As filed with the Securities and Exchange Commission on March 19, 1997
Registration No. 333-18667
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-------------------------
COMPU-DAWN, INC.
(Name of Small Business Issuer in its Charter)
Delaware 7373 11-3344575
(State or other jurisdic- (Primary Standard (I.R.S. Employer
tion of incorporation Industrial Classifi- Identification Number)
or organization) cation Code No.)
77 Spruce Street
Cedarhurst, New York 11516
Telephone : (516) 374-6700
Telecopier: (516) 374-9553
(Address and telephone number of principal executive
offices) (Address of principal place of business or intended
principal place of business)
-------------------------
Mark Honigsfeld
Chairman of the Board and
Chief Executive Officer
COMPU-DAWN, INC.
77 Spruce Street
Cedarhurst, New York 11516
Telephone: (516) 374-6700
Telecopier: (516) 374-9553
(Name, address and telephone number of agent for service)
-------------------------
Copies to:
Fred Skolnik, Esq. Edward K. Blodnick, Esq.
Gavin C. Grusd, Esq. Blodnick, Blodnick & Zelin, P.C.
Certilman Balin Adler & Hyman, LLP 2 Expressway Plaza, Suite 200
90 Merrick Avenue Roslyn Heights, New York 11577
East Meadow, NY 11554 Telephone: (516) 621-7500
Telephone: (516) 296-7000 Telecopier: (516) 621-7533
Telecopier: (516) 296-7111
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of the registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o ______________
[Cover continued on next page.]
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o ____
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. o___________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed Maximum Proposed Maximum
Titles of Each Class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered (1) per Share (2) Price (2) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares (3) 1,150,000 $5.00 $5,750,000 $1,796.88
Underwriter's Common Share Purchase 100,000 --- $ 100 ---
Warrants (4)
Common Shares (5) 100,000 $8.25 $ 825,000 $249.99
Common Shares (6) 431,200 $5.00 $2,156,000 $674.82
Common Shares (7) 250,250 $5.00 $1,251,250 $391.02
---------------------
Total Registration Fee: $3,112.71 (8)
====================================================================================================================================
</TABLE>
<TABLE>
<C> <C>
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended ("Securities Act"), this
Registration Statement covers such additional indeterminate number of Common Shares
underlying warrants (the "Bridge Warrants") issued to certain bridge lenders (the "Bridge
Lenders") and Underwriter's Common Share Purchase Warrants (the "Underwriter's
Warrants") as may be issued by reason of adjustments in the number of Common Shares
pursuant to anti-dilution provisions contained in the Bridge Warrants and Underwriter's
Warrants, respectively. Because such additional Common Shares will, if issued, be issued
for no additional consideration, no registration fee is required.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes 150,000 Common Shares subject to the Underwriter's overallotment option.
(4) To be issued to the Underwriter.
(5) Issuable upon exercise of the Underwriter's Warrants.
(6) Issuable upon exercise of the Bridge Warrants and registered on behalf of the Bridge
Lenders.
(7) Registered on behalf of Selling Stockholders.
(8) Previously paid.
</TABLE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 19, 1997
PROSPECTUS
Compu-DAWN, Inc.
1,000,000 Shares of Common Stock, par value $.01 per share
Offering Price Per Share - $5.00
---------------
Compu-DAWN, Inc., a Delaware corporation (the "Company"), hereby offers
1,000,000 shares of Common Stock, par value $.01 per share (the "Common
Shares"). See "Risk Factors" and "Description of Securities". The "Risk Factors"
section begins on page 6 of this Prospectus.
The Company will apply for inclusion of the Common Shares on The Nasdaq
SmallCap Market, although there can be no assurances that an active trading
market will develop even if the securities are accepted for quotation. See "Risk
Factors - Lack of Prior Market for Common Shares; No Assurance of Public Trading
Market" and "Risk Factors - Penny Stock Regulations May Impose Certain
Restrictions on Marketability of Securities".
Prior to this offering (the "Offering"), there has been no public
market for the Common Shares. It is currently anticipated that the initial
public offering price will be $5.00 per Common Share. The price of the Common
Shares has been determined by negotiations between the Company and E.C. Capital,
Ltd., the underwriter of this Offering (the "Underwriter"), and does not
necessarily bear any relationship to the Company's assets, book value, net worth
or results of operations or any other established criteria of value. For
additional information regarding the factors considered in determining the
initial public offering price of the Common Shares, see "Risk Factors -
Arbitrary Offering Price; Possible Volatility of Stock Price," "Risk Factors -
Lack of Prior Market for Common Shares; No Assurance of Public Trading Market,"
"Description of Securities" and "Underwriting".
