As filed with the Securities and Exchange Commission on November 3, 1997
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMPU-DAWN, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
11-3344575
(I.R.S. Employer Identification No.)
77 Spruce Street, Cedarhurst, New York 11516
(Address of Principal Executive Offices)
COMPU-DAWN, INC. 1996 STOCK OPTION PLAN
COMPU-DAWN, INC. 1997 QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
(Full Title of Plans)
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) 374-9410
(Name, Address and Telephone Number of Agent for Service)
Copies of all communications and notices to:
Fred Skolnik, Esq.
Gavin C. Grusd, Esq.
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York 11554
Telephone: (516) 296-7000
Telecopier: (516) 296-7111
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Maximum Maximum
of Securities Amount Offering Aggregate Amount of
To Be To Be Price Offering Registration
Registered Registered(1) Per Share Price Fee
Common Shares
(par value
$.01 per
<S> <C> <C> <C> <C> <C> <C>
share) 1,320,800(2)(3) $ 8.06 (4) $ 10,645,648 (4) $ 3,225.63
============================ ========================== =========================== ============================ =================
Common Shares
(par value
$.01 per
share) 64,000(5) $.50 $32,000 $9.70
============================ ========================== =========================== ============================ =================
Common Shares
(par value
$.01 per
share) 3,250(6) $1.00 $3,250 $0.98
============================ ========================== =========================== ============================ =================
Common Shares
(par value
$.01 per
share) 8,250(7) $2.00 $16,500 $5.00
============================ ========================== =========================== ============================ =================
Common Shares
(par value
$.01 per
share) 185,500(8) $3.00 $556,500 $168.64
============================ ========================== =========================== ============================ =================
Common Shares
(par value
$.01 per
share) 3,250(9) $4.00 $13,000 $3.94
============================ ========================== =========================== ============================ =================
Common Shares
(par value
$.01 per
share) 25,000(10) $5.875 $146,875 $44.51
============================ ========================== =========================== ============================ =================
2
<PAGE>
============================ ========================== =========================== ============================ =================
Common Shares
(par value
$.01 per
share) 389,950(11) $ 8.06 (4) $ 3,142,997 (4) $ 952.32
============================ ========================== =========================== ============================ =================
Common Shares
(par value
$.01 per
share) 500,000(12) $ 8.06 (4) $ 4,030,000 (4) $ 1,221.09
Common Shares
(par value
$.01 per
share) 250,000(13)(14) $ 8.06 (4) $ 2,015,000 (4) $ 610.55
============================ ========================== =========================== ============================ =================
Common Shares
(par value
$.01 per
share) 2,360,050(15) $ 8.06 $ 19,022,003 $ --(16)
============================ ========================== =========================== ============================ =================
Total $6,242.36
============================ ========================== =========================== ============================ =================
</TABLE>
(1) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended (the "1933 Act"), an additional indeterminate number of Common
Shares is being registered to cover any adjustments in the number of
Common Shares pursuant to the anti-dilution provisions of the
Compu-DAWN, Inc. 1996 Stock Option Plan (the "1996 Plan") and the
Compu- DAWN, Inc. 1997 Qualified Employee Stock Purchase Plan (the
"1997 Plan").
(2) The 1996 Plan authorizes the granting of options to purchase a maximum
of 2,000,000 Common Shares, of which options for the purchase of an
aggregate of 679,200 Common Shares have been granted, of which options
for the purchase of an aggregate of 389,950 Common Shares have been
exercised.
(3) Represents the issuance of Common Shares issuable upon the exercise of
options which may be granted under the 1996 Plan.
(4) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457.
(5) Represents the issuance of Common Shares issuable upon the exercise of
options which have been granted under the 1996 Plan at a purchase price
of $.50 per Common Share.
<PAGE>
(6) Represents the issuance of Common Shares issuable upon the exercise of
options which have been granted under the 1996 Plan at a purchase price
of $1.00 per Common Share.
(7) Represents the issuance of Common Shares issuable upon the exercise of
options which have been granted under the 1996 Plan at a purchase price
of $2.00 per Common Share.
(8) Represents the issuance of Common Shares issuable upon the exercise of
options which have been granted under the 1996 Plan at a purchase price
of $3.00 per Common Share.
(9) Represents the issuance of Common Shares issuable upon the exercise of
options which have been granted under the 1996 Plan at a purchase price
of $4.00 per Common Share.
(10) Represents the issuance of Common Shares issuable upon the exercise of
options which have been granted under the 1996 Plan at a purchase price
of $5.875 per Common Share.
(11) Represents the resale of 389,950 Common Shares acquired upon the
exercise of options granted to certain persons who may be deemed
affiliates of Compu-DAWN, Inc. (the "Registrant") under the 1996 Plan.
(12) Represents a good-faith estimate of the number of Common Shares which
may be issuable upon the exercise of reload options which may be
granted under the 1996 Plan.
(13) The 1997 Plan authorizes the granting of options to purchase a maximum
of 250,000 Common Shares.
(14) Represents the issuance of Common Shares issuable upon the exercise of
options which may be granted under the 1997 Plan.
(15) Represents the resale of up to 2,360,050 Common Shares which may be
acquired upon the exercise of options granted, or which may be granted,
to certain persons who may be deemed affiliates of the Registrant under
the 1996 Plan and 1997 Plan.
(16) Pursuant to Rule 457(h)(3), no additional filing fee is payable with
respect to the registration of the resale of Common Shares issuable
upon the exercise of options granted under the 1996 Plan and 1997 Plan.
EXPLANATORY NOTE
Pursuant to General Instruction C of Form S-8, this Registration Statement
contains (as Annex A hereto) a prospectus meeting the requirements of Part I of
Form S-3 relating to reofferings of Common Shares, $.01 par value, of the
Registrant acquired, or which may be acquired, pursuant to the 1996 Plan and
1997 Plan, respectively, by persons who may be deemed affiliates of the
Registrant.
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 3. Incorporation of Documents by Reference
Incorporated herein by reference are the following documents filed by the
Registrant with the Securities and Exchange Commission (the "Commission") under
the 1933 Act and the Securities Exchange Act of 1934, as amended (the "1934
Act"), as the case may be:
(a) The prospectus included in the Registrant's Registration
Statement on Form SB-2 (File No. 333-18667) (the "Form SB-2 Registration
Statement"), which was declared effective by the Commission on June 10, 1997
under the 1933 Act.
(b) The Registrant's Quarterly Report on Form 10-QSB, as
amended, for the three months ended June 30, 1997.
(c) The description of the Registrant's Common Shares
contained in the Registrant's Registration Statement on Form 8-A (File No.
000-22611), which was declared effective by the Commission on June 10, 1997
under the 1934 Act.
All documents filed by the Registrant pursuant to Sections 13, 14 and 15(d)
of the 1934 Act prior to the filing of a post-effective amendment to this
Registration Statement which indicates that all securities offered hereby have
been sold or which deregisters all such securities then remaining unsold, shall
be deemed to be incorporated herein by reference and to be a part hereof from
their respective dates of filing.
Item 4. Description of Securities
Not applicable.
Item 5. Interests of Named Experts and Counsel
Certain legal matters in connection with the offering of the
securities registered hereunder are being passed upon for the Registrant by
Certilman Balin Adler & Hyman, LLP, 90 Merrick Avenue, East Meadow, New York
11554.
Item 6. Indemnification of Directors and Officers
Article X of the Registrant's Certificate of Incorporation
eliminates the personal liability of directors to the Registrant 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
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<PAGE>
(i) for any breach of the director's duty of loyalty to the Registrant 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 Registrant 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
Registrant's by-laws, any agreement, vote of stockholders or otherwise.
The effect of the foregoing is to require the Registrant to the extent
permitted by law to indemnify the officers, directors, employees and agents of
the Registrant 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 Registrant, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Item 7. Exemption from Registration Claimed
The 389,950 outstanding Common Shares to be reoffered or resold pursuant to
this Registration Statement were acquired in private transactions not involving
a public offering that were exempt from the registration provisions of the 1933
Act pursuant to Section 4(2) thereof. The Company determined that the holders of
such Common Shares were sophisticated investors. Sales of the Common Shares were
without the use of an underwriter, and the certificates evidencing the
securities bear restrictive legends permitting the transfer thereof only upon
registration of such securities or pursuant to an exemption under the 1933 Act.
