to local, state and national crime databases to access information for more
in-depth and efficient investigation of incidents. Records management and
photograph imaging systems for law enforcement agencies make arrest and booking
procedures and incident investigations more efficient, while similar systems for
fire and EMS departments contribute to the efficient deployment of firefighting
and emergency equipment and investigation of incidents. Without a computerized
records management system, records and reports would need to be handwritten or
typed, and physically stored in various filing cabinets, file rooms, or on
microfilm or microfiche. In such form, such reports are comparatively error
prone, and may be misplaced or unavailable, which makes retrieval difficult and
time consuming. Computerized records systems allow for easy entry and retrieval,
and increased productivity, enabling agency personnel to spend more time "on the
beat" in the community.
In essence, the foregoing computer technology enables law enforcement and
public safety agencies to allocate and utilize resources and manpower hours to
maximize their goal of public safety.
The Company believes that the market for application software and
technology products utilized in the law enforcement and public safety market is
growing due to (i) an increased public and governmental priority for law
enforcement and public safety, (ii) an awareness that specific computer
technology for the law enforcement and public safety market now exists, (iii)
the availability of federal funding assistance to obtain computer equipment and
technology, (iv) breakthroughs in development of new mobile wireless computer
communications technology and (v) acknowledgment by certain agencies that
computer-aided law enforcement has contributed to a recent drop in crime rates,
and the ability to effectively handle increasing incidents of crime without
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increasing personnel. For example, The New York Times recently reported that New
York City's mayor and top police officials attribute that city's drop in crime
rate, in part, to a series of new police strategies which includes, among other
things, the use of computer technology that has allowed the police department to
identify crime patterns much more quickly and flood problem streets with
undercover and beat officers. Also, the city of Chicago has installed an E911
dispatch system which has contributed to a recent decline in crime. In addition
to New York City and Chicago (which do not utilize Company systems), the city of
Glens Falls, New York, a customer of the Company, recently advised the Company
that, although incidents of crime had increased, its computer system enabled the
police department to effectively respond to, and handle, these incidents without
increasing personnel.
Development of Technology
The Company's current technology has been developed and enhanced over
approximately an eight year period by Dong H. Lew, the Company's President, Alan
Daniels (the Company's founder and former President) and technicians employed by
the Company. Mr. Daniels no longer has any daily involvement with the operations
or research and development activities of the Company; however, he is available
as needed by the Company, from time to time, pursuant to an informal arrangement
to provide consulting services on technical issues and software programming on
an hourly basis. The Company's technology is not patented or covered by any
registered copyrights; however, the Company believes that its software programs
have copyright protection under common law. The Company does not license any
technology from third parties other than technology for certain operating
software. The Company continually undertakes research and development, under the
supervision of Mr. Lew, and Louis Libin, the Company's Chief Technology Officer,
to develop new, and enhance existing, technology and products. The Company
cannot, however, give any assurance that it will develop any new products or
technology, or enhancements for existing products and technology, or that the
Company will have the services of Mr. Lew or Mr. Libin indefinitely. If it does
develop or enhance any products or technology, the Company cannot predict the
pace or time period of such new developments or enhancements, the costs relating
to such research and development (which could be significant or prohibitive), or
the availability of qualified technical personnel. See "Risk Factors - Evolving
Market; New Product Development; Technological Obsolescence", "Risk Factors -
Intellectual Property Protection and Infringement", "Risk Factors - New
Management Team; Dependence on Executive Management; Need to Retain Key
Personnel" , "Risk Factors - Dependence on Licensors" and "Business -
Intellectual Property Rights and Licenses".
Products and Services
Products
The Company's software products consist of CAD systems, computer interface
systems which connect the customer's computer system to local, state and
national crime information databases, AMO communication systems utilizing radio
frequency, AVL systems employing dynamic map displays, records management
systems, and photo-imaging database systems. Certain of the Company's software
systems also interface with and utilize space satellite technology,
telecommunications technology, computer hardware and other infrastructure
provided by third parties. The Company's software is compatible with virtually
all operating systems, utilizing a
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variety of software, including Windows(R) and Unix(R). The Company's software
also allows linkage of its products to mainframe systems and is adaptable to
both small and large hardware systems.
The Company markets its products to law enforcement agencies under the
ALECS 2000(TM) (Advanced Law Enforcement Computer System) product line and to
fire and EMS departments under its AFFECT(TM) (Advanced Firefighter Computer
Technology) product line.
The Company licenses its software to customers in modules pursuant to a
perpetual license. Customers may acquire all the modules as an integrated "total
solution" package, or any of the modules individually, on a stand alone basis or
as an addition to, or as a replacement for, an existing system. The software
modules licensed from the Company can be integrated with the customer's other
software systems. The Company's "total solution" package of integrated modules
maximizes efficiency since data entered into one module will be available in all
modules in real time. A hybrid network comprised of certain of the Company's
modules and other software systems may require data to be entered into the
Company modules and other software systems separately.
The price to the customer of the Company's products, whether a "total
solution" package or individual modules, varies depending on several factors,
including the need for, and existence of, communication infrastructure in the
customer's jurisdiction (such as radio towers necessary for AMO radio frequency
modules), volume of use of telecommunications systems (such as telephone lines
and radio cells), and the customer's computer hardware requirements to implement
the software system.
The Company's ALECS 2000(TM) product line for law enforcement and its
AFFECT(TM) product line for fire and EMS are similar in many respects. Both
address the reporting of incidents, the dispatch of resources and the deployment
of personnel.
In May 1997, the Company received the 1997 Long Island Software Awards
("LISA") software product of the year award for its ALECS 2000(TM) software. The
Company competed with 15 finalists for this award including, among others, Long
Island Lighting Company ("LILCO"), Henry Schein, Inc., Life Sciences Associates,
Lightstone Group, and Quantum Research and Technologies, Inc. The 1997 LISA was
sponsored by the Long Island Research Institute, State University of New York at
Stony Brook, Cheyenne Software, Inc., Computer Associates, Inc., LILCO,
Renaissance Technologies and Symbol Technologies, Inc., among others.
The Company's modules are described below. See "Business - Customers".
Computer-Aided Dispatching - CAD and AVL
The Company's CAD system, under both the ALECS 2000(TM) and AFFECT (TM)
product lines, integrates several software and communications technologies, such
as E911 dispatch systems, mapping software integrated with global positioning
systems for vehicle tracking, and geo-based mapping systems, which include
street addresses and intersections, longitude/latitude, and other information to
identify the locations and addresses of incidents. The integration of these
systems with the Company's CAD software provides to police and other public
safety agencies the capability to respond rapidly and efficiently to incidents,
and streamlines record management, enhancing productivity and accuracy of record
keeping. The Company is currently developing, and readying for beta site
testing, visual CAD software (known as V-CAD, or Visual Computer-Aided
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Dispatching), which, in addition to having greater functionality than the
current CAD system, is more user-friendly and provides the dispatcher with touch
screen graphical interfacing and the ability to dispatch police, fire and/or EMS
agencies at the same time.
The CAD system allows the dispatcher receiving the E911 call to immediately
identify the caller's telephone number, the related address, and the name of the
telephone number owner (unless the call is made from a cellular phone). The CAD
system enables the dispatcher to access any records maintained in the agency's
database relative to that person or the location of the incident (e.g. gun
permit issued, prior domestic violence or prank calls) as well as in local,
state and national crime information databases.
Once a decision is made to dispatch a vehicle to an incident, a record is
created and the location of the incident appears on a computer-generated map of
the area. Using AVL software, which links the customer's system and a receiver
in each of the customer's vehicles to GPSs (global positioning satellites), the
map also shows the position of vehicles "in the field" which are available to
respond to the incident. The dispatcher can then select the closest available
vehicle to respond to the incident and can observe the movement of that vehicle
as it responds to the call.
Wireless Mobile Data Communications System - AMO
The Company has recently developed and begun to market a wireless AMO data
communications system which permits "on-line" real time access between vehicles
in the field and the central database, between the central database and local,
state or national databases, crime information centers and other centralized
computer records, and between vehicles. The Company's AMO system employs radio
frequency networks (i.e. private radio networks, public radio networks, and
cellular and short range spread spectrum technology) to provide complete
communication and access from the vehicle to the central databases as well as
vehicle to vehicle. The Company's AMO system allows the agency's personnel to
log onto the customer's central database directly from their vehicles and have
access to all information in such central database. Additionally, the AMO
technology provides capability for the agency's personnel to input information
into the agency's database directly from their vehicles, and transfer or access
information from vehicle to vehicle. In comparison, other currently existing
competitive mobile data access systems do not provide for on-line and real time
access to information between vehicles and the central databases, but only allow
for the transmittal of batch data from the central databases to vehicles and
vice versa. AMO employs unique "text to voice" technology which converts data
received by the vehicles' systems from text into voice data, and, by voice
recognition, converts voice commands into text to be sent to the dispatcher.
This enhances the safety of vehicle operators since they can receive and give
information without having to divert their attention to read a computer screen
or input information by keyboard. Furthermore, the main police, fire and EMS
radio channels are not employed and remain available.
AMO, through the use of photo imaging technology, allows "mug shots" to be
rapidly made available at a crime or incident scene, or the personnel at the
scene can create a permanent computer photograph record of the accident or crime
scene and transmit it directly into the agency's central database or to other
vehicles.
The Company intends to use a portion of the net proceeds from this Offering
to develop a radio modem to be used in connection with the Company's AMO system
and other mobile
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computing software systems. However, the Company cannot assure that it will be
successful in developing such a radio modem. See "Use of Proceeds".
The Company has sold AMO systems to, and installed such AMO systems in,
Onondaga County (New York) for its E911 department which covers multiple
agencies such as police, fire and EMS departments, the Putnam County (New York)
Sheriff's Department, the Johnson City Police Department (in Broome County, New
York), the Glens Falls Police Department (in Warren County, New York) and the
Long Beach and Garden City Police Departments (in Nassau County, New York). See
"Business - Customers".
As a recently developed product, AMO is subject to the risks inherent in
the development of new technology, including unanticipated delays in
implementing the system, expenses, technical problems or difficulties and the
possible insufficiency of funding to complete development. See "Risk Factors -
Evolving Market; New Product Development; Technological Obsolescence".
Records Management
The Company's records management systems for law enforcement and other
public safety agencies offers a wide range of options and flexibility to fit an
agency's needs and budget. The ALECS 2000(TM) records management system
processes data from the incident report through prosecution, and is made up of
component sub-modular units, including a records management system, a
photograph/"mug shot" imaging system, a parking violation system, and a false
alarm billing system. The AFFECT(TM) records management system processes data
from the incident report through closing the investigation, and also provides
information such as the location of resources, including, without limitation,
hydrants and secondary sources of water (such as ponds, lakes, rivers, and
seawater access), foam and other chemical fire extinguishing material, hoses and
jaws-of-life.
As discussed above, the Company's records management systems obviate the
need for handwritten or typed reports and physical filing systems which are
cumbersome, error prone, and make for difficult and time consuming information
retrieval.
Local Court Records Management and Sheriff's Records Management
The Company's products also include records management systems which are
specifically designed for local courts and sheriff departments. The local court
records management system records summonses, tracks fines payable and enters the
appropriate dates on court calendars. The sheriff's records management system
provides several functions through the following sub-modules: civil
warrants/attachment records management, pistol permit records management, photo
imaging/booking for county jails, property records management, jewelry recovery
and pawn shop records management, and police academy records management. One of
the goals of this technology is to streamline procedures and allow for more
efficient allocation of resources and manpower hours.
Services
Installation and Training
System installation is an integral part of the Company's services. The
Company's installation procedure commences with an in-depth consultation with
the customer to determine the appropriate
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modules needed to meet the customer's particular requirements within budgetary
parameters. Once the customer's needs have been identified, the Company provides
customized system design and file creation. The Company then implements the
system, undertakes system start-up and provides training for the customer's
personnel in the operation of the Company's software products. Customer training
is conducted either at the customer's site or at a remote location, and can
range up to several days, depending on the customer's particular system.
Support and Maintenance
The Company provides post-installation system software maintenance and
training support for all of its software products. The Company's systems support
teams, which include communications and software technicians and program
developers, are available to assist customers via telephone access, 24 hours a
day, seven days a week, 52 weeks a year, and provide on-site support, pursuant
to a software maintenance agreement. Software updates and enhancements to the
modules are included under maintenance contracts. Customers pay the Company a
set monthly service fee (currently ranging between 1% and 2% of the installation
contract value) which is dependent on the extent and complexity of the
customer's system. Currently, the Company has maintenance agreements with all of
its customers. During the fiscal years ended December 31, 1995 and 1996, support
and maintenance income represented approximately 21% and 58%, respectively, of
the Company's revenues. See "Business-Customers".
Possible Future Acquisitions
In addition to the foregoing products and services, the Company intends to
explore opportunities to add, through acquisition or licensing, technology or
products to enhance or add to its current product line, or to acquire a customer
base or sales organization to augment the Company's infrastructure. The Company
is not actively seeking any acquisition at this time. In exploring a potential
acquisition or license, the Company will consider, among other criteria, the
comparative cost to the Company in capital, resources and personnel to create
the identified technology or product, or establish the targeted customer base or
sales organization, restrictions on the Company developing similar technology or
products arising from patent or other intellectual property protection, and the
synergy of the identified technology or products with the Company's products and
organization. At present, the Company has not identified any acquisition or
license candidates and it does not have any current plans, proposals or
arrangements with respect to any acquisitions; however, it is actively seeking
such candidates. There can be no assurance that the Company will identify any
acquisition or licensing candidates or, if it does, that it will be able to
reach any agreements to acquire or license technology or products, or acquire
assets, on terms acceptable to the Company. With respect to possible
acquisitions or licensing agreements, the Company may, from time to time, enter
into agreements with related parties (of which none are presently contemplated).
In such case, the Company anticipates that the terms of such agreements will be
commercially reasonable and no less favorable to the Company than the Company
could obtain from unrelated third parties. Additionally, the Company intends
that such agreements will be approved by a majority of disinterested directors.
See "Risk Factors - Unascertainable Risks Related to Possible Unspecified
Acquisitions" and "Use of Proceeds".
Intellectual Property Rights and Licenses
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The Company's products are based on approximately 3,000 interdependent
software application programs and system utility modules, including software
developed for creating applications of the modules. The Company's technology is
not patented and the Company has not obtained, or applied for, copyright
registration for any of its software. Although the registration of a copyright
in the United States copyright office provides a rebuttable presumption of the
copyright's validity, such registration is not required to make a copyright
legally effective, and the Company believes that its software programs have
copyright protection.
The Company believes that it takes at least two to three months of training
for a programmer to grasp the complete structure of the Company's software. The
Company requires every employee to sign an agreement of nondisclosure and
assignment of development rights. While large software vendors often institute
lawsuits to protect software property rights against infringers, the Company
believes that, in its case, the complexity and total system integration of the
Company's products best protects its trade secrets. There can be no assurance
that the intellectual property and contractual rights on which the Company
relies to protect its intellectual property and confidential and proprietary
information will provide it with meaningful protections. See "Risk Factors -
Intellectual Property Protection and Infringement".
The Company utilizes certain operating system software (written in the "M"
computer programming language and owned by Intersystems, Inc. ("Intersystems")),
in the development of its software systems. The Company uses such operating
system software pursuant to a perpetual license which allows the Company to use
such software to create its software modules, and, in some cases, to "bundle"
such operating system software with its own software as part of its software
products. The Company pays Intersystems a monthly fee to sublicense such
operating software (based on the number of product units in which Intersystem's
operating system software is included), and an annual fee to use such operating
software to create software (based on the number of product units for which the
third party's operating system software is used to create). The termination of
this license could have a material adverse effect on the Company's ability to
produce and deliver its software products on a timely basis. If such license is
terminated, the Company would be required to license alternative operating
system software. The Company believes alternative operating system software
written in different versions of the "M" computer programming language is owned
by, and currently available from, other sources. However, the Company would have
to revise its software to make it compatible with such alternative operating
system software, which the Company believes would result in production and
delivery delays of approximately three to six months. See "Risk Factors -
Dependence on Licensors".
Sales and Marketing
According to the National Directory of Fire Chiefs and Emergency Department
(1993) and the National Directory of Law Enforcement Administration (1996), the
national law enforcement and public safety market is estimated to have more than
18,000 law enforcement agencies and more than 35,000 fire departments. Based on
management's exposure to the marketplace, the Company believes that the majority
of such agencies currently have limited or no computerization of their law
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enforcement and public safety activities. The Company believes that mobile
wireless computer communications, computer-aided dispatching, integrated mapping
and photo-imaging technology have not been marketed extensively to a majority of
these agencies.
The Company intends to implement the following marketing strategy with a
portion of the proceeds of this Offering, although no assurances can be given
that, if such marketing strategy is implemented, it will be successful. See
"Risk Factors - Limited Sales and Marketing Experience" and "Use of Proceeds".
Direct Marketing
The Company currently participates to a limited extent in public safety
conferences and trade shows, holds regional seminars, presents and conducts
demonstrations, and conducts targeted mailings and phone campaigns. The Company
intends to expand such direct marketing significantly following the consummation
of this Offering.
Current Customers
Generally, once a system is designed and installed for a customer, there is
little repeat business other than maintenance and support, and the provision of
software enhancements or updates. Accordingly, the Company intends to intensify
sales efforts to current customers for add-on products and to obtain references
for other prospective customers, a strategy which has been somewhat successful
with current sales resources. See "Business-Customers".
Subcontracting and Strategic Business Alliance Opportunities
The Company is pursuing a strategy whereby it seeks to create strategic
business alliances and subcontractor relationships with large system integrators
and public network providers in order to have the resources needed to establish
a presence in the "large size" market segment (i.e. departments or agencies with
more than 200 sworn officers or personnel). The purpose of the strategic
business alliance agreements is to establish a relationship between the Company
and large system integrators or public network providers (each an "Alliance
Partner") which provides for the Company and the Alliance Partner to cooperate
and complement each other's efforts in identifying, proposing and marketing
their own products and services and integrated systems to public safety
customers. The strategic business alliance agreements which the Company seeks to
establish typically will provide that the Company and its Alliance Partner will
agree upon a particular teaming arrangement with each party assuming defined
roles and responsibilities in order to more effectively compete for future
business opportunities and programs, and with respect to mutually agreed
projects, to jointly market and support each other's services without soliciting
services or products from other sources or offering services and products to
other contractors. Strategic business alliances are currently in place with AT&T
and GTE, and a subcontractor relationship has been established with Data
General, pursuant to agreements (which set forth the relationship of the parties
in the event of a system
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installation and do not relate to any particular customer contracts) upon the
following principal terms.
GTE Agreement. The Company entered into a two-year Mobile Data Services
Business Agreement (the "GTE Agreement") as of November 15, 1996. The GTE
Agreement provides for the Company, on a non-exclusive basis, to promote GTE's
mobile data services and to solicit customers for GTE's mobile data services in
a particular territory, which includes certain cities nationwide, in conjunction
with the Company marketing its products for its own account. The Company is
entitled to compensation from GTE, equal to 6% of the net monthly revenues (as
defined in the GTE Agreement) generated by GTE customers which were obtained by
the Company for GTE, if the Company provides implementation services for the
Company's products sold to the customer and technical support services with
respect to the Company's products and to GTE's mobile data services. (The
Company may refer problems regarding the mobile data services which it cannot
resolve to GTE). Charges for technical support services will be established
between the Company and the customer. GTE will pay the Company compensation
during the term of the GTE Agreement, and for up to four years after the
termination of the GTE Agreement, if the Company continues to provide technical
support services to the customer during that time. In the event GTE includes the
Company in a business opportunity with a customer, the Company will pay GTE a
fee equal to 5% of one year's revenues received by the Company from such
customer. The GTE Agreement restricts the Company from soliciting any GTE
customer to use a third party's wireless services during the term, and for one
year after the termination, of the GTE Agreement. The Company and GTE may, but
are not required to, participate in joint marketing activities which will be
addressed on a case-by-case basis.
AT&T Agreement. The Company entered into a two-year Wireless Data Program
Agreement (the "AT&T Agreement") as of February 19, 1997. The AT&T Agreement is
automatically renewable for consecutive one-year terms unless terminated at the
end of a particular term by any party. Pursuant to the AT&T Agreement, the
Company will, on a non-exclusive basis, market AT&T's wireless communication
services to potential customers in a territory located in the eastern and
midwestern United States. The AT&T Agreement also provides that the Company may,
for its own account, market its products to those customers. The Company will be
entitled to a customer support fee from AT&T for technical support to the
customer equal to 10% of the revenues generated by the Customer (subject to
certain limitations and reductions if AT&T receives more than a certain number
of technical support requests from its customer in a particular calendar
quarter). Additionally, the Company is entitled to a goal attainment fee, equal
to 2% of the revenues generated by particular customers, if revenues from new
customers and customers for whom AT&T paid the Company customer support fees are
$50,000 or more each year. The Company is also entitled to a nominal activation
processing fee for the configuration of each laptop computer included in a
customer's system. The Company will be entitled to all compensation under the
AT&T Agreement for a period of years from the customer activation date (subject
to earlier termination under certain conditions). The AT&T Agreement provides
for minimum performance standards which requires that revenues generated by
customers for whom the Company is receiving customer support fees must equal or
exceed $7,500 in each calendar quarter. AT&T has the right to terminate the
agreement, among other standard early termination rights, if the
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minimum performance standards are not met for two consecutive quarters. The AT&T
Agreement further provides for the Company to maintain certain technical support
staff capabilities. The AT&T Agreement also restricts the Company from
soliciting AT&T's customers for alternative wireless communication services
during the terms of the AT&T Agreement and for one year following termination of
the agreement.
Data General Agreement. The Company entered into a master supplier
agreement (the "Data General Agreement"), effective as of March 3, 1997 which is
terminable by either party on 30 days notice (except with respect to any project
(a "Project") which is being undertaken by the Company and Data General at the
time of termination of the Data General Agreement). Pursuant to the Data General
Agreement, the Company has provided Data General a non-exclusive license to make
available to its customers or potential customers, the Company's products. The
Data General Agreement provides that the Company has the right to use Data
General's and Data General's customers' software and data in performing its
obligations in any Project; and ideas and concepts jointly developed will be
jointly owned by the Company and Data General. The Data General Agreement
further provides that if a particular Project requires the Company to provide
consulting services, Data General will pay the Company a consulting fee as
determined by the terms of such Project. If consulting services are furnished,
the Data General Agreement states that Data General may terminate the Company's
consulting services, which are furnished for a fixed fee for a defined purpose,
if the customer cancels the portion of the Project relating to such consulting
services. Additionally, Data General may cancel the Company's consulting
services which are provided on an hourly basis, at any time. In either event,
Data General is required to pay the Company for consulting services actually
rendered. Data General shall also pay the Company a product license fee as
provided by the terms of a particular Project. The Company has agreed to provide
a warranty on its products for 90 days after installation (other than products
packaged with a "break-the-seal" license for which the Company will provide a
warranty directly to the customers as set forth in such "break-the-seal" license
agreement). If a particular Project requires the Company to provide support
services, the Company will be entitled to a support services fee from Data
General, as set forth by the terms of that particular Project. Such support
services require the Company to investigate problems and suggest solutions;
update its licensed product for any enhancements or improvements; and provide
technical support for, and correct any problems of, any new release of a product
for 180 days.
No revenues have been derived to date from the foregoing arrangements and
no assurances can be given that the Company will derive revenues therefrom. The
Company is also seeking subcontractor relationships with system integrators and
network providers including, among others, International Business Machines Corp.
("IBM") (with which the Company has acted as a subcontractor in the past, as
described below), Bell Atlantic, Motorola and RAM Mobile Data. In addition, no
assurances can be given that the Company will enter into any other strategic
business alliances or subcontractor relationships.
42
<PAGE>
The Company monitors governmental announcements of officially published
requests for proposals ("RFPs") to find business alliance or subcontracting
opportunities. The selection of the appropriate large system integrator by the
Company as a potential business alliance partner or prime contractor often
depends on the specifications in the RFP. The Company's strategy includes
contact with large system integrators to demonstrate the Company's product
capabilities and, more importantly, to establish a credible presence for
participating in "large size" market segment projects. Although, in the past,
the Company has had some success in strategic alliances with large system
integrators, no assurance can be given that the Company will be viewed by these
entities as an acceptable strategic business alliance partner or subcontractor
in the future. If the Company is unable to establish such a business
relationship, its plans to expand into the "large size" market segment may be
delayed or hindered due to a limitation of resources needed to respond
competitively to RFPs or to meet "large size" market segment agency
requirements. See "Risk Factors-Dependence on Strategic Business Alliances and
Subcontractor Relationships", "Risk Factors - Limited Sales and Marketing
Experience" and "Business - Competition".
Increase in Sales Staff
Until recently, the Company had no sales staff and sales efforts were
conducted by one of the Company's principals and its project manager. Since the
closing of the Bridge Financing Transaction, the Company has retained four
full-time sales associates. The Company intends to use a portion of the proceeds
of this Offering to increase sales staff in order to penetrate geographic
markets beyond New York. In addition, the Company has engaged a marketing
support person, a technical writer and other individuals to coordinate
installations, handle subcontract relations with large system integrators, and
provide technical sales support. See "Risk Factors - Challenges to Management of
Growth", "Risk Factors - Limited Sales and Marketing Experience" and "Use of
Proceeds".
Customers
The Company has installed various modules of its software systems for, and
provides maintenance and support services to, 58 customers, 54 of which are law
enforcement agencies and four of which include fire and EMS departments. The
following customers accounted for the following percentage of software sales
revenues for the fiscal year ended December 31, 1995: Onondaga County (New
York), 42.8% and the Queens County (New York) District Attorney, 21.4%. No other
customer accounted for 10% or more of the Company's software sales during such
period. The following customers accounted for the following percentages of
software sales for the year ended December 31, 1996: Madison County (New York),
28.2% and Westchester County (New York), 18.6%. No other customer accounted for
10% or more of the Company's software sales during such period. The project
undertaken by the Company for Onondaga County is described below. The Company
provided consulting services to the Queens County District Attorney's Office
with respect to the conversion of an early dialect of the "M" computer
programming language running on that agency's old hardware system to a current
standard version of "M" running on a high-speed multi-processor Unix(R)
computer. The Company sold to, and installed in, Madison
43
<PAGE>
County a records management system, a CAD system, and a specialized version of a
network wireless radio system between fixed points, for that county's fire
department. The Company sold to, and installed in, Westchester County a records
management system, a CAD system, a photo imaging system and special modules such
as civil warrant processing, jury duty processing, pawn shop records and police
academy records. The Company does not rely on past customers for future revenues
from sales and installations of software systems. Accordingly, the Company will
not suffer any material adverse effect if the Company does not sell software
systems to such customers in the future.
Based on the experience of management in the marketplace, management's
discussions with a senior New York State Division of Criminal Justice Services
official and an E911 consultant to a major telecommunications company, a recent
referendum in Bergen County, New Jersey supporting the regionalized sharing of
services by towns and municipalities, and the specifications of RFPs received by
the Company soliciting bids for law enforcement and public safety software
systems, the Company believes that there is a trend away from town and
municipality dispatching and toward county-wide dispatching. As a result of this
trend, the Company believes that there will be a need in the near future for
comprehensive public safety systems which will address and integrate the needs
of police, fire and EMS departments. As a "total solution" software system
provider, the Company believes that, with the proceeds of this Offering and the
successful implementation of its marketing and product development plan, it will
be in a position to meet such needs. See "Risk Factors - Dependence on
Significant Customers", "Use of Proceeds" and "Business - Sales and Marketing".
Typically, a customer will procure a software system from the Company under
a perpetual license, pursuant to which the Company will be paid a percentage of
the license fee at the time the contract is entered into, and then will receive
further installments as certain performance milestones are met, until completion
of the contract. After the contract is completed, any further revenues from that
customer are usually derived from a maintenance and support contract. From time
to time, however, the Company may receive additional contracts from an existing
customer for add-on modules, an aspect of business which the Company intends to
market more aggressively in the future. See "Business-Sales and Marketing".
The length of time that it takes to complete a systems installation
contract varies (generally from three to twelve months), depending on the nature
and complexity of the system and the customer's internal procurement procedures.
During the period of time that installments are being paid, the customer, or a
small number of customers with contracts in progress, may account for a
significant percentage of the Company's revenues. However, once those contracts
are completed, such customers will no longer represent a material portion of the
Company's future revenues. Accordingly, the Company does not rely on such
customers for a continuing revenue stream and the Company does not believe that
the make-up of its current significant customers is material to an understanding
of the Company's future business prospects. However, the Company anticipates
that at any particular time a limited number of large customers will continue to
represent a significant portion of its revenues for the foreseeable future. See
"Risk Factors - Lengthy Sales Cycle", "Risk
44
<PAGE>
Factors - Evolving Market; New Product Development; Technological Obsolescence",
"Risk Factors - Significant Customers" and "Business - Sales and Marketing".
The following two examples are illustrative of the diverse application of
the Company's products and services:
(i) The Onondaga County Police Department utilizes an AMO application,
designed, developed and installed by the Company, which links over 700 police,
fire and EMS vehicles. For this project, the Company was retained by IBM as a
subcontractor to design, develop, install and service all the required AMO
software. The project included integration by the Company of IBM and Digital
Equipment Corp. hardware which already contained application software provided
by other subcontractors for both records management and computer-aided dispatch;
and
(ii) The Company, as prime contractor, designed, developed and installed a
"total solution" system for the Putnam County Sheriff's Office, a comparatively
small agency of seven vehicles. The system consisted of a records management
system, a CAD system and an AMO system.
Competition
The Company faces competition in the "small size" market segment (which the
Company views as departments or agencies with 20 or fewer sworn officers or
personnel) and the "medium size" market segment (which the Company views as
departments or agencies with 21 to 200 sworn officers or personnel) from
companies such as NewWorld Systems, Pamet Systems, Inc. and Software Corporation
of America. Although such competitors have significantly greater financial,
technical and other resources than those of the Company, the Company feels that
it has been able to compete successfully in such market due to its "total
solution" system integration technology and local presence, the Company having
installed systems in over 50 "small size" and "medium size" law enforcement
agencies in the state of New York. The Company believes further that, as it
expands its presence to other geographical areas and market segments, sales to
such agencies are likely to develop outside of its current primary market of New
York.
The Company believes that more intense competition exists in the "large
size" market segment in which the system price ranges widely (between $1 million
and $100 million) depending on the size of the customer and the complexity of
the system (as compared to the Company's typical sale in the "small size" and
"medium size" market segments, which historically has ranged between $25,000 and
$350,000). The "large size" market is dominated by software vendors, such as PRC
Public Safety, Inc. and Systemhouse, Ltd., and large system integrators such as
IBM, Andersen Consulting, Electronic Data Systems and Harris Corporation. In
order to penetrate the "large size" market segment, the Company is pursuing
strategic business alliances or subcontracting relationships with large systems
integrators having greater financial resources and name recognition than the
Company. The Company believes that, in the future, through an extensive
marketing plan, it can build brand name awareness for its products and services.
The Company cannot, however, assure
45
<PAGE>
that it will be successful in this strategy. See "Risk Factors - Competition"
and "Business - Sales and Marketing".
The Company believes that the mobile wireless computer communication
technology sub- market is in its infancy. With the development of the Company's
AMO system utilizing radio frequency networks as discussed above, the Company
believes that, with sufficient resources, it will be capable of increasing its
sale price range to between $75,000 and $1 million per installation, depending
on the customer size and the extent and complexity of the system.
The Company further believes that large software companies, communication
equipment companies and computer hardware companies are currently not
concentrating their resources on the law enforcement and public safety market
because of that market's special requirements for secure radio operations and
the particular applications and expertise needed to meet those special
requirements. Additionally, most "large size" agencies have a general need for
highly specific customized systems and systems integration. Generally, such
companies that do have an interest in pursuing the law enforcement and public
safety markets look for a strategic business alliance partner, like the Company,
that has the necessary expertise to design and install law enforcement and
public safety systems. The Company also believes that, as a "total solution"
provider in the field of law enforcement and public safety computer technology,
it is, subject to obtaining the appropriate resources, positioned to develop
generic communications software protocols for secure on-line radio frequency
mobile data transmission basic to almost all mobile computers for police, fire
and EMS departments. See "Business - Products and Services" and "Business -
Sales and Marketing".
Employees
The Company currently has 24 full-time employees and one part-time
employee, including eight software developers/programmers, one technical writer,
one marketing employee, four sales persons, and 12 executive and administrative
personnel. The Company also has two part-time industry consultants. Management
believes that its relations with its employees are satisfactory.
The Company's Product Development Group performs research and development
activities and its Customer Service Support Group handles installations,
maintenance and service. The Company's new customers are trained by consultants
who generally are retired and active-duty police officers from police
departments that have systems installed by the Company. The Company's daily
operations are managed by a software development manager, a manager of
operations, and a director of technology.
Facilities
The Company's executive offices are located at 77 Spruce Street,
Cedarhurst, New York where it leases approximately 5,000 square feet of space.
The premises are held pursuant to a five year double net lease expiring in
September 2001 that provides for a base annual rental of approximately
46
<PAGE>
$85,000. The Company believes that its premises are adequate for its needs for
the foreseeable future.
47
<PAGE>
MANAGEMENT
Executive Officers and Directors
The names and ages of, and the positions held by, the executive officers
and directors of the Company are set forth below.
<TABLE>
<S> <C> <C> <C>
Class of
Name Age Positions Held Directorship(1)
Dong W. Lew 67 President, Chief Operating I
Officer, Treasurer and Director
Mark Honigsfeld 43 Chairman of the Board, Chief II
Executive Officer, Secretary
and Director
Louis Libin 38 Chief Technology Officer and III
Director
John P. Hefferon 52 Executive Vice President - Sales -
and Marketing
William D. Rizzardi 54 Director I
Harold Lazarus, Ph.D. 70 Director II
</TABLE>
- ------------------
(1) The Company's Certificate of Incorporation provides for three classes of
directors. The term of each class is three years except that the initial term of
office of the Class I directors will expire at the Company's annual meeting of
stockholders in 1997 and the initial term of office of the Class II directors
will expire at the Company's annual meeting in 1998.
Dong W. Lew
Mr. Lew joined the Company in 1988. He was elected a director
and the President in August 1992 and was elected Treasurer in August
1996. He graduated from the Massachusetts Institute of Technology
("M.I.T.") with a Bachelor of Arts Degree in Business and Engineering
Administration, and has over 25 years of experience in the computer
industry. From 1981 to 1988, Mr. Lew was an independent computer
consultant providing turnkey computer systems with custom software to the
manufacturing and publishing industries. Prior to 1981, he was employed
in computer systems design and managerial capacities by such firms as
Mergenthaler, Inc., Harris-Intertype, Inc., and Codesco International,
Inc.
48
<PAGE>
Mark Honigsfeld
Mr. Honigsfeld joined the Company as Chairman of the Board,
Secretary and a director in August 1996 and, effective October 1, 1996,
he was elected Chief Executive Officer of the Company. In 1978, he
founded Facelifters Home Systems, Inc. ("FACE"), a cabinet manufacturing
and installation company for which he served as Chief Executive Officer
and Chairman of the Board until April 25, 1996. On such date, FACE, a
publicly-traded company, was acquired by a New York Stock Exchange
company in a transaction valued at approximately $70 million to FACE's
stockholders. Prior to the merger, FACE's revenues on an annualized basis
approached $50 million. As the founder, Chief Executive Officer and
Chairman of the Board, Mr. Honigsfeld was directly involved in the
planning and development of almost all areas of FACE's business,
including corporate finance, public offerings, investor relations,
mergers and acquisitions, licensing, product design and engineering,
sales and marketing, manufacturing, field installation, customer service,
management information services and management training. Prior to the
sale transaction, FACE had approximately 600 employees and associates
representing its products and services at 28 locations in 14 states,
approximately 135 telemarketing personnel, 180 direct sellers, 120
manufacturing employees and 165 supervisory, management and
administrative personnel. In addition, FACE had working arrangements with
approximately 175 independent contracting companies nationwide. Mr.