The registration statement of which this Prospectus forms a part also
covers the resale of an aggregate of 431,200 Common Shares (the "Warrant
Shares") underlying warrants (the "Bridge Warrants") issued to certain bridge
lenders (the "Bridge Lenders") (see "Bridge Financing") and an aggregate of
250,250 Common Shares held by certain stockholders (collectively with the Bridge
Lenders, the "Selling Stockholders"). The Company will not receive any of the
proceeds from the resale of the Common Shares by the Selling Stockholders. The
Common Shares held by the Selling Stockholders may be resold at any time
following the date of this Prospectus, subject to an agreement between the
Bridge Lenders and the Underwriter restricting the transfer of the Warrant
Shares for a period of six months without the Underwriter's consent. The resale
of the Common Shares by the Selling Stockholders is subject to Prospectus
delivery and other requirements of the Securities Act of 1933, as amended (the
"Act"). Sales of such Common Shares or the potential of such sales at any time
may have an adverse effect on the market price of the Common Shares offered
hereby. See "Principal and Selling Stockholders" and "Risk Factors - Shares
Eligible for Future Sale May Adversely Affect the Market".
----------------
[Cover Continued on Next Page]
<PAGE>
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK
VALUE OF THE COMMON SHARES OFFERED HEREBY AND SHOULD BE
CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" AND "DILUTION".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price Underwriting Discounts Proceeds to
to Public and Commissions (1) Company (2)
- --------------------------------------------------------------------------------
Per Share...... $5.00 $0.50 $4.50
- --------------------------------------------------------------------------------
Total (3)......$5,000,000 $500,000 $4,500,000
================================================================================
(1) Does not reflect additional compensation to be received by the Under-
writer in the form of (i) a non-accountable expense allowance of
$150,000 ($172,500 if the Overallotment Option (as hereinafter defined
is exercised in full), $50,000 of which has already been paid, (ii) a
three year financial advisory and investment banking agreement
providing for aggregate fees of $108,000 payable in advance at the
closing of this Offering, and (iii) warrants (to be purchased by the
Underwriter for one mil ($.001) per warrant) to purchase 100,000 Common
Shares (10% of the total number of Common Shares sold pursuant hereto)
(the "Underwriter's Warrants"), exercisable for a period of four years,
commencing one year from the date of this Prospectus. The Company and
the Underwriter have agreed to indemnify each other against certain
liabilities, including liabilities under the Act. The Company has
been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is
therefore unenforceable. See "Underwriting".
(2) Before deducting expenses of the Offering payable by the Company
estimated at $625,000, including the Underwriter's non-accountable
expense allowance and financial advisory fee referred to in footnote
(1) (not assuming exercise of the Overallotment Option), registration
fees, transfer agent fees, NASD fees, Blue Sky filing fees and
expenses, legal fees and expenses, and accounting fees and expenses.
See "Use of Proceeds" and "Underwriting".
(3) Does not include 150,000 additional Common Shares to cover
overallotments which the Underwriter has an option to purchase for 45
days from the date of this Prospectus at the initial public offering
price, less the Underwriter's discount (the "Overallotment Option"). If
the Overallotment Option is exercised in full, the total Price to
Public will be $5,750,000, Underwriting Discounts and Commissions will
be $575,000, and Proceeds to Company will be $5,175,000. See
"Underwriting".
---------------
[Cover Continued on Next Page]
<PAGE>
The Common Shares are offered by the Underwriter on a "firm commitment"
basis, when, as and if delivered to and accepted by the Underwriter, and subject
to prior sale, allotment and withdrawal, modification of the offer with notice,
receipt and acceptance by the Underwriter named herein and subject to its right
to reject orders in whole or in part and to certain other conditions. It is
expected that the delivery of the certificates representing the Common Shares
and payment therefor will be made at the offices of the Underwriter on or about
__________, 1997.
E. C. CAPITAL, LTD.
The date of this Prospectus is _______, 1997.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ SMALLCAP MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
A SIGNIFICANT PORTION OF THE COMMON SHARES TO BE SOLD IN THIS OFFERING
MAY BE SOLD TO CUSTOMERS OF THE UNDERWRITER. SUCH SALES MAY AFFECT THE MARKET
FOR AND LIQUIDITY OF THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL
BROKER-DEALERS DO NOT MAKE A MARKET IN THE COMPANY'S SECURITIES, AS TO WHICH
THERE CAN BE NO ASSURANCE. SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE COMMON SHARES THROUGH AND/OR WITH
THE UNDERWRITER.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME
TO TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE MARKET FOR THE COMMON SHARES. HOWEVER, THERE IS NO
ASSURANCE THAT THE UNDERWRITER WILL OR WILL NOT CONTINUE TO BE A DOMINATING
INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREBY MAY BE
SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE UNDERWRITER'S PARTICIPATION
IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR
FROM TIME TO TIME. SEE "RISK FACTORS - LACK OF PRIOR MARKET FOR COMMON SHARES;
NO ASSURANCE OF PUBLIC TRADING MARKET".