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<PAGE>
Item 8. Exhibits
4.1 Specimen Common Stock Certificate(1)
5 Opinion of Certilman Balin Adler & Hyman, LLP as to
the legality of the Common Shares issuable pursuant
to the 1996 Plan and the 1997 Plan and being
registered hereunder
10.1 1996 Stock Option Plan(1)
10.2 1997 Qualified Employee Stock Purchase Plan, as
amended
23.1 Consent of Lazar Levine & Company, LLP
23.2 Consent of Certilman Balin Adler & Hyman, LLP
(included in its opinion filed as Exhibit 5)
24 Powers of Attorney (included in signature page forming a
part hereof)
Item 9. Undertakings
The undersigned Registrant will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration 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 in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(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 the time to be the initial bona
fide offering.
- --------------------
(1) Denotes document filed as an exhibit to the Registrant's Form SB-2
Registration Statement (File No. 333-18667) which is incorporated herein by
reference thereto.
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<PAGE>
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-8 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Nassau, State of New York, on the 31st day of
October, 1997.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
Mark Honigsfeld
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Mark Honigsfeld with full power to act as his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, and each of his
substitutes, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
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<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Signature Capacity Date
/s/ Mark Honigsfeld Chairman of the Board, October 31, 1997
- ------------------------------ Chief Executive Officer,
Mark Honigsfeld Secretary and Director
(Principal Financial Officer
and Principal Accounting Officer)
/s/ Dong W. Lew President, Chief Operating October 31, 1997
- -------------------------------- Officer, Treasurer and
Dong W. Lew Director
/s/ Louis Libin Chief Technology Officer and
- -------------------------------- Director October 31, 1997
Louis Libin
/s/ William D. Rizzardi Director October 31, 1997
- --------------------------------
William D. Rizzardi
/s/ Harold Lazarus Director October 31, 1997
Harold Lazarus, Ph.D.
</TABLE>
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<PAGE>
ANNEX A
PROSPECTUS
COMMON SHARES
COMPU-DAWN, INC.
This Prospectus relates to the sale or offer for sale on the Nasdaq
SmallCap Market, or otherwise, of an aggregate of 2,750,000 Common Shares, $.01
par value (the "Common Shares"), of Compu-DAWN, Inc., a Delaware corporation
(the "Company"), 389,950 of which have been acquired, and 2,360,050 of which may
be acquired, by certain persons who may be deemed affiliates of the Company,
pursuant to the exercise by them of options granted (or which may be granted)
pursuant to the terms of the Company's 1996 Stock Option Plan (the "1996 Plan")
and the Company's 1997 Qualified Employee Stock Purchase Plan (the "1997 Plan"
and collectively with the 1996 Plan, the "Plans") as well as such additional
Common Shares as may become issuable upon the exercise of options under the
Plans, including Common Shares which may be acquired pursuant to the exercise of
reload options which may be granted thereunder.
The various persons and entities referred to herein are hereinafter
referred to individually as a "Selling Shareholder" and collectively as the
"Selling Shareholders". There are no commitments pursuant to which the Company
will receive any proceeds from the resale of the Common Shares by the Selling
Shareholders. See "Selling Shareholders."
A PURCHASE OF THESE SECURITIES INVOLVES A CERTAIN DEGREE OF RISK. SEE "RISK
FACTORS." THE "RISK FACTORS" SECTION BEGINS ON PAGE A-5 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The Selling Shareholders, directly through agents designated by them from
time to time or through broker-dealers or underwriters also to be designated,
may sell the Common Shares, from time to time, in or through privately
negotiated transactions, or in one or more transactions, including block
transactions, on the Nasdaq SmallCap Market, or on any other market or stock
exchange on which the Common Shares may be listed in the future pursuant to and
in accordance with the applicable rules of such market or exchange or otherwise.
The selling price of the Common
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Shares may be at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. See "Selling
Shareholders" and "Plan of Distribution".
The Selling Shareholders and any agents, broker-dealers, or underwriters
that participate with the Selling Shareholders in the distribution of any of the
Common Shares may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "1933 Act"), and any commissions
received by them, and any profit on the resale of the Common Shares purchased by
them, may be deemed to be underwriting commissions or discounts under the 1933
Act. The Company is not aware of any underwriting arrangements with respect to
the resale of the Common Shares by the Selling Shareholders. See "Selling
Shareholders" and "Plan of Distribution".
The Company's Common Shares are traded on the Nasdaq SmallCap Market under
the symbol "CODI". On October 27, 1997, the closing price for the Company's
Common Shares, as reported by The Nasdaq Stock Market, was $8 1/2 per share.
November 3, 1997
A-2
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
For further information with respect to the Company and the Common Shares
offered hereby, reference is hereby made to the Company's Registration Statement
on Form SB-2 (File No. 333-18667), which was declared effective by the
Commission on June 10, 1997 (the "Form SB-2 Registration Statement") and the
exhibits thereto. Additionally, the Company files reports, proxy and information
statements and other information with the Commission. Such Form SB-2
Registration Statement and the exhibits thereto, reports, statements 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 Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
Regional Offices of the Commission: 7 World Trade Center, Suite 1300, New York,
New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can also be obtained from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Furthermore, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding the Company. The address of such Web
site is http://www.sec.gov.
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<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company with the
Commission under the 1933 Act and the Securities Exchange Act of 1934, as
amended (the "1934 Act"), as the case may be, and are incorporated herein by
reference:
(a) The prospectus included in the Company's Form SB-2 Registration
Statement.
(b) The Company's Quarterly Report on Form 10-QSB, as amended, for the
three months ended June 30, 1997.
(c) The description of the Company's Common Shares contained in the
Company's Registration Statement on Form 8-A, as amended (File No.
000-22611), which was declared effective by the Commission on June 10,
1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the 1934 Act after the date of this Prospectus and prior to the
termination of the offering of the Common Shares offered hereby shall be deemed
to be incorporated by reference into this Prospectus and to be a part hereof
from their respective dates of filing.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, a copy of any or all of the documents referred to above which have been
incorporated into this Prospectus by reference (other than exhibits to such
documents). Requests for such copies should be directed to the Secretary, 77
Spruce Street, Cedarhurst, New York 11516 (telephone number: (516) 374-6700).
Any statement contained in a document incorporated herein by reference
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
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<PAGE>
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 58 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.
FORWARD-LOOKING STATEMENTS
The Company cautions readers that certain important factors may affect the
Company's actual results and could cause such results to differ materially from
any forward-looking statements which may be deemed to have been made in this
Prospectus or which are otherwise made by or on behalf of the Company. For this
purpose, any statements contained in this Prospectus that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may", "will", "expect",
"believe", "anticipate", "intend", "could", "estimate", or "continue" or the
negative variations thereof or comparable terminology are intended to identify
forward-looking statements. Factors which may affect the Company's results
include, but are not limited to, the risks and uncertainties associated with the
sale, implementation and maintenance of computer software products and systems.
The Company is also subject to other risks detailed herein or detailed from time
to time in the Company's Commission filings. Factors that could cause or
contribute to such difference include, but are not limited to, those discussed
in "Risk Factors" below, as well as those discussed elsewhere in this Prospectus
and in the Company's filings with the Commission.
RISK FACTORS
An investment in the securities offered hereby is speculative and involves
a high degree of risk and should only be purchased by investors who can afford
to lose their entire investment. Prospective purchasers, prior to making an
investment, should carefully consider the following risks and speculative
factors, as well as other information set forth elsewhere in this Prospectus. As
discussed above, this Prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's
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<PAGE>
actual results could differ materially. Factors that could cause or contribute
to such difference include, but are not limited to, those discussed below, as
well as those discussed elsewhere in this Prospectus.
1. 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 six months of 1997 and
1996, the Company's revenues were $300,686 and $313,259, 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. Since December 1996, the Company
has not generated significant revenues. The Company believes that, through the
net proceeds of approximately $5,764,000 realized in the Company's initial
public offering, which proceeds are intended to be used for product enhancement,
marketing and the introduction of new products, the Company will be able to
increase revenues over the long term; however, the significance of such increase
cannot be determined. For the year ended December 31, 1996, the Company
experienced a net loss of $570,769. For the first six months of 1997 and 1996,
the Company had a net loss of $1,322,577 and $23,921, 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. Furthermore, the net loss figures for the first six months of 1997 and
1996 are also attributable to the fact that the Company did not generate
significant revenues in such periods, though the Company expects to generate
revenues in the long term as a result of product enhancement and the
introduction of new products funded by the net proceeds of its initial public
offering. The Company believes that, for the foreseeable future, it will be
unable to achieve sufficient additional revenues to offset the anticipated
significant operating costs described above. 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. 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.