Honigsfeld holds a Bachelor of Science Degree in Industrial Arts, magna
cum laude, and a Master of Science Degree in Industrial Arts, with
honors, from City College of the City University of New York.
Louis Libin
Mr. Libin joined the Company in January 1997 on a per diem basis
as Chief Technology Officer and a director. Effective March 10, 1997, he
began to serve as the Company's Chief Technology Officer on a full-time
basis. Since 1989, Mr. Libin has represented the United States on
satellite and transmission issues at the International Telecommunications
Union (the "ITU") in Geneva, Switzerland. Mr. Libin has also been
Chairman of the Expert Group On Broadcast Interactive Services of the ITU
since 1991. From 1987 to 1997, Mr. Libin served as the Director of
Technology (specializing in broadcast transmission systems) for the
General Electric Corporation ("GE") and the National Broadcasting
Corporation. From 1995 to 1997, Mr. Libin also served as Assistant
Secretary of all GE's wholly-owned subsidiaries that are involved in
broadcast media, with the responsibility for technical developments and
all Federal Communications Commission (the "FCC") issues and licenses.
From 1983 to 1986, Mr. Libin was a project manager for Radio Corporation
of America ("RCA") until RCA's acquisition by GE. From 1981 to 1982, Mr.
Libin was employed by the Loral Corporation as an electronic design
engineer where he designed radio frequency systems for the United States
military. From 1980 to 1981, Mr. Libin was a design engineer for the
Chryon Corporation, a computer graphics company. From 1979 to 1980, he
worked for Burroughs Computer Systems, Inc. (now part of Unisys) as a
field engineer. Additionally, since 1988, Mr. Libin has acted as a
consultant and advisor to the FCC in connection with the planning of
communications systems and logistics for major events in the United
States and abroad, including political conventions, presidential
inaugurations, and
49
<PAGE>
the Olympics. Mr. Libin is an active member of the National Society of
Professional Engineers and the Association of Federal Communications
Consulting Engineers. He also sits on the Engineering Advisory Board of the
National Association of Broadcasters. Mr. Libin received a B.S.E.E. Degree
in Electrical Engineering from the Pratt Institute and completed his
graduate studies in optical electronics at M.I.T.'s Executive Program in
1991. Mr. Libin has planned and managed telecommunications projects in the
United States and in Europe. Mr. Libin was responsible for the planning and
implementation of a new television and telecommunications network in New
Zealand in 1990. Mr. Libin has also provided expert consulting on satellite
issues in certain of the republics of the former Soviet Union. Mr. Libin
was also instrumental in the development of the new transmission technology
and the algorithms for software modeling of the new North American digital
terrestrial television system which was approved by the FCC in 1996. Mr.
Libin has published numerous scientific papers in radio frequency and
telecommunications.
John P. Hefferon
Mr. Hefferon joined the Company in October 1996 as Executive
Vice President - Sales and Marketing. From January 1973 to January 1987,
he served in various positions with Wang Laboratories, Inc. ("Wang
Laboratories"), including sales representative, branch manager, district
manager, Atlantic area director and Eastern Regional Vice President Sales
and Marketing of Wang Financial Information Services Corporation, a
subsidiary of Wang Laboratories (a position he held for eleven years).
From January 1987 to November 1988, Mr. Hefferon worked for Computer
Leasing, Inc. where he was involved in arranging lease financing for
multi-million dollar IBM mainframes in the Fortune 500 marketplace. From
late 1988 through March 1990, Mr. Hefferon was Eastern Regional Director
for Imnet, Inc., a start-up imaging software company. From March 1990 to
August 1995, Mr. Hefferon served in several executive sales and marketing
positions with Allerion, Inc., a network systems integrator. From August
1995 to October 1996, Mr. Hefferon served as Vice President - Sales of
Ultradata Inc., an application software company.
William D. Rizzardi
Mr. Rizzardi joined the Company in January 1997 as a director.
Since December 1996, Mr. Rizzardi has been the President of Environmental
Solutions Corporation, a bio-remediation company. From 1995 to 1996, Mr.
Rizzardi was an independent management consultant to the Long Island
Research Institute, a not-for-profit technology development laboratory.
From 1979 to 1994, Mr. Rizzardi held various positions with Northrop
Grumman Corporation and its affiliates, including a Vice President of
Grumman Data Systems Division, where he was responsible for the
development, operations and support of all information systems for the
Grumman Corporation, Corporate Vice President of Information Management
and Chief Information Officer of Grumman Data Systems Division, and a
Vice President of Northrop Grumman Corporation - Data Systems and
Services Division following the acquisition of Grumman Corporation by
Northrop Corporation. Mr. Rizzardi received a Bachelor of Science Degree
in Nuclear Physics from City College of the City University of New York
and a B.S.E.E. Degree in Management from the Sloan School of M.I.T.
50
<PAGE>
Harold Lazarus, Ph.D
Dr. Lazarus joined the Company as a director in March 1997. Dr.
Lazarus has been a Professor of Management at the Hofstra University
Frank G. Zarb School of Business (the "Hofstra Business School") since
1980. From 1973 to 1980, Dr. Lazarus served as Dean of the Hofstra
Business School. Dr. Lazarus is an organization development consultant
who lectures in Europe, Asia, North America and South America on
leadership, time management, total quality management, managing
change, effective meetings, problem solving, decision making, mission
statements, management by objectives, and communications. Dr. Lazarus
was Professor of Management at the New York University Leonard N.
Stern School of Business for ten years, and he also taught at Columbia
University Graduate School of Business and Harvard University Business
School. Dr. Lazarus currently serves as a director of Graham-Field
Health Products, Inc., a New York Stock Exchange - listed manufacturer
and wholesaler with $200 million in annual sales. Dr. Lazarus has
served on several boards of directors of public companies in the past,
including FACE, Ideal Toy Corporation, Superior Surgical Manufacturing
Company, and Stage II Apparel Corporation. Dr. Lazarus has published
seven books and 65 articles on business management. He also chairs the
board of Phi Beta Kappa Alumni of Long Island (New York). Dr. Lazarus
received a Masters of Science Degree and a Doctor of Philosophy Degree
in Management and Marketing from Columbia University.
Each director will hold office until the next annual meeting of
stockholders during the year in which the term of his class of directorship
expires and until his successor is elected and qualified. Executive officers
serve at the pleasure of the Board of Directors. See "Risk Factors - Control of
the Company" and "Certain Relationships and Related Transactions".
There is no family relationship among any of the Company's executive
officers and directors.
Executive Compensation
The following table provides summary information concerning cash and
certain other compensation paid or accrued by the Company to, or on behalf of,
Mr. Lew, the Company's President, and Mr. Honigsfeld, the Company's Chairman of
the Board and Chief Executive Officer, during the last three fiscal years. Mr.
Honigsfeld was elected Chairman of the Board and Chief Executive Officer in
August 1996 and October 1996, respectively. No other executive officer of the
Company had a combined salary and bonus in excess of $100,000 for the year ended
December 31, 1996.
51
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principal Positions Year Salary Bonus Compensation Award(s) Options Payout Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark Honigsfeld (1) 1996 $62,500(2) - - - 233,000 - -
Chairman of the Board, 1995 - - - - - - -
Chief Executive Officer 1994 - - - - - - -
and Secretary
Dong W. Lew (3) 1996 $87,500(4)$15,000 (5) - - 156,950 - -
President and 1995 $70,980 - - - - - -
Treasurer 1994 $70,980 - - - - - -
- -----------
</TABLE>
(1) Mr. Honigsfeld was elected Chief Executive Officer of the Company and was
entitled to compensation effective as of October 1, 1996.
(2) Represents accrued and unpaid salary relating to 1996 (based on a salary
of $250,000 per annum) which is being converted into 12,500 Common Shares
at the closing of the Offering. See "Management - Employment Agreements".
(3) Mr. Lew acted as the Company's Chief Executive Officer during 1994,
1995 and the period January 1, 1996 to September 30, 1996.
(4) Based upon a salary of $75,000 per annum from January 1, 1996 to
September 30, 1996 and $125,000 per annum from October 1, 1996 to
December 31, 1996.
(5) Represents an accrued and unpaid signing bonus (relating to the execution
of Mr. Lew's employment agreement in October 1996) which is being
converted into 3,000 Common Shares at the closing of the Offering. See
"Management - Employment Agreements".
Each non-employee director of the Company is entitled to receive a
director's fee of $500 per meeting (other than telephonic meetings) and options
to purchase 5,000 Common Shares of the Company each year, which options will be
exercisable for a period of ten years from the date of grant, at an exercise
price equal to the market price of the Company's Common Shares on the date of
the grant. Additionally, each non-employee director will be reimbursed for
reasonable out-of-pocket expenses incurred in attending meetings of the Board of
Directors of the Company. The members of the Board of Directors intend to meet
regularly, as needed.
52
<PAGE>
The following table sets forth certain information concerning individual
grants of stock options during the fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996
Number of Percentage of Total
Common Shares Underlying Options Granted To
Name Options Granted Employees in Fiscal Year Exercise Price Expiration Date
- ---- --------------- ------------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Mark Honigsfeld 233,000 46.9% $.30 July 31, 2001
Dong W. Lew 156,950 31.6% $.30 July 31, 2001
</TABLE>
No options were exercised during the fiscal year ended December 31, 1996;
however, in April 1997, Mr. Honigsfeld exercised his options for the purchase of
233,000 Common Shares.
Employment Agreements
The Company is a party to Employment Agreements with Mark Honigsfeld and
Dong W. Lew, each for a term of three years commencing as of October 1, 1996,
subject to continuing, automatic one-year extensions, unless either the Company
or the individual notifies the other, at least 90 days prior to any annual
anniversary date, of its desire not to extend the term thereof. Each Employment
Agreement provides for earlier termination as discussed below.
Pursuant to their respective Employment Agreements, Mr. Honigsfeld serves
as Chairman of the Board and Chief Executive Officer of the Company and Mr. Lew
serves as President and Chief Operating Officer of the Company.
The Employment Agreements provide for base annual compensation of $250,000
and $125,000 for Messrs. Honigsfeld and Lew, respectively. No amounts due Mr.
Honigsfeld under his Employment Agreement have been paid to date. The Employment
Agreement for Mr. Lew provides for a signing bonus in the amount of $15,000,
none of which has been paid to date. Of the accrued and unpaid compensation
payable to Mr. Honigsfeld, $100,000 is being converted into 20,000 Common Shares
at the closing of the Offering. In addition, the $15,000 signing bonus payable
to Mr. Lew is being converted into 3,000 Common Shares at the closing of the
Offering.
In addition to base compensation, each of Messrs. Honigsfeld and Lew is
entitled to receive (i) an annual bonus amount equal to a percentage of base
salary (ranging from 7 1/2% to 20%) based upon the Company achieving certain
sales levels (ranging from $3,750,000 to $6,000,000 in the initial year, with
$1,000,000 increased sales level thresholds per year if the bonus is earned in a
particular year) and (ii) an annual bonus based on the Company's EBITANC (as
defined below), if any. Such latter bonus for each ranges from 5% to 10% of
EBITANC based on EBITANC thresholds ranging from $250,000 to $1,500,000. EBITANC
is an amount equal to the Company's earnings before deducting the following:
interest expense, taxes, and any one time nonrecurring charges resulting from
divestitures, acquisitions, consolidations, restructurings and changes in
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<PAGE>
accounting principles. The use of EBITANC, as opposed to earnings, has the
effect of increasing the earnings base (by the amount of the excluded
deductions) for the purpose of calculating the bonus.
The Employment Agreements for Messrs. Honigsfeld and Lew also provide that
each is entitled to receive, for each year thereof, options for the purchase of
5,000 Common Shares of the Company for each $100,000 of EBITANC. Such options
would be exercisable for a five year period at an exercise price of no less than
110% of the market value of the Common Shares on the date of the grant. Messrs.
Honigsfeld and Lew are also entitled to receive an expense allowance of up to
$500 per month and an automobile allowance in the amount of $1,000 per month.
Each Employment Agreement provides that, notwithstanding the rolling three
year term thereof, it may be terminated prior to such expiration date under the
following circumstances: (i) death; (ii) total disability (as provided for in
the Employment Agreements); (iii) termination by the Company for "cause" (as
defined in the Employment Agreements); (iv) termination by the Company at any
time upon written notice to the employee; (v) termination by the employee upon
30 days written notice to the Company; (vi) termination by the employee at any
time for "good reason" (as defined in the Employment Agreements); or (vii)
termination by the Company at any time within 12 months after a "change in
control" (as defined in the Employment Agreements). Additionally, Mr.
Honigsfeld's Employment Agreement allows him to devote up to 10% of his working
time to other endeavors which are not in competition with the Company.
The Employment Agreements provide for compensation under certain
circumstances upon termination of employment (in addition to accrued but unpaid
compensation) as follows: (i) in the event of the employee's death, the
employee's estate or spouse shall be entitled to receive an amount equal to the
employee's monthly salary as of the date of death multiplied by the number of
full years that he was an employee of the Company or a subsidiary or a
predecessor in interest thereof; (ii) in the event of termination of an
Employment Agreement due to disability, the employee shall be entitled to
receive an amount equal to his monthly salary as of the date of termination of
such Employment Agreement, multiplied by the number of full years that he was an
employee of the Company or a subsidiary or a predecessor in interest thereof
(but, in no event, would the disabled employee be entitled to an amount equal to
less than six months of salary); and (iii) in the event of termination of
employment by the Company following a "change of control" or for any reason
other than death, disability or "cause", or in the event of termination of an
Employment Agreement by the employee for "good reason", the employee shall be
entitled to receive his full salary for the unexpired term of such agreement,
without mitigation of damages based upon employment obtained elsewhere.
The Employment Agreements provide for a restriction on the solicitation of
customers of the Company for a period of two years following termination
thereof, and a covenant not to compete with the Company for a period of six
months following termination of employment for cause. See "Risk Factors - New
Management Team; Dependence on Executive Management; Need to Retain Key
Personnel".
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<PAGE>
Effective January 6, 1997, the Company and Louis Libin entered into a
three-year employment agreement, providing for Mr. Libin to serve as the
Company's Chief Technology Officer on a non- full-time per diem basis until
March 10, 1997, and on a full-time basis commencing on such date. Such
employment agreement provides for a salary of $200,000, $225,000 and $250,000
per annum in the first, second and third years, respectively. Additionally, Mr.
Libin's Employment Agreement allows him to devote up to one day a week to other
endeavors which are not in competition with the Company. Other terms of Mr.
Libin's employment agreement conform in structure to the material provisions of
Messrs. Honigsfeld's and Lew's Employment Agreements such as bonuses, benefits,
restrictive covenants and termination.
Stock Plans
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") provides for the
grant of options intended to qualify as "incentive stock options" ("ISOs") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
options that are not intended to so qualify ("Nonstatutory Stock Options"). The
total number of Common Shares reserved for issuance under the 1996 Plan is
2,000,000 (subject to adjustment in the event of a stock split, stock dividend,
recapitalization or similar capital change) plus an indeterminate number of
Common Shares issuable upon the exercise of "reload options".
The 1996 Plan is presently administered by the Board of Directors of the
Company, which selects the eligible persons to whom options shall be granted,
determines the number of Common Shares subject to each option, the exercise
price therefor and the periods during which options are exercisable, interprets
the provisions of the 1996 Plan and, subject to certain limitations, may amend
the 1996 Plan. Each option granted under the 1996 Plan is evidenced by a written
agreement between the Company and the optionee.
Options may be granted to all full-time employees (including officers) and
directors of, and certain consultants and advisors to, the Company or any
subsidiary of the Company.
The exercise price for ISOs granted under the 1996 Plan may not be less
than the fair market value of the Common Shares on the date the option is
granted, except for ISOs granted to 10% stockholders which must have an exercise
price of not less than 110% of the fair market value of the Common Shares on the
date the option is granted. The exercise price for Nonstatutory Stock Options is
determined by the Board of Directors. ISOs granted under the 1996 Plan have a
maximum term of ten years, except for 10% stockholders who are subject to a
maximum term of five years. The term of Nonstatutory Stock Options is determined
by the Board of Directors. Options granted under the 1996 Plan are not
transferable, except by will and the laws of descent and distribution. The total
amount of ISOs that may be granted to any individual person in any calendar year
is limited; however, there is no limit as to Nonstatutory Stock Options. The
Company and the Underwriter have agreed that, for a period of one year after the
date of this Prospectus, there shall
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<PAGE>
not be outstanding more than 1,100,000 options and warrants (excluding the
Bridge Warrants and Underwriter's Warrants).
As of the date of this Offering, there are outstanding under the 1996 Plan
(i) currently exercisable options held by Mr. Lew for the purchase of an
aggregate of 156,950 Common Shares at an exercise price of $.30 per share;
above); (ii) ten year options held by Messrs. Honigsfeld and Hefferon for the
purchase of 100,000 and 5,000 Common Shares, respectively, at an exercise price
of $3.00 per share, which vest in January 1998; (iii) ten year options held by
Messrs. Libin and Rizzardi for the purchase of 50,000 and 5,000 Common Shares,
respectively, at an exercise price of $3.00 per share, which vest in one-third
increments in January 1998, 1999, and 2000; (iv) ten year options held by Dr.
Lazarus for the purchase of 5,000 Common Shares at an exercise price of $3.00
per share, which vest in one-third increments in March 1998, 1999 and 2000; (v)
various options granted to certain non-executive employees of the Company to
purchase an aggregate of 124,250 Common Shares; and (vi) reload options, which
apply to all the options granted under the 1996 Plan. Most grants were at
exercise prices at least equal to the fair market value of the Company's Common
Shares on the date of grant, as determined by the Board of Directors.
Compensation expense has been reflected for certain options granted at exercise
prices which were below the deemed fair value at date of grant.
1997 Qualified Employee Stock Purchase Plan
The Company's 1997 Qualified Employee Stock Purchase Plan (the "1997 Plan")
provides for the grant of options intended to qualify as "employee stock
options" under Sections 421,423 and 424 of the Code. A total of 250,000 Common
Shares are reserved for issuance under the 1997 Plan (subject to adjustment in
the event of a stock split, stock dividend or similar capital change).
The 1997 Plan is presently administered by the Board of Directors of the
Company. Any person who has been an employee of the Company for at least one
year, who works at least 20 hours per week continuously, or full-time for at
least five months in each calendar year, and who does not have more than 5% or
more of the total combined voting power or value of all classes of capital stock
of the Company, is eligible to participate in the 1997 Plan. The exercise price
of the options shall be the lesser of 85% of the fair market value of the Common
Shares at the time of the grant, or 85% of the fair market value of the Common
Shares at the time the option is exercised. No employee can be granted options
to buy more than 5,000 Common Shares, or a number of Common Shares valued in
excess of $25,000, per year. As of the date of this Offering, no options have
been granted under the 1997 Plan.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of the date of this
Prospectus with respect to the beneficial ownership of the outstanding Common
Shares of the Company by (i) any holder of more than 5% of the outstanding
Common Shares; (ii) the Company's directors; (iii) the directors and executive
officers of the Company as a group; and (iv) the Selling Stockholders. The
number of Common Shares under the column below entitled "Number of Common Shares
Beneficially
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Owned Before the Offering" includes, for the holders of the Bridge Warrants, the
Common Shares underlying the Bridge Warrants (which become exercisable upon the
consummation of the Offering).
<TABLE>
<CAPTION>
Percentage of Class(1)
Name and Address Number of Common Number of Common ----------------------
of Beneficial Owner; Shares Beneficially Number of Shares Beneficially
Name of Selling Owned Before the Common Shares Owned After the Before After
Stockholder Offering Offered Offering Offering Offering(2)
<S> <C> <C> <C> <C> <C>
Dong W. Lew(3) 869,650(4)(5)(6) 0 566,200(4) 58.3% 18.7%
Mark Honigsfeld(3) 656,800(7) 33,600 623,200 49.9% 21.7%
About Face, Ltd. (8 ) 103,075(4)(9) 103,075 0 7.9% -
Robert H. Solomon(10) 100,275(4)(11) 100,275 0 7.7% -
Robert LoRusso(12) 100,100(4) 100,100 0 7.8% -
Harvey Bibicoff(13) 70,000(14) 70,000 0 5.2% -
Apollo Equities(15) 56,000(14) 56,000 0 4.2% -
James Favia 42,000(14 42,000 0 3.2% -
Sydney Gluck 22,400(14) 22,400 0 1.7% -
Steven Wallitt 16,800(14) 16,800 0 1.3% -
John Eckhoff 14,000(14) 14,000 0 * -
Kenneth Moschetto 14,000(14) 14,000 0 * -
Lawrence Levine 11,200(14 11,200 0 * -
Maretza Jimenez
Campos 11,200(14) 11,200 0 * -
Lori Siegal 11,200(14) 11,200 0 * -
Horizon Acquisitions 8,400(14) 8,400 0 * -
Stuart Copperman 5,600(14) 5,600 0 * -
Teddy Selinger 5,600(14) 5,600 0 * -
John P. Hefferon 5,600(14) 5,600 0 * -
Peter Guardino 2,800(14) 2,800 0 * -
James Portnof 2,800(14) 2,800 0 * -
Windsor L. P. 2,800(14) 2,800 0 * -
Louis Libin (3) 0 0 0 - -
William D. Rizzardi (3) 0 0 0 - -
Harold Lazarus (16) 0 0 0 - -
Directors and executive
officers as a group
(6 persons) 1,532,050(4)(5)(6) 39,200 1,189,40 100.0% 39.3%
(7)(17)
</TABLE>
* Less than 1%.
(1) Does not give effect to the exercise of the Underwriter's Overallotment
Option or the Underwriter's Warrants. See "Underwriting".
(2) Gives effect to the issuance and sale of 389,200 Common Shares issuable
upon the exercise of the Bridge Warrants.
(3) The address for Messrs. Lew, Honigsfeld, Libin and Rizzardi is 77 Spruce
Street, Cedarhurst, New York.
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<PAGE>
(4) The number of Shares reflected as being owned by Mr. Lew before the
Offering includes all of the shares beneficially owned by Messrs. LoRusso
and Solomon and About Face, Ltd., as such shares are subject to a limited
irrevocable proxy which will expire upon consummation of this Offering. See
"Certain Relationships and Related Transactions".
(5) Includes 156,950 shares issuable upon the exercise of options granted under
the 1996 Plan and 3,000 shares issuable at the closing of the Offering
pursuant to the conversion of accrued and unpaid compensation in the amount
of $15,000. See "Management - Stock Plans" and "Management Employment
Agreements".
(6) In October 1996, the Company made a $70,000 loan to Mr. Lew, the proceeds
of which were utilized by him to participate in the Bridge Financing
Transaction. In March 1997, Mr. Honigsfeld purchased from the Company the
promissory note evidencing the loan. Mr. Lew has pledged 28,000 shares to
secure the repayment of the loan to Mr. Honigsfeld. Mr. Lew retains voting
rights to such shares unless and until there is a default under the terms
of the loan. See "Certain Relationships and Related Transactions".
(7) Represents (i) 33,600 shares issuable upon the exercise of Bridge Warrants,
(ii) 563,200 shares held by the Mark Honigsfeld Living Trust dated March
27, 1996 (the "Honigsfeld Trust") whose sole beneficiary is Mr.
Honigsfeld's wife and (iii) 60,000 shares issuable to the Honigsfeld Trust
at the closing of the Offering pursuant to the conversion of indebtedness
in the amount of $200,000, and accrued and unpaid compensation in the
amount of $100,000, owed by the Company to Mr. Honigsfeld. Mr. Honigsfeld,
the settlor and trustee of the Honigsfeld Trust, has the right to terminate
the Honigsfeld Trust and receive the shares. See "Bridge Financing",
"Management-Employment Agreements" and "Certain Relationships and Related
Transactions".
(8) About Face, Ltd.'s address is 6539 Waggoner Drive, Dallas, Texas. About
Face, Inc., a Texas corporation, is the general partner of About Face,
Ltd., a Texas limited partnership. Murray Gross is the principal
stockholder of About Face, Inc. Mr. Gross is also a limited partner of
About Face, Ltd.
(9) Includes 28,000 shares issuable upon the exercise of the Bridge Warrants.
(10) Mr. Solomon's address is 68 West Park Avenue, Long Beach, New York.
(11) Includes 25,200 shares issuable upon the exercise of the Bridge Warrants.
(12) Mr. LoRusso's address is 410 Jericho Turnpike, Jericho, New York.
(13) Mr. Bibicoff's address is 55 Maple Run Drive, Jericho, New York.
(14) Represents shares issuable upon the exercise of the Bridge Warrants.
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<PAGE>
(15) Apollo Equities' address is 30 Broad Street, New York, New York.
(16) The address for Dr. Lazarus is Management, 228 Weller, 134 Hofstra
University, Hempstead, New York.
(17) Includes 5,600 shares issuable to Mr. Hefferon upon the exercise of the
Bridge Warrants.
The Company will not receive any of the proceeds from the resale of the
Common Shares by the Selling Stockholders. The Common Shares held by the Selling
Stockholders may be resold at any time following the date of this Prospectus,
subject to an agreement between each of the Bridge Lenders and the Underwriter
restricting the transfer of the Warrant Shares for a period of two years. The
sale of such Common Shares or the potential of such sales at any time may have
an adverse effect on the market prices of the Common Shares offered hereby. The
Underwriter has agreed with the Company that it will not waive the transfer
restrictions with respect to the Warrant Shares prior to the expiration date.
See "Risk Factors - Shares Eligible For Future Sale May Adversely Affect the
Market"and "Underwriting".
The Common Shares offered may be sold from time to time directly by the
Selling Stockholders. Alternatively, the Selling Stockholders may from time to
time offer such Common Shares through underwriters, dealers, or agents. The
distribution of Common Shares by the Selling Stockholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Stockholders in connection with such sales of Common Shares. The Common Shares
offered by the Selling Stockholders may be sold by one or more of the following
methods, without limitation: (i) a block trade in which a broker or dealer so
engaged will attempt to sell the Common Shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (ii)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (iii) ordinary brokerage
transactions in which the broker solicits purchasers; and (iv) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. The Selling Stockholders
and intermediaries through whom such Common Shares are sold may be deemed
"underwriters" within the meaning of the Act with respect to the Common Shares
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
At the time a particular offer of Common Shares is made by or on behalf of
a Selling Stockholder, to the extent required, a Prospectus Supplement will be
distributed which will set forth the number of Common Shares being offered and
the terms of the offering, including the name or names of any underwriters,
dealers or agents, the purchase price paid by any underwriter for
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<PAGE>
Common Shares purchased from the Selling Stockholder and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, and the
proposed selling price to the public.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective August 1996, the Company issued 330,200 Common Shares to the
Honigsfeld Trust in consideration for $.30 per share or an aggregate price of
$99,060. Upon Mr. Honigsfeld accepting the position as Chairman of the Board, he
was issued a five year option for the purchase of up to 233,000 Common Shares of
the Company pursuant to the 1996 Plan at an exercise price of $.30 per share.
This option was exercised in full in April 1997 and the underlying Common Shares
were issued to the Honigsfeld Trust. See "Management - Stock Plans".
In September 1996, the Company entered into a certain consulting agreement
with Alan Daniels and Geraldine Lum Daniels, the Company's founders and two of
the Minority Stockholders (as defined below), providing for Alan Daniels and
Geraldine Lum Daniels to assist the Company with technical and marketing issues
until the Bridge Financing Transaction closed (which occurred in October 1996)
in consideration for a one-time payment of $25,290 at such closing.
In October 1996, the Company repurchased 65,000 Common Shares and canceled
warrants for the purchase of 50,700 Common Shares (the "Repurchase Agreements")
from 13 individuals (the "Minority Stockholders"), such repurchases occurring
upon the consummation of the Bridge Financing Transaction. Pursuant to the
Repurchase Agreements, the Minority Stockholders were paid $.30 per share and
received new warrants exercisable for a five year period to purchase an
aggregate of 31,200 Common Shares at an exercise price of $5.00 per share.
In October 1996, the Company loaned $70,000 to Dong W. Lew, President and
Chief Operating Officer of the Company, for purposes of his participation in the
Bridge Financing Transaction. Such loan was evidenced by a promissory note (the
"Lew Note"), providing for the payment of principal and interest at the rate of
8% per annum in 120 equal monthly installments, subject to acceleration on the
closing date of this Offering. Payment of the Lew Note is secured by a pledge of
28,000 Common Shares of the Company. All voting rights to such shares remain
with Mr. Lew except in the event of a default on the payment of the Lew Note. In
March 1997, Mr. Honigsfeld purchased the Lew Note from the Company in
consideration for the payment in cash of the outstanding principal amount of the
Lew Note. Mr. Honigsfeld concurrently received an assignment of the Company's
rights as pledgee of Mr. Lew's Common Shares. In May 1997, the Lew Note was
amended to make it nonrecourse except to the pledged Common Shares and to
conform the payment terms to those of the Bridge Notes. See "Bridge Financing".
In January 1997, the Company entered into the secured Credit Agreement with
Mr. Honigsfeld. Pursuant to the Credit Agreement, the Company borrowed $200,000,
all of which is outstanding. The Company entered into the Credit Agreement
because it required additional financing to fund the Company's working capital
needs and no other sources of financing were available at that time. The Company
and Mr. Honigsfeld have agreed that, at the closing of the Offering, the
$200,000
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<PAGE>
indebtedness will be converted into 40,000 Common Shares. In April 1997, the
Company and Mr. Honigsfeld amended the Credit Agreement to provide for an
additional line of credit of $500,000. In May 1997, the Company borrowed an
additional $200,000 under the Credit Agreement. The repayment of up to $200,000
under the Credit Agreement is secured by a first priority security interest in
all the assets of the Company. The Company believes that the terms of the Credit
Agreement are commercially reasonable and are at least as favorable to the
Company as the Company could have obtained from an unrelated third party. The
Credit Agreement was approved by, among others, all the disinterested directors
of the Company.
Reference is made to "Management - Employment Agreements" for a discussion
of certain conversions into Common Shares of accrued and unpaid compensation
that are to occur at the closing of the Offering.
To the extent that the Company may enter into any agreements with related
parties in the future (of which none are presently contemplated), the Board of
Directors of the Company has determined that the terms of such agreements must
be commercially reasonable and no less favorable to the Company than the Company
could obtain from unrelated third parties. Additionally, the Board of Directors
of the Company has further determined that such agreements must be approved by a
majority of disinterested directors. See "Risk Factors - Challenges to Growth;
Unascertainable Risks Related to Possible Acquisitions".
DESCRIPTION OF SECURITIES
Common Shares
The Company is authorized to issue up to 20,000,000 Common Shares, par
value $.01 per share, of which 1,282,700 shares are issued and outstanding as of
the date of this Prospectus (giving effect to the Debt Conversion and Accrued
Compensation Conversion that will occur upon the closing of the Offering, as
discussed under "Management - Employment Agreements"). The Common Shares are
currently owned by five stockholders of record. All of the issued and
outstanding Common Shares are validly issued, fully paid and non-assessable. An
additional 866,600 Common Shares are reserved for issuance upon the exercise of
outstanding options and warrants, including the Bridge Warrants.
Holders of the Common Shares of the Company are entitled to share equally
on a per share basis in such dividends as may be declared by the Board of
Directors out of funds legally available therefor. There are presently no plans
to pay dividends with respect to the Common Shares. See "Dividend Policy". Upon
liquidation, dissolution or winding up of the Company, after payment of
creditors and the holders of any senior securities of the Company, including
Preferred Shares, if any, the assets of the Company will be divided pro rata on
a per share basis among the holders of the Common Shares. The Common Shares are
not subject to any liability for further assessments. There are no conversion or
redemption privileges, nor any sinking fund provisions, with respect to the
Common Shares, and the Common Shares are not subject to call. The holders of the
Common Shares do not have any preemptive or other subscription rights.
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<PAGE>
Holders of the Common Shares are entitled to cast one vote for each share
held at all stockholders' meetings including the annual meeting for the election
of directors. The Common Shares do not have cumulative voting rights.
Preferred Shares
The Company's Certificate of Incorporation authorizes 1,000,000 "blank
check" Preferred Shares, par value $.01 per share, whereby the Board of
Directors of the Company shall have the authority, without further action by the
holders of the outstanding Common Shares, to issue Preferred Shares from time to
time in one or more series, to fix the number of shares constituting any series
and the stated value thereof, if different from the par value, and to fix the
terms of any such series, including dividend rights, dividend rates, conversion
or exchange rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price and the liquidation preference of
such series. As of the date of this Prospectus, there are no Preferred Shares
issued and outstanding, and the Company has no plans to issue any Preferred
Shares.
Delaware Anti-Takeover Law; Staggered Board of Directors
The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law enacted in 1988. In general,
the law prohibits a Delaware public corporation from engaging in a 'business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless it is approved in a prescribed manner.
The Company's Certificate of Incorporation provides for staggered terms for
the Board of Directors in three classes. The term of each class is three years
(except that the initial term of office of the Class I directors will expire at
the Company's annual meeting of stockholders in 1997 and the initial term of
office of the Class II directors will expire at the Company's annual meeting of
stockholders in 1998). Each director holds office until the next annual meeting
of stockholders during the year in which the term of his class of directorship
expires and until his successor is elected and qualified. The Company currently
has five directors (two in Classes I and II and one in Class III). Accordingly,
based on the current size of the Board and the makeup of the classes of
directors, the term of no more than two directors will expire in any given year.
As a result of Section 203 of the General Corporation Law of Delaware and
the Company's staggered Board of Directors, potential acquirors of the Company
may be discouraged from attempting to effect acquisition transactions with the
Company, thereby possibly depriving holders of the Company's securities of
certain opportunities to sell or otherwise dispose of such securities at
above-market prices pursuant to such transactions.
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Limitation on Liability of Directors; Indemnification
Article X of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by Section 102 of the Delaware General Corporation Law, provided that
this provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) arising under Section 174 of the
Delaware General Corporation Law (with respect to unlawful dividend payments and
unlawful stock purchases or redemptions); or (iv) for any transaction from which
the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of Incorporation
and its by-laws provisions to indemnify its directors, officers, employees and
agents and to purchase insurance with respect to liability arising out of the
performance of their duties as directors, officers, employees and agents as
permitted by Section 145 of the Delaware General Corporation Law. The Delaware
General Corporation Law provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors, officers, employees and agents may be entitled under the Company's
by-laws, any agreement, vote of stockholders or otherwise.
Furthermore, the Company has entered into an indemnification agreement to
indemnify its directors and officers, under certain circumstances, to the extent
provided in the Certificate of Incorporation and Bylaws of the Company, subject
to Delaware General Corporation Law, against any claim or action against, or
involving, any of them in their respective capacities as a director or an
officer of the Company or its affiliates.