2
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information (including financial
statements and notes thereto) contained in this Prospectus and is qualified in
its entirety by the more detailed information appearing elsewhere herein. In
addition, unless otherwise indicated to the contrary, the information appearing
herein does not give effect to the issuance of (a) 150,000 Common Shares upon
exercise of the Overallotment Option; (b) 100,000 Common Shares upon exercise of
the Underwriter's Warrants; (c) 431,200 Common Shares upon the exercise of the
Bridge Warrants; or (d) 710,400 Common Shares upon the exercise of other
outstanding options and warrants. See "Bridge Financing". However, all
references to Common Shares and prices per share in this Prospectus give
retroactive effect to a 325 for 1 stock split effectuated on October 18, 1996 as
part of the Company's reincorporation in the State of Delaware. See
"Underwriting". Each prospective investor is urged to read this Prospectus in
its entirety.
The Company
Compu-DAWN, Inc. (the "Company") is primarily engaged in the business
of designing, developing, licensing, installing and servicing computer software
products and systems for law enforcement and public safety agencies. The
software systems include computer-aided dispatching, computer interfacing with
state and national crime information databases, advanced mobile on-line radio
computing, automatic vehicle location (employing dynamic map displays), records
management and photo-image database systems. Certain of these applications
utilize telecommunications and space satellite technology, and other
infrastructure, provided by third parties. The Company has developed, licensed
and installed its systems in more than 55 agencies primarily located in the
State of New York.
The Company was incorporated under the name Coastal Computer Systems,
Inc. in New York on March 31, 1983 and was reincorporated in Delaware under its
present name on October 18, 1996.
The Company's executive offices are located at 77 Spruce Street,
Cedarhurst, New York 11516 and its telephone number is (516) 374-6700.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating the Company and its business.
3
<PAGE>
The Offering
Common Shares Being Offered............. 1,000,000 shares
Common Shares Outstanding Prior to
the Offering ........................... 986,700 shares
Common Shares to be Outstanding
After the Offering (1).................. 1,986,700 shares
Use of Proceeds......................... The net proceeds to the Company from
the sale of the 1,000,000 Common Shares
offered hereby are estimated to be
$3,875,000. The net proceeds are
expected to be applied in the following
approximate percentages for the
following purposes: (i) product
enhancement and development (32.3%);
(ii) repayment of indebtedness (25.2%);
(iii) marketing and advertising
(16.8%); (iv) hiring and training of
additional personnel (3.8%); (v)
purchase of equipment (3.8%);
(vi) payment of accrued compensation to
Chairman of the Board and Chief
Executive Officer, and to President
(3.0%); and (vii) working capital
(15.1%). See "Use of Proceeds".
Risk Factors............................ An investment in the securities offered
hereby involves a high degree of risk
and immediate substantial dilution
of the book value of the Common Shares,
and should be considered only by
persons who can afford the loss of
their entire investment. See "Risk
Factors" and "Dilution".
Proposed Nasdaq SmallCap Market
Symbol(2)............................. "CODI"
- -----------------
(1) Does not give effect to the issuance of (i) 150,000 Common Shares upon
exercise of the Overallotment Option; (ii) 100,000 Common Shares upon
exercise of the Underwriter's Warrants; (iii) 431,200 Common Shares upon the
exercise of the Bridge Warrants; (iv) 389,950 Common Shares upon the
exercise of outstanding options which are currently exercisable (the
"Exercisable Options"); (v) 31,200 Common Shares upon the exercise of
other outstanding warrants (the "Other Warrants") ;or (vi) 289,250 Common
Shares upon the exercise of other outstanding options (collectively with the
Exercisable Options and the Other Warrants, the "Other Derivative
Securities"). See "Bridge Financing", "Management - Stock Option Plan",
"Certain Relationships and Related Transactions" and "Underwriting".
(2) Although the Company will apply for inclusion of the Common Shares on
The Nasdaq SmallCap Market, there can be no assurance that the
Company's securities will be included
4
<PAGE>
for quotation, or, if so included, that the Company will be able to
continue to meet the requirements for continued quotation, or that a
public trading market will develop or, if such market develops, that it
will be sustained. See "Risk Factors - Lack of Prior Market for Common
Shares; No Assurance of Public Trading Market".
Summary Financial Information
The following summary financial information has been derived from the
financial statements of the Company included elsewhere in this Prospectus. All
amounts are in dollars except the number of Common Shares. The information
should be read in conjunction with the financial statements and the related
notes thereto. See "Financial Statements".