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 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,
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<PAGE>
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.
2. 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.
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.
3. 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
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<PAGE>
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.
4. 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, that 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, the
Company will meet any of the imposed standards, minimum revenue levels will be
achieved, or 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 or enter into such
alliances or relationships would have a material adverse effect upon the
Company's ability to implement its business plan.
5. 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.
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<PAGE>
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.
6. 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.
7. 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.
8. 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
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<PAGE>
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 make-up 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.
9. 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 six months 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.
10. 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.
11. 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.
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<PAGE>
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 could 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.
12. 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
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.
13. 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
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<PAGE>
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.
14. 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 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 shareholders 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. In most cases, each acquisition may be consummated without
seeking and obtaining shareholder approval, in which case, the shareholders will
not have an opportunity to review the financial statements of an acquisition
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<PAGE>
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.
15. 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.
16. Control by Existing Management and Shareholders; Effect of Certain
AntiTakeover Considerations. The Company's directors, executive officers and
certain principal shareholders and their affiliates own beneficially
approximately 44.6% of the outstanding Common Shares. Accordingly, such holders,
if acting together, 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 shareholders 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 shareholder 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 shareholders 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 shareholder" for a
period of three years after the date of the transaction in which the person
became an interested shareholder, unless it is approved in a prescribed manner),
could delay or make more difficult a merger, tender offer or proxy contest
involving the Company.
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17. Impact of Revised Nasdaq SmallCap Market Rules. The Company's
Common Shares are currently traded on the Nasdaq SmallCap Market. In August
1997, the Nasdaq Stock Market, Inc. adopted a rule change which imposes
substantially more stringent criteria for the continued listing of securities on
the Nasdaq SmallCap Market. The new rules, which take effect on February 22,
1998, provide that, for continued listing on the Nasdaq SmallCap Market, a
company will 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, companies will be required to have at least
two independent directors, and an Audit Committee, a majority of the members of
which will need to be independent directors.
If the Company is unable to satisfy the requirements for continued
quotation on the Nasdaq SmallCap Market, trading, if any, in the Company's
Common Shares would be conducted in the 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, a purchaser of the Common Shares offered hereby may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, such securities. The above-described rules may adversely affect the
liquidity of the market for the Company's securities. 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 continued 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 sustaining any market for
the Common Shares.
18. Securities Market Factors. In recent years, the securities markets
have experienced a high level of volume volatility and market prices for many
companies, particularly small and emerging growth companies, have been subject
to wide fluctuations in response to quarterly variations in operating results.
The securities of many of these companies, which trade in the over-the-counter
market, have experienced wide price fluctuations, which in many cases were
unrelated to the operating performance of, or announcements concerning, the
issuers of the affected stock. Factors such as announcements by the Company or
its competitors concerning technological innovations, new products or
procedures, government regulations and developments or disputes relating to
proprietary rights may have a significant impact on the market for the Company's
securities. General market price declines or market volatility in the future
could adversely affect the future price of the Company's securities.
19. "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. At the present
time, the Common Shares offered hereby are authorized for quotation on the
Nasdaq SmallCap Market; therefore, such securities are exempt from the
definition of "penny stock". If the Common Shares offered hereby are removed
from listing on the Nasdaq SmallCap Market at any
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time, however, 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 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.
20. 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.
21. Common Shares Eligible for Future Sale May Adversely Affect the
Market. Of the Company's outstanding Common Shares, 1,189,400 are "restricted
securities" and, in the future, may be sold upon compliance with Rule 144 or
pursuant to registration under the 1933 Act. 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 and 233,000 Common Shares have been owned by Messrs. Lew and Honigsfeld
for more than one year. However, such Common Shares are subject to an agreement
restricting the public sale thereof for a period of one year without consent of
the underwriter of the Company's initial public offering which closed on June
16, 1997.
The Company is registering under the registration statement of which this
Prospectus is a part the issuance of 1,860,050 Common Shares that are issuable
to certain shareholders upon the exercise of options granted, and which may be
granted, under the Plans, and the resale (pursuant to this Prospectus) of
2,750,000 Common Shares issued, or which may be issued, upon the exercise of
options granted under the Plans to certain persons who may be deemed affiliates
of the Company.
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In addition, the Company previously registered for resale 509,200 Common Shares
underlying certain warrants. Of such 509,200 Common Shares, 120,000 are issuable
upon the exercise of warrants commencing on June 10, 1998 and may be resold at
any time thereafter, and 389,200 may be resold at any time, subject to
restrictions on transfer for a period of two years from June 10, 1997.
Prospective investors should be aware that the possibility of resales by other
shareholders 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.
22. 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 shareholders for monetary
damages for breach of fiduciary duty as a director, with certain exceptions.
These provisions may discourage shareholders from bringing suit against a
director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by shareholders 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.
SUBSEQUENT EVENTS
On July 18, 1997, John P. Hefferon resigned as the Executive Vice
President -- Sales and Marketing. The Company has not replaced Mr. Hefferon at
this time, and it is currently searching for an appropriate candidate. Although
the Company expects to identify and secure a qualified replacement for Mr.
Hefferon, there can be no assurance that such a person will be engaged by the
Company in the near future or at all.
SELLING SHAREHOLDERS
The following table sets forth, as of October 24, 1997, to the Company's
knowledge, certain securities ownership information with respect to the Selling
Shareholders:
<TABLE>
Common Shares to
Common Shares Number of Common be Beneficially
Beneficially Owned Shares Offered Owned After
Name Before Offering(1) for Sale Offering
<S> <C> <C> <C> <C> <C>
Percent of
Number Outstanding
Mark Honigsfeld 623,200(2) 333,000(3) 390,200 14.1%
Dong W. Lew 566,200 156,950 409,250 14.5%
Louis Libin 0 50,000(4) 0 --
William D. Rizzardi 5,000 (5) 5,000(4) 5,000(5) *
Harold Lazarus 5,000(4) 0 --
</TABLE>
- ----------------
*less than one percent
(1) Unless otherwise noted, the Company believes that all persons named
above have sole voting and investment power with respect to all Common
Shares beneficially owned by them, subject to community property laws,
where applicable. A person is deemed to be the
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beneficial owner of securities that can be acquired by such person
within 60 days from September 30, 1997 upon the exercise of warrants or
options. Each beneficial owner's percentage ownership is determined by
assuming that options or warrants that are held by such person (but not
those held by any other person) and which are exercisable within 60
days from September 30, 1997 have been exercised.
(2) 423,200 Common Shares are held by the Mark Honigsfeld Living Trust
dated March 27, 1996 (the "Honigsfeld Trust") whose sole beneficiary is
Mr. Honigsfeld's wife. Mr. Honigsfeld, the settlor and trustee of the
Honigsfeld Trust, has the right to terminate the Honigsfeld Trust and
receive the Common Shares. 200,000 Common Shares are held by the Mardee
Charity Fund Foundation (the "Foundation"). Mr. Honigsfeld is the sole
trustee of the Foundation.
(3) Includes 100,000 Common Shares issuable upon the exercise of options
granted under the 1996 Plan, which options are not exercisable within
60 days from September 30, 1997. Since such options are not so
exercisable, the underlying Common Shares are not included within
"Common Shares Beneficially Owned Before Offering."
(4) Represents Common Shares issuable upon the exercise of options granted
under the 1996 Plan, which options are not exercisable within 60 days
from September 30, 1997. Since such options are not so exercisable, the
underlying Common Shares are not included within "Common Shares
Beneficially Owned Before Offering."
(5) Does not include Common Shares described in footnote 4.
There are no commitments pursuant to which the Company will
receive any proceeds from the sale of the Common Shares by the Selling
Shareholders.
To the Company's knowledge, no Selling Shareholder has had any
position, office or other material relationship with the Company or any of its
affiliates during the past three years (other than as a holder of the Company's
securities), except that (i) Mr. Honigsfeld has served as Chairman of the Board,
Chief Executive Officer and Secretary of the Company since 1996; (ii) Mr. Lew
has served as a director of the Company and President of the Company since 1992,
and has served as Treasurer of the Company since 1996; (iii) Mr. Libin has
served as director of the Company and Chief Technology Officer of the Company
since January 1997; (iv) Mr. Rizzardi has served as a director of the Company
since January 1997; and (v) Dr. Lazarus has served as a director of the Company
since March 1997.