The effect of the foregoing is to require the Company, to the extent
permitted by law, to indemnify the officers, directors, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to indemnify
the Company, its directors, officers, and each person who controls the Company
within the meaning of Section 15 of the Act with respect to any statement in or
omission from the Registration Statement or the Prospectus or any amendment or
supplement thereto if such statement or omission was made in reliance upon
information furnished in writing to the Company by the Underwriter specifically
for or in connection with the preparation of the Registration Statement, the
Prospectus, or any such amendment or supplement thereto.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has
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<PAGE>
been informed that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
The Company intends to obtain directors and officers insurance in the
approximate amount of $1,000,000.
Transfer Agent
The transfer agent for the Company's Common Shares is American Stock
Transfer Company.
UNDERWRITING
General
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriter has agreed to purchase the 1,200,000
Common Shares offered hereby from the Company on a "firm commitment" basis, if
any are purchased. The Underwriter has advised the Company that it proposes to
offer the Common Shares to the public at a price of $5.00 per Common Share, as
set forth on the cover page of this Prospectus, and that it may allow to certain
dealers who are NASD members concessions not to exceed $___ per Common Share, of
which an amount not in excess of $___ per Common Share may be reallowed to other
dealers who are members of the NASD. After the Offering, the public offering
price, concession and reallowance may be changed by the Underwriter.
The Company has granted an Overallotment Option to the Underwriter,
exercisable during the 45 day period from the date of this Prospectus, to
purchase up to a maximum of 180,000 additional Common Shares at the Offering
price, less the underwriting discount, to cover overallotments, if any.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement, including liabilities arising under the Act. Insofar
as indemnification for liabilities arising under the Act may be provided to
officers, directors or persons controlling the Company, the Company has been
informed that, in the opinion of the Commission, such indemnification is against
public policy and is therefore unenforceable.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance of 3% of the aggregate Offering price of the Common Shares offered
hereby, including any Common Shares purchased pursuant to the Overallotment
Option, $50,000 of which has already been paid.
The Company has agreed to sell to the Underwriter, or its designees,
warrants to purchase an aggregate of 10% of the Common Shares sold pursuant to
this Offering, exclusive of the exercise of the Underwriter's Overallotment
Option, for a purchase price of one mil ($.001) per warrant (the
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"Underwriter's Warrants"). The Underwriter's Warrants shall be exercisable
during a four year period commencing one year from the effective date of the
Registration Statement of which this Prospectus is a part. Any profits realized
upon the sale of the Common Shares issuable upon exercise of the Underwriter's
Warrants may be deemed to be additional underwriting compensation. The exercise
price of the Common Shares issuable upon exercise of the Underwriter's Warrant
shall be $8.25 per share (165% of the initial public offering price of the
Common Shares). The sale, transfer or hypothecation of the Underwriter's
Warrants are restricted for a period of one year from the effective date of the
Registration Statement of which this Prospectus is a part, except to officers of
the Underwriter, other NASD members participating in the Offering, and their
officers or partners. The exercise price of the Underwriter's Warrants and the
number of Common Shares covered thereby are subject to adjustment in certain
events to prevent dilution. For the life of the Underwriter's Warrants, the
holders thereof are given, at a nominal cost, the opportunity to profit from a
rise in the market price of the Company's Common Shares with a resulting
dilution in the interest of other stockholders. The Company may find it more
difficult to raise capital for its business if the need should arise while the
Underwriter's Warrants are outstanding. At any time when the holders of the
Underwriter's Warrants might be expected to exercise them, the Company would
probably be able to obtain additional capital on more favorable terms. The
Company has granted the Underwriter certain "demand" and "piggyback"
registration rights with respect to the Underwriter's Warrants and the
underlying Common Shares.
At the closing of the sale of the Common Shares offered hereby, the Company
will enter into a three year financial advisory and investment banking agreement
with the Underwriter, pursuant to which the Company will be obligated to pay the
Underwriter $108,000 in advance for financial and investment advisory services
to the Company.
At the closing of this Offering, the Company and the Underwriter will enter
into a non-exclusive merger and acquisition agreement pursuant to which the
Underwriter would be compensated at the rate of between 2% - 5% of the value of
any consummated transaction with respect to which the Company was introduced to
the other party by the Underwriter.
The Company has also agreed to have a designee of the Underwriter serve as
a director of the Company, or as an observer of the Board of Directors, for a
period of three years following the date of this Prospectus.
The Company's current stockholders have agreed that, except with respect to
the Common Shares underlying the Bridge Warrants owned by them, they will not
transfer any of their Common Shares publicly for a period of one year following
the date of this Prospectus without the prior consent of the Underwriter.
Notwithstanding the foregoing, Robert LoRusso, About Face, Ltd., and Robert H.
Solomon, principal stockholders of the Company, are exempt from such consent
requirement with respect to the 100,100 75,075 and 75,075 Common Shares,
respectively owned by them. The Underwriter has advised the Company that it has
no current plans, proposals, arrangements or understandings with, and it knows
of no plans, proposals, arrangements or understandings with respect to, or
related to, the offering of such 250,250 Common Shares by
65
<PAGE>
Messrs. LoRusso and Solomon and About Face, Ltd. The holders of the Bridge
Warrants have agreed with the Company and the Underwriter that they will not
exercise or transfer the Bridge Warrants, and that they will not transfer any of
the Warrant Shares for a period of two years following the date of this
Prospectus. The Underwriter has agreed with the Company that it will not waive
the transfer restriction with respect to the Bridge Warrants or Warrant Shares
prior to the expiration of the lock-up period. In the event the Underwriter
enters into transactions with any of the Selling Stockholders involving (i) from
5% up to 10% of the Selling Stockholders' Common Shares, the Company will file a
"sticker" supplement to the Prospectus and (ii) over 10% of the Selling
Stockholders' Common Shares, the Company will file a post-effective amendment to
the Registration Statement of which this Prospectus is a part. See "Principal
and Selling Stockholders".
The Company has agreed not to issue any equity securities, or securities
convertible into, or exchangeable or exercisable for, equity securities, for a
period of twelve months from the date of this Prospectus, except that the
Company may issue (i) Common Shares upon the exercise of the Bridge Warrants and
the Underwriter's Warrants; (ii) Common Shares upon the exercise of the Other
Derivative Securities that are currently outstanding, as well as upon the
exercise of options hereafter granted, of up to 867,000 Common Shares in the
aggregate; and (iii) Common Shares and Preferred Shares in connection with a
merger or acquisition transaction.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and Underwriter's Warrants which have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
The Underwriter, a registered broker-dealer, purchases and sells securities
on behalf of its customers. The Underwriter also engages in investment banking
activities and provides companies with financial advisory services. The
Underwriter has been in business for approximately two years. This is the first
offering underwritten by the Underwriter. There is no affiliation or material
relationship between any promoter of the Company and the Underwriter. See "Risk
Factors Inexperience of Underwriter".
Determination of Public Offering Price
Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price for the Common Shares has been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in the negotiations were an analysis of the areas of activity
in which the Company is engaged, the present state of the Company's business,
the Company's financial condition, the Company's prospects, an assessment of
management, the general condition of the securities market at the time of this
Offering and the demand for similar securities of comparable companies. The
public offering price of the Common Shares does not necessarily bear any
relationship to assets, earnings, book value or other criteria of value
applicable to the Company.
66
<PAGE>
The Company anticipates that the Common Shares will be listed for quotation
on The Nasdaq SmallCap Market under the symbol "CODI", but there can be no
assurance that an active trading market will develop, even if the securities are
accepted for quotation. The Underwriter intends to make a market in the Common
Shares of the Company.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon for
the Company by Certilman Balin Adler & Hyman, LLP, 90 Merrick Avenue, East
Meadow, New York 11554. Certain legal matters will be passed upon for the
Underwriter by Caro & Graifman, P.C., 60 East 42nd Street, New York, New York
10165.
EXPERTS
The financial statements of the Company as of December 31, 1996 and for the
years ended December 31, 1996 and 1995 included in this Prospectus have been
audited by Lazar, Levine & Company LLP, independent certified public
accountants, as set forth in their report thereon appearing elsewhere herein and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the Act
with the Commission in Washington, D.C. with respect to the Common Shares
offered hereby. This Prospectus, which is part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto. For further information with respect to the Company
and the Common Shares offered hereby, reference is hereby made to the
Registration Statement and such exhibits, which may be inspected without charge
at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Reports and other information filed by the Company with the Commission
can be inspected and copied at the public reference facilities maintained by the
Commission at the following addresses: New York Regional Office, Seven World
Trade Center, New York, New York 10048; and Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Furthermore,
the Commission maintains a Web site that will contain reports, proxy and
information statements and other information regarding the Company. The address
of such Web site is http://www.sec.gov.
67
<PAGE>
- INDEX TO FINANCIAL STATEMENTS -
<TABLE>
Page(s)
<S> <C>
Independent Auditors' Report F - 2
Financial Statements:
Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 and F - 3
1995
Statements of Operations for the Three Month Periods Ended March 31, 1997 F - 4
and 1996 (unaudited) and for the Years Ended December 31, 1996 and 1995
Statement of Shareholders' Equity for the Two Years in the Period Ended F - 5
December 31, 1996 and for the Three Month Period Ended March 31, 1997
(unaudited)
Statements of Cash Flows for the Three Month Periods Ended March 31, 1997 F - 6
and 1996 (unaudited) and for the Years Ended December 31, 1996 and 1995
Notes to Financial Statements F - 8
</TABLE>
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Compu-DAWN, Inc.
Cedarhurst, New York
We have audited the accompanying balance sheets of Compu-DAWN, Inc. as of
December 31, 1996 and 1995 and the statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1996 and 1995. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Compu-DAWN, Inc. as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the years ended December 31, 1996 and 1995, in conformity with generally
accepted accounting principles.
/s/ Lazar, Levine & Company LLP
LAZAR, LEVINE & COMPANY LLP
New York, New York
February 13, 1997 except
as to Note 3 which is dated
March 11, 1997
F - 2
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
BALANCE SHEETS
- ASSETS (Note 8) -
March 31, December 31,
1997 1996
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash (Note 2b) $ 30,016 $ 286,497
Accounts receivable, net of allowances for doubtful accounts of $35,000 and
$30,000 for 1997 and 1996, respectively (Note 2b) 197,011 100,010
Prepaid expenses 22,281 19,281
Loan receivable from officer (Note 3) - 69,247
Income tax refund receivable (Notes 2f and 11) 36,004 36,004
----------- -----------
TOTAL CURRENT ASSETS 285,312 511,039
----------- -----------
FIXED ASSETS (Notes 2c, 4 and 6) 182,597 138,814
----------- -----------
OTHER ASSETS:
Deferred offering costs (Note 13) 212,368 139,326
Deferred compensation 339,960 34,056
Financing costs (Note 7) 1,557,050 1,588,400
Security deposits 21,525 21,525
----------- -----------
2,130,903 1,783,307
----------- -----------
$2,598,812 $2,433,160
========== ==========
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable $ 92,037 $ 123,473
Accrued expenses and other current liabilities (Note 5) 300,759 136,661
Deferred revenue (Note 2d) 32,282 28,100
Due to former shareholders (Note 9) - 34,710
Capitalized lease payable - current (Note 6) 8,298 7,859
------------ -----------
TOTAL CURRENT LIABILITIES 433,376 330,803
------------ -----------
NON-CURRENT LIABILITIES:
Note payable - officer (Note 8) 200,000 -
Capitalized lease payable (Note 6) 27,654 29,541
Deferred rent liability (Note 12a) 26,637 23,115
Promissory notes payable (Note 7) 770,000 770,000
------------ ------------
1,024,291 822,656
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 10, 12, 13 and 14)
SHAREHOLDERS' EQUITY (Note 9):
Preferred stock, $.01 par value; 1,000,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 20,000,000 shares authorized, 986,700
shares issued for 1997 and 1996, respectively 9,867 9,867
Additional paid-in capital 2,044,758 1,670,258
Retained earnings (deficit) (913,480) (400,424)
------------ ------------
1,141,145 1,279, 701
------------ -----------
$2,598,812 $2,433,160
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 3
<PAGE>
<TABLE>
Compu-DAWN, Inc.
STATEMENTS OF OPERATIONS
<CAPTION>
For the Three Months Ended For the Year Ended
March 31, December 31,
------------------------------ -------------------------
1997 1996 1996 1995
-------------- ----------- ------------ ---------
(Unaudited) (Unaudited)
REVENUES (Notes 2d and 10):
<S> <C> <C> <C> <C>
Software sales $ 98,484 $ 18,925 $ 202,511 $ 817,271
Maintenance income 87,317 72,594 275,016 222,910
----------- --------- ----------- -----------
185,801 91,519 477,527 1,040,181
----------- --------- ----------- -----------
COSTS AND EXPENSES:
Programming costs and expenses 76,837 51,902 268,915 404,165
General and administrative expenses 514,948 84,568 660,006 365,760
Research and development (Note 2e) 47,913 30,914 158,099 140,275
----------- --------- ----------- -----------
639,698 167,384 1,087,020 910,200
----------- --------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (453,897) (75,865) (609,493) 129,981
----------- --------- ------------ -----------
OTHER INCOME (EXPENSES):
Interest and other income 1,342 780 4,845 1,367
Interest expense and financing costs (Note 7) (60,501) (176) (36,274) (993)
Loss on abandonment of leasehold improvements
(Note 12a) - - (5,378) -
------------ --------- ----------- -----------
(59,159) 604 (36,807) 374
----------- --------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION (CREDIT)
FOR INCOME TAXES (513,056) (75,261) (646,300) 130,355
Provision (credit) for income taxes (Notes 2f and 11) - (18,000) (75,531) 51,695
----------- --------- ----------- -----------
NET INCOME (LOSS) $(513,056) $ (57,261) $ (570,769) $ 78,660
========= ========= =========== ===========
EARNINGS (LOSS) PER COMMON SHARE
(Note 2g) $(.31) $(.03) $(.34) $.05
===== ===== ====== ====
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING (Note 2g) 1,678,913 1,678,913 1,678,913 1,678,913
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 4
<PAGE>
<TABLE>
Compu-DAWN, Inc.
STATEMENT OF SHAREHOLDERS' EQUITY
<CAPTION>
Additional Retained Total
Preferred Common Stock Paid-in Earnings Treasury Shareholders'
Stock Shares Amount Capital (Deficit) Stock Equity (Deficit)
--------- --------- ------- ---------- -------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (Note 9) - 1,157,000 $11,570 $ 54,430 $ 91,685 $(38,500) $ 119,185
Purchases of treasury stock, 107,250
shares at cost (Note 9) - - - - - (33,000) (33,000)
Net income - - - - 78,660 - 78,660
------ --------- ------ --------- ------ ------ ------
Balance at December 31, 1995 - 1,157,000 11,570 54,430 170,345 (71,500) 164,845
Cancellation of shares held in treasury
(Note 9) - (685,750) (6,858) (64,642) - 71,500 -
Issuances of common stock (Note 9) - 580,450 5,805 168,330 - - 174,135
Warrants issued pursuant to debt offering
(Note 7) - - - 1,509,200 - - 1,509,200
Options issued below fair value (Note 9) - - - 37,000 - - 37,000
Purchase of outstanding options (Note 9) - - - (15,210) - - (15,210)
Purchases and cancellation of outstanding
shares (Note 9) - (65,000) (650) (18,850) - - (19,500)
Net loss - - - - (570,769) - (570,769 )
------ --------- ------ --------- -------- ----- --------
BALANCE AT DECEMBER 31, 1996 - 986,700 9,867 1,670,258 (400,424) - 1,279,701
Options issued below fair value (Note 9) - - - 374,500 - - 374,500
Net loss (unaudited) - - - - (513,056) - (513,056)
----- --------- ------ --------- ------- ----- ---------
BALANCE AT MARCH 31, 1997 (Unaudited) - 986,700 $ 9,867 $2,044,758 $(913,480) $ - $1,141,145
===== ========= ====== ========= ======= ===== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 5
<PAGE>
<TABLE>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 1 of 2
------------------------
<CAPTION>
For the Three Months Ended For the Year Ended
March 31, December 31,
1997 1996 1996 1995
------------- --------------- ----------- -----------
(Unaudited) (Unaudited)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 87,982 $ 192,154 $ 582,053 $1,027,473
Cash paid to suppliers and employees (447,827) (164,254) (825,948) (977,193)
Interest paid (1,395) (176) (1,995) (993)
Interest and other income received 1,342 780 3,791 1,367
Income taxes paid - (506) (47,284) -
----------- ---------- -------- --------
Net cash provided (utilized) by operating activities (359,898) 27,998 (289,383) 50,654
----------- ---------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to officer - - (70,000) -
Principal repayments of officer's loan 69,247 - 753 -
Purchase of fixed assets (56,630) - (95,117) (29,232)
Proceeds from sale of fixed assets - - 2,500 -
Payment of security deposits - - (14,745) (3,480)
----------- --------- --------- --------
Net cash provided (utilized) by investing activities 12,617 - (176,609) (32,712)
----------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan received from officer 200,000 - - -
Proceeds from debt offering - - 770,000 -
Expenses associated with debt offering - - (100,100) -
Payments for common stock and options acquired (34,710) (10,164) (21,583) (29,167)
Principal payments of other long-term debt - - (3,726) (67,235)
Payments of capital lease obligations (1,448) (610) (2,828) (1,661)
Expenses associated with initial public offering (73,042) - (139,326) -
Proceeds from sale of shares - - 144,090 -
----------- --------- -------- -------
Net cash provided (utilized) by financing activities 90,800 (10,774) 646,527 (98,063)
----------- --------- -------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (256,481) 17,224 180,535 (80,121)
Cash and cash equivalents, at beginning of year 286,497 105,962 105,962 186,083
---------- --------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 30,016 $ 123,186 $ 286,497 $105,962
========== ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F - 6
<PAGE>
<TABLE>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 2 of 2
------------------------
<CAPTION>
For the Three Months Ended For the Year Ended
March 31, December 31,
1997 1996 1996 1995
-------------- ---------- ------------ ----------
(Unaudited) (Unaudited)
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH (UTILIZED) PROVIDED BY
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income (loss) $(513,056) $(57,261) $(570,769) $ 78,660
Adjustments to reconcile net income (loss) to net cash
(utilized) provided by operating activities:
Allowance for doubtful accounts 5,000 - 12,000 13,000
Depreciation and amortization 44,196 9,565 45,947 12,370
Deferred tax expense (benefit) - - 6,200 (4,450)
Deferred rent liability 3,522 (3,558) (3,315) 26,430
Compensatory stock 68,596 - 32,988 -
Loss on disposal of fixed assets - - 7,617 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (102,000) 126,635 106,456 (28,139)
(Increase) decrease in prepaid expenses (3,000) 468 (16,714) 501
(Increase) in tax refund receivable - - (36,004) -
Increase (decrease) in accounts payable and
accrued expenses 132,662 (3,347) 221,692 (119,715)
(Increase) decrease in deferred revenue 4,182 (26,000) (1,930) 15,430
(Decrease) increase in income taxes payable - (18,504) (93,551) 56,567
---------------- --------------- ----------- ---------
NET CASH (UTILIZED) PROVIDED BY
OPERATING ACTIVITIES $(359,898) $ 27,998 $(289,383) $ 50,654
========= ========== ========= ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
(a) During 1996 and 1995, the Company incurred capital lease obligations of
$33,595 and $7,271, respectively in connection with the purchase of
office equipment.
The accompanying notes are an integral part of these financial statements.
F - 7
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 1 - DESCRIPTION OF COMPANY:
Compu-DAWN, Inc., the Company, was incorporated under the name of Coastal
Computer Systems, Inc., in New York on March 31, 1983, and was
reincorporated in Delaware under its present name on October 18, 1996. The
Company is engaged in the business of designing, developing, licensing,
installing and servicing computer software products and systems
predominantly for public safety and law enforcement agencies. The Company's
customers, to date, are primarily located in New York State.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with generally accepted
accounting principles. Outlined below are those policies which are
considered particularly significant.
(a) Use of Estimates:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain estimates and
assumptions, where applicable, that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period.
While actual results could differ from those estimates, management
does not expect such variances, if any, to have a material effect on
the financial statements.
(b) Concentration of Credit Risk /Fair Value:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash investments
and accounts receivable.
The Company maintains, at times, deposits in federally insured
financial institutions in excess of federally insured limits.
Management monitors the soundness of these financial institutions and
feels the Company's risk is negligible.
Management believes that concentrations of credit risk with respect to
accounts receivable are limited due to the Company's methods of
progress billings and collections.
As of March 31, 1997 and December 31, 1996, the fair value of cash and
cash equivalents, receivables, obligations under accounts payable and
debt instruments approximate the carrying value.
(c) Fixed Assets:
Fixed assets are recorded at cost. Depreciation of fixed assets is
provided on a straight-line basis as follows:
Computer equipment 3 years
Furniture and fixtures 5 years
Motor vehicles 5 years
F - 8
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(c) Fixed Assets:
Maintenance and repairs are expensed as incurred. Leasehold
improvements are amortized over the useful life of the asset or the
lease, whichever is shorter. Capital leases are amortized over the
term of the respective leases or the useful lives of the related
assets, whichever is shorter.
Depreciation and amortization expense for the years ended December 31,
1996 and 1995 aggregated $25,046 and $12,370, respectively.
Depreciation and amortization expense for the three month periods
ended March 31, 1997 and 1996 aggregated $12,847 and $9,565,
respectively.
(d) Revenue Recognition:
The Company generates revenues from the granting of nonexclusive,
non-transferable and non-assignable licenses to use software it has
developed, through fixed price contracts. Revenues from such fixed
price contracts are recognized using the percentage of completion
method of accounting. The Company retains title to the software and
warranties that it will provide technical support and repair any
defects in the software at no charge. The warranty period for each
contract is negotiated individually, for periods ranging from 90 days
to three years. To date, repair costs have been minimal and therefore
the Company has not established a reserve for such warranty costs.
In addition, the Company provides post-contract customer support to
licensees of its software. Revenues from such services are recognized
ratably over the period of performance. Fees billed and/or received
prior to performance of services are reflected as deferred revenue.
(e) Software Development Costs:
The Company reflects costs incurred in establishing the technological
feasibility of a computer software product to be leased or sold, as
research and development costs, and expenses such costs in the period
incurred. Research and development costs for the years ended December
31, 1996 and 1995 aggregated $158,099 and $140,275, respectively.
Research and development costs for the three month periods ended March
31, 1997 and 1996 aggregated $47,913 and $30,914, respectively.
After technological feasibility has been established, all costs
incurred on the software product are to be capitalized and amortized
on a product by product basis. Capitalization of computer software
costs is discontinued when the product is available to be sold or
leased.
To date, the Company has only sold or leased software which has been
developed for specific customers. As such, all costs incurred have
been expensed as research and development costs.
Costs associated with post-contract customer support (maintenance) are
charged to expense when related revenue is recognized or when those
costs are incurred, whichever occurs first.
F - 9
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(f) Income Taxes:
The Company has adopted Financial Accounting Standards Board Statement
No. 109 "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets
and liabilities and are measured by applying enacted tax rates and
laws to taxable years in which such differences are expected to
reverse.
(g) Earnings Per Share:
Earnings per share has been computed on the basis of the weighted
average number of common shares and common equivalent shares
outstanding during each period presented. In accordance with the rules
of the Securities and Exchange Commission, all shares issued and
"cheap" options and warrants are being treated as outstanding for all
periods presented.
(h) Statements of Cash Flows:
For purposes of the statements of cash flows, the Company considers
all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
NOTE 3 - LOAN RECEIVABLE - OFFICER:
In October 1996, the Company made a loan of $70,000 to its president
and chief operating officer for the purpose of such officer's
participation in a debt offering (see Note 7). This loan was made to
allow such officer to maintain an equity ownership in the Company that
aligned his interest with that of the other shareholders. The loan was
made since the officer did not have the resources or the ability to
obtain the necessary funds otherwise. Such loan is evidenced by a
promissory note requiring 120 equal monthl payments, at an annual
interest rate of 8% and is secured by shares of common stock owned by
the individual with a value equal to 120% of the outstanding balance.
This note which may be prepaid at any time is also due and payable
upon the closing of a public offering of the Company's common stock
should such occur within three years of the date of the note and yield
gross proceeds of at least $4,500,000.
In March 1997, the Chairman of the Board of the Company purchased this note
from the Company in consideration for the payment in cash of the then
outstanding amount. The Chairman of the Board concurrently received an
assignment of the Company's collateral for this note.
NOTE 4 - FIXED ASSETS:
Fixed assets consist of the following:
March 31, December 31,
1997 1996
Computer equipment $183,948 $139,916
Furniture and fixtures 16,877 16,499
Motor vehicles 12,597 12,597
Leasehold improvements 57,565 45,345
Assets under capitalized leases 41,484 41,484
------- -------
312,471 255,841
Less: accumulated depreciation and amortization 129,874 117,027
------- -------
$182,597 $138,814
======= =======
F - 10
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 5 - ACCRUED EXPENSES:
Accrued expenses is comprised of the following:
March 31, December 31,
1997 1996
Payroll and payroll taxes $258,132 $121,037
Interest 42,627 15,624
-------- --------
$300,759 $136,661
======== ========
NOTE 6 - CAPITALIZED LEASE OBLIGATIONS:
The Company has entered into various capital leases for furniture, fixtures
and equipment which expire in years through 2001. The assets and liability
under these capital leases are recorded at the lower of the present value
of the minimum lease payments or the fair market value of the assets. The
assets are depreciated over their estimated useful lives. Depreciation of
assets under capital leases for the years ended December 31, 1996 and 1995
aggregated $5,989 and $1,315, respectively.
Minimum future lease payments under capital leases as of December 31, 1996
are as follows:
1997 $11,711
1998 10,049
1999 8,388
2000 8,388
2001 7,689
-------
Total minimum lease payments 46,225
Less: amount representing interest 8,825
-------
$37,400
=======
Depreciation of assets under capital leases for the three month periods
ended March 31, 1997 and 1996 aggregated $2,337 and $658, respectively.
NOTE 7 - DEBT OFFERING:
In October 1996, the Company successfully completed the sale of 77 units in
a private offering, each unit consisting of a $10,000 principal amount 12%
promissory note ("bridge note") and a redeemable stock purchase warrant to
acquire 5,600 shares of the Company's common stock for aggregate gross
proceeds of $770,000. The warrants are exercisable at a price of $.50 per
share only upon the successful completion of an Initial Public Offering
("IPO"), see Note 13, of the Company's common stock. See Note 14(b) re:
Subsequent Events.
Each of the bridge notes is due and payable upon the closing of the IPO. In
the event such closing occurs on or before September 15, 1997, no interest
will be payable on these notes. In the event that the Company closes an IPO
after September 15, 1997 but before September 15, 1999, the notes shall
bear interest at a rate of 8% per annum and be payable upon the closing of
the IPO. In the event the Company does not close an IPO by September 15,
1999, interest shall accrue at a rate of 12% per annum through such date
and the notes shall be payable in 120 equal monthly installments with
interest at a rate of 8% per annum beginning September 16, 1999.
F - 11
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 7 - DEBT OFFERING (Continued):
In accordance with APB No. 14, the proceeds of debt issued with stock
purchase warrants should be allocated based on the fair values of the debt
without the warrants and of the warrants themselves when issued.
Accordingly, the Company has reflected deferred financing costs and
additional paid-in capital based upon the difference between the deemed
fair value of the warrants ($4.00) and the warrant exercise price.
Financing costs, which represent costs incurred in connection with this
private offering, are being charged to operations as additional interest
expense over the term of the bridge notes.
In September 1996, prior to the closing of this private offering, the
Company entered into a consulting agreement with one of its founding
shareholders which provided for a one-time payment at closing of $25,290.
NOTE 8 - NOTE PAYABLE - OFFICER:
In January 1997, the Company entered into a secured credit agreement with
its Chairman of the Board which provides for up to $200,000 of borrowings.
These borrowings are secured by all the assets of the Company, bear
interest at a rate of 10% per annum and mature upon the closing of an IPO
(see Note 13).
See Note 14(c) re: Subsequent Events.
NOTE 9 - CAPITAL STOCK AND EQUIVALENTS:
In October 1996, simultaneously with its reincorporation in the State of
Delaware, (see Note 1) the Company increased its authorized capital to
20,000,000 shares of common stock, $.01 par value, and 1,000,000 shares of
preferred stock, $.01 par value. The Company also effected a stock split of
its issued and outstanding common stock on a 325 for 1 basis, resulting in
1,157,000 shares. This stock split has been reflected retroactively in the
accompanying financial statements and accordingly, all references to the
number of common shares issued and outstanding have been restated. No
preferred shares are issued and outstanding.
During 1994 the Company repurchased 578,500 shares of its common stock from
certain shareholders at an aggregate cost of $38,500. These shares are
reflected as shares held in treasury for 1995 and as being cancelled in
1996.
During 1995 the Company repurchased an additional 107,250 shares of its
common stock from certain shareholders at an aggregate cost of $33,000.
These shares are also reflected as treasury stock for 1995 and as being
cancelled in 1996.
In August 1996, the Company sold 480,300 shares of its common stock at a
price of $.30 per share, for cash proceeds of $144,090 and issued 100,150
shares of its common stock in lieu of payment of legal and consulting fees
of $30,045, for an aggregate amount of $174,135.
F - 12
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 9 - CAPITAL STOCK AND EQUIVALENTS (Continued):
The Company had also granted, to certain former shareholders, options to
purchase an aggregate of 50,700 shares of common stock (post-split) at an
aggregate exercise price of $156. In October 1996, following the successful
completion of a debt offering (see Note 7), the Company entered into
agreements with the former shareholders, canceling these unexercised
options in consideration of payment of $.30 for each underlying share and
the issuance of warrants to purchase an aggregate of 31,200 shares of stock
at an exercise price of $5.00 per share. The payment for these options
aggregating $15,210 has been charged against additional paid-in capital.
The Company also purchased, in October 1996, 65,000 shares held by these
former shareholders at a per share price of $.30. These shares were
cancelled upon the repurchase, and accordingly, common stock and additional
paid-in capital have been reduced by $650 and $18,850, respectively.
In addition, in October 1996, the Company established a Stock Option Plan
under which options (including non-statutory options) to purchase up to
2,000,000 shares may be granted to eligible persons. As of December 31,
1996, the Company had granted options to purchase an aggregate of 491,950
shares of common stock at prices ranging from $.30 to $4.00, aggregating
$221,485. In connection therewith the Company recorded deferred
compensation (measured as the excess of the fair value of the underlying
stock over the exercise price of the option at date of grant) of $37,000.
As of March 31, 1997, the Company granted additional options to purchase an
aggregate of 187,250 shares of common stock at an exercise price of $3.00
aggregating $561,750. Accordingly, the Company recorded additional deferred
compensation costs of $374,500. Deferred compensation costs are being
amortized over the vesting period of the related options. Amortization of
such costs for the year ended December 31, 1996 and the three-month period
ended March 31, 1997, aggregated $2,943 and $68,597, respectively.
In April 1997, subsequent to the balance sheet date, options were exercised
to purchase 233,000 shares of common stock for which the Company received
$69,900 in gross proceeds. (See also Note 2g regarding earnings per share).
In 1997, the Company established the 1997 Qualified Employee Stock Purchase
Plan which provides for the grant of up to a total of 250,000 options
intended to qualify as employee stock options. The exercise price of
options granted under this plan shall be the lesser of 85% of fair market
value of the Company's common shares at date of grant or 85% of the fair
market value on the exercise date. To date, no options have been granted
under the 1997 plan.
NOTE 10 - ECONOMIC DEPENDENCY:
To date, the Company's revenues have been materially dependent on a limited
number of customers. The nature of the Company's business (see Note 1) is
such that during any individual accounting period it will license its
software products to a limited number of significant customers. In
addition, revenues from the Company's products are primarily from the
public safety and law enforcement markets.
Also, the Company currently relies on a limited number of (two or three)
software licensors of its main computer operating system. The Company
cannot assure that if any of these licenses are terminated, it will be able
to replace those licenses on a timely basis.
F - 13
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 11 - INCOME TAXES:
The income tax expense (benefit) is comprised of the following:
For the Three Months Ended For the Year Ended
March 31, December 31,
--------------------------- -------------------
1997 1996 1996 1995
------------ ---------- ------- -------
CURRENT:
Federal $ - $ (7,735) $(50,709) $39,050
State - (4,065) (18,622) 17,095
DEFERRED:
Federal - (4,165) (4,165) (3,000)
State - (2,035) (2,035) (1,450)
------------ ---------- --------- -------
$ - $(18,000) $(75,531) $51,695
============ ========== ========= =======
The Company has net operating loss carryforwards as of December 31, 1996,
of approximately $400,000, which may be applied against future taxable
income, and which expire in various years beginning after 2011. Since there
is no assurance that the Company will generate future taxable income to
utilize the deferred tax asset resulting from its net operating loss
carryforwards, the Company has not recognized this asset.
Due to the carryback of the 1996 loss to previous years, the Company will
recoup the maximum amount refundable for taxes it paid. The following is a
reconciliation of the maximum statutory federal tax rate to the Company's
effective tax rate:
For the Year Ended
December 31,
1996 1995
Federal statutory rate (34.0%) 34.0%
State income taxes (7.0) 7.9
Other - benefit from tax loss carryback 29.3 (2.0)
------ -----
(11.7%) 39.7%
====== =====
NOTE 12 - COMMITMENTS:
(a) In October 1996, the Company entered into a lease, for its current
executive offices, which provides for base annual rental of $85,000.
This lease, which is for an initial term of five years, has scheduled
annual increases, and can be renewed for an additional five year
period. The total amount of the base rent payments is being charged to
expenses using the straight-line method over the term of the lease.
The Company has recorded a deferred credit to reflect the excess of
rent expense over cash payments since the inception of this lease.
Previously, the Company was occupying space pursuant to a lease which
expires in March 1997. The Company elected to write-off the remaining
balance of unamortized leasehold improvements on this old space of
$5,378 during 1996.
F - 14
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 12 - COMMITMENTS (Continued):
The Company also sublets to an unaffiliated third party, space which
was previously utilized as its executive offices under a lease which
expires in February 1998. As of March 31, 1997 and December 31, 1996,
the Company had a remaining accrued liability of $9,584 and $12,198
which represents the net cost to the Company in excess of rental
income.
Total net rent expense for operating leases, consisted of the
following:
<TABLE>
<CAPTION>
For the Three Months For the Year Ended
Ended March 31, December 31,
----------------------- -----------------------
1997 1996 1996 1995
---------- --------- ----------- -------
<S> <C> <C> <C> <C>
Minimum rentals $32,918 $10,050 $ 48,677 $39,544
Sublease rentals (4,500) (4,500) (18,000) (1,500)
---------- --------- ---------- -------
Total net rent expense $28,418 $ 5,550 $ 30,677 $38,044
========== ========= ========== ======
</TABLE>
At December 31, 1996, future minimum rentals (based upon the new
space) and sublease income are as follows:
Total Sublease
Rent Income Net
1997 $ 95,428 $18,000 $ 77,428
1998 87,616 3,000 84,616
1999 87,975 - 87,975
2000 93,075 - 93,075
2001 72,675 - 72,675
-------- ------ -------
Total $436,769 $21,000 $415,769
======== ======= ========
(b) The Company also leases certain types of equipment under operating
leases which expire at various dates through 1999. Lease payments,
which are charged to operations, aggregate approximately $1,100 per
month.
(c) The Company is also committed to provide post-contract customer
support, to two of its customers through a third-party provider. The
agreement with the third party provides for monthly payments of $483
and expires in July 1997.
(d) Effective October 1, 1996, the Company entered into a three-year
employment agreement with the Chairman of its Board of Directors,
whereby he will also serve as Chief Executive Officer of the Company.