Statement of Operations Data
Years Ended
December 31,
1996 1995
---- ----
Revenues ....................... $ 477,527 $1,040,181
Operating income (loss) ......... (606,549) 129,981
Net income (loss) ............... (549,170) 78,660
Net income (loss) per share ..... $ (.29) $ .04
Weighted average number of
Common Shares outstanding ... 1,894,933 1,894,933
Balance Sheet Data
December 31, 1996 December 31, 1995
-------------------------------------
Actual As Adjusted(1) Actual
------ -------------- ------
Working capital ................. $ 115,817 $3,360,143 $140,179
Total assets .................... 943,059 4,048,059 385,240
Total liabilities ............... 1,153,459 383,459 220,395
Total stockholders' equity (deficit) (210,400) 3,664,600 164,845
- ---------------
(1) Adjusted to give effect to the receipt and application of the net
proceeds of approximately $3,875,000 from the sale of the Common Shares
offered hereby.
5
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative and
involves a high degree of risk and substantial dilution, and should only be
purchased by investors who can afford to lose their entire investment.
Prospective purchasers, prior to making an investment, should consider carefully
the following risks and speculative factors associated with this Offering, as
well as other information set forth elsewhere in this Prospectus, including the
information contained in the financial statements herein.
1. Dependence on Offering Proceeds; Possible Need for Additional
Financing. The Company's cash requirements have been and will continue to be
significant. The Company is dependent on the proceeds from this Offering in
order to sustain and further expand its operations. The Company believes that
the net proceeds of this Offering, together with anticipated increased revenues
generated from operations, will be sufficient to conduct the Company's
operations for at least 12 months. In the event that the Company's plans change,
or the costs of operations prove greater than anticipated, the Company could be
required to curtail its expansion or seek additional financing sooner than
currently anticipated. The Company has no current arrangements with respect to
additional financing and there can be no assurance that such additional
financing, if available, will be on terms acceptable to the Company. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Liquidity and Capital Resources".
2. Inexperience of Underwriter. This is the first offering under-
written by the Underwriter. There can be no assurance that the Underwriter's
limited experience will not adversely affect the development of a trading market
for, or liquidity of, the Company's securities. Therefore, purchasers of the
Common Shares offered hereby may suffer a lack of liquidity in their investment
or a material diminution of the value of their investment. See "Underwriting".
3. Downward Trend in Revenues; Current Period and Anticipated Future
Losses. For the years ended December 1996 and 1995, the Company's revenues were
$477,527 and $1,040,181, respectively. The decline in revenues was primarily as
a 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. For the
year ended December 31, 1996, the Company experienced a net loss of $549,170.
The Company's operating results for future periods are subject to numerous
uncertainties. The Company anticipates significant expenses for the foreseeable
future, including, without limitation, research and development expenses,
enhancing and refining 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
6
<PAGE>
general administrative expenses. The Company believes that, for the foreseeable
future, it will be unable to achieve sufficient additional revenues to offset
such anticipated significant operating costs. Accordingly, the Company
anticipates that operating losses will continue for a significant period of
time. If such operating losses do continue, the Company cannot predict the
severity or length of time of such operating losses and the impact of such
operating losses on the financial conditions and results of operations of the
Company. There can be no assurance that the Company's technology and products
will be able to compete successfully in the marketplace and/or generate
significant revenue, or that the Company's business will be able to operate
profitably. See "Risk Factors - Competition", "Business - Competition",
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Results of Operations".
The Company's quarterly operating results have, in the past,
varied and may in the future vary significantly, depending on facts such as the
size, timing and recognition of revenue from significant software sales and
system integration activity, the time of new product releases and market
acceptance of these new releases, and increases in operating expenses. Thus, the
Company's revenues and results of operations have and may continue to vary
significantly from quarter to quarter, period to period, and year to year based
upon frequency and volume of sales and licensing of the Company's software
applications and providing of consulting services during such period. Due to the
relatively fixed nature of certain of the Company's costs throughout each
quarterly period, including personnel and facilities costs, the decline of
revenues in any quarter typically results in lower profitability in that
quarter. There can be no assurance that the Company will become profitable or
avoid losses in any future period.
4. 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
7
<PAGE>
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. See "Business".
5. Failure to Integrate Various Product Introductions and Offerings.
The Company believes that significant market opportunities exist for a provider
of fully integrated software designed for the public safety marketplace. One of
the Company's business strategies is to provide a "total solution" fully
integrated software product line used in public safety. Although the Company has
had limited success in the past integrating its software products with other
systems, there can be no assurance, however, 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.
6. Intellectual Property Protection and Infringement. The Company's
technology is not patented or covered by a registered copyright. In the absence
of patent protection, the Company's business and competitive advantage may be
materially and adversely affected by competitors who develop substantially
equivalent technology. The Company instead currently relies on trade secrets and
common law intellectual property rights (including, without limitation, common
law copyright), together with non-disclosure agreements 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.