A-17
<PAGE>
PLAN OF DISTRIBUTION
The Common Shares set forth in the "Selling Shareholders" table may be sold
by the Selling Shareholders, or by pledgees, donees, transferees or other
successors in interest, either pursuant to the Registration Statement of which
this Prospectus forms a part or, if available, under Section 4(1) of the 1933
Act or Rule 144 promulgated thereunder.
To the Company's knowledge, this offering is not being underwritten. The
Company believes that the Selling Shareholders, directly through agents
designated from time to time, or through broker-dealers or underwriters also to
be designated (who may purchase as principal and resell for their own account),
may sell the Common Shares from time to time, in or through privately negotiated
transactions, or in one or more transactions, including block transactions, on
the Nasdaq SmallCap Market or on any other market or stock exchange on which the
Common Shares may be listed in the future pursuant to and in accordance with the
applicable rules of such market or exchange or otherwise. The selling price of
the Common Shares may be at market prices prevailing at the time of sale, at
prices relating to such prevailing market prices or at negotiated prices. From
time to time, to the extent permitted by applicable law, the Selling
Shareholders may engage in short sales against the box, puts and calls and other
transactions in securities of the Company or derivatives thereof, and may sell
and deliver the Common Shares in connection therewith. Further, except as a
result of limitations imposed on the Selling Shareholders pursuant to Form S-8
General Instruction C(2)(b), and as set forth herein, the Selling Shareholders
are not restricted as to the number of Common Shares which may be sold at any
one time, and it is possible that a significant number of Common Shares could be
sold at the same time, which may have a depressive effect on the market price of
the Company's Common Shares.
The Selling Shareholders may also pledge Common Shares as collateral for
margin accounts, and such Common Shares could be resold pursuant to the terms of
such accounts. Resales or reoffers of the Common Shares by the Selling
Shareholders must be accompanied by a copy of this Prospectus.
The Selling Shareholders and any agents, broker-dealers or underwriters
that participate in the distribution of the Common Shares may be deemed to be
underwriters, and any profit on the sale of the Common Shares by them, and any
discounts, commissions or concessions received by them, may be deemed to be
underwriting commissions or discounts under the 1933 Act.
The Common Shares offered for resale herein for the accounts of each of the
Selling Shareholders are subject, among other things, to an agreement with E.C.
Capital, Ltd. ("E.C. Capital") and the Company imposing certain restrictions on
public sale thereof until June 10, 1998.
A-18
<PAGE>
LEGAL MATTERS
Matters relating to the legality of the securities being offered hereby are
being passed upon for the Company by Certilman Balin Adler & Hyman, LLP, 90
Merrick Avenue, East Meadow, New York 11554.
EXPERTS
The financial statements of the Company as of December 31, 1996 and for the
years ended December 31, 1996 and 1995 included in the Prospectus forming a part
of the Form SB-2 Registration Statement have been audited by Lazar Levine &
Company, LLP, independent certified public accountants, as set forth in their
report thereon appearing therein and are incorporated herein by reference to the
Form SB-2 Registration Statement 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 S-8 (together with
all amendments thereto, the "Registration Statement") with the Commission under
the 1933 Act with respect to the securities offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and to the exhibits
filed therewith, copies of which may be obtained upon payment of a fee
prescribed by the Commission, or may be examined free of charge at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Each statement made in this Prospectus
referring to a document filed as an exhibit to the Registration Statement is
qualified by reference to the exhibit for a complete statement of its terms and
conditions.
A-19
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
Number of Exhibit
4.1 Specimen Common Stock Certificate(1)
5 Opinion of Certilman Balin Adler & Hyman, LLP as to the
legality of the Common Shares issuable pursuant to the 1996
Plan and the 1997 Plan and being registered hereunder
10.1 1996 Stock Option Plan(1)
10.2 1997 Qualified Employee Stock Purchase Plan, as amended
23.1 Consent of Lazar Levine & Company, LLP
23.2 Consent of Certilman Balin Adler & Hyman, LLP (included in its
opinion filed as Exhibit 5)
24 Powers of Attorney (included in signature page forming a part
hereof)
- --------------------
(1) Denotes document filed as an exhibit to the Company's Form SB-2
Registration Statement (File No. 333-18667) which is incorporated herein by
reference thereto.
EXHIBIT 5
October 31, 1997
Compu-DAWN, Inc,
77 Spruce Street
Cedarhurst, New York 11516
Re: Registration of 2,360,050 Common Shares,
par value $.01 per share, under the
Securities Act of 1933, as amended
Gentlemen:
In our capacity as counsel to Compu-DAWN, Inc., a Delaware corporation (the
"Company"), we have been asked to render this opinion in connection with a
Registration Statement on Form S-8 being filed contemporaneously herewith by the
Company with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Registration Statement"), covering, among other things,
the issuance of an aggregate of 2,360,050 Common Shares, par value $.01 per
share, of the Company (the "Common Shares") that may be issued upon the exercise
of options to acquire Common Shares granted under the Company's 1996 Stock
Option Plan and 1997 Qualified Employee Stock Purchase Plan (collectively, the
"Plans").
In that connection, we have examined the Certificate of Incorporation and
the ByLaws of the Company, each as amended, the Registration Statement and the
Plans and are familiar with corporate proceedings of the Company relating to the
adoption of each of the Plans. We have also examined such other instruments and
documents as we deemed relevant under the circumstances.
For purposes of the opinions expressed below, we have assumed (i) the
authenticity of all documents submitted to us as original, (ii) the conformity
to the originals of all documents submitted as certified, photostatic or
facsimile copies and the authenticity of the originals, (iii) the legal capacity
of natural persons, (iv) the due authorization, execution and delivery of all
documents by all parties and the validity and binding effect thereof and (v) the
conformity to the proceedings of the Board of Directors of all minutes of such
proceedings. We have also assumed that the corporate records furnished to us by
the Company include all corporate proceedings taken by the Company to date.
<PAGE>
Compu-DAWN, Inc.
October 31, 1997
Page 2
Based upon and subject to the foregoing, we are of the opinion that the
Common Shares have been duly and validly authorized and, when issued and paid
for as described in each of the Plans, will be duly and validly issued, fully
paid and nonassessable.
We hereby consent to the use of our opinion as herein set forth as an
exhibit to the Registration Statement.
This opinion is as of the date hereof, and we do not undertake, and hereby
disclaim, any obligation to advise you of any changes in any of the matters set
forth herein.
We are rendering this opinion only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters.
This opinion is for your exclusive use only and is to be utilized and
relied upon only in connection with the matters expressly set forth herein.
Very truly yours,
/s/ Certilman Balin Adler & Hyman, LLP
CERTILMAN BALIN ADLER & HYMAN, LLP
- -------------------------------------------------------------------------------
* * * * *
1997 QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
OF
COMPU-DAWN, INC.
(As amended through October 21, 1997)
* * * * *
- -------------------------------------------------------------------------------
<PAGE>
<TABLE>
1997 QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
OF
COMPU-DAWN, INC.