This agreement provides for annual compensation of $250,000 and a
signing bonus based on a fixed formula. See Note 14(a) re: Subsequent
Events.
Effective October 1, 1996, the Company entered into a three-year
employment agreement with its President and Chief Operating Officer.
This agreement provides for annual compensation of $125,000 and a
signing bonus of $15,000. See Note 14(a) re: Subsequent Events.
F - 15
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 12 - COMMITMENTS (Continued):
The agreements with both of these officers provide for continuing
automatic one year extensions, increases as determined by the Board of
Directors, annual bonuses based on sales and pretax income and include
provisions for termination and covenants not to compete. In addition,
the agreements provide for common stock option grants based upon
levels of Company earnings.
In January 1997, the Company entered into a three-year employment
agreement with an employee to serve as the Company's Chief Technology
Officer. Such agreement provides for annual base salaries of $200,000,
$225,000 and $250,000 in the first, second and third years,
respectively. Other terms of this employment agreement conform in
structure to the material provisions of the employment agreements
described above.
(e) The Company has entered into two business alliance agreements with
large public network providers and one master supplier relationship
agreement with a large computer system integrator. The purpose of
these arrangements is to provide the Company with the necessary
resources needed to establish a presence with the larger size public
safety market segment. The business alliance agreements provide for
the Company to promote and/or market certain products of the network
providers to customers in certain specified territories, in
conjunction with the Company being allowed to market its own products
to those customers and to establish technical support relationships.
The Company is entitled to a percentage of the fees generated (ranging
from 6-12%) by customers obtained subject to certain minimums and
restrictions. The master supplier agreement provides that the Company
has granted a non-exclusive license to the supplier to make available
to its customers, the Company's products. The Company on the other
hand, has the right to use the supplier's software in performing its
obligations on any project on such customers. The agreement also
provides for the Company to receive consulting fees for any consulting
services provided, product license fees and support services fees, if
applicable.
To date, no revenues have been generated from the above-mentioned
arrangements.
NOTE 13 - PROPOSED INITIAL PUBLIC OFFERING:
The Company is preparing to undertake an initial public offering ("IPO") of
1,200,000 shares of its common stock at a price of $5.00 per share, or an
aggregate of approximately $4,700,000 of net proceeds. The net proceeds
from this offering will be used to repay the promissory notes from the
private offering (see Note 7), build a staff of regional sales managers to
cover the United States and for marketing, product development, etc.
The proposed offering also covers the resale of an aggregate of 389,200
(see Note 14b) shares of common stock underlying the warrants issued in
connection with the debt offering and an aggregate of 250,250 shares
currently held by certain shareholders. The Company will not receive any of
the proceeds from the resale of these shares.
F-16
<PAGE>
NOTE 14 - SUBSEQUENT EVENTS:
(a) The Company had accrued compensation payable to two officers (the
President and the Chairman of the Board) in the aggregate amount of
$125,000 as of March 31, 1997. In April 1997, the officers agreed to
convert $115,000 of such compensation into common shares at a
conversion price of $5.00 per share (the IPO price), such conversion
to occur upon the consummation of the IPO. See Note 13.
(b) In April 1997, the holders of the bridge notes (see Note 7) agreed to
(i) increase the exercise price of the five year warrants issued to
them from $.50 per warrant to $3.00 per warrant and (ii) increase the
holding period of these warrants from six months to two years from the
effective date of the IPO.
In connection with an agreement reached with certain of the bridge
noteholders, the Company canceled bridge warrants to purchase 42,000
shares. The number of shares underlying the bridge warrants has
therefore been reduced from 431,200 to 389,200 common shares.
(c) In April 1997, the Chairman of the Board of the Company agreed to
convert a note payable to him by the Company (see Note 8) into common
shares at a conversion price of $5.00 per share (the IPO price) upon
the consummation of such IPO. In addition, this officer agreed to
provide a $500,000 credit line to the Company (at terms similar to the
$200,000 loan) for a period of two years. To date, the Company has
borrowed $200,000 against this new $500,000 credit line which is
payable in eight equal quarterly installments.
F - 17
<PAGE>
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or the Underwriter. Neither the delivery
of this Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company since the date hereof. This Prospectus does not constitute an offer of
any securities other than the securities to which it relates or an offer to any
person in any jurisdiction in which such an offer would be unlawful.
- --------------
TABLE OF CONTENTS
Page
Prospectus Summary......................................................
Risk Factors............................................................
Use of Proceeds.........................................................
Dilution................................................................
Capitalization..........................................................
Dividend Policy.........................................................
Bridge Financing........................................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...........................................................
Business................................................................
Management..............................................................
Principal and Selling Stockholders......................................
Certain Relationships and Related Transactions..........................
Description of Securities...............................................
Underwriting............................................................
Legal Matters...........................................................
Experts.................................................................
Additional Information..................................................
Financial Statements....................................................
--------------
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
1,200,000 Shares of Common Stock
COMPU-DAWN, INC.
PROSPECTUS
E. C. Capital, Ltd.
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Article X of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by Section 102 of the Delaware General Corporation Law, provided that
this provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) arising under Section 174 of the
Delaware General Corporation Law (with respect to unlawful dividend payments and
unlawful stock purchases or redemptions), or (iv) for any transaction from which
the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of Incorporation
and its by-laws provisions to indemnify its directors, officers, employees and
agents and to purchase insurance with respect to liability arising out of the
performance of their duties as directors, officers, employees and agents as
permitted by Section 145 of the Delaware General Corporation law. The Delaware
General Corporation law provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors, officers, employees and agents may be entitled under the Company's
by-laws, any agreement, vote of stockholders or otherwise.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers, directors, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to indemnify
the Company, its directors, and each person who controls it within the meaning
of Section 15 of the Act with respect to any statement in or omission from the
registration statement or the Prospectus or any amendment or supplement thereto
if such statement or omission was made in reliance upon information furnished in
writing to the Company by the Underwriter specifically for or in connection with
the preparation of the registration statement, the Prospectus, or any such
amendment or supplement thereto.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses to be incurred by the Company in connection with the
issuance and distribution of the securities being registered, other than
underwriting discounts and commissions, are estimated as follows:
SEC Registration Fee 3,359.78
NASD Filing Fee 2,000.00
Blue Sky Fees and Expenses 25,000.00
Registrant's Counsel Fees and Expenses 150,000.00
Accountant's Fees and Expenses 85,000.00
Underwriter's Non-Accountable Expense Allowance 180,000.00
Underwriter's Consulting Fee 108,000.00
Printing and Engraving Expenses 50,000.00
NASDAQ Listing Fees 10,000.00
Blue Sky Counsel Fees 35,000.00
Transfer Agent and Registrar's Fees and Expenses 15,000.00
Miscellaneous Expenses 36,640.22
-----------
Estimated Total $700,000.00
==========
Item 26. Recent Sales of Unregistered Securities.
The Company sold the following Common Shares during the past three years.
The number of Common Shares referred to herein gives effect to a 325 for 1 stock
split effectuated on October 18, 1996 in connection with the Company's
reincorporation in the State of Delaware.
In October 1996, the Company borrowed $770,000 from the following bridge
lenders (the "Bridge Lenders") in a bridge financing transaction. In
consideration for making the loans, the Company issued Bridge Warrants to the
Bridge Lenders for the purchase of an aggregate of 431,200 Common Shares at a
price of $.50 per share.
II-2
<PAGE>
Number of
Common Shares
Name Underlying Warrants
Dong W. Lew 39,200
Mark Honigsfeld 33,600
Robert H. Solomon 25,200
Murray Gross 28,000
Harvey Bibicoff 70,000
Apollo Equities 56,000
James Favia 42,000
Sydney Gluck 22,400
Steven Wallitt 16,800
John Eckhoff 14,000
Kenneth Moschetto 14,000
Lawrence Levine 11,200
Maretza Jimenez
Campos 11,200
Lori Siegal 11,200
Horizon Acquisitions 8,400
Stuart Copperman 5,600
Teddy Selinger 5,600
John P. Hefferon 5,600
Scott Cohen 2,800
Peter Guardino 2,800
James Portnof 2,800
Windsor L. P. 2,800
---------
Total 431,200
Subsequent to the closing of the bridge financing transaction, the exercise
price of the Bridge Warrants was increased to $3.00 per share and Messrs. Lew
and Cohen agreed to the cancellation of the Bridge Warrants issued to them.
In August 1996, the Company sold an aggregate of 480,300 Common Shares at a
price of $.30 per share to the following persons for the following
consideration:
Number of Aggregate
Name Common Shares Consideration
Murray Gross 50,000 $15,000.00
Robert LoRusso 100,100 30,030.00
Mark Honigsfeld
Living Trust 330,200 99,060.00
------- ---------
Total 480,300 $129,090.00
======= ==========
Additionally, in August 1996, the Company issued 25,075 Common Shares to
Mr. Gross in payment of consulting fees of $7,522.50 in connection with the
Company's marketing activities and 75,075 Common Shares to Robert H. Solomon in
payment of legal and consulting fees of $22,522.50.
In April 1997, the Company issued 233,000 Common Shares to the Mark
Honigsfeld Living Trust upon the exercise of a certain option by Mr. Honigsfeld
for the purchase of such shares at an exercise price of $.30 per share.
II-3
<PAGE>
All the foregoing transactions were private transactions not involving a
public offering and were exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof. The bridge financing securities
were sold only to accredited investors. The Company determined that the
stockholders to whom the Company issued Common Shares in the August 1996 and
April 1997 transactions discussed above were sophisticated investors. Except as
otherwise indicated below, sales of the securities were without the use of an
underwriter, and the certificates evidencing the securities relating to the
foregoing transactions bear restrictive legends permitting the transfer thereof
only upon registration of such securities or an exemption under the Securities
Act.
The Underwriter of this Offering acted as placement agent for the Company
in connection with the bridge financing transaction on a "best efforts, all or
none" basis. The Underwriter received a placement fee of 10% of the gross
proceeds of the Bridge Financing transaction, or $77,000, and a non-accountable
expense allowance of 3% of the gross proceeds of the Bridge Financing
transaction or $23,100. The Company also paid the fees and disbursements of the
Underwriter's counsel in connection with representing the Underwriter in its
capacity of placement agent in the Bridge Financing transaction.
Item 27. Exhibits.
Exhibit
Number Title of Exhibit
1.1 Form of Underwriting Agreement by and between the Company and the
Underwriter.*
1.2 Form of Financial Consulting Agreement between the Underwriter and the
Company.*
2.1 Agreement of Merger between the Company and Coastal Computer Systems, Inc.,
a New York corporation.*
3.1 Articles of Incorporation of the Company.*
3.2 By-Laws of the Company.*
4.1 Specimen Common Share Certificate.*
4.2 Form of Underwriter's Common Share Purchase Warrant.*
5.1 Opinion of Certilman Balin Adler & Hyman, LLP, counsel for the Company.*
10.1 Restated and Amended Employment Agreement dated as of October 1, 1996
between the Company and Dong W. Lew.*
10.2 Restated and Amended Employment Agreement dated as of October 1, 1996
between the Company and Mark Honigsfeld.*
II-4
<PAGE>
10.3 $70,000 Promissory Note dated October 30, 1996 from Dong W. Lew to the
Company.*
10.4 Form of Warrant between the Company and each of the Bridge Lenders.*
10.5 1996 Stock Option Plan.*
10.6 Lease dated October 1, 1996 between Summit Equities Corp. and the Company.*
10.7 Pledge and Hypothecation Agreement dated October 30, 1996 between the
Company and Dong W. Lew.*
10.8 Credit Agreement dated January 20, 1997 between the Company and Mark
Honigsfeld.*
10.9 $100,000 Promissory Note dated January 20, 1997 from the Company to Mark
Honigsfeld.*
10.10 $50,000 Promissory Note dated February 19, 1997 from the Company to Mark
Honigsfeld.*
10.11 $50,000 Promissory Note dated March 5, 1997 from the Company to Mark
Honigsfeld.*
10.12 Form of Indemnification Agreement between the Company and the Company's
directors and officers.*
10.13 Consulting Agreement dated September 27, 1996 between the Company and Alan
Daniels and Geraldine Lum Daniels.*
10.14 Employment Agreement dated January 6, 1997 between the Company and Louis
Libin.*
10.15 Amended and Restated Credit Agreement dated April 30, 1997 between the
Company and Mark Honigsfeld.*
10.16 $100,000 Promissory Note dated May 8, 1997 from the Company to Mark
Honigsfeld.*
10.17 $100,000 Promissory Note dated May 28, 1997 from the Company to Mark
Honigsfeld.*
10.18 Mobile Data Services Business Agreement dated as of November 15, 1996
between the Company, and GTE Mobilnet Service Corp.
II-5
<PAGE>
10.19 Wireless Data Channels Program Agreement dated as of February 19, 1997
between the Company and AT&T Wireless Data, Inc.
10.20 Master Supplier Agreement dated as of March 3, 1997 between the Company
and Data General Corporation.
23.1 Consent of Lazar, Levine & Company LLP, independent auditors.
23.2 Consent of Certilman Balin Adler & Hyman, LLP (included in its opinion
filed as Exhibit 5.1 hereto).
27.1 Financial Data Schedule.*
*Previously filed.
Item 28. Undertakings.
(a) Rule 415 Offering.
The undersigned Company will:
(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information set forth in
the registration statement; and
(iii) include any additional or changed material information on the
plan of distribution.
(2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Equity Offerings of Nonreporting Small Business Issuers.
The undersigned Company will provide to the Underwriter, at the closing
specified in the underwriting agreement, Common Share certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
(c) Indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions referred to in Item 24 of this Registration
Statement, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling persons of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(d) Rule 430A.
The undersigned Company will:
(1) for determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company under Rule 424(b)(1) or (4) or
497(h) under the Securities Act, as part of this Registration Statement
as of the time the Commission declared it effective;
(2) for determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration
Statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
(e) Rule 424(c) Supplement; Post Effective Amendment.
The undersigned Company will, in the event the Underwriter in this
Offering enters into transactions with the Selling Stockholders or
waives the lock-up restrictions applicable to such Selling
Stockholders' Common Shares:
(1) involving from 5% up to 10% of the Selling Stockholders' Common Shares,
file "sticker" supplements to the Prospectus pursuant to Rule 424(c)
under the Securities Act; or
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(2) involving over 10% of the Selling Stockholders' Common Shares, file a
post-effective amendment to the Registration Statement.
II-8
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Company certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB- 2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
County of Nassau, State of New York, on June 4, 1997.
COMPU-DAWN, INC.
By:/s/ Mark Honigsfeld
Mark Honigsfeld, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
/s/ Mark Honigsfeld Chairman of the Board, June 4, 1997
- --------------------------
Mark Honigsfeld Chief Executive Officer,
Secretary and Director
(Principal Financial Officer
and Principal Accounting Officer)
* President, Chief Operating June 4, 1997
- ------------------------- Officer, Treasurer and
Dong W. Lew Director
* Director June 4, 1997
- -------------------------
Louis Libin
* Director June 4, 1997
- -------------------------
William D. Rizzardi
* Director June 4, 1997
- -------------------------
Harold Lazarus, Ph.D.
*By: /s/ Mark Honigsfeld
--------------------
Mark Honigsfeld
Attorney-in Fact
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MOBILE DATA SERVICES BUSINESS AGREEMENT
THIS AGREEMENT (This "Agreement") is entered into as of the 15 day of
November 1996 by and between GTE Mobilnet Service Corp. on its behalf and on
behalf of its affiliates, GTE Mobilnet Incorporated and Contel Cellular
Incorporated ("GTE Mobilnet") and Compu-DAWN, Inc. ("Business Representative").
WHEREAS, GTE Mobilnet wishes to market Mobile Data Services to
Customers through a variety of direct and indirect distribution channels,
including business representatives; and
WHEREAS, Business Representative wishes to offer to Customers various
Applications which will use Mobile Data Services and intends to solicit
Customers to GTE Mobilnet for their Mobile Data Services needs;
NOW THEREFORE, in consideration of these premises, the mutual
covenants exchanged below and other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties hereto, wishing to be
legally bound, hereby agree as follows:
1. DEFINITIONS
Unless otherwise indicated, definitions of terms capitalized in this
Agreement are set forth in Exhibit A attached hereto.
2. ESTABLISHMENT OF RELATIONSHIP AND ACKNOWLEDGMENT
2.1 Appointment: GTE Mobilnet hereby authorizes Business Representative,
in conjunction with the marketing of the Application(s) described in
Exhibit B, to solicit and refer potential Customers located in the
Territory described in Exhibit B to GTE Mobilnet for the sale of
Mobile Data Services, subject only to the terms and conditions
contained herein. This Agreement shall not be construed to create a
joint venture, partnership, employment relatonship or franchise or any
other legal relationship between the parties. Neither party shall
share or be responsible for the debts and liabilities of the other
party, or have the authority to legally bind the other in any manner.
2.2 Business Representative's Acknowledgment of GTE Mobilnet's Alternative
Distribution Rights: GTE Mobilnet shall not be liable to Business
Representative in any manner if any sale, activation or order for
Mobile Data Services, wireless data applications, or other services or
products is obtained by GTE Mobilnet or by any third party, even
though Business Representative may have previously solicited the
Customer who purchased, activated or made such order. Business
Representative acknowledges that GTE Mobilnet
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will enter into different financial and other arrangements with
various participants in alternative distribution channels (including
direct sales, agents, Resellers and other Business Representatives),
and that GTE Mobilnet shall not be liable to Business Representative
in any manner if Business Representative's Compensation, joint
marketing activities, benefits, responsibilities, Territory, rates, or
other categories of Mobile Data Services hereunder are not as
favorable as those provided by GTE Mobilnet to others. Business
Representative also acknowledges that GTE Mobilnet may now or in the
future offer additional Wireless Services or applications which GTE
Mobilnet is not obligated to allow Business Representative to offer.
2.3 Valid Execution; Term: This Agreement, and any amendments hereto,
shall be effective only after its execution by an officer of both
Business Representative and GTE Mobilnet. The term of this Agreement
shall be two (2) years from the date hereof. It is expressly
understood and agreed that neither party has any right or expectation
of renewal or extension of this Agreement beyond the initial two (2)
year term.
2.4 Regulatory Matters: This Agreement shall at all times be subject to
local, state, and federal regulatory agencies having jurisdiction over
the provision of Mobile Date Services and any Applications therefor.
2.5 Mobile Data Services Rates: GTE Mobilnet shall determine the rates,
charges, and categories of Mobile Data Services to be presented to
Customers and set forth in the CSA. GTE Mobilnet, in its sole
discretion, may add, delete, suspend, or modify its rates, charges or
categories for Mobile Data Services, and determine whether such
changes apply to both existing or future Customers, or apply only in
certain geographic markets. GTE Mobilnet shall notify Business
Representative of each such modification which applies to any part of
the Territory assigned hereunder to Business Representative. Business
Representative shall not represent or agree that Customers will be
charged for GTE Mobilnet's Mobile Data Services at any rates other
than those determined by GTE Mobilnet.
2.6 No Guarantee of Profit: Business representative acknowledges that GTE
Mobilnet has made no representations or guarantees, express or
implied, regarding the profit that Business Representative will or
might make. Business Representative assumes all financial risks
associated with its activities under this Agreement.
2.7 Fee Paid to GTE Mobilnet: GTE Mobilnet is in the process of marketing,
communicating and selling Mobile Data Services to a wide range of
businesses, governmental entities and other accounts, directly and
through
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various channels of distribution. Therefore, if, during such process,
GTE Mobilnet is responsible for identifying and qualifying a
customer's intent to purchase Mobile Data Services and GTE Mobilnet
offers in writing to include Business Representative in a particular
business opportunity because of its application and/or services, as a
provider of products and/or services to such customer, then Business
Representative agrees to pay to GTE Mobilnet a sum equal to five
percent (5%) of one year's revenues received by Business
Representative, or such other amount as the parties may mutually agree
upon, for providing systems integration, software, hardware, and
implementation services that results in customer acceptance of the
system, less the total amount of Business Representative's documented
pass-through costs.
2.8 TEXAS ONLY: DISCLAIMER OF TEXAS DECEPTIVE TRADE PRACTICES - CONSUMER
PROTECTION ACT. AGENT SPECIFICALLY ACKNOWLEDGES AND AGREES THAT IT HAS
KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE
IT TO EVALUATE THE MERITS AND RISKS OF ITS TRANSACTION WITH GTE
MOBILNET, AND THAT IT IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING
POSITION WITH GTE MOBILNET. AGENT SPECIFICALLY ACKNOWLEDGES THAT IT IS
NOT A CONSUMER (AS DEFINED IN THE TEXAS DECEPTIVE TRADE PRACTICES -
CONSUMER PROTECTION ACT) AND THAT THE TEXAS DECEPTIVE TRADE PRACTICES
CONSUMER PROTECTION ACT DOES NOT APPLY TO THE AGENT. TO THE EXTENT
THAT THE AGENT IS A BUSINESS CONSUMER (AS DEFINED IN THE TEXAS
DECEPTIVE TRADE PRACTICES CONSUMER PROTECTION ACT) WITH ASSETS OF $5
MILLION OR MORE ACCORDING TO ITS MOST RECENT FINANCIAL STATEMENT
PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES,
THE AGENT EXPRESSLY DISCLAIMS AND WAIVES ALL PROVISIONS OF THE TEXAS
DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT OTHER THAN SECTION
17.555.
3. ARBITRATION.
BUSINESS REPRESENTATIVE AND GTE MOBILNET HEREBY AGREE THAT ALL
DISPUTES ARISING OUR OF OR RELATING IN ANY WAY TO THIS AGREEMENT WHICH
CANNOT BE RESOLVED THROUGH GOOD FAITH NEGOTIATIONS TO THE MUTUAL
SATISFACTION OF BOTH PARTIES WITHIN THIRTY (30) CALENDAR DAYS (OR SUCH
LONGER PERIOD AS MAY BE MUTUALLY AGREED UPON BY THE PARTIES) AFTER THE
COMPLAINING PARTY HAS NOTIFIED THE OTHER PARTY OF THE
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COMPLAINT, SHALL BE FINALLY SETTLED BY BINDING ARBITRATION IN ATLANTA
BEFORE THE ATLANTA REGIONAL OFFICE OF THE AMERICAN ARBITRATION
ASSOCIATION BY THREE (3) ARBITRATORS IN ACCORDANCE WITH THE RULES OF
COMMERCIAL ARBITRATION OF THE AMERICAN ARBITRATION ASSOCIATION THEN IN
EFFECT AND THE ARBITRATORS' DECISION SHALL BE FINAL AND BINDING UPON
THE PARTIES. IN DECIDING ANY CLAIM, THE ARBITRATORS SHALL APPLY GEORGIA
LAW; PROVIDED, HOWEVER, THAT THE ARBITRATORS SHALL HAVE NO AUTHORITY TO
AWARD CONSEQUENTIAL DAMAGES OR PUNITIVE DAMAGES UNDER ANY
CIRCUMSTANCES.
4. BUSINESS REPRESENTATIVE RESPONSIBILITIES AND OBLIGATIONS
Business Representative agrees to the following responsibilities and
obligations:
4.1 Services Provided by Business Representative: Business
Representative shall provide the Sales Services and any
Implementation Services and Technical Support Services described
in Schedule 1 to Customers for Business Representative's
Applications and GTE Mobilnet's Mobile Data Services. Business
Representative shall be solely responsible and bear all liability
for its performance of such services. Business Representative
acknowledges that the purpose of the Agreement is the sale of
Mobile Data Services only.
4.2 Identification: Business Representative shall identify itself as
authorized by GTE Mobilnet to solicit potential Customers for GTE
Mobilnet. Such designation shall be specifically limited to a
form and style prescribed by GTE Mobilnet and shall automatically
cease with the termination or expiration of this Agreement.
4.3 Business Representative's Responsibility for Its Employees and
Personnel: Business Representative shall be responsible for
ensuring compliance with this Agreement by its employees and
personnel, whether permanent, temporary, contract or otherwise,
employed or otherwise engaged by Business Representative to
perform services under this Agreement. Business Representative
shall be liable to GTE Mobilnet for any damages suffered as a
result of non-compliance.
4.4 Business Representative's Agents: Business Representative shall
not have the right to employ, appoint, engage or otherwise use
Agent(s) in the performance of its obligations under this
Agreement, unless Business Representative receives the prior
written consent of GTE Mobilnet.
4.5 Public Statements or Press Releases: Business Representatives
agrees not to
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initiate any public relations activities related to GTE
Mobilnet's Mobile Date Services, including without limitation
news releases, news conferences, news briefings, or any other
type of function involving reporters, editors or news directors
of any news organizations, without prior written approval of GTE
Mobilnet. Further, Business Representative agrees to refer to GTE
Mobilnet all questions from news organizations related to GTE
Mobilnet or GTE Mobilnet's Mobile Data Services.
4.6 Trademarks and Related Matters: Business Representative is not
granted any rights in and is not authorized, licensed or
permitted to use the Marks of GTE Mobilnet or any of its
Affiliates except for the sole purpose of Business Representative
identifying itself as authorized to solicit and refer potential
Customers to GTE Mobilnet. In connection with this limited use,
GTE Mobilnet shall furnish the list of Marks that Business
Representative is permitted to use and the rules and regulations
pertaining to use of the Marks, with which Business
Representative agrees to comply. During the term of this
Agreement and at any time thereafter, Business Representative and
its owner(s) and Affiliates shall not use any identical or
confusingly similar mark or trade name, service mark, trademark,
advertising logo, insignia, symbols or decorative designs to
Marks or other items used by GTE Mobilnet. Business
Representative also agrees to return to GTE Mobilnet upon
termination of this Agreement or at GTE Mobilnet's earlier
request any advertising and marketing materials, forms, training
materials or other materials containing any GTE Mark or other
materials relating to GTE's Mobile Data Services.
4.7 Insurance: Business Representative shall at all times during the
term hereof, at Business Representative's sole expense, be
insured under a comprehensive liability insurance policy against
claims for bodily and personal injury, death and property damage
caused by or occurring in conjunction with the operation of
Business Representative's business. GTE Mobilnet shall be named
as an additional insured party on each policy. Such insurance
coverage shall be maintained under one or more policies of
insurance from a recognized insurance company qualified to do
business within the Territory, providing in the aggregate a
minimum liability protection of One Million Dollars ($1,000,000)
per occurrence for bodily and personal injury and death, subject
to such deductibles as GTE Mobilnet determines from time to time
to be appropriate. Each such insurance policy shall provide for
not less than thirty (30) days prior notice to all insured of any
modification, cancellation or non-renewal. Business
Representatives shall furnish proof satisfactory to GTE Mobilnet
that the insurance coverage required hereunder is in force.
5. GTE MOBILNET RESPONSIBILITIES AND OBLIGATIONS
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<PAGE>
5.1 No Warranties: GTE MOBILNET MAKES NO WARRANTY, EITHER EXPRESS OR
IMPLIED, CONCERNING THE MOBILE DATA SERVICES, INCLUDING WITHOUT
LIMITATION, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR USE OR PURPOSE. GTE Mobilnet shall in no event be
liable for direct, indirect, special, consequential or punitive
damages or for lost profits which are suffered or incurred by
Business Representative, Customers or any other persons who
utilize or rely upon Mobile Data Services and which are a result
of Mobile Data Services System downtime or isolated or systemic
failures of or defects affecting either such services or Business
Representative's Products and Services. GTE Mobilnet shall have
no liability for Applications related failures or defects, and
GTE Mobilnet's liability for failures or defects in the
performance of Mobile Data Services shall be limited to the
refund of payments received by GTE Mobilnet for the affected
services.
5.2 Customer: Upon approval and acceptance by GTE Mobilnet of the
required CSA or an order for Mobile Data Services otherwise
accepted by GTE Mobilnet, the person or entity ordering Mobile
Data Services shall become a Customer of GTE Mobilnet with
respect to such services. GTE Mobilnet shall provide Mobile Data
Services, subject to the provisions in the CSA, to such Customer
and shall be responsible for the billing and collection of all
charges for Mobile Data Services.
5.3 Compensation: GTE Mobilnet shall pay to Business Representative
Compensation in accordance with the terms of Schedule 2 attached
hereto, provided, however, that:
(a) GTE Mobilnet may, at its option, forgo all payments
of Compensation otherwise due during periods in which
Business Representative fails materially to provide
the services set forth in Schedule 1; and
(b) any restrictions on the payment of Compensation set
forth in this Agreement or in the Schedule, including
without limitation the deduction provisions obtained
in Section 8.2(b), 9.12 and Schedule 2, shall be
enforceable against any Compensation due or paid to
Business Representative.
5.4 Billing and Collections: GTE Mobilnet has the sole right and
responsibility for verifying credit information and for
billing of and collection from Customers or potential
Customers or any money or charges for Mobile Data Services
provided by GTE Mobilnet.
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5.5 Administration: GTE Mobilnet shall be responsible for
establishing the administrative procedure and guidelines for
processing Customer CSAs, and, if applicable, for procedures
for Implementation Services provided to Customers by
Business Representative.
5.6 Sales Support: As it deems appropriate, GTE Mobilnet may,
but is not obligated to, provide sales support to Business
Representative under this Agreement. That support may
include the following, some of which will be free and some
of which may, with prior notice, be charged to Business
Representative at cost to GTE Mobilnet: promotional
literature, sales brochures, sales and wireless data
equipment support, sales training, and training in
administrative procedures and system operating
characteristics.
6. DEFAULT
6.1 Default by GTE Mobilnet: GTE Mobilnet shall be in "Default"
of its obligations under this Agreement if GTE Mobilnet
materially breaches this Agreement and fails to cure such
breach within thirty (30) days after written notice of such
breach is received by GTE Mobilnet by certified mail.
6.2 Default by Business Representative: Each of the following
shall constitute a "Default" by Business Representative of
its obligations under this Agreement:
(a) Business Representative (or one or more of its owners,
employees or Affiliates) makes a material
misrepresentation or omission, whether verbal or
written, to induce GTE Mobilnet to enter into this
Agreement:
(b) Business Representative makes an assignment for the
benefit of creditors or files a voluntary petition
under Title 11 of the United States Code or under any
similar state insolvency laws or Business
Representative shall have an involuntary petition for
bankruptcy filed against it under Title 11 of the
United Sates Code and such involuntary petition is not
dismissed within thirty (30) days; or a trustee or
receiver is appointed to administer Business
Representative's business or assets;
(c) Business Representative, without the prior written
consent of GTE Mobilnet, violates the rates and/or
billing provisions of Section 2.5 or Section 5.4
hereof;
(d) Business Representative engages in conduct which GTE
Mobilnet
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reasonably believes might violate any federal or state
antitrust laws or other consumer protection laws; or
(e) Business Representative fails to comply with, or
breaches, any other provision or requirement of this
Agreement not specifically set forth in this Section
6.2, or any tariff relating to Mobile Data Services,
and, if such failure is capable of being cured, does
not cure such failure within 30 days after written
notice of such failure to comply is delivered to
Business Representative.
7. TERMINATION OF AGREEMENT
7.1 Termination by Business Representative. Upon Default by GTE
Mobilnet under Section 6.1 hereof, Business Representative may
give notice of Default by providing written notice to GTE
Mobilnet of such Default, and the 30-day cure period described in
Section 6.1 shall begin effective upon delivery of the notice of
Default to GTE Mobilnet by certified mail.
7.2 Termination by GTE Mobilnet:
(a) Regulatory and Contractual Requirements. GTE Mobilnet,
at its sole option, may terminate this Agreement upon
thirty (30) days written notice if:
(I) the authorization by the FCC or any other regulatory
authority to provide cellular telephone service is not
continued in substantially the same form and such
change, in GTE Mobilnet's sole discretion, impacts, in
a materially adverse manner, GTE Mobilnet's ability to
conduct its Mobile Data Services or cellular business;
or
(ii) Business Representative or an Affiliate
thereof is granted regulatory authority to
construct or operate Mobile Data Service or
any Wireless Services anywhere in the United
States.
(b) Default. GTE Mobilnet, at its sole option, may
terminate this Agreement effective upon delivery of
written notice to Business Representative of Default by
Business Representative under Section 6.2 hereof.
(c) Breach of Other Agreement. GTE Mobilnet, at its sole
option, may terminate this Agreement effective upon
delivery of written notice to
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Business Representative if Business Representative
(or any Affiliate thereof) breaches its obligations
under any other agreement with GTE Mobilnet (or any
Affiliate thereof), and such agreement is terminated.
7.3 Termination by Mutual Agreement: This Agreement may be terminated
by mutual written agreement of the parties.
8. REMEDIES
8.1 Remedies of Business Representative: Business Representative's
sole remedy for Default by GTE Mobilnet under this Agreement
shall be termination of this Agreement pursuant to Section 7.1.
Specifically, except for the indemnification obligations set
forth in Section 9.4, GTE Mobilnet shall have no liability for
any lost profits or consequential damages even if advised of the
possibility of such damages. Notwithstanding the foregoing, GTE
Mobilnet shall pay to Business Representative any Compensation
owing to Business Representative, subject to all deduction and
off-set provisions in this Agreement and any other amounts owing
to GTE Mobilnet under Section 8.2 hereof.
8.2 Remedies of GTE Mobilnet: GTE Mobilnet, in its discretion, shall
be entitled to exercise one or more of the following remedies for
Default by Business Representative under this Agreement:
(a) Terminate this Agreement pursuant to Section 7.2 hereof;
(b) Deduct from Business Representative's Compensation all
damages and costs incurred by GTE Mobilnet as a result of
Business Representative's Default;
(c) Any other remedy available to GTE Mobilnet at law or in
equity; provided however, that except for the
indemnification obligations set forth in Section 9.4,
Business Representative shall have no liability for any lost
profits or consequential damages even if advised of the
possibility of such damages.
GTE Mobilnet may simultaneously, in its sole discretion,
exercise one or more of the remedies to which it is entitled
hereunder. GTE Mobilnet shall not be deemed to have waived
any right, remedy, provision or option under this Agreement,
including the right to demand exact compliance with the
terms of this Agreement, by virtue of exercising, or not
exercising, any of its remedies hereunder. Failure by GTE
Mobilnet to exercise one or more of its remedies on
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one or more occasions shall not prohibit the exercise of
such remedies subsequently.
9. GENERAL PROVISIONS
9.1 Business Representative Representations: Business Representative
represents and warrants that the execution and performance of
this Agreement will not conflict with or result in the breach of
any other agreement or contract to which Business Representative
is a party. Business Representative further warrants that it is
not subject to any limitation or restriction which would
prohibit, restrict or impede Business Representative's
performance hereunder.
9.2 DISCLAIMER OF WARRANTIES: GTE MOBILNET MAKES NO WARRANTY, EITHER
EXPRESS OR IMPLIED, CONCERNING THE APPLICATIONS, INCLUDING
BUSINESS REPRESENTATIVE'S PRODUCTS AND SERVICES, INCLUDING
WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR USE OR PURPOSE OR OF GOOD AND WORKMANLIKE MANNER.
GTE MOBILNET MAKES NO WARRANTY, EITHER EXPRESS OR IMPLIED,
CONCERNING THE PERFORMANCE OF THE APPLICATIONS, INCLUDING
BUSINESS REPRESENTATIVE'S PRODUCTS AND SERVICES, ON THE MOBILE
DATA SERVICES NETWORK.