In the absence of a registered copyright, the Company will be unable to bring
an action for copyright infringement. If the Company registers a common law
copyright after the infringing action occurs, it may be limited in its ability
to prove its case and its recovery of damages. Registration of a copyright with
the United States copyright office is not a requirement to make a copyright
legally effective; however, registration of a copyright generally provides a
rebuttable presumption of its validity. A copyright may be registered at any
time prior to bringing an infringement action. However, the option to elect
statutory damages in lieu of actual damages and profits, and the
8
<PAGE>
eligibility to receive an award of attorney's fees (at the discretion of the
court) are not available if the infringement occurred prior to registration. The
Company intends to seek registered copyright protection under United States law
with respect to some of its technology, 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 anyone 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 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. See "Risk Factors - Competition", "Business - Intellectual
Property Rights and Licenses" and "Business Competition".
7. Competition. The Company's products compete with those of numerous
well-established companies, which design, sell, produce or market software
systems for public safety operations. Many of these companies have substantially
greater financial, technical and other resources than those of the Company, and
they may have established reputations for success in the development, licensing,
sale and service of their products and technology. Certain of those competitors
have the financial resources necessary to enable them to withstand substantial
price competition or downturns in the market for computer software products used
by public safety agencies and organizations. In addition, the Company
anticipates that a material portion of the sale of its products will be made
through the competitive bid process. There can be no assurance that the Company
will be able to compete effectively in such process. See "Business -
Competition" and "Business - Products and Services".
8. Limited Sales and Marketing Experience. The Company has limited
experience in the areas of sales, marketing and distribution. The Company's
sales and marketing staff will require additional personnel in the future. There
can be no assurance that the Company will be able to build an adequate sales and
marketing staff, that establishing such a sales and marketing staff will be
cost-effective, or that the Company's sales and marketing efforts will be
successful. See "Risk Factors Challenges to Growth; Unascertainable Risks
Related to Possible Acquisitions" and "Business Sales and Marketing".
9. Dependence on Significant Customers. Although the composition of the
Company's largest customers has changed from year to year, historically the
Company's revenues have been materially dependent on a limited number of
customers. Generally, the Company does not receive repeat business from its
customers for the design and installation of software systems. Further revenues
from customers to whom the Company has licensed software systems are usually
derived from maintenance and support contracts. Accordingly, the Company does
not believe that the makeup of its current customers is material to an
understanding of the Company's future business prospects. While the Company
expects its customer base to continue to expand, a limited number
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<PAGE>
of large customers may continue to account for a significant portion of the
Company's sales during any given period for the foreseeable future. As such, the
Company's financial condition and results of operations may be adversely
affected by a delay, reduction or cancellation of orders from one or more of its
current or future significant customers or the loss of one or more such
customers. See "Risk Factors - Lengthy Sales Cycle" and "Business - Customers".
10. 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 are expected to continue to account for
all of the Company's revenues for the foreseeable future. Any factors adversely
affecting the Company's products, such as the introduction of superior
competitive products or shifts in the needs of the marketplace, would have a
material adverse effect on the Company's financial condition and results of
operations. See "Risk Factors - Competition", "Business - Products and Services"
and "Business-Competition".
11. Lengthy Sales Cycle. Licensing of the Company's software products
typically involves a detailed technical evaluation and a commitment of capital,
technical, marketing and other resources, with the attendant delays frequently
associated with customers' internal procedures to approve large capital
expenditures and to test and accept new technologies that affect the customer's
operations infrastructure. For those and other reasons, the sales cycle
associated with the Company's products is typically lengthy and subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance procedure, that are beyond the Company's control. Because of
the lengthy sales cycle and the generally large size of customer orders, if
revenues forecasted from a specific customer for a particular fiscal quarter are
not realized in that quarter, the Company's operating results for that quarter
could be materially adversely affected. See "Risk Factors - Dependence on
Significant Customers".
12. New Management Team; Dependence on Executive Management; Need to
Retain Key Personnel. The Company's executive management team, Mark Honigsfeld,
Chairman and Chief Executive Officer of the Company, Dong W. Lew, President and
Chief Operating Officer of the Company, and Louis Libin, Chief Technology
Officer of the Company, have worked together for only a brief period. Mr.
Honigsfeld was elected Chairman of the Board of the Company in August 1996 and
was elected Chief Executive Officer of the Company effective as of October 1,
1996. Mr. Libin was elected as a director of the Company and became the
Company's Chief Technology Officer in January 1997 and only began serving as
Chief Technology Officer on a full-time basis in March 1997.
The Company has a three-year employment agreement with each of
Messrs. Honigsfeld, Lew and Libin, each of which includes, among other things, a
non-competition and non- solicitation provision. However, each agreement
provides that the employee can terminate his agreement with the Company at any
time upon 30 days notice for any reason. Additionally, Mr. Honigsfeld's
employment agreement allows him to devote up to 10% of his working time, and Mr.