(As Amended through October 21, 1997)
<CAPTION>
TABLE OF CONTENTS
<S> <C>
<C>
1. Designation and Purpose of the Plan .............................................................1
2. Shares Reserved for the Plan ....................................................................1
3. Administration of the Plan ......................................................................2
(a) General ................................................................................2
(b) Committee Procedures ...................................................................2
(c) Authority over the Plan ................................................................2
(d) Changes in Law Applicable ..............................................................3
4. Eligibility and Participation in Plan ...........................................................3
(a) Eligible Employees .....................................................................3
(b) Election to Participate ................................................................3
(c) Restrictions on Participation ..........................................................4
(d) Rights and Privileges of Participating Employees ...................................... 4
5. Term ............................................................................................4
6. Method of Granting and Exercising Stock Options ................................................ 4
(a) Grant of Option ........................................................................4
(b) Option Period ..........................................................................5
(1) General .......................................................................5
(2) Termination of Option Upon Retirement, Death or Termination
of Employment .................................................................5
(c) Option Purchase Price ..................................................................6
(1) Purchase Price ................................................................6
(2) Determination of Fair Market Value ............................................6
(d) Exercise of Options ....................................................................7
(e) Nontransferability of Options and Rights ...............................................7
(f) Compliance with Securities Laws ........................................................7
7. Medium and Time of Payment ......................................................................9
(a) Payroll Deductions .....................................................................9
(b) Authorization ..........................................................................9
i
<PAGE>
(c) Amount of Deduction ....................................................................9
(d) Account of Participating Employee ......................................................10
(e) No Changes in Payroll Deductions .......................................................10
(f) Termination and Withdrawal of Payroll Deductions .......................................10
(g) Effect on Participation ................................................................10
(h) Termination of Employment ..............................................................11
(i) No Payment of Interest .................................................................11
(j) Use of Funds ...........................................................................11
8. Issuance and Delivery of Common Shares ..........................................................11
9. Participating Employee's Rights as Stockholder ..................................................11
10. Participating Employee's Agreement to Serve .....................................................12
11. Adjustments on Changes in Capitalization ........................................................12
(a) Changes in Capitalization ..............................................................12
(b) Reorganization, Dissolution or Liquidation .............................................13
(c) Change in Par Value ....................................................................13
(d) Notice of Adjustments ..................................................................13
(e) Effect Upon Holder of Option ...........................................................14
(f) Right of Company to Make Adjustments ...................................................15
12. Amendment of the Plan ...........................................................................15
13. Termination of the Plan .........................................................................16
14. Effective Date of Plan ..........................................................................16
15. Indemnification of Board of Directors or the Committee ..........................................16
16. Notices .........................................................................................16
17. Designation of Beneficiary ......................................................................17
18. Application of Funds ............................................................................17
19. Approval of Stockholders ........................................................................17
20. Governing Law ...................................................................................18
</TABLE>
ii
<PAGE>
1997 QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
OF
COMPU-DAWN, INC.
(As Amended through October 21, 1997)
COMPU-DAWN, INC. (the "Company"), a Delaware corporation, has adopted and
established a qualified employee stock purchase plan effective May 9, 1997, as
amended hereby, for eligible employees in accordance with the following terms
and conditions:
1. Designation and Purpose of the Plan.
This plan is designated the "Compu-DAWN Inc. 1997 Qualified Employee Stock
Purchase Plan" (the "Plan"). The purpose of the Plan is to advance the growth
and development of the Company or any Subsidiary (as hereinafter defined) by
providing an opportunity to all Participating Employees (as hereinafter defined)
to acquire an ownership interest in the Company. It is believed that employee
participation in the ownership of the business will help to achieve the unity of
purpose essential to the continued growth of the Company and the mutual benefit
of its employees and Stockholders. The Plan is intended to comply with the
provisions of Sections 421, 423 and 424 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the Plan shall be administered, interpreted and
construed in accordance with such provisions. As used herein, the term
Subsidiary or Subsidiaries shall mean any corporation (other than the employer
corporation) in an unbroken chain of corporations beginning with the employer
corporation if, at the time of a stock option, each of the corporations other
than the last corporation in the unbroken chain owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
2. Shares Reserved for the Plan.
Subject to adjustments as provided in Section 11 hereof, there shall be
reserved for issuance and purchase by participating Employees under the Plan an
aggregate of Two Hundred and Fifty Thousand (250,000) common shares, $0.01 par
value, of the Company (the "Common Shares"), which Common Shares in whole or in
part either shall be authorized, but unissued, Common Shares, or issued Common
Shares which shall have been reacquired by the Company as determined from time
to time by the Board of Directors of the
1
<PAGE>
Company (the "Board of Directors").
3. Administration of the Plan.
(a) General. The plan shall be administered, at the expense of
the Company, by the Board of Directors of the Company (the "Board of
Directors") or by a committee chosen by the Board of Directors who
shall serve at the pleasure of the Board of Directors and which shall
be designated as the Compensation Committee (the "Committee").
(b) Committee Procedures. If the Board of Directors determines to
choose a Committee to administer the Plan, the Board of Directors may
from time to time appoint members of the Committee in substitution for
or in addition to members previously appointed and may fill vacancies,
however caused, in the Committee. If the Board of Directors does not
designate a Chairman of the Committee, the Committee shall select one
of its members as its Chairman. The Committee shall hold meetings at
such times and places at it may determine. A majority of its members
shall constitute a quorum. Any action of the Committee shall be taken
by a majority vote of its members at a meeting at which a quorum is
present. Notwithstanding the preceding, any action of the Committee
may be taken without a meeting by a written consent signed by all of
the members, and any action so taken shall be deemed fully as
effective as if it had been taken by a vote of the members present in
person at a meeting duly called and held. The Committee may appoint a
Secretary, and shall keep minutes of its meetings, and shall make such
rules and regulations for the conduct of its business as it shall deem
advisable. The Committee may request advice or assistance or employ
such other persons as are necessary for proper administration of the
Plan.
(c) Authority over the Plan. The Board of Directors or the
Committee, as the case may be, shall have the sole authority and
power, subject to the express provisions and limitations of the Plan,
to construe the Plan and to adopt, prescribe, amend and rescind rules
and regulations relating to the Plan, and to make all other
determinations necessary or advisable for administering the Plan;
provided, however, that the Board of Directors or the Committee shall
at all times administer the Plan and make determinations and
interpretations hereunder such that the Plan is a qualified employee
stock purchase plan within the meaning of Sections 421 and 423 of the
Code. All determinations of the Board of Directors or the
2
<PAGE>
Committee, as the case may be, shall be final and binding upon all
persons, and in the case where the Plan is administered by the
Committee, unless otherwise determined by the Board of Directors. No
member of the Board of Directors or the Committee shall be liable for
any action or determination made in good faith with respect to the Plan
or any Option granted under it. In the case where the Plan is
administered by the Committee, upon issuing an Option under the Plan,
the Committee shall report to the Board of Directors the name of the
Participating Employee granted the Option, the number of shares of
Common Shares covered by the Option and the terms and conditions of
such Option.
(d) Changes in Law Applicable. If the laws relating to
qualified stock purchase plans are changed, altered or amended during
the term of the Plan, the Board of Directors shall have full authority
and power to alter or amend the Plan to conform to such changes in the
law without the necessity of obtaining further stockholder approval,
unless the changes require such approval.
4. Eligibility and Participation in Plan.
(a) Eligible Employees. Any employee who is employed by the
Company or a Subsidiary on any January 1 during the term of the Plan
(each a "Commencement Date") is eligible to participate in the Plan
with respect to the particular year provided such employee:
(1) has been employed by the Company or a Subsidiary
for at least one (1) year prior to the Commencement Date,
and
(2) has customary employment of more than twenty (20)
hours per week, and has customary employment of at least
five (5) months in such calendar year.
Employees eligible to participate in the Plan pursuant to the
provisions of this Section 4(a) are hereinafter referred to as
"Eligible Employees".
(b) Election to Participate. Each Eligible Employee on each
Commencement Date may participate in the Plan by filing with the Board
of Directors, the Committee, or such other person designated by the
Board of Directors or the Committee at least thirty (30) days prior to
each such Commencement Date a Participation Election Form which shall
be distributed by the Board of Directors or the Committee to each
Eligible Employee at least thirty-five (35) days prior to each
Commencement Date. Eligible Employees who elect to
3
<PAGE>
participate in the Plan as provided above are hereinafter referred to
as "Participating Employees".
(c) Restrictions on Participation. Notwithstanding any
provision of the Plan to the contrary, no Participating Employee may be
granted an Option under the Plan:
(1) if, immediately after the grant, such
Participating Employee would own Common Shares, and/or hold
outstanding Options to purchase Common Shares, possessing five
percent (5%) or more of the total combined voting power or
value of all classes of capital stock of the Company. In
determining stock ownership under this Section 4(c), the stock
attribution rules of Section 424(d) of the Code shall apply,
and Common Shares which the employee may purchase under any
outstanding options, whether or not such options qualify for
the special tax treatment afforded by Section 421(a) of the
Code, shall be treated as Common Shares owned by the employee;
or
(2) which permits such Participating Employee's
rights to purchase stock of any class or description under all
employee stock purchase plans of the Company (previously or
hereafter adopted) to which Section 423 of the Code applies,
to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) (or such other maximum as may be prescribed from
time to time by the Code) of fair market value of such stock
(determined at the time such Option is granted) for each
calendar year in which such Option is outstanding at any time.
For purposes of this Section 4(c), the rules of Section
423(b)(8) of the Code shall apply in determining the accrual
rate of a Participating Employee's rights to purchase such
stock.