9.3 Named Accounts: Business Representative acknowledges that GTE
Mobilnet, as a direct seller of Mobile Data Services, will be
soliciting Customers it considers to be named Accounts. If
Business Representative is currently a GTE Mobilnet Agent for
distribution of voice services pursuant to an agreement (a "Voice
Agent Agreement") between GTE Mobilnet and Business
Representative, then Business Representative agrees to be bound
by the terms of the Voice Agent Agreement as to Named Accounts.
If Business Representative is not subject to a Voice Agent
Agreement, then the following procedure shall apply as to Named
Accounts: GTE Mobilnet shall notify Business Representative of
any list of its Named Accounts, by name or category, which may be
published by GTE Mobilnet from time to time. Should Business
Representative solicit any of the Named Accounts for the purpose
of selling Wireless Services, Business Representative agrees that
it will give the GTE Mobilnet contract administrator five
business days prior notice of such solicitation. Any Named
Account list or Customer Information provided under the terms of
this section is highly confidential and is subject to Section 9.7
below.
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9.4 Indemnification: Each party agrees to indemnify and hold the
other harmless from any and all liability, loss, claim, damage,
cost or expense (including attorney's fees and court costs)
arising out of claims made by third parties against the other, as
the result of (a) any material failure by the party so
indemnifying to perform its obligations hereunder, (b) an alleged
theft or infringement by the indemnifying party of a third
party's patent, copyright, trade secret, or other intellectual
property rights, or (c) a failure of or defect in a Product or
Service provided by Business Representative (from which claim
Business Representative (from which claim Business Representative
shall indemnify GTE Mobilnet). The obligations of the parties
under this Section shall survive the termination or expiration of
this Agreement.
9.5 Notices: Except as otherwise provided in this Agreement, all
notices required or permitted to be given hereunder shall be in
writing and shall be valid and sufficient if dispatched by
facsimile or by certified or registered mail, postage prepaid,
return receipt requested, in any post office in the United
States, addressed as follows:
If to GTE Mobilnet:
GTE Mobilnet Service Corp.
245 Perimeter Center Parkway
Atlanta, Georgia 30346
Attn.: Dale Voyles, Esq., Business
Development/Contracts Counsel
with a copy to:
Rod Sandel, Director of Data Sales
at the same address
If Business Representative:
Compu-DAWN, Inc.
(Authorized Representative)
166 West Park Avenue
(Address)
Long Beach, NY 11561
John P. Hefferon
(Contact name)
(516) 432-7096
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(Telephone)
(516) 432-5356
(Facsimile)
Either party hereto may change its address by providing notice of such address
changes to the other party in the manner set forth above. Notices given as
herein provided shall be considered to have been received five (5) days after
mailing thereof, or when actually received, whichever occurs first.
9.6 Assignment or Transfer of Interest: Neither party may assign or
transfer this Agreement without the written consent of the other
party, except that GTE Mobilnet may assign this Agreement to any
of its Affiliates. In the event of a change in ownership or
control of a party, the other party may terminate this Agreement
on ten (10) days notice.
9.7 Confidential and Proprietary Information: Any disclosure of
Confidential Information between the parties during the term of
this Agreement shall be made pursuant to the terms set forth in
Exhibit C, attached hereto and by this reference made a part
hereof. Business Representative specifically agrees that all
Customer Information is the property of GTE Mobilnet and is
highly competitive, confidential and proprietary information.
Notwithstanding breach of this Agreement on the part of either
party, this provision shall survive the expiration, cancellation
or termination of this Agreement.
9.8 No Solicitation: During the term of this Agreement and for one
(1) year after its termination (whether voluntary or
involuntary), Agent will not solicit any Customer that Agent
knows to be a Customer of GTE Mobilnet to use Wireless Services
provided by another carrier if the result of the Customer's use
of such other Wireless Services would be to curtail or cancel its
business with GTE Mobilnet. Business Representative shall not be
bound by the foregoing sentence if Business Representative can
demonstrate through clear and convincing evidence that such
Customer, through no solicitation, influence, inducement,
referral or participation on the part of Business Representative,
independently decided to obtain Mobile Data Service or
competitive Wireless Services from another provider or Reseller
of such Services.
9.9 Survival of Obligations: Expiration or termination of this
Agreement for any cause shall not release either party from any
liability which at the time of termination or expiration has
already accrued to the other party or which thereafter may accrue
in respect to any act or omission prior to termination. All
obligations of either party which expressly or by their nature
survive the
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expiration or termination of this Agreement, including without
limitation Sections 4.3, 4.4, 4.6, 5.1, 8.1, 8.2, 9.8, and 9.9,
shall continue in full force and effect notwithstanding its
expiration or termination, until they are satisfied in full or by
their nature expire.
9.10 Binding Effect: This Agreement, and any amendments hereto, shall
be binding upon the parties hereto, their respective executors,
administrators, heirs, assigns, and successors in interest.
9.11 Notification of Actions Involving Business Representative:
Business Representative shall notify GTE Mobilnet in writing
within five (5) days of the commencement of any material action,
suit or proceeding or of the issuance of any subpoena, civil
investigative demand, order, writ, injunction, award or decree of
any court, grand jury, agency or other governmental
instrumentality relating to the Mobile Data Services or
Customer's obtaining such Services involving Business
Representative, or any business conducted by Business
Representative or any of its employees.
9.12 Business Representative Off-Sets: Business Representative agrees
that GTE Mobilnet may, in its discretion, deduct from any
Compensation or any other amounts owed Business Representative an
amount equal to any debt owed by Business Representative to GTE
Mobilnet or its Affiliates, and pay these amounts directly to GTE
Mobilnet or its Affiliates for the account of Business
Representative.
9.13 Waiver: Neither Business Representative nor GTE Mobilnet shall be
deemed to have waived any right or option under this Agreement,
including the right to demand exact compliance or to declare a
breach of the Agreement, by virtue of any contrary custom or
practice of the parties. Failure of Business Representative or
GTE Mobilnet to enforce a provision of this Agreement on one or
more occasions shall not prohibit the enforcement of that same
provision on a subsequent occasion.
9.14 Severability and Substitution of Valid Provisions: Each provision
of this Agreement shall be considered severable and if a
provision is for any reason held to be invalid, including without
limitation Section 9.8 and 9.9, all remaining provisions shall be
enforceable. If any provision of this Agreement is held to impose
a restriction upon Business Representative which is unenforceable
in scope but could be made enforceable by limiting the scope,
Business Representative and GTE Mobilnet agree to a modification
of the invalid or unenforceable provision to the extent required
by enforceability.
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9.15 Execution: This Agreement may be executed in counterparts, each
of which shall be deemed an original.
9.16 Effects of Headings: Headings to articles and paragraphs of this
Agreement are for reference only, do not form a part of this
Agreement and shall not affect the interpretation hereof.
9.17 Applicable Law: The validity, construction and performance of
this Agreement shall be governed by and interpreted in accordance
with the laws of the State of Georgia.
9.18 Entire Agreement; Amendments: Both GTE Mobilnet and Business
Representative have read this Agreement and understand and accept
the terms, conditions to this Agreement are expressly
incorporated herein by this reference and the term "Agreement"
shall include all Exhibits and Schedules attached hereto. Neither
party shall be bound by any representations made by any of its
officers, employees or Business Representatives which are
contrary to the terms of this Agreement. This Agreement,
including any Schedules, Exhibits or other attachments, sets
forth the entire understanding between the parties and supersedes
all previous agreements, arrangements and understanding between
the parties, whether verbal or written. Except for those Sections
which expressly authorize GTE Mobilnet to make unilateral changes
in certain terms and conditions, this Agreement may not be
amended except in writing signed by authorized representatives of
both parties unless otherwise provided in this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
BUSINESS REPRESENTATIVE:
By: /s/ John Hefferon
[Authorized Company Representative]
Print name: John Hefferon
Title: Executive Vice President
Date: November 15, 1996
GTE MOBILNET SERVICE CORP.:
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By: /s/ Ronald R. Grawert
[Authorized Company Representative]
Print Name: Ronald R. Grawert
Title: Executive Vice President -Operations
Date: December 17, 1996
By: /s/ Laura E. Binion
[Authorized Company Representative]
Print Name: Laura E. Binion
Title: Assistant Secretary
Date: December 18, 1996
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EXHIBIT A
DEFINITIONS
Agent: A person, corporation or any other entity or organization
which is employed, appointed, engaged or otherwise used by
Business Representative, as an agent for the purpose of
referring Customers for activation of Mobile data Services
with GTE Mobilnet or to perform any other obligations under
this Agreement.
Agreement: This Agreement, including all exhibits, schedules and
amendments hereto.
Affiliates: A person, association, partnership, corporation or
joint-stock company or trust that directly or indirectly,
through one or more intermediaries, controls, is controlled
by or is under common control with, another person or
entity. Control shall be defined as (i) ownership of a
majority of the voting power of all classes of voting stock;
(ii) ownership of a majority of the beneficial interests in
income and capital of an entity other than a corporation;
and (iii) ownership of a general partnership interest in a
limited partnership.
Applications: The value-added applications for Mobile Data
Services described in ExhibitB, which include Business
Representative's Products and Services, and may include
other wireless data devices, hardware, software or other
products or services which utilize or when commercially
available will utilize any form of Mobile Data Services, or
systems integration services related thereto, and in
conjunction with which Business Representative is authorized
pursuant to the terms of this Agreement to offer GTE
Mobilnet's Mobile Data Services to actual or potential
Customers.
Compensation:Compensation paid to Business Representative by GTE
Mobilnet for Business Representative's services under this
Agreement, as set forth in Schedule 2 hereto.
Customer: The person, organization, corporation or other entity
which purchases Mobile Data Services from GTE Mobilnet and
is responsible for the repayment of charges to GTE Mobilnet
for such Mobile Data Services.
Customer Information: Any and all information about actual or
potential customers obtained by Business Representative in
connection with its activities on behalf of GTE Mobilnet,
including but not limited to, lists of actual or potential
Customers provided by GTE Mobilnet, CSAs and terms offered
or agreed to by GTE Mobilnet and the names, addresses,
telephone numbers, and network addresses (including, but not
limited to, Network Entity Identifiers and
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Internet Protocol Addresses) of Customers for GTE Mobilnet's
Mobile Data Services.
CSA: Customer Service Agreement between GTE Mobilnet and Customer
which sets forth the terms for the provisions of GTE
Mobilnet's Mobil Data Services to Customer, as such
agreement is issued by GTE Mobilnet from time to time.
Implementation Services: The customization of Applications, and
initial administrative, training and technical support, if
any, which Business Representative is required by Schedule 1
to provide to Customers in connection with their adoption
and implementation of Applications and GTE Mobilnet's Mobile
Data Services.
Marks: Any and all trademarks, service marks, trade names,
insignia, symbols, decorative designs, or other patented,
restricted or licensed marks which GTE Mobilnet or its
Affiliates own or are licensed or sublicensed to use in
connection with Mobile Data Services, wireless data
equipment relating thereto or in any other manner.
Mobile Data Services: The data-specific circuit switched service
and cellular digital packet data services offered and
marketed by GTE Mobilnet from time to time as GTE Mobilnet's
Mobile Data Services offering, which may be provided by GTE
Mobilnet directly or indirectly through other carriers. When
the context of this Agreement so indicates, Mobile Data
Services refers to data transmission services competitive to
any of GTE Mobilnet's Mobile Data Services.
Named Account: An account designated or considered by GTE
Mobilnet to be a Named Account in accordance with Section
9.3 of the Agreement. The list of Named Accounts provided by
GTE Mobilnet may be modified or updated by GTE Mobilnet at
its sole discretion from time to time.
Net Monthly Revenues: GTE Mobilnet's revenues, net of all
credits, adjustments and one-time charges, excluding port
charges and activation fees, during a monthly billing cycle
for Mobile Data Services provided to Customers pursuant to
CSA's which were properly completed and submitted by
Business Representative and thereafter approved and accepted
by GTE Mobilnet.
Products and Services: Data compatible hardware, software and
professional services offered by Business Representative,
either directly or indirectly, which may be integrated into
an Application which contains the hardware, software and
professional services of third parties.
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SalesServices: The obligations of Business Representative to
market GTE Mobile Data Services in conjunction with the
marketing and sale of Applications, as set forth in Schedule
1.
Technical Support Services: The first line customer services and
technical support, if any, which Business Representative is
required by Schedule 1 to provide as long as Compensation is
being paid.
Territory: The geographic areas defined in Exhibit B, as modified
from time to time by GTE Mobilnet with written notice to
Business Representative, in which the Business
Representative is authorized pursuant to the terms of this
Agreement to solicit Customers for Mobile Data Services in
conjunction with the marketing of Business Representative's
Applications.
Wireless Services: Services, other than Mobile Data Services,
which provide or will provide wireless voice, data or paging
communications, including without limitation other
Commercial Mobile Radio Services ("CMRS"), Specialized
Mobile Radio ("SMR"), Enhanced Specialized Mobile Radio
("EMSR") and 1.8 GHz frequency communications.
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EXHIBIT C
TERMS FOR THE DISCLOSURE OF CONFIDENTIAL INFORMATION
1. Confidential Information, as used herein, shall mean written or
documentary information which (i) relates to the above identified subject
matter, (ii) is received by one party from the other party, and (iii) is marked
"Confidential" or "Proprietary Confidential", or bears a marking of like import,
or which one party states in writing at the time of transmittal to or receipt by
the other party is to be considered confidential. Orally disclosed information
identified as confidential at the time of disclosures shall be considered
confidential if, within twenty (20) days after the first oral disclosure
thereof, a party confirms in a writing delivered to the receiving party the
confidential nature of such orally disclosed information. Such writing shall be
sufficiently specific to enable the receiving party to identify the information
considered to be confidential.
2. The term "Trade Secrets" as used in the Agreements and this Exhibit
C shall mean Confidential Information that:
(i) derives economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from its disclosure or
use; and
(ii) is the subject of efforts that are reasonable under the circumstances
to maintain its secrecy.
3. The terms "Confidential Information" and "Trade Secrets" do not
include, and the receiving party shall have no obligation with respect to
information which:
(i) is already known to the receiving party as evidenced by prior
documentation or other tangible embodiments of such information
thereof; or
(ii) is or becomes publicly known through no wrongful act of the receiving
party; or
(iii)is rightfully received by the receiving party from a third party
without restriction and without breach of this or any other Agreement;
or
(iv) is approved for release by written authorization of the conveying
party.
4. The parties acknowledge and agree that the parties may obtain and
have access to Confidential Information and Trade Secrets of the other party and
that the misappropriation, unauthorized use or disclosure of such Confidential
Information or Trade Secrets would cause irreparable harm to the parties hereto.
The parties agree to use the same degree of care to avoid and prevent disclosure
of any party's Confidential Information and Trade Secrets as each party uses to
prevent disclosure of its own Confidential Information
<PAGE>
and Trade Secrets.
5. With respect to any Confidential Information, each party agrees that
for a term of five (5) years following the disclosure of Confidential
Information pursuant to the Agreement, they shall not directly or indirectly
disclose any Confidential Information that the parties may have or acquire in
connection with the Agreement except as authorized by the party to whom the
Confidential Information belongs.
6. With respect to any Trade Secrets, each party agrees not to use for
any purpose whatsoever or disclose the Trade Secrets or any party at any time
hereafter except as necessary for the performance of its duties under the
Agreement or until such Trade Secrets become generally available to the publics
by independent discovery or development or publication. The rights of the
parties to protection of their Trade Secrets in the Agreement are in addition to
the rights which the parties have under common or statutory law for the
protection of Trade Secrets.
7. The parties to the Agreement agree to disclose Confidential
Information or Trade Secrets only to employees with a need to know.
8. The parties to the Agreement agree that all Confidential Information
or Trade Secrets are the property of the party supplying it and agree promptly
to return to the party supplying it upon demand, any Confidential Information or
Trade Secrets and copies thereof, furnished under the Agreement which is either
received in or reduced to material form.
9. Nothing contained in the Agreement shall be construed as (i)
requiring a party to disclose, or to accept, any particular information, or (ii)
granting to the receiving party a license, either express or implied, under any
patent, copyright, trade secret, or other intellectual property rights now or
hereafter owned, obtained, or licensable by the other party.
10. The provisions of the Agreement and this Exhibit C concerning
nondisclosure and use of Confidential Information and Trade Secrets shall
survive the expiration or termination of this Agreement.
<PAGE>
SCHEDULE 1
BUSINESS REPRESENTATIVE SERVICES
I. Sales Services
A. Business Representative shall provide Sales Services in accordance with
the following provisions:
1. Prospective Customers: Business Representatives shall be
responsible for generating leads for potential customers, qualifying
customer interests and providing a statement of work or a sales proposal
from potential customers for Mobile Data Services. If GTE Mobilnet
identifies and qualifies a customer's intent to purchase wireless data
services and Business Representative accepts GTE Mobilnet's offer to then
market its application and/or services to such customer, then Business
Representative shall compensate GTE Mobilnet therefor pursuant to the
provisions of Section 2.7 hereof.
2. Product Development and Marketing: Business Representative shall
assume the entire responsibility for development and marketing of the full
range of Applications, and Business Representative specifically
acknowledges that GTE Mobilnet has no responsible or liability for the
development, marketing or performance of Applications. Business
Representative shall use reasonable efforts to promote the use of GTE
Mobilnet's Mobile Data Services in conjunction with the Applications.
Either GTE Mobilnet or Business Representative may request the other to
engage in joint marketing activities, which requests will be addressed on a
case by case basis.
3. Customer Service Agreement: GTE Mobilnet shall issue from time to
time CSAs for particular customers or categories of customers, together
with any applicable procedures for Business Representative to follow in
pursuing the execution of the CSA by GTE Mobilnet and the Customer. GTE
Mobilnet may change the CSA and related procedures at any time in its sole
discretion. When properly completed and signed by the Customer, the CSA
shall constitute an offer by the Customer to purchase from GTE Mobilnet the
Mobile Data Services set forth therein. Upon approval and acceptance by GTE
Mobilnet of each CSA from a Customer referred by Business Representative,
the CSA shall constitute a binding contract between GTE Mobilnet and the
Customer. Business Representative shall have no rights or obligations under
the CSA and the Customer thereafter shall be a Customer of GTE Mobilnet.
Absence of a properly completed, signed and approved CSA will disqualify
Business Representative for any Compensation for such Customer.
4. Advertising and Promotions: GTE Mobilnet shall from time to time
establish standards for all advertising, signage, promotional and Customer
training materials
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used or distributed by Business Representative which relate to GTE
Mobilnet's Mobile Data Services. Such standards will be limited to factual
matters pertaining to GTE Mobilnet's Mobile Data Services, the overall use
of the GTE Mobilnet Marks and the specifics of described promotions.
Business Representative is required in its use of such materials to comply
with any such standards established by GTE Mobilnet. BUSINESS
REPRESENTATIVE SHALL NOT USE ANY ADVERTISING OR MARKETING MATERIALS
RELATING TO GTE MOBILNET'S MOBILE DATA SERVICES, REGARDLESS OF WHETHER SUCH
MATERIALS MAKE USE OF THE MARKS, WITHOUT THE PRIOR WRITTEN APPROVAL OF GTE
MOBILNET. GTE Mobilnet may from time to time offer promotions in the
Territory, in which GTE Mobilnet may allow Business Representative to
participate on terms specified by GTE Mobilnet. GTE Mobilnet is not,
however, obligated to offer such promotions to Business Representative and
Business Representative shall not be obligated to participate in such
promotions.
II. Implementation Services
A. Business Representative shall provide Implementation Services in
accordance with the following provisions.
1. Sale of Lease of Applications. For its own account, Business
Representative may sell, license and/or lease Applications to be used by
Customers of GTE Mobilnet's Mobile Data Services. IT IS EXPRESSLY
UNDERSTOOD THAT GTE MOBILNET IS IN NO WAY OBLIGATED TO DISTRIBUTE ANY
APPLICATIONS TO BUSINESS REPRESENTATIVE FOR RESALE. All sales licenses
and/or leases of Applications shall be made by or on behalf of Business
Representative for its own account, and not as Business Representative for,
or for the account of, GTE Mobilnet. Business Representative shall
establish sale process, license fees, and lease charges or other fees for
Applications, and GTE Mobilnet shall have no control over such prices,
charges and fees. With respect to the sale, license and/or lease of
Applications, Customers shall be the customers of Business Representative,
and GTE Mobilnet shall have no responsibility or liability to Business
Representative or Customers therefor.
2. Customization and Implementation. Business Representative shall
provide, as appropriate, customization and integration of Applications, as
well as administrative, training and technical support, to assist the
Customer in the modification, delivery, programming and initial operation
of the Applications and the use of GTE Mobilnet's Mobile Data Services.
Business Representative shall act as the interface between GTE Mobilnet and
the Customer with respect to the Mobile Data Services during such
implementation phase. Any charges by the Business Representative for such
Implementation Services shall be determined by Business Representative and
the Customer. GTE Mobilnet shall be obligated to pay Business
Representative only the Compensation set forth in Schedule 2.
III. Technical Support Services
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A. Business Representative shall provide Technical Support Services in
accordance with the following provisions.
1. First Line Customer Services: Business Representative agrees to
provide all first line Customer services, including a technical help desk
capable of responding to technical inquiries regarding Applications and GTE
Mobilnet's Mobile Data Services. Business Representative agrees to refer
promptly to GTE Mobilnet all Customer service inquiries or technical
problems which relate to GTE Mobilnet's Mobile Data Services and which
cannot be solved by Business Representative's Technical Support Services
alone. Business Representative shall not call, or refer Customers to call,
GTE Mobilnet or GTE Mobilnet's technical help desk for problems which
should have been solved by Business Representative's Technical Support
Services.
2. Ongoing Technical Support. The Technical Support Services shall be
provided by Business Representative to Customers during the term of this
Agreement. Any charges by the Business Representative for such Technical
Support Services shall be determined by Business Representative and the
Customer. GTE Mobilnet shall be obligated to pay Business Representative
only the Compensation set forth in Schedule 2. GTE Mobilnet shall continue
to pay Business Representative the Compensation set forth in Schedule 2 for
a period of four (4) years following termination of this Agreement (the
"Post- Termination Period") in the event Business Representative continues
to provide the Technical Support Services during such period as GTE
Mobilnet reasonably determines. This Schedule 2 shall survive for the
period following termination of this Agreement that Business Representative
provides Technical Support Services, as set forth herein.
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SCHEDULE 2
BUSINESS REPRESENTATIVE COMPENSATION
A. GTE Mobilnet agrees to pay to Business Representative, and Business
Representative agrees to accept, Compensation subject to the terms and
conditions contained in the Agreement and this Schedule 2. Compensation
shall be paid monthly, one month in arrears.
B. GTE Mobilnet may make deductions from Business Representative's
Compensation pursuant to Sections 8.2(b) and 9.13 of the Agreement, and as
otherwise set forth in the Agreement and this Schedule 2. In addition, GTE
Mobilnet will deduct from future Compensation any amounts improperly paid
to Business Representative which are not actually due and payable. Business
Representative shall be responsible for reimbursing GTE Mobilnet for any
improperly paid Compensation if: (i) the next payable amount of
Compensation is insufficient to cover the improper payment; or (ii) this
Agreement expires or is terminated.
C. In any instance in which more than one Business Representative
authorized to represent GTE Mobilnet is involved in a Customer sale, only
the Business Representative that is responsible for the Customer's
Implementation Services and Technical Support (as set forth in Schedule 1
above) is eligible for Compensation from GTE Mobilnet for the account
resulting from such sale. For any Customer sale that is solely for
circuit-switched services and that involves GTE Mobilnet Representative,
the Business Representative will not be compensated hereunder.
D. Business Representative shall notify Mobilnet within sixty (60)
days of receiving a Compensation payment of any discrepancies which
Business Representative believes have occurred during a Compensation
period. Subject to the deduction provisions herein, payment will be deemed
correct if GTE Mobilnet does not receive notification of any discrepancy
within such sixty (60) days.
E. Adjustment of the length of the Compensation period may be
necessary from time to time as a result of circumstances unknown to either
party of this Agreement at the time of Compensation period was originally
set, provided however, that any such change shall apply only to Customers
activated after the date thereof.
F. GTE Mobilnet shall pay, and Business Representative shall accept,
Compensation as set forth below:
(1) Business Representative shall earn Compensation in the form
of a monthly Customer Account Management Fee ("CAM Fee") based upon
the Net Monthly Revenues
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of GTE Mobilnet for Mobile Data Services provided to Customers
pursuant to CSAs which were properly completed and submitted by
Business Representative and thereafter approved and accepted by GTE
Mobilnet. Business Representative shall earn a monthly CAM Fee equal
to six percent (6%) of the Net Monthly Revenues.
(2) Subject to Section IIIA.2 of Schedule 1, GTE Mobilnet's
obligation to pay Compensation, including CAM Fees, to Business
Representative shall cease when the CAM Fee (a pro-rated portion
thereof based on business days in the month), less any deductions or
setoffs allowed under this Agreement or by law, is paid for the Net
Monthly Revenues in the month in which the Agreement expired or was
terminated.
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AT&T WIRELESS DATA CHANNELS PROGRAM AGREEMENT
This AT&T Wireless Data Channels Program Agreement (this "Agreement"),
dated as of February 19, 1997, is made between AT&T Wireless Data, Inc., d/b/a
AT&T Wireless Services, a Delaware corporation, on behalf of its affiliated
wireless data communication service providers (collectively, "Company"), and
Compudawn, Inc., a Delaware corporation ("Channel Member"). Company and Channel
Member sometimes are referred to collectively as "Parties" and individually as a
"Party."
RECITALS
A. Company has the authority to provide Service to Subscribers in the Area.
B. Company intends to enter into agreements with various third parties who
are willing to assist Company in obtaining requests for Service from potential
Subscribers.
C. Company would like Channel Member to solicit and refer potential
Subscribers to Company, and Channel Member is willing to provide such
assistance, all in strict accordance with the terms and conditions of this
Agreement.
AGREEMENTS
In consideration of the mutual promises contained in this Agreement, the
Parties hereby agree as follows:
Section 1. Definitions
The following capitalized terms (whether used in the singular or plural)
are used in this Agreement with the respective meanings set forth below.
1.1 "Affiliate" means, with respect to either Party, any Person that
(directly or indirectly) controls, is controlled by or is under common control
with that Party. "Control" of a Person means the power (directly or indirectly)
to direct the management or policies of that Person, whether through the
ownership of voting securities, by contract, by agency or otherwise.
1.2 "Application" means a software program designed to operate in
conjunction with the Service.
1.3 "Area" means the geographic Area described in Exhibit A, within which
Channel Member is authorized to solicit Subscribers under this Agreement.
Company may amend Exhibit A from time to time upon written notice to Channel
Member.
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1.4 "Business Day" means any day other than a Saturday, a Sunday or any of
the following holidays: New Year's Day, Presidents' Day, Memorial Day, the
Fourth of July, Labor Day, Thanksgiving Day and Christmas Day. Company may from
time to time designate additional holidays upon written notice to Channel
Member.
1.5 "CDS Service" means the circuit-switched cellular data service offered
by Company from time to time. Circuit-switched cellular data service generally
consists of a wireless data communications service in which data is sent over a
cellular network in a connection-oriented session, similar to the manner in
which data is sent over analog phone lines via standard modems.
1.7 "Confidential Information" means all information, not generally known
to the public, relating to the business, technology, finances, plans or
practices of a Party disclosed by that Party to the other (including, but not
necessarily limited to, pricing and sales information, business, marketing and
research plans, financial data, budgets and projections, business processes and
systems, the terms of this Agreement and any other information designated by
such party as confidential). With respect to Company, Confidential Information
shall include the identity of and information about present, past and potential
Subscribers.
1.8 "Data Network" means the network(s) on which Company provides Service
to Subscribers.
1.9 "Equipment" means the terminal devices (modems, computers, cellular
telephones and other similar devices) used by Subscribers in conjunction with or
in order to utilize Service, together with any accessories or enhancements
associated with such devices.
1.10 "ESN" means the Electronic Serial Number associated with a cellular
telephone.
1.11 "FCC" means the Federal Communications Commission.
1.12 "Event of Default" means any of the events described in Section 9.
1.13 "Marks" means any trade name, trademark, service mark, logo, trade
dress, or other name or mark that is owned or licensed by a Party and is
protected or protectable under the laws of the United States of America, any
state of the United States of America, or any other country.
1.14 "MSA" means Metropolitan Statistical Area, as defined in FCC Public
Notice, Report No. 9240, issued January 24, l992.
1.15 "NEI" means collectively (a) the network entity and service
identifiers and (b) Internet Protocol address assigned to a Subscriber in order
to access PDS Service.
1.16 "Number" means a telephone number or NEI assigned to a Subscriber in
order for the Subscriber's Equipment to access Service.
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1.17 "PDS Service" means the cellular digital packet data service offered
by Company from time to time. Cellular digital packet data service generally
consists of a wireless data communications service in which data is sent through
a cellular network in a connectionless packet data format, similar to the manner
in which data is sent over a TCP/IP Local Area Network. If Channel Member is
authorized hereunder to solicit PocketNetTM Service, PDS Service as used herein
shall include PocketNetTM Service.
1.18 "Person" means a corporation, partnership, joint venture, association,
individual or other entity.
1.19 "Personnel" means the owners, officers, employees, agents and
independent contractors of a Party, to the extent such individuals or entities
are involved in fulfilling such Party's obligations under this Agreement.
1.20 "PocketNetTM Service" means the Internet/intranet access data service
offered by Company from time to time through Company's PocketNet gateway.
1.21 "Program Rules" means Company's written policies, procedures and rules
now or hereafter in effect relating to its relationship with Channel Member. The
Program Rules, as of the date of this Agreement, are set forth in Exhibit B.
1.22 "RSA" means Rural Service Area, as defined in FCC Public Notice,
Report No. 92-40, issued January 24, 1992.
1.23 "Service" means that PDS Service, CDS Service and/or PocketNet Service
as described on Exhibit C for which Channel Member is authorized to solicit
Subscribers under this Agreement, and such ancillary services as Company from
time to time may offer.
1.24 "Subscriber" means a customer who has been assigned a Number by
Company. Each new Number activated for a customer will be deemed to be a new
"Subscriber".
Section 2. Relationship between Company and Channel Member
2.1 Appointment
Company and Channel Member agree that Channel Member is appointed as an
authorized representative for Company (a) to obtain requests for Service in the
Area from potential Subscribers, and (b) to provide such assistance to
Subscribers as Company periodically may authorize or require, all subject to the
terms and conditions of this Agreement.
2.2 Nature of Relationship
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2.2.1 Company and Channel Member are entering into this Agreement as
independent contracting parties, and this Agreement will not create an agency,
joint venture, partnership or employment relationship between them. Except as
specifically provided in this Agreement or directed by either Party in writing,
neither Party will (a) be a legal representative or agent of the other Party for
any purpose, (b) have any authority to assume or create any obligation on behalf
of the other Party, and (c) will have no right to make any representation or
warranty on the other Party's behalf.
2.2.2 Channel Member has not paid, and will not pay in the future, any
franchise or other fee for the right to become or remain Company's
representative or to use or continue to use any of Company's Marks. No franchise
will be created by the execution or performance of this Agreement.
2.3 Channel Member Responsible for its Business
2.3.1 Except as otherwise provided in this Agreement, Channel Member will
operate its business as it sees fit. Channel Member will be free to engage in
such other business activities as Channel Member may desire, as long as such
activities do not interfere or conflict with Channel Member's performance of any
of its obligations under this Agreement.
2.3.2 Channel Member will be responsible for the costs of operating its
business. Company will not make any deduction, withholding or contribution with
respect to Channel Member on account of social security, industrial insurance,
unemployment compensation, income tax or otherwise, arising under any federal,
state or local law.
2.4 Company's Reservation of Rights to Compete with Channel Member
Company reserves the right, by itself, through its Affiliates or through
non-Affiliates (including other channel members or other authorized
representatives): (a) to market Service to potential Subscribers, to obtain
requests for Service and to activate Subscribers on Company's Data Network, (b)
to obtain requests for service and activate additional Numbers from existing
Subscribers, whether or not such Subscribers were referred to Company by Channel
Member, and (c) to sell or lease Equipment, and to provide installation,
maintenance or repair service for such Equipment, to any Person.
2.5 Program Rules
The Program Rules (including all future amendments) are incorporated by
reference into this Agreement. The Program Rules may include such rules,
policies and procedures relating to the Company's relationship with Channel
Member as Company periodically may establish. Subject to Channel Member's right
to terminate this Agreement under Section 10.4, Company may amend the Program
Rules upon thirty (30) days' written notice to Channel Member. Each amendment to
the Program Rules will specify an effective date and will apply to Channel
Member's actions (including, without limitation, Subscriber activations)
occurring on or after such date.
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2.6 No Violation of Other Agreements
Channel Member represents and warrants to Company that Channel Member's
execution and performance of this Agreement will not violate any other contract
to which Channel Member is a party or obligation by which Channel Member is
bound (including, without limitation, terms relating to covenants not to compete
and confidentiality). Channel Member will not disclose to Company, or use or
induce Company to use, any proprietary information or trade secrets of any other
Person.
2.7 Ethical Conduct and Practices
In all dealings with each other, Subscribers and other Persons, Channel
Member and Company will be governed by the highest standards of honesty,
integrity, fair dealing and ethical conduct. Neither Party will engage in any
activity that may be harmful to the other Party's goodwill or may reflect
unfavorably on its Marks. This prohibition includes, without limitation, the
commission of any unfair trade practice, the publication of any false,
misleading or deceptive advertising, or the commission of any fraud or
misrepresentation.
Section 3. Channel Member's General Obligations
3.1 Records
Channel Member will create and maintain complete and accurate records of
all transactions and activities relating to this Agreement (including, without
limitation, records of its contacts with Subscribers, potential Subscribers, and
Service activations) and any other records required under applicable law.
Channel Member (a) will preserve such records at its principal place of business
for a period consistent with generally accepted document retention principles,
and (b) will make such records available to Company for inspection and copying
during normal business hours. Channel Member will keep all accounting records in
accordance with generally accepted accounting principles.
3.2 Channel Member Personnel
3.2.1 Channel Member will exercise sole control of its Personnel and will
be solely responsible for their actions and omissions. Any breach of this
Agreement by Channel Member's Personnel will constitute a breach by Channel
Member, entitling Company to pursue all of its rights and remedies under this
Agreement or applicable law. Notwithstanding the foregoing, Company will have no
obligation to or liability for any Personnel, and none of the Personnel is
intended to be a third-party beneficiary of this Agreement.
3.2.2 Channel Member will advise all its Personnel of their obligations
under this Agreement and will ensure that its current or former Personnel comply
with this Agreement and the Program Rules.
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3.2.3 Channel Member will ensure that all of its Personnel involved in the
sale and use of the Service and the demonstration, installation and repair of
the Equipment or Applications attend regular training courses as required by
Company, which training will be conducted within 100 miles of where Channel
Member's principal business is located. Company will provide such training at no
direct charge to Channel Member or its Personnel; provided, however, that any
incidental costs (including, for example, travel and living expenses) incurred
by Channel Member or its Personnel in connection with such training will be the
sole responsibility of Channel Member. In the event Company now or hereafter
requires any of Channel Member's Personnel to be certified by Company prior to
performing any of Channel Member's obligations hereunder, Channel Member will
comply fully with such certification requirements. Company may in addition offer
optional training and may charge Channel Member for such training.
3.2.4 Channel Member may not appoint any agent, independent contractor,
subcontractor, or other representative to solicit potential Subscribers for the
Service (or perform services related to such solicitation) without Company's
prior written approval (which will not be unreasonably withheld).