Libin's employment agreement allows him to devote up to one day a week, to other
endeavors which are not competitive with the Company. The loss of the services
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<PAGE>
of either Mr. Honigsfeld, Mr. Lew or Mr. Libin would have a material adverse
effect on the Company's business.
The Company has obtained a "key-man" life insurance policy on
the life of Mr. Honigsfeld which will provide for a death benefit to the
Company, on his life, of $1,000,000. The Company intends to obtain "key man"
life insurance policy on the life of Mr. Libin which would provide 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 Mr. Lew's 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 the Company's inability to recruit qualified
personnel could have a material adverse effect on the Company's business and
results of operations. There can be no assurance that the Company will be able
to retain the members of its current management or personnel, or that it will be
able to successfully attract and retain qualified management, engineering and
sales or other personnel in the future. See "Management - Employment
Agreements".
13. 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. See "Business- Intellectual Property Rights and
Licenses".
14. Challenges to Growth; Unascertainable Risks Related to Possible
Acquisitions. 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, to install new management information and
control systems, and to 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
11
<PAGE>
the future to experience, a time lag between the date on which technical and
sales personnel are hired and the time at which such persons become fully
productive. In addition, customer satisfaction could be substantially affected
by the quality of the Company's post-sales system implementation process and, in
many cases, its maintenance and service capabilities. If the Company is unable
to hire, train and retain qualified personnel and consultants to implement these
services or is unable to manage the post-sales process effectively, its ability
to attract repeat sales or obtain references for new prospective sales could be
adversely affected, which 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.
The Company intends to explore opportunities to add, through
acquisition or licensing, technology or products to enhance or add to its
current product line, or to acquire a customer base or sales organization to
augment the Company's infrastructure. The Company is not actively seeking any
acquisition at this time. In exploring a potential acquisition or license, the
Company will consider, among other criteria, the comparative cost to the Company
in capital, resources and personnel to create the identified technology or
product, or to establish the targeted customer base or sales organization;
restrictions on the Company developing similar technology or products arising
from patent or other intellectual property protection; and the synergy of the
identified technology or products, or customer base or sales organization, with
the Company's products and organization. Although the Company anticipates it
will follow the foregoing 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 stockholders
of the Company, which may be significant. If debt financing ultimately proves to
be available, any borrowings may subject the Company to various risks
traditionally associated with the incurring of indebtedness, including the risks
of interest rate fluctuations and insufficiency of cash flow to pay principal
and interest. To the extent any such transaction involves the acquisition of a
business, there can be no assurance that the Company will successfully integrate
the operations of the acquired business with
12
<PAGE>
those of the Company, or that all of the benefits expected from such integration
will be realized. Any delays or unexpected costs incurred in connection with
such integration could have an adverse effect on the combined company's
business, operating results or financial condition. Furthermore, there can be no
assurance that the operations, management and personnel of the companies will be
compatible or that the Company will not experience the loss of key personnel.
The amount of net proceeds of this Offering, if any, expended with respect to an
acquisition will be determined by the Board of Directors of the Company. In most
cases each acquisition may be consummated without seeking and obtaining
stockholder approval, in which case, the stockholders will not have an
opportunity to review the financial statements of an acquisition candidate,
except in those cases where stockholder approval is required. Although the
Company will endeavor to evaluate the risks inherent in a particular
acquisition, there can be no assurance that the Company will properly ascertain
or assess such significant risk factors. See "Risk Factors - Limited Sales and
Marketing Experience", "Business - Products and Services" and "Business - Sales
and Marketing".
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 to the Company 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 Stockholders; Effect of Certain
Anti- Takeover Considerations. Upon completion of the Offering, the Company's
directors, executive officers and certain principal stockholders and their
affiliates will own beneficially approximately 48% of the Common Shares (giving
effect to the sales of Common Shares by the Selling Stockholders and without
giving effect to the exercise of the Overallotment Option). Accordingly, such
holders, if acting together, will have the ability to exert significant
influence over the election of the Company's Board of Directors and other
matters submitted to the Company's stockholders for approval. The voting power
of these holders may discourage or prevent any proposed takeover of the Company
unless the terms thereof are approved by such holders. Pursuant to the Company's
Certificate of Incorporation, Preferred Shares may be issued by the Company in
the future without
13
<PAGE>
stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of Common Shares will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Shares
that may be issued in the future. The issuance of Preferred Shares could have
the effect of discouraging a third party from acquiring a majority of the
outstanding Common Shares of the Company and preventing stockholders from
realizing a premium on their Common Shares. The Certificate of Incorporation
also provides for staggered terms for the members of the Board of Directors. A
staggered Board of Directors, and certain provisions of the Company's by-laws
and of Delaware law applicable to the Company (which law prohibits the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless it is approved in a prescribed manner),
could delay or make more difficult a merger, tender offer or proxy contest
involving the Company. See "Principal and Selling Stockholders" and "Description
of Securities".