(d) Rights and Privileges of Participating Employees. All
Participating Employees granted Options under the Plan shall have the
same rights and privileges, except as otherwise provided in Section
4(c) hereof.
5. Term. The Plan shall continue in effect from the Effective Date
until all of the Common Shares reserved for issuance under the Plan have
been issued or until the Plan is terminated by the Company, whichever is
earlier.
6. Method of Granting and Exercising Stock Options.
4
<PAGE>
(a) Grant of Option. On the Commencement Date, this Plan shall
be deemed to have granted to the Participating Employee an option (the
"Option") for as many full Common Shares as the Participating Employee
will be able to purchase with the payroll deductions credited to the
Participating Employee's account during a given Option Period (as
hereinafter defined) (the "Offering"). Notwithstanding the foregoing,
no Participating Employee may purchase more than Five Thousand (5,000)
Common Shares during any single Offering. If the total number of Common
Shares for which Options are to be granted on any date in accordance
with this section exceeds the number of Common Shares then available
under the Plan (after deduction of all Common Shares for which Options
have been exercised or are then outstanding), the Company shall make a
pro rata allocation of the Common Shares remaining available in as
nearly a uniform manner as shall be practicable and as it shall
determine to be equitable. In such event, the payroll deductions to be
made pursuant to the authorizations therefor shall be reduced
accordingly and the Company shall give written notice of such reduction
to each employee affected thereby.
(b) Option Period.
(1) General. The Option shall be for a period of
twelve (12) months (the "Option Period") and shall be deemed
to be exercised one year from the date of grant, subject to
earlier termination as provided in Section 6(b)(2) below.
(2) Termination of Option Upon Retirement, Death or
Termination of Employment. (i) In the event a Participating
Employee retires or dies, or his employment terminates for any
other reason prior to the exercise of the Option granted to
such Participating Employee (a "Terminated Employee"), subject
to the provisions of Section 6(b)(ii) below such Terminated
Employee shall not be considered a Participating Employee
under the Plan after the date such Terminated Employee retires
or dies or his employment terminates, and such Terminated
Employee's rights with respect to any Options granted for such
year shall cease and the Option shall be null and void.
(ii) Notwithstanding the provision of
Section 6(b)(2)(i), the Board of Directors or the Committee,
in its sole and absolute discretion, may permit a
5
<PAGE>
Terminated Employee, upon the written consent of such
Terminated Employee, or the representative of a deceased
Terminated Employee, to be considered as a Participating
Employee for the purposes of the Plan only, until the
expiration of the Option Period during which the employment of
the Terminated Employee terminated and until the outstanding
Options granted by such Terminated Participating Employee at
the beginning of such Option Period are deemed exercised. The
provisions of this Section 6(b)(2)(ii) shall not be construed
as granting the Terminated Employee any right to be retained
in the employ of the Company or Subsidiary.
(c) Option Purchase Price.
(1) Purchase Price. The "Option Purchase Price" for each share of
Common Shares shall be an amount equal to the lesser of: (i) eighty-five percent
(85%) of the fair market value of such Common Share on the date the Option is
granted, or (ii) eighty-five percent (85%) of the fair market value of such
Common Share on the date the Option is exercised.
(2) Determination of Fair Market Value. During such time as the Common
Shares of the Company is not listed upon an established stock exchange, the fair
market value per Common Share shall be deemed to be the closing sale price of
the Common Shares on the Nasdaq Stock Market, Inc. ("Nasdaq") on the day the
Option is granted or exercised, as applicable, as reported by Nasdaq, if the
Common Shares are so quoted, and if not so quoted, the mean between the dealer
"bid" and "ask" prices, of the Common Shares in the New York over-the-counter
market on the day the Option is granted or exercised, as applicable, as reported
by the National Association of Securities Dealers, Inc. If the Common Shares are
listed upon an established stock exchange or exchanges, such fair market value
shall be deemed to be the highest closing price of the Common Shares on such
stock exchange or exchanges on the day the Option is granted or exercised, as
applicable, or, if no sale of the Common Shares of the Company shall have been
made on established stock exchange on such day, on the next preceding day on
which there was a sale of
6
<PAGE>
Common Shares. If there is no market price for the Common Shares, then the Board
of Directors or the Committee may, after taking all relevant facts into
consideration, determine the fair market value of the Common Shares.
(d) Exercise of Options. Each Participating Employee who
continues to be a Participating Employee one year after a given
Commencement Date shall be deemed to have exercised the Option on the
one-year anniversary of such Commencement Date, and shall be deemed to
have purchased from the Company such number of full Common Shares
reserved for the purpose of the Plan as the Participating Employee's
accumulated payroll deduction on such date will pay for at the Option
price, subject to adjustment as provided in Section 6(a) above.
(e) Nontransferability of Options and Rights. All Options
granted pursuant to this Plan shall be personal to the Participating
Employee receiving such Options and shall be exercisable only by such
Participating Employee. No Participating Employee shall have the right
to sell, assign, transfer, pledge, or otherwise dispose of or encumber
either such Participating Employee's right to participate in the Plan
or such Participating Employee's interest in the fund, if any,
accumulated for the benefit of such Participating Employee, and such
right and interest shall not be liable for, or subject to, the debts,
contracts, or liabilities of such Participating Employee. No Option or
any right thereunder shall be subject to execution, attachment or
similar process or remedy. Upon any attempt to sell, exchange, assign,
pledge, discount, hypothecate or otherwise transfer or encumber any
Option or any right thereunder or in connection therewith contrary to
or in violation of the provisions of this Plan, such Option and all
rights thereunder shall immediately become null and void and the
balance of any unused payroll deductions of the Participating Employee
then being held by the Company shall be refunded to such Participating
Employee without interest.
(f) Compliance with Securities Laws. The Plan and the grant
and exercise of the rights to purchase Common Shares hereunder, and the
Company's obligation to sell and deliver Common Shares upon the
exercise of rights to purchase Common Shares, shall be subject to all
applicable federal and state laws, rules and regulations, and to such
approvals by any regulatory or governmental agency as may, in the
opinion of counsel for the
7
<PAGE>
Company, be required, and shall also be subject to all applicable rules
and regulations of any stock exchange or Nasdaq upon which the Common
Shares of the Company may then be listed or quoted as the case may be.
At the time of exercise of any Option, the Company may require the
Participating Employee to execute any documents or take any action
which may be then necessary to comply with the Securities Act of 1933,
as amended ("Securities Act"), and the rules and regulations
promulgated thereunder, or any other applicable federal or state laws
regulating the sale and issuance of securities, and the Company may, if
it deems necessary, include provisions in the Option Agreements to
assure such compliance. The Company may, from time to time, change its
requirements with respect to enforcing compliance with federal and
state securities laws, including the request for and enforcement of
letters of investment intent, such requirements to be determined by the
Company in its judgment as necessary to assure compliance with said
laws. Such changes may be made with respect to any particular Option or
stock issued upon exercise thereof. Without limiting the generality of
the foregoing, if the Common Shares usable upon exercise of an Option
granted under the Plan are not registered under the Securities Act, the
Company at the time of exercise will require that the registered owner
execute and deliver an investment representation agreement to the
Company in form acceptable to the Company and its counsel, and the
Company will place a legend on the certificate evidencing such Common
Shares restricting the transfer thereof, which legend shall be
substantially as follows:
THE COMMON SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAW BUT HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT
OF THE HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD OR
TRANSFERRED UNTIL EITHER (i) A REGISTRATION STATEMENT
UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH
REGARD THERETO, OR (ii) THE COMPANY SHALL HAVE
RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY AND ITS COUNSEL THAT REGISTRATION UNDER SUCH
SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS IS
8
<PAGE>
NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
OFFER, SALE OR TRANSFER.
7. Medium and Time of Payment.
(a) Payroll Deductions. The purchase price of the Common
Shares as to which the Option shall be exercised shall be paid in full
through periodic payroll deductions during the term of the Option.
(b) Authorization. A Participating Employee shall authorize
the Company to make payroll deductions from the compensation of such
Participating Employee by completing an authorization for payroll
deduction on the form prescribed by the Board of Directors or the
Committee and filing it with the Board of Directors, the Committee, or
such other person designated by the Board of Directors or the Committee
at the time such Participating Employee files a Participation Election
form with the Board of Directors or the Committee (as provided in
Section 4(b) hereof). Payroll deductions for a Participating Employee
shall commence on the Commencement Date of the Offering immediately
following the date of execution of the payroll deduction authorization
form by the Participating Employee and shall end on December 31 of that
year unless sooner terminated by the Participating Employee as provided
in Section 7(f) hereof.