3.3 Compliance with Laws
In connection with Channel Member's performance of its obligations under
this Agreement, Channel Member will comply with all applicable federal, state
and local laws, rules, regulations and court orders. Without limiting the
generality of the foregoing, Channel Member will pay, collect and remit such
taxes as may be imposed with respect to any compensation, royalties or
transactions under this Agreement in accordance with applicable laws, rules,
regulations and orders of governmental authorities having jurisdiction.
3.4 Insurance
During the term of this Agreement, Channel Member at its sole expense will
maintain with insurers reasonably acceptable to Company at a minimum the
following types of insurance policies with the stated coverage limits:
1. Commercial General Liability $1,000,000 / 2,000,000 aggregate
2. Automobile $1,000,000
All policies shall cover each occurrence up to an amount of $1 million per
occurrence, and shall name Company as an additional insured. Company may upon
written notice require Channel Member to change the above minimum coverages, and
Channel Member will obtain any additional insurance coverage within (90) ninety
days of such notice. Channel Member will provide Company with certificates of
insurance, endorsements and other supporting materials as Company reasonably may
request to evidence Channel Member's continuing compliance with this Section
3.4.
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3.5 Provision of Information
Upon Company's reasonable request, Channel Member will provide Company with
true and accurate financial and other information regarding Channel Member's
business, as it relates to this Agreement.
Section 4. Channel Member's Obligations Relating to Service
4.1 Advertising and Promotion
4.1.1 Channel Member will actively promote and market the Service in that
portion of the Area identified in Exhibit A as owned or operated by Company, and
Channel Member may in addition actively promote and market the Service in the
remaining portion of the Area. From time to time, Company may establish
standards for Channel Member's advertising, promotional and training materials
relating to Service. All advertising and promotional activities conducted by
Channel Member will be completely factual and ethical, and Channel Member shall
be solely responsible for the content thereof, whether or not reviewed by
Company.
4.1.2 Company may, in its sole discretion, reference Channel Member in
advertising and promotion of the Service, including but not limited to, lists of
Channel Members to be provided to potential Subscribers, and general advertising
of the Channel Member program. In the event a specific advertisement or
promotion is planned which will reference only Channel Member and not other
Company channel members or other authorized representatives, Company must first
obtain Channel Member's written consent before such use. Company must also
obtain Channel Member's prior written consent before using any Channel Member
Mark.
4.2 Solicitation of Requests
4.2.1 Channel Member will use commercially reasonable efforts to solicit
and obtain requests for Service from potential Subscribers in that portion of
the Area owned or operated by Company, and may solicit and obtain requests for
Service from potential Subscribers in the remaining portion of the Area. Channel
Member will at all times give prompt, courteous and efficient service to the
public.
4.2.2 Company periodically may authorize or restrict Channel Member from
soliciting requests for Service under certain rate plans or from certain
potential Subscribers or in certain portions of the Area by providing Channel
Member with written notice of such authorization or restriction.
4.2.3 In soliciting requests for Service, Channel Member will use only
Company-approved Subscriber Agreements, enrollment procedures and activation
procedures. Company may change such Subscriber Agreements and procedures at any
time, upon written notice to Channel Member.
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4.2.4 Channel Member at all times will identify Company as the Service
provider in all portions of the Area (including those MSAs and RSAs not owned or
operated by Company but in which Company provides Service). Except as may
otherwise be provided in the Program Rules, Channel Member will not state or
suggest, or use any advertising or marketing materials that state or suggest,
any association with Company without Company's prior written consent.
4.2.5 Channel Member will only quote to and activate potential Subscribers
on Company-approved rate plans for that portion of the Area in which Subscriber
will primarily use the Service, and Company's terms and conditions for Service.
Channel Member will not discount or adjust any such rate plans, terms or
conditions. Company may change its rates, terms and conditions for Service at
any time for existing or potential Subscribers and will provide Channel Member
with prompt written notice of any such change.
4.3 Subscriber Agreements
4.3.1 Each Subscriber will be subject to Company's potential acceptance or
rejection, based upon Company's review of the potential Subscriber's credit, the
sufficiency and validity of information contained in the Subscriber Agreement,
or any other valid business reason.
4.3.2 If Company does not accept a potential Subscriber obtained by Channel
Member, Channel Member will not enter into a written agreement for Service with,
or otherwise agree to provide Service to, the potential Subscriber.
4.4 Deposits and Billings
4.4.1 Channel Member will collect such deposits and advance payments from
Subscribers as Company may require. Such deposits and advance payments will be
made payable to Company, not Channel Member, unless Company specifically
authorizes Channel Member in writing that such deposits and advance payments may
be made payable to some other Person. Channel Member will deliver all such
payments to Company in accordance with Company's then-current activation
procedures.
4.4.2 Company will bill Subscribers directly for Service and Channel Member
shall not be authorized to make payments on behalf of a Subscriber unless
Company specifically authorizes Channel Member in writing to collect such
amounts on Company's behalf. Company retains the sole right to collect all
moneys and to settle all claims by Subscribers relating to Service and Channel
Member will have no right to require Company to assert or enforce claims against
Subscribers. Channel Member, upon Company's request, will assist Company in
obtaining any information relating to any Subscriber claim or obligation.
4.5 Relationship between Channel Member and Subscribers
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4.5.1 Channel Member's duties hereunder consist solely of acting on
Company's behalf as a facilitator to match the needs of potential Subscribers
with Company's Service offerings. Company's provision of Service to any
Subscriber will constitute a transaction between Company and the Subscriber
only. Channel Member will have no rights in the transaction and will not
interfere with the contractual relationship between Company and Subscriber.
4.5.2 Channel Member will not resell (directly or indirectly) any Service
during the term of this Agreement.
Section 5. Channel Member's Obligations Relating to Equipment and Applications
5.1 General
Channel Member, acting for its own account and not as agent for Company,
(a) may sell or lease, or arrange for the sale or lease of, Equipment and
Applications to be used by Subscribers, (b) may provide for the proper
preparation and installation of such Equipment and Applications, and (c) may
furnish warranty and maintenance service for such Equipment and Applications.
Channel Member may obtain Equipment and Applications from any supplier, provided
that the Equipment meets or exceeds the regulations and standards described in
Section 5.2. Channel Member will be solely responsible for establishing the
price and other terms and conditions for its Equipment and Application sales and
leases, and obtaining payment therefor.
5.2 Minimum Quality Standards
Channel Member will recommend, sell, lease or otherwise furnish to
Subscribers only (a) that Equipment which complies with all applicable FCC
regulations and (b) that Equipment and Applications that comply with Company's
minimum technical and other standards relating to transmission, regulatory
compliance, network compatibility, reliability, security and overall quality (as
published by Company from time to time).
5.3 Configuration
5.3.1 Except as Company may specify in writing, Channel Member will program
the Equipment of each Subscriber whose Service application is obtained through
Channel Member's efforts and is accepted by Company with (a) the Number and NEI
(as applicable) assigned by Company for use on Company's Data Network, (b) any
Applications selected by Subscriber, and (c) all other parameters specified by
Company in connection with Service. "Program" shall include entering all
information required by Company and the Equipment or Application providers for
initial trouble-free operation on Company's Data Network.
5.3.2 Channel Member will be solely responsible for the configuration of
any Application provided by Channel Member to a Subscriber.
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5.3.3 Channel Member will not charge Subscribers commercially unreasonable
fees for the initial configuration, programming or activation of Equipment or
Applications.
5.4 Demonstration Equipment and Service
Company, at its sole option, may supply Equipment, Applications, or Service
to Channel Member for demonstrating Service to potential Subscribers. Channel
Member will use such Equipment, Applications and Service only for that purpose.
Channel Member will bear the risk of loss or damage to demonstration Equipment
and Applications (other than ordinary wear and tear) from the time any such
Equipment and Applications are placed in the possession of Channel Member until
returned to Company, and shall mark all such Equipment as being the property of
Company. Channel Member shall return all such Equipment and Applications to
Company at the earlier of Company's written request or upon termination of the
Agreement.
Section 6. Channel Member Compensation
6.1 General
6.1.1 Subject to the terms of this Agreement and the Program Rules, Channel
Member will be eligible to receive compensation, in such amounts and at such
times as are specified in the Program Rules, for each Subscriber Agreement that
(a) is procured primarily by Channel Member or its Personnel, (b) is accepted by
Company, and (c) for which Service is activated during the term of this
Agreement.
6.1.2 The compensation set forth in the Program Rules will be the total
compensation payable to Channel Member by Company for Channel Member's services
provided hereunder. Channel Member will only be entitled to receive compensation
in connection with Subscribers whose Subscriber Agreement have been solicited
and whose Service has been activated in strict compliance with this Agreement.
6.1.3 Company, at any time and without prior notice to Channel Member, may
introduce new Service rate plans for which different compensation will be paid
to Channel Member.
6.1.4 Company may cease offering any Service rate plan to Subscribers or
potential Subscribers at any time. In such case, Company will notify Channel
Member of the effective date on which any such Service rate plan will be
discontinued. Channel Member will not be entitled to any compensation for
Subscribers activated on any discontinued Service rate plan on or following the
date of discontinuance. To the extent a Subscriber continues to receive Service
under a different Service rate plan, Channel Member will continue to receive
compensation under the Program Rules for any remaining eligible period for such
Subscriber.
6.2 Disputes between Channel Members and Others
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If any dispute arises between Channel Member and a third party relating to
any payment alleged to be due Channel Member from Company, Company may withhold
payment of the disputed amount (without the accrual of interest) until the
earlier of (a) the parties' mutual resolution of the dispute, or (b) the
resolution of the dispute by final order of a court or arbitration tribunal in
accordance with Subsection 12.1.
6.3 Company's Right to Offset
Company may offset against any amount owed to Channel Member by Company
hereunder, any amounts owed by Channel Member to Company or its Affiliates
pursuant to this Agreement, or otherwise, including without limitation, any
expenses and damages that are incurred by Company and are subject to
indemnification by Channel Member under Section 12.4.
6.4 Reserve
Upon any termination of this Agreement, Company may withhold a reasonable
reserve from any amounts owed to Channel Member, which reserve will be used to
satisfy any obligations owed by Channel Member to Company. Company will within
six (6) months of withholding a reserve review whether such reserve continues to
be necessary. Within thirty (30) days following Company's determination that a
portion of the reserve is no longer necessary to satisfy any of Channel Member's
obligations, Company will pay such portion to Channel Member.
Section 7. Marks
7.1 Ownership
Each Party's Marks are and will remain the exclusive property of such Party
or such Party's licensors (if any). Each Party will comply with all rules and
procedures relating to the Marks that such Party may from time to time
prescribe. Neither Party will have any rights to the Marks except as expressly
provided herein and will not acquire any rights therein or expectancy to their
use as a result of such Party's use of the Marks during the term of this
Agreement. A Party may discontinue the other Party's use of or license to its
Mark at any time.
7.2 Use
Except as otherwise provided in Section 4.2.4, neither Party will use any
of the other Party's Marks without specific prior written approval. Any
unauthorized use of the Marks, or any use of Company's Marks that is not in
compliance with Company's rules and procedures, will constitute a material
breach of this Agreement. Upon the termination of this Agreement, each Party
immediately will discontinue its use of all of the other Party's Marks.
Section 8. Nondiversion of Subscribers and CDS Service Exclusivity
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8.1 Nondiversion
During the term of this Agreement and for one (l) year after its
termination (whether voluntary or involuntary), Channel Member, its Personnel
and its Affiliates (a) will not request any Subscriber of Company who Channel
Member knows to be a Subscriber of Company to curtail or cancel its business
with Company, or (b) otherwise solicit, divert or attempt to divert any such
Subscriber from patronizing Company's Service. During the one-year period after
termination of this Agreement, any Subscribers of Company who contact Channel
Member, its Personnel, or its Affiliates, whether with respect to existing
Service or potential additional Service, will be referred directly to Company.
Channel Member will advise all of its Personnel of their obligations under this
Section 8.
8.2 CDS Service Exclusivity
If Channel Member is authorized pursuant to Exhibit C to solicit
Subscribers to CDS Service, Channel Member agrees that, at all times during the
term of this Agreement, it will not market, offer, provide, procure, or refer
any potential Subscriber or actual Subscriber to any voice or circuit switched
data service competing with Company in the Area, which service is offered by or
through any Person (including any reseller) other than Company or Company's
Affiliates.
Section 9. Events of Default
Each of the following events will constitute an Event of Default:
(a) any breach of this Agreement by a Party;
(b) the commission of any illegal act (excluding misdemeanors not
involving dishonesty or moral turpitude) by, or the filing of any criminal
indictment or information against, a Party, or any of its owners, officers,
directors or employees;
(c) a Party's insolvency, becoming the subject of a petition in
bankruptcy, having a receiver appointed for its business or entering into any
arrangement with, or assignment for the benefit of, its creditors or ceasing to
function as a going concern or experiencing a material deterioration in its
financial condition such that, in the other Party's reasonable business
judgment, its ability to perform the terms of this Agreement is threatened;
(d) a Party (or any of its Affiliate's) defaulting under any other
material agreement between it (or its Affiliate) and the other Party (or any of
its Affiliates), so that such other Party (or its Affiliate) has the present
right to terminate such other agreement for default; and
(e) a Party's unauthorized assignment of this Agreement.
Section 10. Term and Termination
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10.1 Term
This Agreement is for a two (2) year term commencing as of the date first
written above.
10.2 Renewal
Upon the expiration of the initial term of this Agreement, and provided
that Company continues to offer Service in the Area, this Agreement
automatically will be extended for additional one (1) year periods unless either
Party gives the other Party at least sixty (60) days' written notice prior to
the expiration of the then current term of its intention to terminate this
Agreement.
10.3 Termination
10.3.1 Except as otherwise provided in Section 10.3.2 and Section 10.3.3,
either Party may terminate this Agreement upon the occurrence of an Event of
Default relating to the other Party if the defaulting Party fails to fully cure
the Event of Default within thirty (30) days following its receipt of written
notice from the Party.
10.3.2 The Non-defaulting Party may terminate this Agreement immediately,
by giving the defaulting Party written notice of termination, upon the
occurrence of the Event of Default described in clause (b) or (c) of Section 9.
10.3.3. Company may terminate this Agreement immediately by giving Channel
Member written notice of termination if (a) Channel Member has made a material
misrepresentation or omission in its application to establish a representative
relationship with Company, (b) Channel Member substantially or continually fails
to abide by the standards established by Company under Section 4.1, or (c)
Channel Member violates any of its obligations under Section 8.
10.3.4 Either Party may terminate this Agreement for its convenience upon
ninety (90) days' written notice to the other Party.
10.4 Channel Member's Additional Termination Rights
If Company amends the Program Rules in a manner such that Channel Member's
total expected compensation is reduced by greater than ten percent (10%),
Channel Member may terminate this Agreement by giving Company written notice of
termination at least fifteen (15) days prior to the effective date of Company's
proposed amendment. Notwithstanding the foregoing, if Company rescinds the
amendment within twenty (20) days after receiving Channel Member's notice (or
such lesser time as may remain prior to the effective date of the amendment),
this Agreement will not terminate but will continue in full force and effect.
10.5 Company's Additional Termination Rights
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10.5.1 Upon the expiration or revocation of any license required for
Company to operate in any portion of the Area, this Agreement will immediately
terminate with respect to such portion of the Area and Exhibit A will be deemed
automatically amended to delete such portion of the Area. If Company transfers
any required license to a non-Affiliated third party, Company will have the
option with respect to the relevant portion of the Area of either terminating
this Agreement, assigning this Agreement to the license transferee, or
continuing this Agreement through the offering of some reasonable substitute for
Service.
10.5.2 Company may terminate this Agreement upon thirty (30) days' written
notice to Channel Member, (a) if the FCC or any other regulatory agency rules
and regulations governing the provision of Service or the operation of Company's
Data Network in the Area change materially and have an adverse impact upon the
Company's ability to conduct its business, or (b) upon any change in regulatory
authorization affecting any part of this Agreement on terms and conditions that
are unacceptable to Company or its Affiliates.
10.6 Survival
Upon the termination of this Agreement, all rights and obligations of the
Parties hereunder will cease without further liability, effective as of the date
of termination; provided, that all provisions of this Agreement that reasonably
may be interpreted or construed as surviving termination will survive the
termination of this Agreement, including but not limited to those set forth in
Section 8.1, 11 and 12.4.
Section 11. Confidential Information
11.1 Ownership and Use
All Confidential Information is and will remain the exclusive property of
the Party to which it belongs, even if it was gained or developed as a result of
or in the course of the Parties' relationship. During the term of this Agreement
and at all times thereafter, neither Party, or such Party's Affiliates or
Personnel, will use or disclose any Confidential Information to any Person
except as expressly provided in this Agreement. Each Party will use its best
efforts to avoid disclosure, dissemination or unauthorized use of Confidential
Information, including, at a minimum, the same degree of effort it uses to
protect its own confidential information of a similar nature.
11.2 Exceptions
The provisions of Section 11.1 will not apply to any information that (a)
is or becomes publicly available without breach of this Agreement, (b) can be
shown by documentation to have been known to a Party at the time of its receipt
from the other Party, (c) is rightfully received from a third Party without a
requirement that the third party treat the information as confidential and such
third party did not acquire or disclose such information by a wrongful act, (d)
can be shown by documentation to have been independently developed by such Party
without reference to any of the
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other Party's Confidential Information, or (e) is required to be disclosed by
judicial or regulatory process, or other requirements of law.
11.3 Personnel
Each Party will restrict the possession, knowledge, development and use of
Confidential Information to those of its Personnel who have a need to know
Confidential Information in connection with this Agreement. Such individuals
will have access only to the Confidential Information they need for such
purpose.
11.4 Obligations upon Termination
Upon termination of this Agreement, each Party will promptly deliver to the
other or destroy all materials, including but not limited to written documents,
audio and video tapes, computer diskettes, and other magnetic, optical or other
storage media, containing Confidential Information, and will erase all
Confidential Information from its computer hard drives or other storage media
which cannot reasonably be transferred.
Section 12. Disputes and Claims
12.1 Arbitration
12.1.1 Arbitration Clause. Except as stated in paragraph 12.1.6 below, all
claims (including counterclaims and cross-claims) and disputes between the
Parties shall be resolved by submission to binding arbitration. The Parties
shall submit any such disputes to the Seattle, Washington offices of Judicial
Arbitration & Mediation Services, Inc. ("JAMS") or such other arbitration
service located in Seattle, Washington for which the Parties may agree. If there
are no such offices of JAMS, the Parties shall arbitrate their disputes under
the commercial arbitration rules of the American Arbitration Association, before
one neutral arbitrator, except to the extent that those rules are modified
herein.
12.1.2 Selection of Arbitrator. In the event that a dispute is submitted to
JAMS for resolution, the Parties may agree on a jurist from the JAMS panel. If
the Parties are unable to agree, JAMS will provide a list of three available
panel members and each Party may strike one. The remaining panel member will
serve as the arbitrator.
12.1.3 Initiation of Arbitration. The aggrieved Party can initiate
arbitration under this paragraph by sending written notice of an intention to
arbitrate to the other Party. The notice must contain a description of the
dispute, the amount involved, and the remedy sought.
12.1.4 Procedures and Discovery. The arbitrator shall schedule a prehearing
conference to reach agreement on procedural matters, arrange for the exchange of
information, obtain stipulations,
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schedule the arbitration hearing, and attempt to narrow the issues. In order to
expedite the arbitration proceedings, the Parties have agreed to place the
following limitations on discovery:
(a) Each Party may propound only one interrogatory requesting the names and
addresses of the witnesses to be called at the arbitration hearing.
(b) On a date to be determined at the prehearing conference, each Party may
serve one request for the production of documents. The documents are to be
exchanged twenty-one (21) days after service of the request.
(c) Each Party may depose four (4) witnesses. Each deposition must be
concluded within four (4) hours and all depositions must be taken within 60 days
of the prehearing conference. Any Party deposing an opponent's expert witness
must pay the expert's fee for attending the deposition.
12.1.5 Enforcement of Award. There shall be no right to appeal the decision
of the arbitrator. The award of the arbitrator may be confirmed or enforced in
any court having jurisdiction.
12.2 Injunctive Relief
Notwithstanding paragraph 12.1.1, either Party shall have the option to
bring court proceedings to seek an injunction or other equitable relief to
enforce any right, duty or obligation under this Agreement, including but not
limited to those contained in paragraph 7, 8 and 11. To obtain injunctive or
other equitable relief, the Party shall not be required to post a bond or, if
required by law or by the court, the other Party hereby consents to a bond in
the lowest amount permitted by law.
12.3 Attorney's Fees
If one Party commences any arbitration or court action against the other,
the substantially prevailing Party will be entitled to recover its reasonable
costs incurred in connection with the action, including any appeals. For the
purposes of this Section 12.3, the term "costs" includes, without limitation,
attorneys' fees, paralegal fees, investigative fees, expert witness fees,
administrative costs, any other charges billed by the attorney to the prevailing
Party and the cost of efforts of in-house legal staff (which will be valued at
market rates for comparable services from private practitioners).
12.4 Indemnification
12.4.1 EACH PARTY WILL, DEFEND, INDEMNIFY AND HOLD THE OTHER AND THE
OTHER'S AFFILIATE'S (AND THE OWNERS, DIRECTORS, EMPLOYEES AND AGENTS OF EACH OF
THEM) HARMLESS AGAINST ANY DAMAGES, LOSSES AND EXPENSES (INCLUDING REASONABLE
ATTORNEYS' FEES AND DISBURSEMENTS) ARISING OUT OF OR RELATING TO ANY CLAIMS,
ACTIONS OR OTHER PROCEEDINGS
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THAT (A) ARE BROUGHT BY OR ON BEHALF OF ANY THIRD PARTY, AND (B) RESULT FROM THE
ACTS OR OMISSIONS OF THE INDEMNIFYING PARTY. FOR THE PURPOSES OF THIS SECTION
12.4.1, "THIRD PARTY" MEANS ANY PERSON OR ENTITY OTHER THAN THE PARTIES AND
THEIR RESPECTIVE AFFILIATES.
12.4.2 With respect to any claim, action or proceeding for which one Party
is required to indemnify the other Party under Section 12.4.1, the indemnified
Party will (a) give the indemnifying Party prompt written notice of the claim,
action or proceeding, (b) cooperate with the indemnifying Party in connection
with the defense, settlement or prosecution of the claim, action or proceeding,
and (c) not settle the claim, action or proceeding without the prior written
consent of the indemnifying Party, which consent will not be unreasonably
withheld. Notwithstanding the foregoing, the indemnified Party will have the
right to fully participate in the defense at its own expense, and, further,
Company (as an indemnified Party) will have the right to approve Channel
Member's selection of counsel, which approval will not be unreasonably withheld.
Failure to provide timely notice under this Section will only limit a Party's
rights hereunder to the extent the Party entitled to receive notice is
prejudiced.
12.5 No Consequential Damages
NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES ARISING OUT OF SUCH PARTY'S FAILURE TO PERFORM UNDER THIS
AGREEMENT. FOR THE PURPOSES OF THIS SECTION 12.5, "PARTY" MEANS THE PARTY, ITS
AFFILIATES AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
NOTHING IN THIS SECTION 12.5 WILL LIMIT A PARTY'S OBLIGATION TO FULLY INDEMNIFY
THE OTHER UNDER SECTION 12.4 FOR ACTIONS BROUGHT BY THIRD-PARTIES, EVEN IF SUCH
ACTIONS INCLUDE CLAIMS FOR INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
12.6 Limitation of Actions
EXCEPT FOR INDEMNIFICATION ACTIONS ARISING IN CONNECTION WITH SECTION 12.4,
NEITHER PARTY MAY BRING A LEGAL ACTION OR ASSERT A CLAIM WITH RESPECT TO THIS
AGREEMENT MORE THAN TWELVE (12) MONTHS AFTER THE CAUSE OF ACTION OR CLAIM
ACCRUES.
Section 13. Miscellaneous
13.1 Cooperation in Regulatory Proceedings
Channel Member will support Company's efforts before regulatory authorities
or others regarding Company's provision of Service hereunder. Upon reasonable
notice and at Company's expense, Channel Member will cooperate with Company
regarding any such efforts, including,
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among other things, by providing Personnel who are able to testify at
appropriate times regarding any aspect of this Agreement or related issues.
13.2 Force Majeure
Neither Party will be liable for any loss, damage, cost, delay or failure
to perform resulting from causes beyond its reasonable control including, but
not limited to, acts of God, fires, floods, earthquakes, strikes, insurrections,
riots, lightening or storms, or delays of suppliers or subcontractors for the
same causes.
13.3 Notices
Any notice or other communication under this Agreement given by one Party
to the other will be in writing and will be delivered in person, by
electronically receipted facsimile (that is acknowledged in a similar manner by
the intended recipient) by certified mail, return-receipt requested (properly
addressed and stamped with the required postage) or by national overnight
delivery service to the intended recipient at its address specified below its
signature at the end of this Agreement and to the attention of the individual
who executed this Agreement on behalf of such Party. Notices are effective upon
receipt. Any Party may change such address or individual by giving the other
Party notice in accordance with this Section l3.3.
13.4 Export Control
The Parties acknowledge that any Equipment, Applications, products,
software, and technical information (including, but not limited to, Services and
training) provided under this Agreement are subject to the export laws and
regulations of the United States of America and any use or transfer of such
Equipment, Applications, products, software, and technical information outside
of the United States or to foreign nationals must be authorized under those
regulations.
13.5 No Waiver
No failure or delay on the part of Company in exercising any right, power
or privilege under this Agreement or under the Program Rules, and no course of
dealing between Channel Member and Company, will be deemed a waiver of any
further exercise of any right, power or privilege. The rights and remedies
expressly provided herein are cumulative and not exclusive of any rights or
remedies which Company would otherwise have.
13.6 Assignment
This Agreement will bind and inure to the benefit of Channel Member,
Company and their respective successors and assigns. Company may assign or
delegate all or any portion of its rights or obligations hereunder. Channel
Member may not assign or delegate any of its rights or obligations hereunder
without Company's prior written consent, which may be withheld at Company's sole
Channels Agreement - R 2/18/97
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discretion. For the purposes of this Section, any transaction by which a Person
acquires fifty percent (50%) or more of the voting power, interest in income or
dividends or assets of Channel Member, or the right to control Channel Member or
its business, will constitute an assignment of this Agreement by Channel Member.
13.7 Applicable Law
This Agreement will be interpreted, construed and enforced in all respects
in accordance with the laws of the State of Washington without reference to its
choice of law rules.
13.8 Entire Agreement
13.8.1 This Agreement represents the entire agreement between the Parties
with respect to the matters addressed in this Agreement and, except as expressly
provided herein, may not be modified by any other agreements, representations or
understandings, whether oral or in writing. This Agreement supersedes all prior
agreements between the Parties, except that any covenants relating to
confidentiality, business record retention and other post-termination covenants
of prior agreements will survive.
13.8.2 This Agreement will be construed as a separate contract with each of
Company's Affiliates now or hereafter providing Service hereunder. If any such
Affiliate ceases to be affiliated with Company, such Affiliate may terminate
this Agreement (solely with respect to the Affiliate) upon thirty (30) days'
written notice to Channel Member (which notice may be given prior to
disaffiliation).
13.9 Amendments
Except as otherwise provided in this Agreement, no amendment, modification
or waiver of any of the provisions of this Agreement will be valid unless set
forth in a written instrument signed by the Party to be bound thereby.
Notwithstanding the foregoing, Company unilaterally may modify this Agreement at
any time, provided such modification is reasonably necessary to comply with the
laws, orders, regulations and approval requirements of governmental authorities
having jurisdiction over the Company's provision of Service hereunder. Company
will notify Channel Member as soon as practicable of any such modifications.
13.10 Severability
If any provision of this Agreement is held invalid under any applicable
law, such invalidity will not affect any other provision of this Agreement that
can be given effect without the invalid provision. Further, all terms and
conditions of this Agreement will be deemed enforceable to the fullest extent
permissible under applicable law and, when necessary, the arbitrator or court is
requested to reform any and all terms or conditions to give them such effect.
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Section 14. Independent Investigation
COMPANY AND CHANNEL MEMBER ACKNOWLEDGE THEY HAVE READ THIS AGREEMENT AND
UNDERSTAND AND ACCEPT THE TERMS AND CONDITIONS CONTAINED HEREIN AS BEING
REASONABLY NECESSARY TO MAINTAIN COMPANY'S HIGH STANDARDS FOR SERVICE. CHANNEL
MEMBER UNDERSTANDS THAT COMPANY MAY AT ANY TIME ALSO BE ENGAGED DIRECTLY OR
INDIRECTLY THROUGH OTHER CHANNEL MEMBERS, REPRESENTATIVES, DEALERS, RETAILERS,
OR OTHERWISE, IN SOLICITING POTENTIAL SUBSCRIBERS FOR SERVICE ON THE SAME OR
DIFFERENT TERMS AS THOSE PROVIDED TO CHANNEL MEMBER. CHANNEL MEMBER ALSO
UNDERSTANDS THAT COMPANY MAY SELL SERVICE TO OTHERS WHO MAY RESELL IT. CHANNEL
MEMBER HAS INDEPENDENTLY INVESTIGATED THE WIRELESS COMMUNICATIONS BUSINESS AND
THE PROFITABILITY (IF ANY) AND RISKS THEREOF AND IS NOT RELYING ON ANY
REPRESENTATION, GUARANTEE, OR STATEMENT OF COMPANY OTHER THAN AS SET FORTH
HEREIN. IN PARTICULAR, CHANNEL MEMBER ACKNOWLEDGES THAT COMPANY HAS NOT
REPRESENTED (A) CHANNEL MEMBER'S PROSPECTS OR CHANCES FOR SUCCESS SELLING
SERVICE UNDER THIS AGREEMENT, (B) THE TOTAL INVESTMENT THAT CHANNEL MEMBER MAY
NEED TO MAKE TO OPERATE UNDER THIS AGREEMENT (COMPANY DOES NOT KNOW THE AMOUNT
OF THE TOTAL INVESTMENT THAT MAY BE REQUIRED FOR THIS PURPOSE), OR (C) THAT IT
WILL LIMIT ITS EFFORTS TO SELL SERVICE OR ESTABLISH OTHER CHANNEL MEMBERS IN THE
AREA.
The Parties have entered into this Agreement through their respective
duly-authorized representatives on the date first above written. Compudawn, Inc.
By: /s/ John Patrick Hefferon
Title: Exec. Vice Pres. Sales & Marketing
Address: 77 Spruce Street
Cedarhurst, New York 11516
Attn: John Hefferon
Telephone: (516) 374-6700 x607
AT&T Wireless Data, Inc. d/b/a AT&T Wireless
Services
By: /s/ illegible
Title: Director of Sales
Address: 10230 N.E. Points Drive
Kirkland, Washington 98033
Attn: Legal Department
Telephone:(206) 803-4000
Channels Agreement - R 2/18/97
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Exhibit B
Channel Program Rules
Effective Date: February 1,1997
1. Incorporated Channel Program Agreement
These Channel Program Rules ("Program Rules") are a part of the AT&T
Wireless Data Channel Program Agreement (the "Agreement") that has been executed
by Company and Channel Member and, except as provided in paragraph 2 below, are
to be interpreted and administered in a manner consistent with the Agreement.
2. Inconsistencies in Terms
If any inconsistency or conflict exists between the Agreement, as it may be
amended from time to time, any prior Agreement, prior Data Solutions Program
Rules, prior Channel Member Rules or these Program Rules, these Program Rules
will control.
3. Defined Terms
In addition to the terms defined in the Agreement, the following terms will
have the meanings set forth below:
3.1 "Activation Date" means the date on which Company makes Service
available to a PDS Subscriber, or, in the case of a CDS Subscriber, the date on
which such CDS Subscriber is registered for CDS Service.
3.2 "CDS Enabling Device" means a circuit switched cellular modem, cable or
laptop computer that enables a laptop computer to access and to operate over
circuit switched cellular networks.
3.3 "CDS Service Revenues" means moneys received by Company from a CDS
Subscriber as payment for local cellular airtime used in connection with CDS
Service. For the period beginning upon execution of the Agreement and continuing
through such time as Company shall provide Channel Member with written notice,
CDS Service Revenues will be based upon a CDS Service Revenues usage profile of
Forty Dollars ($40) per month per Subscriber. For Subscriber Accounts with more
than 25 CDS Subscribers, Channel Member may request Company to establish a
higher usage profile based upon prospective usage information supplied by such
Subscriber Account, and Company may in its sole discretion establish a higher
usage profile for Subscribers associated with such Subscriber Account.
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At such time as Company provides Channel Member with written notice, CDS
Service Revenues will change to:
For Subscribers who have been existing Company cellular voice customers for
at least three full calendar months prior to purchasing a CDS Enabling Device
and registering for CDS Service, CDS Service Revenues for each month will be
calculated as follows:
Cellular Service Revenues for that calendar month, minus such CDS
Subscriber's average monthly Cellular Service Revenues for the three
full calendar months immediately prior to such CDS Subscriber's
registration for CDS Service.
For Subscribers who are new Company cellular voice customers or have been
existing Company cellular voice customers for less than three full calendar
months prior to purchasing a CDS Enabling Device and registering for CDS
Service, CDS Service Revenues for each month will be calculated as follows:
Cellular Service Revenues for that calendar month, minus the average
monthly Cellular Service Revenues for Company's cellular voice
subscribers in the MSA or RSA in which the CDS Subscriber resides for
the three full calendar months immediately prior to such CDS
Subscriber's registration for CDS Service.
CDS Service Revenues shall specifically exclude moneys received by Company
from Subscribers for any CDS Service used in connection with a PocketNetTM
Service Access Device.
3.4 "CDS Subscriber" means a customer who purchases a CDS Enabling Device
from Channel Member, who is registered for CDS Service within thirty (30) days
of such purchase, and, if a new Number is activated for such customer, submits a
Subscriber Agreement for CDS Service (on a Company-authorized rate plan) through
Channel Member in compliance with the Agreement, which Subscriber Agreement is
accepted by Company.
3.5 "Cellular Service Revenues" means, for CDS Subscribers, moneys received
by Company from a CDS Subscriber for voice cellular usage and CDS Service usage.
Cellular Service Revenues shall specifically exclude long distance, toll, taxes,
roaming charges, activation fees, access fees, and feature charges. Cellular
Service Revenues shall be adjusted for CDS Subscriber credits and bad debt.
3.6 "Compensation Schedule" means the Channel Member compensation schedule
attached hereto and made a part hereof, as the same may be modified by Company
from time to time.
3.7 "Level 1 Customer Support" means direct, first contact customer support
regarding all aspects of Subscriber's use of the Service (whether arising in
connection with the Equipment, Application, hardware, software or Service)
including, for example, issues relating to modems,
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<PAGE>
protocol stacks, software configuration and setup, usability issues, Service
activation and Service coverage.
3.8 "PDS Service Revenues" means moneys received by Company from PDS
Subscribers as payment for packet data transmitted and received in connection
with PDS Service and does not include moneys from such charges as, without
limitation, activation fees, taxes, interconnection charges, and feature
charges. PDS Service Revenues will be adjusted for PDS Subscriber credits and
bad debt.
3.9 "PocketNetTM Service Access Device" means an integrated data and
cellular telephone device which enables PDS Subscribers to access PocketNetTM
Service.