17. Broad Discretion in Application of Proceeds; Repayment of
Indebtedness; Payment of Accrued Compensation. While the Company intends to use
the net proceeds of this Offering as described in the "Use of Proceeds" section
of this Prospectus, the Company has broad discretion to adjust the application
and allocation of such net proceeds in order to address changed circumstances
and opportunities. As a result of the foregoing, the success of the Company will
be substantially dependent upon the discretion and judgment of the management of
the Company with respect to the application and allocation of the net proceeds
of this Offering. Pending use of the proceeds, the funds will be invested in
certificates of deposit, high grade commercial paper and government securities
or other low risk investments. See "Use of Proceeds".
The Company intends to utilize an aggregate of $975,000, or
approximately 25% of the net proceeds of this Offering, to repay (i) promissory
notes in the principal amount of $770,000 issued in connection with the
Company's Bridge Financing transaction in October 1996 and (ii) $200,000
borrowed by the Company from its Chairman of the Board and Chief Executive
Officer under a secured credit facility loan agreement (the "Credit Agreement"),
plus interest accrued on such principal amount at the rate of 10% per annum.
Additionally, the Company intends to utilize $115,000, or 3% of the net proceeds
of this Offering, to pay (i) accrued and unpaid compensation of $100,000 to the
Company's Chairman of the Board and Chief Executive Officer, and (ii) an accrued
and unpaid signing bonus of $15,000 payable to the President of the Company,
each in connection with the execution of his employment agreement with the
Company which was effective as of October 1, 1996. As a result of the foregoing,
$1,090,000, or approximately 28% of the net proceeds of this Offering, will not
be available to fund future business activities. See "Use of Proceeds", "Bridge
Financing", "Management" and "Certain Relationships and Related Transactions".
18. Lack of Prior Market for Common Shares; No Assurance of Public
Trading Market. Prior to this Offering, no public trading market existed for the
Common Shares. There can be no assurances that a public trading market for the
Common Shares will develop or that a public trading market, if developed, will
be sustained. Although the Company anticipates that, upon
14
<PAGE>
completion of this Offering, the Common Shares will be eligible for inclusion on
The Nasdaq SmallCap Market, no assurance can be given that the Common Shares
will be listed thereon. Under prevailing rules of The Nasdaq Stock Market, Inc.,
in order to qualify for initial quotation of securities on The Nasdaq SmallCap
Market, a company, among other things, must have at least $4,000,000 in total
assets, $2,000,000 in total capital and surplus, $1,000,000 in market value of
public float and a minimum bid price of $3.00 per share. Although the Company
may, upon the completion of this Offering, qualify for initial quotation of the
Common Shares on The Nasdaq SmallCap Market, in order for the Common Shares to
continue to be listed thereon, the Company, among other things, generally must
have $2,000,000 in total assets, $1,000,000 in total capital and surplus,
$1,000,000 in market value of public float and a minimum bid price of $1.00 per
share.
The Nasdaq Stock Market, Inc. has proposed a rule change
which, if adopted, would impose substantially more stringent criteria for the
initial and continued listing of securities on The Nasdaq SmallCap Market. The
proposed new rules provide that, for initial listing on The Nasdaq SmallCap
Market, a company would need to have, among other things, (i) either net
tangible assets (i.e., net of goodwill and other intangible assets) of
$4,000,000, a market capitalization of $50,000,000 or net income for two of the
last three fiscal years of $750,000, (ii) a minimum market value of public float
of $5,000,000, (iii) a minimum bid price of $4.00 per share, and (iv) either one
year of operating history or a market capitalization of $50,000,000. For
continued listing on The Nasdaq SmallCap Market, a company would need to have,
among other things, (i) either net tangible assets of $2,000,000, a market
capitalization of $35,000,000, or net income for two of the last three fiscal
years of $500,000, and (ii) a minimum market value of public float of
$1,000,000. Additionally, for both initial listing and continued listing on The
Nasdaq SmallCap Market, companies would be required to have at least two
independent directors, and an Audit Committee, a majority of the members of
which would need to be independent directors.
If the Company is unable to satisfy the requirements for
quotation on The Nasdaq SmallCap Market, trading, if any, in the Common Shares
offered hereby would be conducted in the over-the-counter market in what is
commonly referred to as the "pink sheets" or on the NASD OTC Electronic Bulletin
Board. As a result, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, the securities offered hereby.