(c) Amount of Deduction. At the time a Participating Employee
files an authorization for payroll deduction, such Participating
Employee shall elect to have deductions made from such Participating
Employee's compensation on each pay day during the time such
Participating Employee is a participant in an Offering at the rate of
one, two, three, four, five, six, seven, eight, nine or ten percent of
the Regular Compensation of such Participating Employee in effect at
the Commencement Date of the Offering. For the purposes of this Plan,
"Regular Compensation" shall mean the regular rate of pay of a
Participating Employee for the calendar year ending at or immediately
prior to the Commencement Date. In the case of a salaried
Participating Employee, "Regular Compensation" shall be the amount of
base salary such salaried employee received during such calendar year.
In the case of an hourly-paid Participating Employee, "Regular
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Compensation" shall be the hourly rate of pay of such hourly-paid
employee multiplied by 40 hours for the applicable one-week payroll
period. In the case of a Participating Employee who receives all or
part of such Participating Employee's compensation in the form of
commissions, the "Regular Compensation" shall be the base salary of
such Participating Employee plus a proportionate part of any
commissions or bonuses such Participating Employee receives, as
determined by the Board of Directors or the Committee from time to
time to reflect an equitable adjustment for the category of the
activities and the rate of base salary of such employee. Regular
Compensation shall not include any payments for overtime, shift
differential, reimbursement for expenses, finders' fees, suggestion
awards, deferred profit sharing distributions or similar nonregular
payments (all as determined by the Board of Directors or the
Committee).
(d) Account of Participating Employee. All payroll deductions
made for a Participating Employee shall be credited to such
Participating Employee's account under the Plan and applied against
the purchase price of the Common Shares purchased by the Participating
Employee upon exercise of the Option granted to such Participating
Employee. A Participating Employee may not make any separate cash
payments into such account.
(e) No Changes in Payroll Deductions. A Participating Employee
may discontinue participation in the Plan as provided in Section 7(f)
below, but no other change can be made during an Offering and,
specifically, a Participating Employee may not alter the amount of
such Participating Employee's payroll deductions for that Offering.
(f) Termination and Withdrawal of Payroll Deductions. A
Participating Employee may terminate and withdraw payroll deductions
credited to the account of such Participating Employee under the Plan
at any time by giving written notice to the Board of Directors or the
Committee, as the case may be. All of the Participating Employee's
payroll deductions credited to such Participating Employee will be
paid to such Participating Employee promptly after receipt of notice
of withdrawal, and no further payroll deductions will be made from the
compensation of such Participating Employee during the Offering except
in accordance with an authorization for a new payroll deduction filed
in accordance with Section 7(b) hereof.
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<PAGE>
(g) Effect on Participation. The withdrawal of a Participating
Employee from any Offering will not have any effect upon the
eligibility of such Participating Employee to participate in the
Offering or any succeeding Offering or in any similar plan which may
hereafter be adopted by the Company.
(h) Termination of Employment. Upon termination of the employment
of a Participating Employee for any reason, including retirement (but
excluding death), the payroll deductions credited to the account of
such Terminated Employee will be returned to the Terminated Employee,
or, in the case of the death of the Terminated Employee, to the person
or persons entitled thereto as determined in accordance with the
provisions of Section 17 hereof, unless the Terminated Participating
Employee continues to be considered a Participating Employee for the
purposes of the Plan only, pursuant to the provisions of Section
6(b)(2)(ii) hereof.
(i) No Payment of Interest. No interest shall be paid or allowed
on any money credited to the account of any Participating Employee
pursuant to payroll deductions made on behalf of such Participating
Employee.
(j) Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate
purpose, and the Company shall not be obligated to segregate such
payroll deductions.
8. Issuance and Delivery of Common Shares. As soon as practicable after
the exercise of an Option to purchase Common Shares by a Participating Employee
as provided herein, the Board of Directors or the Committee shall undertake and
follow all necessary procedures to cause the prompt issuance of the Common
Shares in the Participating Employee's name, or, if the Participating Employee
has so specified in his Participation Election Form, in the name of the
Participating Employee and another person in joint ownership. Common Shares so
issued shall be delivered promptly to the Participating Employee, provided,
however, that the issuance or delivery of Common Shares or both, may be
postponed, at the sole discretion of the Board of Directors or the Committee, to
enable the Company to comply with all applicable procedures, regulations or
listing requirements of any governmental agency, stock exchange or regulatory
authority.
9. Participating Employee's Rights as Stockholder. No Participating
Employee shall
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have any rights as a stockholder with respect to any Common Shares covered by
the Option granted to such Participating Employee until the deemed exercise of
the Option and the date of issuance of one or more stock certificates issued in
the Participating Employee's name (or in joint names) for such Common Shares.
From the date Common Shares are issued, such Participating Employee shall have
the rights which are the same in all respects as those of all other holders of
Common Shares, including, without limitation, the right to receive dividends and
to vote the Common Shares purchased. No adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued, except as provided in Section 11 hereof.
10. Participating Employee's Agreement to Serve. Each Participating
Employee receiving an Option shall, as one of the terms of the Option Agreement,
agree that such Participating Employee will remain in the employ of the Company
or Subsidiary for a period of at least one (1) year from the date on which the
Option shall be granted to such Participating Employee; and that such employee
will, during such employment, devote such employee's entire time, energy, and
skill to the service of the Company or a Subsidiary as may be required by the
management thereof, subject to vacations, sick leaves, and military absences.
Such employment, subject to the provisions of any written contract between the
Company or a Subsidiary and such employee, shall be at the pleasure of the Board
of Directors of the Company or a Subsidiary, and at such compensation as the
Company or a Subsidiary shall reasonably determine. Neither the action of the
Company in establishing the Plan nor any action taken by the Company, a
Subsidiary or the Board of Directors or the Committee under the provisions
hereof shall be construed as granting the Participating Employee the right to be
retained in the employ of the Company or a Subsidiary, or to limit or restrict
the right of the Company or a Subsidiary, as applicable, to terminate the
employment of any employee of the Company or a Subsidiary, with or without
cause.
11. Adjustments on Changes in Capitalization.
(a) Changes in Capitalization. Subject to any required action
by the stockholders of the Company, the number of Common Shares covered
by the Plan, the number of Common Shares covered by each outstanding
Options, and the exercise price per Common Share specified in each such
Option, shall be proportionately adjusted for any increase or
12
<PAGE>
decrease in the number of issued Common Shares of the Company resulting
from a subdivision or consolidation of Common Shares or the payment of
a stock dividend (but only on the Common Shares) or any other increase
or decrease in the number of such Common Shares effected without
receipt of consideration by the Company after the date the Option is
granted, so that upon exercise of the Option, the optionee shall
receive the same number of Common Shares subject to such optionee's
outstanding Option immediately before the effective date of such change
in the number of issued Common Shares.
(b) Reorganization, Dissolution or Liquidation. Subject to any
required action by the stockholders of the Company, if the Company
shall be the surviving corporation in any merger or consolidation, each
outstanding Option shall pertain to and apply to the securities to
which a stockholder of the number of Common Shares subject to the
Option would have been entitled. A dissolution or liquidation of the
Company or a merger or consolidation in which the Company is not the
surviving corporation, shall cause each outstanding Option to terminate
as of a date to be fixed by the Board of Directors or the Committee
(which date shall be as of or prior to the effective date of any such
dissolution or liquidation or merger or consolidation); provided, that
not less than thirty (30) days written notice of the date so fixed as
such termination date shall be given to each optionee, and each
optionee shall, in such event, have the right, during the said period
of thirty (30) days preceding such termination date, to exercise such
optionee's Option in whole or in part in the manner herein set forth.
(c) Change in Par Value. In the event of a change in the
Common Shares of the Company as presently constituted, which change is
limited to a change of all of its authorized share with par value into
the same number of shares with a different par value or without par
value, the shares resulting from any change shall be deemed to be the
Common Shares within the meaning of the Plan.
(d) Notice of Adjustments. To the extent that the adjustments
set forth in the foregoing paragraphs of this Section 11 relate to
capital stock or other securities of the Company, such adjustments, if
any, shall be made by the Board of Directors or the Committee, whose
determination in that respect shall be final, binding and conclusive,
and
13
<PAGE>
in the case where the Plan is administered by the Committee, unless
otherwise determined by the Board of Directors, provided that each
Option granted pursuant to this Plan shall not be adjusted in a manner
that causes the Option to fail to continue to qualify as a qualified
employee stock option within the meaning of Section 423 of the Code.