3.10 "PDS Subscriber" means a customer who submits a Subscriber Application
for PDS Service or PocketNet Service (provided Channel Member is authorized to
solicit Subscribers to PocketNet Service as provided in Exhibit C to the
Agreement) on a Company-authorized rate plan through Channel Member in
compliance with the Agreement, which Subscriber Agreement is accepted by
Company, who is assigned a Number by Company, and who is activated for PDS
Service in compliance with the Agreement.
3.11 "Service Revenues" means, collectively, all applicable PDS Service
Revenues and CDS Service Revenues.
3.12 "Subscriber" means, collectively, all PDS Subscribers and CDS
Subscribers.
3.13 "Subscriber Account" means any group of Subscribers whose NEIs or
Numbers were assigned in connection with a single Person.
4. Activation Procedures
Channel Member will activate Subscribers in compliance with these Program
Rules and Company's then-current activation procedures. Company will provide
Channel Member with written activation procedures from time to time. In the
event Channel Member is activating Service for a PocketNet Service Access
Device, Channel Member shall only activate PDS Service, and must refer the voice
and CDS Service activation to Company.
5. Compensation
5.1 Company will compensate Channel Member for PDS Subscribers in
accordance with these Program Rules and the Compensation Schedule. Channel
Member will not receive any compensation, and shall not receive any credit
toward Channel Member's PDS Goal Attainment and PDS Minimum Performance
Standards, for any PDS Subscriber unless the PDS Subscriber's Service
application clearly indicates that Channel Member solicited the PDS Subscriber's
order for Service and such PDS Subscriber was activated in accordance with
Section 4. In addition, Channel Member
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<PAGE>
shall not be entitled to any compensation for a PDS Subscriber activating PDS
Service in connection with a PocketNet Service Access Device if Company has
previously paid any compensation to Channel Member or any Person other than
Company or its Personnel to obtain such PDS Subscriber as a cellular voice
subscriber in connection with such PocketNet Service Access Device.
5.3 If Channel Member is authorized to solicit CDS Subscribers pursuant to
the Agreement and Exhibit A thereto, Company will compensate Channel Member for
CDS Subscribers in accordance with these Program Rules and the Compensation
Schedule. Channel Member will not receive any compensation and shall not receive
any credit toward Channel Member's CDS Goal Attainment and CDS Minimum
Performance Standards for any CDS Subscriber unless Channel Member (a) submits
to Company satisfactory evidence that such CDS Subscriber purchased a CDS
Enabling Device from Channel Member, (b) such CDS Subscriber is registered for
CDS Service within thirty (30) days after such purchase, and (c) such CDS
Subscriber was activated in accordance with Section 4.
5.4 Compensation will be available for each Subscriber for a maximum of
four years from the Subscriber's Activation Date, provided, however,
compensation shall immediately terminate with respect to such Subscriber prior
to the expiration of such four years if (a) the Agreement terminates; (b)
Subscriber's agreement with Company terminates; or (c) Channel Member
discontinues providing Level l Customer Support to any Subscriber.
5.5 Company will pay Channel Member any earned compensation on a calendar
quarter basis, within thirty (30) days following the end of each calendar
quarter occurring during the term of the Agreement. Payments of the Goal
Attainment Fee will commence following the calendar quarter during which Channel
Member reached the applicable Attainment Goal, with the first such payment
including all amounts accrued since the beginning of the applicable calendar
year.
6. Customer Support Fee
6.1 Company will pay Channel Member the Customer Support Fee set forth in
the Compensation Schedule for each Subscriber referred to Company by Channel
Member which receives Level l Customer Support from Channel Member, based upon a
percentage of Service Revenues generated by such Subscriber, provided, however,
Channel Member shall not be entitled to receive a Customer Support Fee for any
CDS Subscriber for whom Company is currently paying a voice cellular residual to
any Person.
6.2 With respect to any given Subscriber, Channel Member will be eligible
to receive the Customer Support Fee only during the period in which Channel
Member is actually providing Level l Customer Support.
6.3 If, during any calendar quarter, Company receives service calls from
Subscribers which equal five percent (5%) or more of the total number of
Subscribers, Channel Member will be placed on support probation, and Company
will deduct from Channel Member's Customer Support
Channels Agreement - R 2/18/97
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<PAGE>
Fees for that calendar quarter that percentage equal to the percent of service
calls exceeding 5%. If Channel Member is on support probation for two
consecutive calendar quarters or more than two calendar quarters in any calendar
year, Company may immediately terminate the Agreement by giving written notice
to Channel Member.
7. Goal Attainment Fee
7.1 The PDS Goal Attainment level for the calendar year commencing in which
the Agreement is executed is Fifty Thousand Dollars ($50,000.00). To the extent
that PDS Service Revenues for new PDS Subscribers activated in that year are
equal to or greater than the PDS Goal Attainment level, Company will pay Channel
Member the PDS Goal Attainment Fee based upon eligible PDS Service Revenues for
all PDS Subscribers for whom Channel Member received Customer Support Fees in
that calendar year, and not just such new PDS Subscribers. The PDS Goal
Attainment level for subsequent calendar years may be adjusted by providing
Channel Member with written notice of the PDS Goal Attainment level within
thirty (30) days of the commencement of that year.
7.2 The CDS Goal Attainment level for the calendar year commencing in which
the Agreement is executed is Fifty Thousand Dollars ($50,000.00). To the extent
that CDS Service Revenues for new CDS Subscribers activated in that year are
equal to or greater than the CDS Goal Attainment level, Company will pay Channel
Member the CDS Goal Attainment Fee based upon eligible CDS Service Revenues for
all CDS Subscribers for whom Channel Member received Customer Support Fees in
that calendar year, and not just such new CDS Subscribers. The CDS Goal
Attainment level for subsequent calendar years may be adjusted by providing
Channel Member with written notice of the CDS Goal Attainment level within
thirty (30) days of the commencement of that year.
7.3 If Channel Member's Agreement with Company begins after January 3l of
any year, Company will prorate the above Goal Attainment levels for the first
year of the Agreement, to reflect the actual portion of the year the Agreement
was in effect.
8. Processing Fee
Company will pay Channel Member a Processing Fee pursuant to these Program
Rules and as set forth in the Compensation Schedule. If a Subscriber activates a
PocketNet Service Access Device, Channel Member will be paid only one Processing
Fee.
9. Minimum Performance Standard
9.1 During each calendar year, PDS Subscribers for whom Channel Member is
receiving Customer Support Fees must generate PDS Service Revenues for Company
of at least Thirty Thousand Dollars ($30,000.00). If such PDS Subscribers fail
to generate PDS Service Revenues in the amount of Seven Thousand Five Hundred
Dollars ($7,500.00) in any calendar quarter, Channel
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<PAGE>
Member will be placed on probation. If, during the following calendar quarter,
PDS Subscribers fail to generate PDS Service Revenues of at least Seven Thousand
Five Hundred Dollars ($7,500.00), Company may immediately terminate the
Agreement for cause by giving Channel Member written notice. Any failure by
Company to terminate Channel Member in such event will not be considered a
waiver, and Company will retain the right to terminate Channel Member for any
subsequent failure by PDS Subscribers to generate PDS Service Revenues of at
least Seven Thousand Five Hundred Dollars ($7,500.00) during any calendar
quarter. Company, in its sole discretion, may change the PDS Minimum Performance
Standard once per calendar year by giving Channel Member written notice.
9.2 During each calendar year, CDS Subscribers for whom Channel Member is
receiving Customer Support Fees must generate CDS Service Revenues for Company
of at least Thirty Thousand Dollars ($30,000.00). If such CDS Subscribers fail
to generate CDS Service Revenues in the amount of Seven Thousand Five Hundred
Dollars ($7,500) in any calendar quarter, Channel Member will be placed on
probation. If, during the following calendar quarter, CDS Subscribers fail to
generate CDS Service Revenues of at least Seven Thousand Five Hundred Dollars
($7,500.00), Company may immediately terminate the Agreement for cause by giving
Channel Member written notice. Any failure by Company to terminate Channel
Member in such event will not be considered a waiver, and Company will retain
the right to terminate Channel Member for any subsequent failure by CDS
Subscribers to generate CDS Service Revenues of at least Seven Thousand Five
Hundred Dollars ($7,500.00) during any calendar quarter. Company, in its sole
discretion, may change the CDS Minimum Performance Standard once per calendar
year by giving Channel Member written notice.
9.3 If Channel Member's Agreement with Company begins after January 3l of
any year, Company will prorate the above Minimum Performance Standards for the
first year of the Agreement, to reflect the actual portion of the year the
Agreement was in effect.
10. Technical and Support Personnel
10.1 Within ninety (90) days following the execution of the Agreement,
Channel Member continuously will maintain at least one full time technical
support person who has received a Wireless Data Technical Support Certificate.
If Channel Member fails to maintain a certified technical support person in
compliance with this paragraph, Company immediately may terminate the Agreement
for cause by giving Channel Member written notice. Company's failure to so
terminate the Agreement will not constitute a waiver of its right to terminate
the Agreement at any time Channel Member is in violation of this paragraph.
10.2 Within ninety (90) days following the execution of the Agreement,
Channel Member continuously will maintain at least one full time customer
support person who has received a Wireless Data Customer Support Certificate. If
Channel Member fails to maintain a certified customer support person in
compliance with this paragraph, Company immediately may terminate the Agreement
for cause by giving Channel Member written notice. Company's failure to so
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<PAGE>
terminate the Agreement will not constitute a waiver of its right to terminate
the Agreement at any time Channel Member is in violation of this paragraph.
11. Lead Distribution System
11.1 Company periodically may furnish Channel Member with the names of
potential sales opportunities. Company will distribute leads to Channel Member
only if Company determines (in its sole discretion) that the opportunities are
suitable for Channel Member, taking into consideration Channel Member's
expertise, location, targeted market and other relevant factors. If Company
determines that certain leads are suitable for more than one channel member or
other authorized representative, Company, in its sole discretion (a) will
allocate those leads among qualified members in a reasonable manner, or (b)
distribute the lead to all qualified members.
11.2 Within two Business Days following Channel Member's receipt of any
lead, Channel Member will notify Company whether Channel Member intends to
pursue the sales opportunity. If Channel Member elects to pursue the lead,
Channel Member will follow Company's lead solicitation policies in pursuing such
lead. If Channel Member rejects the lead, or fails to respond to Company within
the two Business Days, Company may assign the lead to another Channel Member or
pursue the lead directly. Should Channel Member desire to pursue the lead after
rejecting it or failing to respond in two Business days Channel Member must
first obtain written permission from Company to pursue the lead. If Channel
Member repeatedly fails to respond to leads in a timely manner, Channel Member
will be deemed ineligible to participate in the lead distribution system.
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Compensation Schedule
February l, 1997
PDS Service
Year Processing Customer Goal Total
Fee New Support Attainment Possible
Subscriber Fee Fee
Bonus
l $35 10%* 2%* 12%
2 10%* 2%* 12%
3 10%* 2%* 12%
4 10%* 2%* 12%
* of PDS Service Revenues
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Exhibit C
Service
PDS Service
PocketNetTM Service
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DATA GENERAL CORPORATION
MASTER SUPPLIER AGREEMENT
EFFECTIVE DATE: March 3, 1997
Compu-DAWN, Inc. ("SUPPLIER"), a Delaware corporation with a principal business
office at 77 Spruce Street, Cedarhurst, NY, 11516, and Data General Corporation
("DGC"), a Delaware corporation with a principal business office at 4400
Computer Drive, Westboro, MA 01580, enter into this Master Supplier Agreement
("MSA") as of the EFFECTIVE DATE stated above.
BUSINESS BACKGROUND AND OBJECTIVES
SUPPLIER and DGC believe there are opportunities where it will be
mutually beneficial for DGC to offer its potential customers certain items
and/or services available from SUPPLIER.
SUPPLIER and DGC have decided to use this MSA to establish the general
terms and conditions that govern their relationship.
SUPPLIER and DGC have decided to use separately executed attachments to
specify the items and/or services (including the pricing and other related
provisions) being made available by SUPPLIER to DGC for use in connection with
the DGC customer identified on the attachment.
Accordingly, SUPPLIER and DGC agree as follows:
A G R E E M E N T
1. DEFINITIONS
A. "CONSULTING SERVICES" - means those services, if any,
identified as such in the applicable PROJECT ATTACHMENT.
B. "CUSTOMER" - means the company or other entity identified as
such in the applicable PROJECT ATTACHMENT.
C. "CUSTOMER CONTRACT" - means the contract between DGC and a
specific DGC customer that relates to the provisions set
forth in the applicable PROJECT ATTACHMENT.
D. "PROJECT ATTACHMENT" - means each document, identified as
such and executed by SUPPLIER and DGC, which incorporates
this MSA by reference and contains the description, pricing
and other specific terms and conditions applicable to items
and/or services to be provided by SUPPLIER for a specific
project.
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1
<PAGE>
E. "PROJECT MANAGER" - means the individual, if any, identified
as such for each party in a PROJECT ATTACHMENT, that serves
as the primary point of contact with regard to the
activities described in the PROJECT ATTACHMENT. Either party
may replace its PROJECT MANAGER upon written notice to the
other party.
F. "LICENSED PROGRAM" - means, for each item, if any,
identified as such in the applicable PROJECT ATTACHMENT, i)
the latest release, available as of the effective date of
such PROJECT ATTACHMENT, of the machine-readable object code
and all related documentation normally supplied therewith,
and ii) all changes thereto and subsequent releases thereof
which SUPPLIER is obligated to provide under such PROJECT
ATTACHMENT.
G. "SUPPORT SERVICES" - means those services, if any,
identified as such in the applicable PROJECT ATTACHMENT.
H. "SOURCE CODE" - means i) all or any identifiable portion of
the source materials, in human or machine-readable form,
from which the related object code is compiled or assembled,
which source materials include, but are not limited to,
annotated listings, flow charts, conversion tools,
supporting documentation, and all other aids and information
needed for support or modification thereof, and ii) the
documentation for such object code in a camera-ready, hard
copy master and mutually acceptable electronic format.
2. SCOPE, ORDERS AND PAYMENT
A. General - This MSA sets forth the general provisions under
which SUPPLIER shall made available to DGC the items and/or
services described in the applicable PROJECT ATTACHMENT, to
enable DGC to bid to, and in the event of award, perform for
CUSTOMER. In case of a conflict between a provision(s) of
the MSA and that of a specific PROJECT ATTACHMENT, the
latter shall control with regard to such PROJECT ATTACHMENT.
B. List of Exhibits - The following lists the Exhibits that are
incorporated into and made a part of this MSA:
1) Exhibit 1 - Mutual Nondisclosure Provisions
2) Exhibit 2 - CONSULTING SERVICES Provisions
3) Exhibit 3 - Licensing Provisions
4) Exhibit 4 - LICENSED PROGRAM Support Provisions
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<PAGE>
C. Implementation of Purchase Orders - DGC may obtain the items
and/or services listed in a PROJECT ATTACHMENT by sending
SUPPLIER a purchase order referencing the PROJECT
ATTACHMENT. Each purchase order shall be governed solely by
the terms and conditions of the applicable PROJECT
ATTACHMENT. As long as DGC is in material compliance with
such PROJECT ATTACHMENT, SUPPLIER shall not reject any
related purchase order related to such PROJECT ATTACHMENT.
D. Fees, Invoices and Payment
1) The fees for the various products and/or services
being provided by SUPPLIER to DGC under a PROJECT
ATTACHMENT are the sole and exclusive compensation
due SUPPLIER from DGC with regard to such PROJECT
ATTACHMENT. In no event shall such fees be less
favorable than those offered or quoted by SUPPLIER,
for similar quantities under similar terms and
conditions, to the most favored of SUPPLIER's other
customers competing with DGC on the same CUSTOMER
project.
2) SUPPLIER shall not send an invoice to DGC prior to
SUPPLIER's shipment of the applicable products or
fulfillment of all, or the applicable portion, as
specified in the PROJECT ATTACHMENT of the services.
Each invoice shall reference the applicable PROJECT
ATTACHMENT and DGC purchase order number and shall be
sent to the address on the applicable PROJECT
ATTACHMENT.
3) DGC shall send payment to SUPPLIER for all correct
invoices for products and/or services listed on the
applicable PROJECT ATTACHMENT within thirty (30) to
forty-five (45) calendar days after DGC's receipt of
such invoice. In case of a bona fide dispute, DGC
shall notify SUPPLIER as soon as is reasonably
possible.
E. Taxes - In addition to the fees for items and/or services in
the applicable PROJECT ATTACHMENT, DGC is responsible for
all related taxes, exclusive of those based on SUPPLIER's
net income or those from which DGC is exempt, as evidenced
by DGC supplying SUPPLIER with a valid tax exemption number.
F. Expenses - Except as agreed in the applicable PROJECT
ATTACHMENT, neither party shall seek reimbursement from the
other for expenses or costs incurred in performing. For all
travel related expenses, other than those covered by a fixed
price in the applicable PROJECT ATTACHMENT, SUPPLIER shall:
1) obtain the written approval of DGC before incurring any
travel expenses; and
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<PAGE>
2) at its option, attempt to book travel through DGC's
Corporate Travel Services at 1-800-343-5880; and
3) submit to DGC a report for DGC approved travel within
thirty (30) calendar days after completion of the trip,
and provide a pre-printed receipt, with appropriate
descriptive information, for any single expenditure
over twenty-five dollars ($25.00); and
4) be reimbursed for approved travel only in accordance
with the same expense reimbursement policies as apply
to DGC's own employees, a copy of which shall be
provided upon SUPPLIER's request.
G. PROJECT MANAGER Responsibilities - The PROJECT MANAGERS,
through their mutual written consent, shall have authority
and be responsible for the following: i) proposing and
developing any modifications to the provisions of the
applicable PROJECT ATTACHMENT, and, subject to the written
mutual approval of an authorized signatory of each party,
make mutually acceptable changes to the obligations of the
PROJECT ATTACHMENT, provided such changes clearly indicate
any changes to the current payment stream and any impact on
future deliveries; ii) submitting and receiving any items
and documents required to be delivered; iii) maintaining,
for record keeping purposes, a log summarizing all material
communications and deliveries between the PROJECT MANAGERS;
iv) implementing appropriate practices and procedures to
address the security and confidentiality of items delivered
and information exchanged; and v) such other
responsibilities as the parties shall mutually agree in
writing. Unless specifically identified as such, the PROJECT
MANAGERS are not authorized signatories for their respective
companies.
3. TERM AND TERMINATION
A. Duration - This MSA commences on the EFFECTIVE DATE and shall
govern each PROJECT ATTACHMENT. The duration of each PROJECT
ATTACHMENT shall be as specified therein. Unless identified as a
"calendar day", the term "day(s)" refers to a business day(s),
i.e. Monday through Friday, excluding legal holidays.
B. Termination of MSA - Either party may terminate this MSA, with or
without cause, by sending the other written notice thereof. Such
termination shall take effect thirty (30) calendar days after
receipt thereof (the "MSA TERMINATION DATE"). However, such
termination shall not affect any PROJECT ATTACHMENT that became
effective prior to the MSA TERMINATION DATE.
C. Cancellation of PROJECT ATTACHMENT - Each party shall notify the
other in writing in case of the other's alleged violation of a
material provision of the
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applicable PROJECT ATTACHMENT. The recipient of such notice shall
have, except to the extent specifically provided otherwise in the
applicable PROJECT ATTACHMENT, thirty (30) calendar days from the
date of receipt of such notice to effect a cure (the "CURE
PERIOD"). If the recipient of such notice fails to effect such
cure within the CURE PERIOD, then the sender of such notice shall
have the option of sending a written notice of cancellation,
which notice shall take effect upon receipt, and such sender
shall thereafter have such remedies as are provided at law, in
this MSA and the applicable PROJECT ATTACHMENT.
D. Survivorship - Any provision of this MSA and a PROJECT ATTACHMENT
that by its very nature or context is intended to survive any
termination, cancellation or expiration thereof, including but
not limited to provisions relating to disclosure of certain
information, the payment of outstanding fees and taxes, and
indemnities, shall so survive.
E. General Access to SOURCE CODE - The parties recognize that DGC's
reputation and customer goodwill are involved in DGC's marketing
of SUPPLIER's products and services and that DGC has a legitimate
interest in the protection thereof. In lieu of establishing an
escrow of the SOURCE CODE, SUPPLIER grants to DGC on a
nonexclusive, nontransferable, and fee-free basis, for the entire
period that SUPPLIER has obligated itself to provide products
and/or related support DGC in connection with a specific
CUSTOMER, the present right and license to use such SOURCE CODE
to the extent reasonably necessary for DGC to i) use and market
such product in accordance with the applicable PROJECT
ATTACHMENT, and ii) provide support and maintenance in
substantially the same manner as required of SUPPLIER under the
applicable PROJECT ATTACHMENT. However, SUPPLIER and/or
SUPPLIER'S successor in interest shall have the obligation to
provide, and DGC shall be entitled to receive and utilize such
SOURCE CODE within the scope of such license, only in the event
that DGC cancels the applicable PROJECT ATTACHMENT due to
SUPPLIER's failure to comply with a material provision thereof.
Promptly after such cancellation, SUPPLIER and/or SUPPLIER's
successor in interest, shall send to DGC a copy of such SOURCE
CODE and shall not interfere with DGC's exercise of DGC's rights
as set forth herein. After such cancellation, DGC shall have no
further obligation to pay any other charges that are in any way
related thereto. In addition, SUPPLIER shall reasonably cooperate
with DGC and negotiate in good faith in the event that DGC
requests authorization to place SOURCE CODE in escrow in order to
fulfill a potential CUSTOMER's requirement for such action.
4. WARRANTIES
A. Each party warrants to the other that it has i) all rights
necessary to fulfill its obligations under this MSA and each
PROJECT ATTACHMENT, and ii) no
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knowledge of any adverse claims against such rights.
B. EXCEPT AS EXPRESSLY STATED IN THIS MSA OR THE APPLICABLE
PROJECT ATTACHMENT, SUPPLIER DISCLAIMS ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, ARISING BY OPERATION OF LAW OR OTHERWISE,
WITH RESPECT TO ITEMS AND/OR SERVICES SUPPLIED HEREUNDER,
INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR PURPOSE.
5. INDEMNITY
A. Proprietary Interests - SUPPLIER shall, at its expense, defend
any suit against DGC and/or CUSTOMER to the extent based on a
claim that any item and/or service provided by SUPPLIER infringes
a patent, trademark or copyright, or misappropriates a trade
secret, and shall notwithstanding any limitations on or
exclusions from liability for damages set forth in this MSA, pay
all damages provided in a settlement made by SUPPLIER and/or
awarded by a court of final appeal attributable to such claim,
provided that the entity seeking indemnification provides
SUPPLIER with i) prompt written notice of such claim, ii) sole
control over the related defense and/or settlement (although
retaining the right to be represented by its own counsel if it
elects, at its own expense), and iii) reasonable cooperation and
assistance with regard to such claim. In addition, should such
item and/or service become, or in SUPPLIER's opinion be likely to
become, the subject of such a claim, SUPPLIER shall, at its
expense, use good faith and reasonable efforts to a) procure the
right for DGC and/or CUSTOMER to continue use thereof, or b)
replace or modify such so that it no longer so infringes or so
misappropriates, but only if such replacement or modification
does not materially and adversely affect the specifications or
use, or c) if neither a) nor b) above are accomplished within a
reasonable period of time, SUPPLIER shall accept return of such
and grant DGC a full refund of the fee paid by DGC to SUPPLIER,
less straight line depreciation, on a pro-rata basis, using a
seven (7) year useful life. The above indemnity shall not apply
to any such claim based on a modification of an item or service
by other than SUPPLIER or the combination, operation or use of
such item or service with items not furnished by SUPPLIER, if
such claim would have been avoided in the absence of such
modification or combination, operation or use with items not
furnished by SUPPLIER. This subsection states SUPPLIER's entire
obligation for claims of infringement and/or misappropriation
relating to items and/or services provided by SUPPLIER under this
MSA and/or a PROJECT ATTACHMENT.
B. Insurance - SUPPLIER shall maintain throughout the term of the
applicable PROJECT ATTACHMENT the following minimum coverages,
and, upon request of DGC, promptly provide evidence thereof:
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1) Workers Compensation - As per the Statutory Requirements for
the state in which services are performed,
2) Employer's Liability - $100,000/occurrence,
3) Comprehensive General Liability - $2,000,000/ occurrence.
6. LIMITATION OF LIABILITY
EXCEPT TO THE EXTENT STATED OTHERWISE IN THE SECTION ENTITLED
"INDEMNITY", NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY
CONSEQUENTIAL, INCIDENTAL, INDIRECT OR SPECIAL DAMAGES WHATSOEVER,
INCLUDING BUT NOT LIMITED TO LOST PROFITS AND DAMAGES RESULTING FROM
LOSS OF USE OR LOST DATA, ARISING FROM ANY CAUSE OR CONNECTED IN ANY
WAY WITH THIS MSA AND/OR THE APPLICABLE PROJECT ATTACHMENT, EVEN IF THE
POSSIBILITY THEREOF IS KNOWN OR SHOULD HAVE BEEN KNOWN. ANY ACTION,
REGARDLESS OF FORM, ARISING OUT OF OR INCIDENTAL TO THE TRANSACTIONS
UNDER THIS MSA OR THE APPLICABLE PROJECT ATTACHMENT, MUST BE BROUGHT
WITHIN ONE (1) YEAR AFTER THE CASE OF ACTION ACCRUES.
7. MISCELLANEOUS
A. This MSA, including each PROJECT ATTACHMENT, shall be construed
in accordance with and governed by the laws of the Commonwealth
of Massachusetts, excluding its conflict of law rules.
B. Neither party shall assign any right or interest under this MSA
and/or a PROJECT ATTACHMENT (excepting moneys due or to become
due) nor delegate any work or other obligation to be performed
hereunder to any entity other than i) its corporate parent, ii) a
division or wholly or majority owned subsidiary of the party or
its corporate parent, iii) the purchaser of all or substantially
all of such party's assets, or iv) a third party subcontractor
that is fully qualified to perform the applicable task(s) and has
executed a nondisclosure contract that is no less restrictive
than that attached to this MSA, without the prior written consent
of an authorized representative of the other, which consent shall
not be unreasonably withheld.
C. Failure to insist in any instance upon strict performance by the
other of any provision of this MSA and/or PROJECT ATTACHMENT
shall not be construed or deemed to be a permanent waiver of such
or any other provision.
D. With the exception of quotes, purchase orders, acknowledgments,
invoices and other
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usual and routine communications, all other notices or writings
required or permitted under this MSA and/or a PROJECT ATTACHMENT,
including but not limited to notices of default or breach, shall
be signed by an authorized representative of the sender, sent to
the respective individuals identified on the applicable PROJECT
ATTACHMENT and as set forth below (which may be changed by
written notice to the other), and shall be deemed to have been
received i) when hand delivered to such individuals by a
representative of the sender, or ii) three (3) days after having
been sent postage prepaid, by registered or certified first class
mail, return receipt requested, or iii) when sent by electronic
transmission, with written confirmation by the method of
transmission, or iv) one (1) day after deposit with an overnight
carrier, with written verification of delivery.
For DGC For SUPPLIER
Data General Corporation To the address stated above,
4400 Computer Drive Attn.: Jack Hefferon
Westboro, MA 01580
Attn.: Vice President - Systems Integration
cc: Office of the General Counsel
E. Headings used in this MSA and/or PROJECT ATTACHMENT are for
reference purposes only and are not a part thereof.
F. A party shall be excused for delays in the performance of its
obligations hereunder due to causes beyond its reasonable control
and which could not have been avoided through the exercise of
reasonable care, such as acts of God, acts or omissions of civil
or military authorities, fires, floods, epidemics, quarantine
restrictions, war, riots, strikes, or the unavailability of
necessary labor, materials, or manufacturing facilities (the
"Force Majeure"). The party whose performance is being adversely
affected shall promptly notify the other of the nature of the
Force Majeure and the obligations which will be adversely
affected thereby. Such party shall thereafter make all reasonable
efforts to resume performance as soon as is reasonably possible
and to mitigate the adverse effects of the Force Majeure.
However, if the Force Majeure causes a delay of ninety (90) or
more days from the original date of performance, the other party
shall have the right to terminate.
G. SUPPLIER hereby acknowledges notice of requirements for
certification of nonsegregated facilities. Unless exempt from
Executive Order 11246 concerning equal employment opportunities,
SUPPLIER shall not maintain any segregated facilities at any of
its establishments and shall complete a certification to the
effect required by the May 7, 1967 Order of the Secretary of
Labor of the United States. The following applicable Federal
Acquisition Regulations ("FAR") are incorporated herein by
reference, and, unless SUPPLIER is exempt from the application
thereof, shall apply to SUPPLIER's performance under this MSA:
Utilization of Small
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Business Concerns and Small Disadvantaged Business Concerns
(52.219-08), Utilization of Women-Owned Small Businesses
(52.219-13) and, if orders under this MSA exceed $500,000,
Subcontracting Plan (52.219-09). SUPPLIER shall, within thirty
(30) calendar days of request of DGC, furnish DGC with
appropriate certifications of compliance therewith.
H. Each party may publicly disclose the existence of the MSA and,
after the mutual execution of the applicable PROJECT ATTACHMENT,
the fact that the party is involved in a specific project, but
each party shall use the same standard of care as it normally
uses to protect its own sensitive information from disclosure, to
protect from disclosure to any third party, for a period of five
(5) years after the commencement of the applicable PROJECT
ATTACHMENT, the specific details, including but not limited to
pricing and payment terms. The parties acknowledge that from time
to time, DGC will provide SUPPLIER with the identity of a
potential CUSTOMER and a description of a specific project with
such account (collectively called "ACCOUNT INFORMATION"). It is
agreed that ACCOUNT INFORMATION is of significant value and shall
be treated as RESTRICTED INFORMATION, as defined in the Mutual
Nondisclosure Provisions in Exhibit 1, even if not specifically
identified as such by DGC and even if not reduced to writing.
I. The parties are independent contractors and nothing herein shall
be construed as forming a joint venture between them or as
constituting either party as agent for the other.
J. If any provision of this MSA and/or a PROJECT ATTACHMENT is held
to be unenforceable for any reason, then such shall be deemed
adjusted to conform to the applicable requirements, to the extent
possible, and the adjusted provision, if any, shall have the same
effect as if originally included herein. In any event, the other
provisions shall remain in effect.
K. DGC and SUPPLIER agree that each company's employees are highly
important to the success of each company, and that each company
reasonably expects to retain its employees free from the other's
interference. During the period that begins when a party has its
first contact with an employee of the other concerning this MSA
or any related project, and expires one (1) year after such
party's last contact with such employee concerning this MSA or
any related project, such party shall not, without the express
written permission of the other, solicit and hire for employment,
either as an employee or as or through an independent contractor,
an employee the other. For purposes of this subsection K.,
prohibited solicitation means the specific targeting, recruitment
and hiring of the employee, as opposed to a general recruitment
effort that is not specifically directed at such an employee,
such as an advertisement in a newspaper, trade publication or
similar electronic forum. DGC and SUPPLIER agree that any breach
of this provision would result in injury to the
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nonbreaching party that would be difficult or impossible to
estimate. Therefore, in the event of such a breach, and as the
sole and exclusive remedy therefor, the breaching party shall
promptly pay to the other a sum equal to six (6) times the gross
monthly salary most recently being paid by the nonbreaching party
to the affected employee, such sum to be paid as liquidated
damages and not as a penalty. For purposes of this paragraph
only, the terms "DGC" and "SUPPLIER", respectively, include such
party, together with all other entities controlling, controlled
by or under common control with such party.
L. This MSA, including its attached Exhibits, and the applicable
PROJECT ATTACHMENT, are the complete and exclusive statement of
the contract between the parties with regard to the subject
matter set forth therein and supersede all prior oral
communications, written communications, proposals, agreements,
representations, statements, negotiations and undertakings
between the parties with respect to such subject matter. Any
amendments or alterations hereof must be made in writing and
executed by an authorized representative of each party. This MSA
and/or any PROJECT ATTACHMENT or any amendments or modifications
thereto may be transmitted by facsimile machine between the
parties. A faxed signature shall be deemed to be an original
signature. A faxed MSA or PROJECT ATTACHMENT, containing an
original and/or faxed signature of both parties shall be binding
on both parties.
ACCORDINGLY, the respective representative of each party, being duly authorized,
has caused this MSA to be executed and to become effective as of the EFFECTIVE
DATE.
Compu-DAWN, Inc. Data General Corporation
("SUPPLIER") ("DGC")
By: /s/ Jack Hefferon By: /s/ Steve Meadows
Print Name: Jack Hefferon Print Name: Steve Meadows
Title: E.V.P. Sales & Marketing Title: Director Professional Services
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Exhibit 1
MUTUAL NONDISCLOSURE PROVISIONS
This Exhibit 1 is hereby attached to and incorporated into the MSA between DGC
and SUPPLIER and sets forth the nondisclosure provisions applicable to their
relationship.
BUSINESS BACKGROUND AND OBJECTIVES
Based on SUPPLIER's and DGC's common understanding that:
In order to advance their respective interests, SUPPLIER and DGC will
engage in various discussions; and
During such discussions, each party is willing to disclose certain
information provided the recipient agrees to certain restrictions on the use or
further disclosure of such information;
Accordingly, SUPPLIER and DGC agree as follows:
A G R E E M E N T
1. SCOPE - This Exhibit governs all "RESTRICTED INFORMATION", as defined
below, exchanged between the parties in the pursuit and/or performance
of a specific project with a prospective CUSTOMER.
2. RESTRICTED INFORMATION - Except as set forth in the Section entitled
"EXCLUSIONS" below, "RESTRICTED INFORMATION" means:
A. the identity of the prospective CUSTOMER and the description of
the specific project therewith, whether or not reduced to
writing; and
B. all other information exchanged within the SCOPE and prior to
expiration of the applicable PROJECT ATTACHMENT, if any, that:
1) is in written, recorded or other tangible form and labeled,
at the time of initial disclosure, as "Proprietary",
"Confidential" or other similar legend, or
2) is in oral form and identified by either of the parties or
DGC's customer as "Proprietary" or "Confidential" at the
time of initial disclosure, and subsequently reduced to
written or recorded form, marked as described in B. 1)
above, and sent to the recipient within seven (7) calendar
days after initial disclosure; and
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C. any information of either party or the CUSTOMER which is viewed or
perceived in the performance of obligations under the applicable
PROJECT ATTACHMENT and which a business person would reasonably
believe to be of a sensitive or confidential nature; and
D. any software (including related documentation) provided by DGC or
CUSTOMER to SUPPLIER for the purpose of assisting SUPPLIER in the
performance of its obligations under the applicable PROJECT
ATTACHMENT.
3. EXCLUSIONS - Unless specifically agreed otherwise in the applicable PROJECT
ATTACHMENT, RESTRICTED INFORMATION DOES NOT MEAN i) any software (including
the related documentation) which SUPPLIER customarily licenses in the
ordinary course of its business (which software, the parties agree shall be
provided solely pursuant to separate licensing provisions), ii) any
information exchanged which the recipient can tangibly demonstrate was in
its possession (or of which it had knowledge), free of restrictions on
disclosure or use, or in the public domain, prior to receipt from the other
party, or iii) any information exchanged with the reasonable knowledge or
expectation that such will be included in communications with the
prospective CUSTOMER.
4. DURATION OF NONDISCLOSURE PERIOD
A. Except as provided in subsection B. below, the NONDISCLOSURE PERIOD
for RESTRICTED INFORMATION commences on the date of initial disclosure
and, unless sooner terminated as stated below, expires five (5) years
later.