The Company shall give timely notice of any adjustments made to each
holder of an Option under this Plan and such adjustments shall be
effective and binding on the optionee.
(e) Effect Upon Holder of Option. Except as hereinbefore
expressly provided in this Section 11, the holder of an Option shall
have no rights by reason of any subdivision or consolidation of shares
of stock of any class or the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class by
reason of dissolution, liquidation, merger, reorganization, or
consolidation, or spin-off of assets or stock of another corporation,
and any issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not
affect, and no adjustment by reason thereof shall be made with respect
to, the number or price of Common Shares subject to the Option. Without
limiting the generality of the foregoing, no adjustment shall be made
with respect to the number or price of Common Shares subject to any
Option granted hereunder upon the occurrence of any of the following
events:
(1) The grant or exercise of any other options which
may be granted or exercised under any qualified or
nonqualified stock option plan or under any other employee
benefit plan of the Company whether or not such options were
outstanding on the date of grant of the Option or thereafter
granted;
(2) The sale of any Common Shares in the Company's
initial or any subsequent public offering, including, without
limitation, Common Shares sold upon the exercise of any
overallotment option granted to the underwriter in connection
with such offering;
(3) The sale of any Common Shares in any private
placement;
(4) The issuance, sale or exercise of any warrants to
purchase Common Shares whether or not such warrants were
outstanding on the date of grant of the Option or thereafter
issued;
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<PAGE>
(5) The issuance or sale of rights, promissory notes
or other securities convertible into Common Shares in
accordance with the terms of such securities (the "Convertible
Securities") whether or not such Convertible Securities were
outstanding on the date of grant of the Option or were
thereafter issued or sold;
(6) The issuance or sale of Common Shares upon
conversion or exchange of any Convertible Securities, whether
or not any adjustment in the purchase price was made or
required to be made upon the issuance or sale of such
Convertible Securities and whether or not such Convertible
Securities were outstanding on the date of grant of the Option
or were thereafter issued or sold; or
(7) Upon any amendment to or change in the terms of
any rights or warrants to subscribe for or purchase, or
options for the purchase of, Common Shares or Convertible
Securities or in the terms of any Convertible Securities,
including, but not limited to, any extension of any expiration
date of any such right, warrant or option, any change in any
exercise or purchase price provided for in any such right,
warrant or option, any extension of any date through which any
Convertible Securities are convertible into or exchangeable
for Common Shares or any change in the rate at which any
Convertible Securities are convertible into or exchangeable
for Common Shares.
(f) Right of Company to Make Adjustments. The grant of an Option
pursuant to the Plan shall not affect in any way the right or power of
the Company to make adjustments, reclassification, reorganizations, or
changes of its capital or business structure or to merge or to
consolidate or to dissolve, liquidate or sell, or transfer all or any
part of its business or assets.
12. Amendment of the Plan. The Board of Directors may at any time, or from
time to time, amend the Plan in any respect, except that, without the approval
of the holders of a majority of the Common Shares of the Company then issued and
outstanding, represented at a meeting and entitled to vote thereat on the
subject matter, no amendment shall be made (a) increasing the number of shares
to be reserved under the Plan (other than as provided in Section 11 hereof), (b)
permitting persons other than Eligible Employees to participate in the Plan, (c)
changing the price at which the
15
<PAGE>
Common Shares covered by an Option may be purchased or (d) increasing the
maximum number of Common Shares which a Participating Employee may purchase
under the Plan. Furthermore, the Plan may not, without said approval of the
Stockholders, be amended in any way which will cause Options issued under it to
fail to meet the requirements of employee stock purchase plans as defined in
Section 423 of the Code, and with or without the approval of the Stockholders,
the Plan may not be amended in any way which will adversely affect the rights of
Participating Employees who were granted Options prior thereto.
13. Termination of the Plan. The Plan may be terminated at any time by the
Board of Directors of the Company; provided, however, any Option outstanding
under the Plan at the time of its termination shall remain in effect until the
Option shall have been exercised or shall have expired.
14. Effective Date of Plan. The Plan shall become effective on the date of
execution hereof, which date is the date the Board of Directors approved and
adopted the Plan (the "Effective Date"); provided, however, if the stockholders
of the Company shall not have approved the Plan by the requisite vote of the
stockholders within twelve (12) months after the Effective Date, then the Plan
shall terminate and all funds standing to each Participating Employee's credit
will be refunded to such employee as promptly as possible.
15. Indemnification of Board of Directors or the Committee. In addition
to such other rights of indemnification as they may have as Directors or as
members of the Committee, the members of the Board of Directors or the Committee
shall be indemnified by the Company against the reasonable expense, including
attorneys' fees actually and necessarily incurred in connection with the
defenses of any action, suit or proceedings, or in connection with any appeal
therein, to which they or any of them may be party by reason of any action taken
or failure to act under or in connection with the Plan or any Option granted
thereunder, and against all amounts paid by them in settlement thereof (provided
such settlement is approved by independent legal counsel selected by the
Company) or paid by them in satisfaction of a judgment in any such action, suit
or proceedings, except in relation to matters as to which it shall be adjudged
in such action, suit or proceeding that such Board of Directors or the Committee
member is liable for negligence or misconduct in the performance of his duties;
provided that within sixty (60) days after institution of
16
<PAGE>
any such action, suit or proceeding a Board of Directors or Committee member
shall in writing offer the Company the opportunity, as its own expense, to
pursue and defend the same.
16. Notices. All notices, elections and authorizations by a Participating
Employee shall be in writing and delivered in person or by mail to the Board of
Directors or the Committee or an official of the Company designated by the Board
of Directors or the Committee or by this Plan. All notices shall be considered
timely if postmarked before midnight of the last day of the relevant period.
17. Designation of Beneficiary. A Participating Employee may file a written
designation of a beneficiary who is to receive any Common Shares and cash to the
Participating Employee's credit under the Plan in the event of such employee's
death prior to delivery to such Participating Employee of such Common Shares and
cash. Such designation of beneficiary may be changed by the Participating
Employee at any time by written notice to the Secretary of the Company. Upon the
death of a Participating Employee and upon receipt by the Company of proof of
the identity and existence at the Participating Employee's death of a
beneficiary validly designated by him under the Plan, the Company shall deliver
such Common Shares and cash to such beneficiary. In the event of the death of a
Participating Employee and in the absence of a beneficiary validly designated
under the Plan who is living at the time of such Participating Employee's death,
the Company shall deliver such Common Shares and cash to the executor or
administrator of the estate of the Participating Employee, or if no executor or
administrator has been appointed (to the knowledge of the Company) the Company,
in its discretion, may deliver such Common Shares and cash to the spouse or to
any one or more dependents or relatives of the Participating Employee, or if no
spouse, dependent or relative is known to the Company, then to such other person
as the Company may designate. No designated beneficiary shall prior to the death
of the Participating Employee by whom he has been designated, acquire any
interest in the Common Shares or cash credited to the Participating Employee
under the Plan.
18. Application of Funds. The proceeds received by the Company from the
sale of Common Shares pursuant to Options granted hereunder will be used for
general corporate purposes.
19. Approval of Stockholders. The Plan shall be submitted to the
Stockholders of the Company within twelve (12) months after the date the Plan is
adopted by the Board of Directors for
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<PAGE>
the approval by the holders of at least a majority of the capital stock of the
Company then outstanding and entitled to vote thereon, present at a meeting.
20. Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the state of incorporation of the Company.
Executed as of this 21st day of October, 1997.
COMPU-DAWN, INC.
By:
Mark Honigsfeld
Chief Executive Officer
ATTEST:
By:
Louis Libin, Assistant Secretary
K:\WPDOC\CORP\COMPUDAW\AGREEMEN\1997\AMENDQE.SPP
18
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
COMPU-Dawn, Inc.
Cedarhurst, New York
We hereby consent to the use in this Registration Statement on Form S-8 of our
report dated February 13, 1997, except as to Note 3 which was 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 this registration
statement.
/s/ Lazar Levine & Company LLP
LAZAR, LEVINE & COMPANY LLP
New York, New York
October 31, 1997
K:\WPDOC\CORP\COMPUDAW\SECFILE\S-8.10