B. The NONDISCLOSURE PERIOD for RESTRICTED INFORMATION is deemed to
terminate as of the date that such is first i) publicly disclosed by
the disclosing party, ii) rightfully received by the recipient from a
third party without restrictions on disclosure or use, iii)
independently developed by the recipient, as evidenced by written
records prepared at the time of such development, iv) approved for
unrestricted disclosure by the disclosing party, v) available by
inspection of items or services marketed without restrictions or
offered for sale or lease in the ordinary course of business by either
party or others, or vi) disclosed pursuant to applicable law, court
order or regulation, provided that the disclosing party is given
notice thereof and an opportunity to defend, limit or protect such
disclosure.
C. Either party shall have the right to correct a failure to identify
RESTRICTED INFORMATION by sending written notice and complying with
the applicable provisions of this Exhibit promptly after discovery of
such failure. The NONDISCLOSURE PERIOD for such RESTRICTED INFORMATION
shall be deemed to commence upon receipt of such notice by recipient,
but shall expire on the same date as if the RESTRICTED INFORMATION had
been correctly identified when first disclosed.
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5. RESTRICTIONS ON DISCLOSURE AND USE - During the NONDISCLOSURE PERIOD, each
party shall use the same degree of care with regard to the protection of
the other's RESTRICTED INFORMATION as it uses with regard to its own
information of a similar nature and sensitivity, and no less than
reasonable care, to i) limit use and disclosure thereof to only those of
its personnel, or those of its subcontractors and their personnel, that
have executed a nondisclosure agreement containing provisions substantially
equivalent to those set forth herein, that require access to perform
functions related to the SCOPE, ii) not make any other disclosure or use
thereof, and iii) return all tangible RESTRICTED INFORMATION to the
disclosing party within ten (10) days after receipt of a written request
therefor.
6. MARKINGS AND LEGENDS - Recipient's obligations concerning use and
disclosure of RESTRICTED INFORMATION are governed solely by the terms and
conditions of this Exhibit and any applicable patent or copyright law(s).
Any restrictive legends placed on RESTRICTED INFORMATION shall not impose
any obligations or restrictions upon the recipient except to the extent set
forth herein. Nothing contained herein shall be construed as granting or
conferring upon the recipient any license under patents or copyrights of
the disclosing party, and no such license or other rights shall arise from
any acts, statements or dealings resulting from or related to the
performance of the obligations hereunder.
7. GENERAL
A. Nothing contained herein shall be construed as establishing a
confidential relationship between the parties.
B. Each party shall comply with all of the provisions of the Export
Administration Regulations of the United States Department of
Commerce, as they currently exist and as they may from time to time be
amended.
C. SUPPLIER agrees to execute such nondisclosure contracts as may be
reasonably required by the third party owner or operator of the
premises where SUPPLIER will perform any services under any applicable
PROJECT ATTACHMENT, and to require any of SUPPLIER's subcontractors to
do the same.
D. Each party warrants that it has the right to disclose its RESTRICTED
INFORMATION to the other. RESTRICTED INFORMATION IS PROVIDED i)
WITHOUT ANY OTHER WARRANTIES, AND, ii) EXCEPT AS SET FORTH HEREIN, ON
AN "AS IS" BASIS.
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Exhibit 2
CONSULTING SERVICES PROVISIONS
This Exhibit 2 is hereby attached to and incorporated into the MSA between DGC
and SUPPLIER and sets forth the provisions applicable to each PROJECT ATTACHMENT
that provides for CONSULTING SERVICES.
BUSINESS BACKGROUND AND OBJECTIVES
In order for SUPPLIER to fulfill its obligations with regard to the CONSULTING
SERVICES described on the applicable PROJECT ATTACHMENT, DGC, and SUPPLIER
recognize that SUPPLIER may need to:
Use information provided by DGC and/or CUSTOMER, and/or
Use information already in SUPPLIER's possession, and/or
Develop new information.
Accordingly, SUPPLIER and DGC agree that the following governs their respective
rights in the information described above:
A G R E E M E N T
1. DEFINITIONS
A. "DGC/CUSTOMER INFORMATION" - means i) any software, data,
documentation and/or other information provided by DGC and/or CUSTOMER
to SUPPLIER to assist SUPPLIER in fulfilling its CONSULTING SERVICES
obligations in the applicable PROJECT ATTACHMENT, and ii) any
DERIVATIVE WORK prepared therefore.
B. "DERIVATIVE WORK" - means any enhanced or modified version of all or
any portion of SUPPLIER INFORMATION or DGC/CUSTOMER INFORMATION which
if prepared or used without the authorization of the copyright holder
of the underlying work would constitute a copyright infringement or
misappropriation of a trade secret.
C. "NEW WORK" - means only that software, documentation, data and/or
other information first developed or prepared by or for SUPPLIER and
delivered by SUPPLIER in fulfillment of its CONSULTING SERVICES
obligations in the applicable PROJECT ATTACHMENT, but does not include
SUPPLIER
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INFORMATION or DGC/CUSTOMER INFORMATION.
D. "SUPPLIER INFORMATION" - means any software, documentation, data
and/or other information (including any DERIVATIVE WORK prepared
therefrom by SUPPLIER) which, i) as of the effective date of the
applicable PROJECT ATTACHMENT, is either owned by SUPPLIER or a
third party other than DGC or CUSTOMER, and ii) is delivered by
SUPPLIER in fulfillment of its CONSULTING SERVICES obligations in
the applicable PROJECT ATTACHMENT, but does not include any
software or documentation which the parties identify on the
applicable PROJECT ATTACHMENT as being licensed to DGC under
provisions other than those set forth in this specific Exhibit.
E. "FIXED DELIVERABLE BASIS" - refers to those CONSULTING SERVICES,
usually consisting of a defined task(s) and/or deliverable(s),
for which SUPPLIER, in exchange for its successful completion
thereof, is to be paid a firm, fixed amount, exclusive of travel
and expense reimbursement, even if the actual amount of time or
effort expended by SUPPLIER differs from the estimate that served
as the basis for establishing the fixed amount.
F. "LABOR RATE BASIS" - refers to those CONSULTING SERVICES, usually
described as providing expertise and/or assistance for a
particular effort, for which SUPPLIER, in exchange for its good
faith efforts, is to be paid (subject to any minimum or maximum
established in the PROJECT ATTACHMENT) an amount, exclusive of
travel and expense reimbursement, based on the actual number of
hours of labor (or other specified unit of measure) multiplied by
a rate of payment per hour (or other specified unit of measure).
2. REPRESENTATIONS
A. By DGC - In the event a claim of infringement or misappropriation
of intellectual property rights is made against SUPPLIER with
regard to DGC/CUSTOMER INFORMATION, DGC will defend and indemnify
SUPPLIER in the same manner and to the same extent that SUPPLIER
is required to indemnify DGC or CUSTOMER under the Section
entitled "INDEMNITY" in the MSA. DGC shall treat and protect
SUPPLIER INFORMATION with the same degree of care assumed by DGC
with regard to its own information of a similar nature and
importance, and no less than reasonable care.
B. By SUPPLIER - SUPPLIER represents to DGC that all SUPPLIER
INFORMATION and NEW WORK is either the original work of SUPPLIER
or that SUPPLIER has all rights therein that are necessary to
fulfill its obligations under the applicable PROJECT ATTACHMENT.
In the event a claim of infringement or misappropriation of
intellectual property rights is made against DGC and/or
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CUSTOMER with regard to SUPPLIER INFORMATION and/or NEW WORK,
SUPPLIER will indemnify DGC and/or CUSTOMER in the same manner
and to the same extent that SUPPLIER is required to indemnify DGC
and/or CUSTOMER in the same manner and to the same extent that
SUPPLIER is required to indemnify DGC and/or CUSTOMER under the
Section entitled "INDEMNITY" in the MSA.
3. ALLOCATION OF RIGHTS
A. Rights in SUPPLIER INFORMATION - Unless otherwise agreed in the
applicable PROJECT ATTACHMENT:
1) Nothing in this Exhibit or the MSA shall serve to transfer
SUPPLIER's ownership or manufacturing rights in, or limit its
right to use or market, SUPPLIER INFORMATION (including all
designs, engineering details and other data pertaining thereto),
and
2) SUPPLIER hereby grants DGC an irrevocable (except for material
breach by DGC of SUPPLIER's intellectual property or proprietary
rights in SUPPLIER INFORMATION), world-wide, nonexclusive right,
at no charge in addition to the CONSULTING SERVICES Fee set forth
in the applicable PROJECT ATTACHMENT, to generally use SUPPLIER
INFORMATION solely in connection with DGC's performance of its
obligations to the CUSTOMER and to license and/or provide
SUPPLIER INFORMATION solely to such CUSTOMER under the same terms
and conditions as used by DGC to provide such CUSTOMER with DGC's
own information of a similar nature.
B. Rights in DGC/CUSTOMER INFORMATION - Unless otherwise agreed in
the applicable PROJECT ATTACHMENT, nothing in this Exhibit or the
MSA shall serve to transfer DGC's or CUSTOMER's ownership or
manufacturing rights in, or limit its right to use or market,
DGC/CUSTOMER INFORMATION (including all designs, engineering
details and other data pertaining thereto). SUPPLIER is hereby
granted the limited, nontransferable right to use DGC/CUSTOMER
INFORMATION only for purposes directly related to fulfillment of
SUPPLIER's obligations under the applicable PROJECT ATTACHMENT.
No other rights are granted to SUPPLIER with regard thereto, and
SUPPLIER shall make no other use thereof. SUPPLIER shall treat
and protect DGC/CUSTOMER INFORMATION with the same degree of care
as used by SUPPLIER with regard to its own information of a
similar nature and importance, and no less than reasonable care.
Unless otherwise agreed in the applicable PROJECT ATTACHMENT,
upon request, SUPPLIER shall promptly return DGC/CUSTOMER
INFORMATION to DGC and/or CUSTOMER, respectively.
B. Rights in DGC/CUSTOMER INFORMATION - Unless otherwise agreed in
the
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applicable PROJECT ATTACHMENT, nothing in this Exhibit or the MSA
shall serve to transfer DGC's or CUSTOMER's ownership or
manufacturing rights in, or limit its right to use or market,
DGC/CUSTOMER INFORMATION (including all designs, engineering
details and other data pertaining thereto). SUPPLIER is hereby
granted the limited, nontransferable right to use DGC/CUSTOMER
INFORMATION only for purposes directly related to fulfillment of
SUPPLIER's obligations under the applicable PROJECT ATTACHMENT.
No other rights are granted SUPPLIER with regard thereto, and
SUPPLIER shall make no other use thereof. SUPPLIER shall treat
and protect DGC/CUSTOMER INFORMATION with the same degree of care
as used by SUPPLIER with regard to its own information of a
similar nature and importance, and no less than reasonable care.
Unless otherwise agreed in the applicable PROJECT ATTACHMENT,
upon request, SUPPLIER shall promptly return DGC/CUSTOMER
INFORMATION to DGC and/or CUSTOMER, respectively.
C. Rights in NEW WORK - NEW WORK is "a work made for hire" by
SUPPLIER for DGC under the copyright laws of the United States.
SUPPLIER does not have any and has not been granted any rights
with regard to NEW WORK, and shall make no use thereof except in
fulfillment of its obligations under the applicable PROJECT
ATTACHMENT. The full and exclusive ownership of NEW YORK,
including any United States and international copyrights rights
therein, vests in DGC or DGC's designee. SUPPLIER shall treat and
protect NEW WORK with the same degree of care as used by SUPPLIER
with regard to SUPPLIER's own information of a similar nature and
importance, and no less than reasonable care. SUPPLIER shall
execute all documents and do all other things reasonably
necessary to fully vest such rights in DGC or DGC's designee.
D. Additional Rights - Ideas, concepts, know-how or techniques
developed in the performance of the applicable PROJECT ATTACHMENT
shall be the property of the party which developed them, or if
jointly developed, shall be the joint property of both parties,
each having the right to generally use the jointly developed
property without accounting to the other.
E. A copyright notice on any DGC/CUSTOMER INFORMATION, SUPPLIER
INFORMATION or NEW WORK does not by itself constitute or evidence
a publication or public disclosure.
4. CANCELLATION FOR BREACH
In the event of a cancellation for breach as set forth in the MSA at
the Section entitled "TERM AND TERMINATION", the following shall apply:
A. CONSULTING SERVICES - FIXED DELIVERABLE BASIS - If DGC cancels a
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PROJECT ATTACHMENT due to SUPPLIER's breach of a material
obligation with regard to CONSULTING SERVICES being provided on a
FIXED DELIVERABLE BASIS, then, promptly after the effective date
of the cancellation, SUPPLIER shall:
1) refund all portions of the CONSULTING SERVICES Fee and all
reimbursements for authorized expenses and/or taxes paid by
DGC prior to such effective date, and
2) provide DGC with all NEW WORK prepared in the performance of
such CONSULTING SERVICES and SUPPLIER INFORMATION needed for
the operation or use of such NEW WORK.
B. CONSULTING SERVICES - LABOR RATE BASIS - If DGC cancels a PROJECT
ATTACHMENT due to SUPPLIER's breach of a material obligation with
regard to CONSULTING SERVICES being provided on a LABOR RATE BASIS,
then, promptly after the effective date of such cancellation, the
following shall apply:
1) DGC shall be obligated to pay SUPPLIER only for that portion
of the CONSULTING SERVICES actually rendered and accepted by
DGC, and for the authorized expenses and taxes directly
related thereto actually incurred by SUPPLIER, prior to the
effective date of such cancellation, and
2) SUPPLIER shall make any claims for amounts due hereunder
within thirty (30) calendar days after the effective date of
such cancellation and shall support such claims with
documentation submitted to DGC, and
3) If DGC has made advance payments in excess of the amount
determined in accordance with subsection 1) above, SUPPLIER
shall promptly refund such excess to DGC, and
4) SUPPLIER shall provide DGC with all NEW WORK prepared by
SUPPLIER in the performance of such CONSULTING SERVICES and
any SUPPLIER INFORMATION needed for the operation or use of
such NEW WORK.
5. TERMINATION WITHOUT BREACH
The following provisions pertain to a termination of CONSULTING
SERVICES in the absence of a breach by SUPPLIER:
A. CONSULTING SERVICES - FIXED DELIVERABLE BASIS - With regard to
CONSULTING SERVICES being provided on a FIXED DELIVERABLE BASIS, if i)
the CUSTOMER terminates or cancels all or that portion of the CUSTOMER
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CONTRACT that relates to such CONSULTING SERVICES, or ii) DGC cancels
all or that portion of the CUSTOMER CONTRACT that relates to such
CONSULTING SERVICES due to CUSTOMER's breach of a material obligation
of the CUSTOMER CONTRACT, the following shall apply:
1) DGC shall have the option of terminating such CONSULTING SERVICES
by sending SUPPLIER written notice indicating the basis for
termination, which notice shall become effective upon receipt,
and
2) DGC shall be obligated to pay SUPPLIER only for that portion of
the originally agreed CONSULTING SERVICES Fee that reasonably
corresponds to the CONSULTING SERVICES actually rendered, plus
authorized expenses and taxes directly related thereto and
incurred by SUPPLIER, prior to the effective date of such
termination, and
3) the provisions of subsection C. below shall apply.
B. CONSULTING SERVICES - LABOR RATE BASIS - Either party may terminate
CONSULTING SERVICES being provided on a LABOR RATE BASIS without cause by
sending the other written notice at any time indicating a termination for
convenience. Thereafter, DGC shall be obligated to pay SUPPLIER only for
the CONSULTING SERVICES actually rendered plus authorized expenses and
taxes directly related thereto and incurred by SUPPLIER, prior to the
effective date of such cancellation, subject to the minimum and/or maximum
compensation amounts and notice periods, if any, in the applicable PROJECT
ATTACHMENT.
C. Additional Provisions - The following shall apply to any terminations made
pursuant to subsection A. or B. above:
1) SUPPLIER shall make any claims for amounts due hereunder within
thirty (30) calendar days after the effective date of such
termination and shall support such claims with documentation
submitted to DGC, and
2) If DGC has made advance payments in excess of the amount
determined in accordance with subsection A. or B. above, as
applicable, SUPPLIER shall promptly refund such excess to DGC,
and
3) SUPPLIER shall promptly provide DGC with all NEW WORK prepared up
to the date of termination in the performance of such CONSULTING
SERVICES and SUPPLIER INFORMATION needed for the operation or use
of such NEW WORK.
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Exhibit 3
Licensing Provisions
This Exhibit 3 is hereby attached to an incorporated into the MSA between DGC
and SUPPLIER and sets forth the provisions applicable to each and every PROJECT
ATTACHMENT involving DGC's procurement of LICENSED PROGRAM from SUPPLIER.
1. FEES
The fees due SUPPLIER from DGC shall be as set forth on the applicable
PROJECT ATTACHMENT.
2. GRANT OF LICENSE AND RIGHT TO USE AND REMARKET
A. Evaluation License - SUPPLIER shall use good faith to attempt to
fulfill, a request from DGC to provide to DGC, at no charge, one
(1) copy of all LICENSED PROGRAM(S) identified on the applicable
PROJECT ATTACHMENT. With regard thereto, SUPPLIER grants DGC a
nonexclusive, nontransferable right and license to use such
solely for purposes of i) demonstration to the applicable
CUSTOMER, ii) testing, supporting and evaluating to determine
conformance to the requirements of the applicable PROJECT
ATTACHMENT. DGC shall make no other use thereof.
B. Sublicensing of LICENSED PROGRAM - SUPPLIER hereby grants to DGC,
on a nonexclusive, nontransferable, irrevocable (except as
expressly provided herein) basis, the right and license to obtain
LICENSED PROGRAM(S) identified on the applicable PROJECT
ATTACHMENT from SUPPLIER for the purpose of providing such to the
applicable CUSTOMER under the terms of the break-the-seal type
license agreement packaged with the LICENSED PROGRAM, if any, or
in the absence of such break-the-seal license agreement, under
the same licensing provisions as used by DGC to license its own
programs of a similar nature to CUSTOMER.
C. Additional Authorizations - Provided DGC is in compliance with
the material provisions of the applicable PROJECT ATTACHMENT,
SUPPLIER shall not invoke, at law or in equity, any intellectual
property or proprietary right, no matter when acquired, in order
to interfere with the exercise of any right or the fulfillment of
any obligation set forth in such PROJECT ATTACHMENT, or to
collect any moneys in excess of the fees set forth in such
PROJECT ATTACHMENT.
D. General - DGC acknowledges SUPPLIER's representation that
LICENSED PROGRAM involves valuable copyrights, trade secrets and
other intellectual property and/or proprietary rights of
SUPPLIER. No title to or ownership thereof is
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transferred to DGC hereunder. DGC shall not be responsible for
any violation of SUPPLIER's intellectual property and/or
proprietary rights by any entity other than DGC. DGC will
promptly notify SUPPLIER if DC becomes aware of any such
violation and will provide reasonably cooperate with SUPPLIER in
the protection or enforcement of SUPPLIER's rights in LICENSED
PROGRAM. DGC shall have no obligation to commence any proceedings
with regard to such violation. DGC and SUPPLIER hereby agree that
the rights and licenses granted to DGC hereunder shall be deemed
made and effective as of the effective date of the applicable
PROJECT ATTACHMENT. SUPPLIER agrees to expeditiously execute such
documents and instruments as may be reasonably requested by DGC
for the enforcement thereof.
E. Restrictions - DGC shall not disassemble or reverse compile
LICENSED PROGRAM unless DGC has received SOURCE CODE as a result
of SUPPLIER's breach of the applicable PROJECT ATTACHMENT. DGC
shall make no use of LICENSED PROGRAM and SOURCE CODE except as
permitted hereunder and shall treat and protect such with same
degree of care as used by DGC with regard to its own materials of
a similar nature and importance, and no less than reasonable
care. DGC shall not remove or alter any copyright or other
proprietary notices affixed to or embedded in LICENSED PROGRAM
and/or SOURCE CODE supplied to DGC by SUPPLIER, and shall include
such in all copies made by DGC. DGC shall have no obligation to
determine the appropriateness of such notices.
3. PURCHASE ORDER PROVISIONS
A. Lead-time and F.O.B. Point - The purchase order submitted by DGC
shall specify a shipment date not be less than five (5) days
after the date on which SUPPLIER receives the purchase order via
mail or Fax, without the prior consent (oral or written) of
SUPPLIER. The shipment shall be send F.O.B. Destination to the
location, and via the freight method and carrier, specified on
the purchase order.
B. Early/Late Arrival - If a shipment has not arrived within five
(5) days after the specified shipment date, SUPPLIER shall, at
DGC's request, re-ship by next day air freight at no additional
charge to DGC. If SUPPLIER fails to ship within ten (10) days
after the specified shipment date, then for each day thereafter
that such shipment remains unshipped, the net price to DGC shall
be reduced by one half (1/2) percent of the applicable fee, with
a maximum reduction of fifty percent (50%). DGC may cancel any
order whose shipment is delayed more than one (1) month after its
specified shipment date.
C. Changes in Shipment Date - Shipments may be rescheduled and/or
canceled by DGC without cost or liability by providing SUPPLIER
written or oral notice thereof at least five (5) days in advance
of the specified shipment date. Such notice shall be given to
SUPPLIER's sales organization.
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D. Incorrect Shipments - SUPPLIER shall take prompt remedial action
for any shipment which fails to inform with the applicable
purchase order, after receipt of notice thereof from DGC.
E. Packing Slips - Packing slips will contain such information as is
required by DGC, including but not limited to, DGC's purchase
order number and/or DGC's customer sales order number, DGC's part
number, carton count, ship date, carrier and shipment origin.
F. Shipment Confirmation - SUPPLIER agrees to provide the following
information to DGC within three (3) days after shipment:
Sales Order # Ship Date Waybill # Freight Charges # of Cartons
Weight (in Pounds) Ship Via (Air, Padded Van, Surface, etc.)
4. LICENSED PROGRAM WARRANTY
A. For any LICENSED PROGRAM that is provided by SUPPLIER to DGC and
subsequently provided by DGC to CUSTOMER under an executed
licensing agreement (as opposed to a LICENSED PROGRAM that is
packaged with its own "break-the-seal" type of license
agreement), SUPPLIER warrants to DGC and CUSTOMER that, for
ninety (90) calendar days after successful installation, the
LICENSED PROGRAM will operate in accordance with SUPPLIER's (or
the manufacturer's) published specifications applicable thereto,
and any other specifications and/or requirements set forth in the
applicable PROJECT ATTACHMENT. If DGC reports a material
deviation from the specifications or applicable requirements
within the WARRANTY PERIOD, and SUPPLIER is unable to correct or
offer an alternative acceptable to DGC within thirty (30)
calendar days after receipt of the report, DGC shall have the
option of returning the LICENSED PROGRAM, and receiving a refund
from SUPPLIER of the full amount paid by DGC for such LICENSED
PROGRAM.
B. For any LICENSED PROGRAM that is provided by SUPPLIER to DGC with
its own "break-the-seal" type of license agreement with the media
and documentation package, SUPPLIER shall provide warranty
service directly to CUSTOMER in the manner specified in such
license agreement.
C. SUPPLIER warrants all that is shall replace without charge,
within ten (10) calendar days after receipt of notice, any
LICENSED PROGRAM media or documentation supplied by SUPPLIER that
is, or becomes, defective within ninety (90) calendar days after
successful installation, provided the defect is not due to
accident, abuse or misapplication after arrival at CUSTOMER.
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D. Restrictions - DGC shall not disassemble or reverse compile
PROGRAM(S) unless DGC has received a license to use the related
SOURCE CODE in the applicable PROGRAM ATTACHMENT. DGC shall make
no use of PROGRAM(S) and/or SOURCE CODE except as permitted
thereunder. DGC shall treat and protect such with the same degree
of care assumed by DGC with regard to its own information and
materials of a similar nature and importance, and no less than
reasonable care. DGC shall not remove or alter any copyright or
other proprietary notices affixed to or embedded therein, and
shall include such in all copies made by DGC. DGC shall have no
obligation to determine the appropriateness thereof. DGC shall
not use or authorize the use of PROGRAM(S) and/or SOURCE CODE
outside of the TERRITORY.
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Exhibit 4
LICENSED PROGRAM Support Provisions
This Exhibit is hereby attached to and incorporated into the MSA between DGC and
SUPPLIER and sets forth the provisions applicable to each and every PROJECT
ATTACHMENT involving DGC's purchase of SUPPORT SERVICES for LICENSED PROGRAM(S),
SUPPLIER INFORMATION or NEW WORK to be provided by SUPPLIER. The purpose of this
Exhibit is to identify i) the support requirements of the CUSTOMER CONTRACT, and
ii) each party's responsibilities in fulfilling such requirements. SUPPLIER
shall comply with its support obligations ("SUPPLIER SERVICES"), as set forth
below, during the WARRANTY PERIOD, if any, and such subsequent periods, if any,
for which DGC has paid the applicable SUPPORT SERVICES Fee, if any.
1. COMMUNICATION
Each party shall designate in writing the names of specific individuals
that shall act as such party's representatives for purposes of
contacting the other party's support center. Each party reserves the
right to change such names when appropriate. Unless otherwise agreed
for a particular matter or circumstance, DGC shall provide support
directly to and act as the contact point with the applicable CUSTOMER.
SUPPLIER shall interface with DGC.
2. SUPPORT SERVICES FEE
The SUPPORT SERVICES Fee shall be as set forth in the applicable
PROJECT ATTACHMENT.
3. PHONE-CALL SUPPORT
SUPPLIER shall promptly alert DGC to known problems, including any
solutions or workarounds, and answer DGC's questions, submitted via
telephone, related to operation, sysgen and installation,
configuration, documentation, general product information, and Trouble
Reporting and Resolution services. When DGC calls SUPPLIER, DGC will
have already conducted an investigation of the problem. The level of
telephone consultation provided by SUPPLIER should minimally be at the
system engineer level. The telephone hotline service will be available
from 8:00 A.M. to 8:00 P.M., Eastern Time.
4. TROUBLE REPORTING AND RESOLUTION
SUPPLIER and DGC shall use the following procedures for Trouble Reports
(TRs).
A. TR Generation - DGC must sufficiently define the problem in the
TR so it can be reproduced by SUPPLIER. SUPPLIER shall promptly
notify DGC if SUPPLIER can not reproduce the problem. DGC shall
request additional information and the TR
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will have a status of "Waiting". If the TR arrives after 3:00 PM,
SUPPLIER's local time, the acknowledgment and verification
interval will begin at the start of the next day.
B. TR Content - A single TR contains only one (1) reported problem,
to ensure separate tracking of unrelated problems.
C. TR Responses - The following are the types of TR responses:
1) "Fix" - usually a change that will close the TR. It may be a
patch (the modification of an existing binary file), a
replacement module, a special program, or a change in
documentation. A Fix will be provided to DGC within the time
frame specified for the assigned Priority Code, even if the
problem will be addressed in the next release. A Fix
includes the change to the code as well as to the related
documentation. A single Fix may apply to more than one TR.
2) "Workaround" - usually a set of procedures that circumvents
or mitigates the impact of a problem, though the problem
continues to exist. A workaround may be provided in lieu of
a Fix for a specific TR.
D. Priority Codes - The Priority Code indicates the urgency
with which SUPPLIER must respond to the TR. DGC will use the
nature of the problem and the business situation to
determine the Priority Code. The TR Priority Code may be
reclassified by SUPPLIER upon consent by DGC. This may
occur, for example, if SUPPLIER provides a satisfactory
Workaround for the problem or determines that the problem
arises from a faulty understanding of the original TR. The
Priority Codes are as follows:
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Priority Code #
Description
10 URGENT PROBLEM - System or major application is not
functional or seriously impacted and there is no reasonable
Workaround currently available.
20 MODERATE PROBLEM - System or application is
moderately impacted. There is no Workaround currently
available or the Workaround is cumbersome to utilize.
30 NON-CRITICAL PROBLEM - System or application is
impacted but causes little or no loss of productivity for
users.
90 REQUESTS FOR ENHANCEMENTS - Although not a
problem, will be treated with the same procedures. An
acceptable response states whether or not the request will be
honored, with no commitment necessary.
Priority Code 10 and 20 TRs will be given top priority.
E. TR Receipt Acknowledgment and Verification - SUPPLIER will
send an acknowledgment of its receipt of an TR to DGC. At
receipt, SUPPLIER will i) enter the TR into the central
problem reporting database, ii) assign technical staff to
verify and analyze the TR, and iii) assign the appropriate
status category to the TR. The acknowledgment and the attempt
to reproduce the problem will be done according to the
following schedule:
Priority Code # Acknowledge/Reproduce Problem
10,20 Within 1 day
30 Within 5 days
90 Within 10 days
F. TR Response: Type and Interval Definition - After receipt and
verification, SUPPLIER shall enter the TR into the TR database,
commence to correct the problem, test the proposed correction
(including regression testing) and forward the correction to DGC
for implementation. SUPPLIER shall provide both an initial and a
final response for each TR. The time period for providing an
initial response begins when an TR has been acknowledged and
verified by SUPPLIER. A final response is made and the TR is
closed when a correction for the problem is included in the next
release.
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Each Priority Code specifies the required content of the initial
response to the TR and the maximum number of days in which such
response shall be made available to DGC. SUPPLIER shall revise
the TR record with information on the initial and final responses
on a timely basis.
Priority INITIAL RESPONSE
CODE (DAYS - RESPONSE TYPE) FINAL RESPONSE
10 1 - Fix or Workaround with Integrate Fix into next
daily update release
20 1 - Fix or Workaround Integrate Fix into next
release
30 30-Fix or Workaround Integrate Fix into next
release
90 125-Fix or Workaround at Fix may be integrated into
SUPPLIER's discretion next release at
SUPPLIER's discretion
G. Performance Goals - SUPPLIER will use its best efforts to provide
the initial response to an TR within the time period for the
Priority Code unless otherwise mutually agreed. SUPPLIER will
provide an initial response to a Priority Code 10 TR as quickly
as possible, based on continuous effort until relief is provided.
Daily updates will be provided to DGC for Priority Code 10 TRs.
H. TR Reporting - The TR form may be submitted electronically. Upon
receipt of an TR, SUPPLIER will enter the TR into its central TR
problem reporting database. An TR record shall contain the date,
status, problem description, configuration, activities done to
reproduce the problem, the Severity Code, and the TR
identification number. The TR record may contain any other
pertinent information. Activities done to resolve the problem
along with the resolution are recorded in the TR record as they
occur. Attachments such as large quantities of input and output
data (e.g., core dumps) may be sent electronically with the
original TR or mailed.
The TR status categories are to be mutually agreed on.
Suggested status categories are:
1. Acknowledged
2. Reproduced
3. Waiting for more information
4. Under Investigation
5. Deferred - A bug exists but no Fix until the next
release.
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6. Not a SUPPORT SERVICES issue - The problem is not
caused by an item overed by SUPPORT SERVICES.
7. User error
8. Not reproducible
9. Duplicate TR - The original TR is cross-referenced.
10. Fix being developed.
11. Fix supplied
12. Fix in next release
13. Closed - DGC and SUPPLIER agree the problem is resolved.
I. Monthly Summary of Escalated Calls - SUPPLIER agrees to
summarize all responses to all unresolved TRs in a monthly
written report that will be provided to DGC within ten (10)
days after the end of each month, and shall include a
description of the specific problem resolution actions taken
or contemplated, and the status of SUPPLIER's remedial efforts
and anticipated time of solution.
5. COMPATIBILITY
Within ninety (90) calendar days after SUPPLIER's receipt of a
subsequent release of the operating system for the applicable DGC
computer system, SUPPLIER shall issue, at no separate or additional
charge to DGC, a subsequent release of LICENSED PROGRAM that continues
to fulfill SUPPLIER's other obligations under the applicable PROJECT
ATTACHMENT and maintains compatibility with such subsequent release of
the operating system.
6. PARITY
Within ninety (90) calendar days after SUPPLIER first issues each new
release of its program, equivalent to LICENSED PROGRAM, made for use on
a non-DGC operating system, SUPPLIER shall issue, to the extent
technically feasible, a subsequent release of LICENSED PROGRAM that
fulfills SUPPLIER's other obligations under the applicable PROJECT
ATTACHMENT and maintains parity with such equivalent program.
7. SUPPORT PERIOD
SUPPLIER will support each release for a period until one hundred
eighty (180) calendar days after SUPPLIER is authorized to commence
shipment of the subsequent release in accordance with the provisions of
this Exhibit (hereinafter called "SUPPORT PERIOD"). During the SUPPORT
PERIOD for each release, problems therein shall be corrected in
accordance with the procedures set forth herein. After the expiration
of the SUPPORT PERIOD for a specific release, problems discovered
therein, which are also reproducible on the then current release, shall
continue to be corrected in accordance with the procedures set forth
herein. Those problems which are not reproducible on the then current
release shall be
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addressed, at SUPPLIER's then current standard terms and prices, within
a reasonable time after DGC's written request.
8. PRODUCT NEWSLETTER
DGC provides and uses for support purposes an on-line product
newsletter describing proposed changes, future releases, information on
compatibility and third party programs or hardware, tips and
techniques, articles, and known problems and solutions not covered in
the TR database, as well as general information. As part of SUPPORT
SERVICES, SUPPLIER will provide relevant information DGC, of the type
that SUPPLIER generally provides to its other distributors and users,
for inclusion in this newsletter.
9. IMPLEMENTATION OF SUBSEQUENT RELEASES
A. General - DGC shall be required to use a subsequent release of
LICENSED PROGRAM only to the extent that such subsequent release
of LICENSED PROGRAM has been accepted for use by DGC's customer
in accordance with the applicable provisions of the CUSTOMER
CONTRACT.
B. Subsequent Releases Included in SUPPORT SERVICES - It is the
intention of the parties that DGC shall have the right, but not
the obligation to obtain from SUPPLIER, as part of SUPPORT
SERVICES any subsequent release of LICENSED PROGRAM, however
designated by SUPPLIER, to the extent that such subsequent
release contains a modification, enhancement, Fix, Workaround or
other change that does not meet the definition of a "NEW
VERSION". A subsequent release is defined as a "NEW VERSION" only
if such release is made generally available by SUPPLIER i) under
a designation or model number different from that used for the
immediately prior release, ii) at a charge that is separate from
or in addition to both the original licensing fee and the usual
and customary support fee charged for support and bug fixes, and
iii) while SUPPLIER continues to separately license and support
the immediately prior release. A NEW VERSION shall only be deemed
to be offered to DGC as part of SUPPORT SERVICES to the extent
that the parties make express provisions to do so.
C. DGC Requested Changes - SUPPLIER agrees, at its then current
standard charges and terms, to make enhancements, changes,
modifications, and additions to LICENSED PROGRAM, in addition to
those required or provided by SUPPORT SERVICES, as may be
reasonably requested by DGC.
D. Format - Subsequent releases containing minor changes may be made
available with the documentation changes specified in a separate
release notice. Subsequent releases containing major
modifications or enhancements shall be made available with the
changes integrated into a revised set of documentation.
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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Amendment No. 5 to the Registration
Statement on Form SB-2 of our report dated February 13, 1997, except as to Note
3 which is dated March 11, 1997, relating to the financial statements of
Compu-DAWN, Inc. and to the reference to our Firm under the caption "Experts" in
the Prospectus.
/s/ Lazar, Levine & Company LLP
LAZAR, LEVINE & COMPANY LLP
New York, New York
June 4, 1997
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