The above-described rules may adversely affect the liquidity of the market for
the Company's securities. If a trading market does in fact develop for the
Common Shares offered hereby, there can be no assurance that it will be
maintained. In any event, because certain restrictions may be placed upon the
sale of securities at prices under $5.00 per share, if the price of the Common
Shares falls below such threshold, unless such Common Shares qualify for an
exemption from the "penny stock" rules, such as a listing on The Nasdaq SmallCap
Market, some brokerage firms will not effect transactions in the Company's
securities and it is unlikely that any bank or financial institution will accept
such securities as collateral. Such factors could have a material adverse affect
in developing or sustaining any market for the Common Shares. See "Risk Factors
- - 'Penny Stock' Regulations May Impose Certain Restrictions on Marketability of
Securities" and "Underwriting".
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<PAGE>
Although it has no legal obligation to do so, the Underwriter
may from time to time act as a market maker and may otherwise effect and
influence transactions in the Company's securities. However, there is no
assurance that the Underwriter will continue to effect and influence
transactions in the Company's securities. The prices and liquidity of the
Company's Common Shares may be significantly affected by the degree, if any, of
the Underwriter's participation in the market. The Underwriter may voluntarily
discontinue such participation at any time. Further, the market for, and
liquidity of, the Company's Common Shares may be materially adversely affected
by the fact that a significant portion of the Common Shares may be sold to
customers of the Underwriter.
19. Arbitrary Offering Price; Possible Volatility of Stock Price. The
initial public offering price of the Common Shares as determined by negotiation
between the Company and the Underwriter may not be indicative of the market
price for such securities in the future, and does not necessarily bear any
relationship to the Company's assets, book value, net worth or results of
operations of the Company or any other established criteria of value. Among the
factors considered in determining the price of the Common Shares were the
history of, and prospects for, the industry in which the Company operates,
estimates of the business potential of the Company, the present state of the
development of the Company's business, the Company's financial condition, an
assessment of the Company's management, the general condition of the securities
markets at the time of this Offering, and the demand for similar securities of
comparable companies. It should be noted that the stock market in recent years
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of many smaller companies. Frequently, such
fluctuations have been unrelated or disproportionate to the operating
performance of such companies. These fluctuations, as well as general economic
and market conditions, may have a material adverse effect on the market price of
the Common Shares. See "Underwriting", "Description of Securities" and
"Financial Statements".
20. "Penny Stock" Regulations May Impose Certain Restrictions on
Marketability of Securities. The Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. If, as anticipated,
the Common Shares offered hereby are authorized for quotation on The Nasdaq
SmallCap Market upon the completion of this Offering, such securities will
initially be exempt from the definition of "penny stock". If the Common Shares
offered hereby are removed from listing on The Nasdaq SmallCap Market at any
time, the Company's Common Shares may become subject to rules that impose
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent 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
16
<PAGE>
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.
21. Immediate and Substantial Dilution; Equity Securities Sold
Previously at Below Offering Price. Upon completion of this Offering, assuming
no exercise of the Overallotment Option, and without giving effect to the
exercise of the Underwriter's Warrant, the pro forma net tangible book value per
share of the Company's Common Shares as of December 31, 1996 would have been
$1.84. At the initial public offering price of $5.00 per share, investors in
this Offering will experience an immediate dilution of approximately $3.16, or
63.2% in net tangible book value per share, and existing investors will
experience an increase of approximately $2.19 per share. The present
stockholders of the Company have acquired their respective equity interest at
costs substantially below the public offering price. Accordingly, to the extent
that the Company incurs losses, the public investors will bear a
disproportionate risk of such losses. The exercise of the Bridge Warrants issued
to the Bridge Lenders for the purchase of 431,200 Common Shares, at an exercise
price of $.50 per share, and the exercise of the Other Derivative Securities,
for the purchase of an aggregate of 710,400 Common Shares, generally at exercise
prices substantially below the public offering price, will result in further
substantial dilution to the public investors. See "Dilution", "Bridge
Financing", "Management - Executive Compensation", "Management - Stock Option
Plan" and "Underwriting".
22. No Dividends. The Company has never paid any dividends on its
Common Shares and does not intend to pay dividends on its Common Shares in the
foreseeable future. Any earnings which the Company may realize in the
foreseeable future are anticipated to be retained to finance the growth of the
Company. See "Dividend Policy" and "Description of Securities".
23. Shares Eligible for Future Sale May Adversely Affect the Market.
All of the Company's outstanding Common Shares are "restricted securities" and,
in the future, may be sold upon compliance with Rule 144 or pursuant to
registration under the Act (see discussion below with respect to the
registration of Common Shares held by certain stockholders of the Company and
underlying the Bridge Warrants held by the Bridge Lenders). Rule 144 currently
provides, in essence, that a person holding "restricted securities" for a period
of two years 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 three years.
Effective April 29, 1997, the foregoing two or three year holding periods will
be reduced to one or two years, respectively. An aggregate of 406,250 Common
Shares have been owned by Mr. Lew for more than
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<PAGE>
two years. However, such shares are subject to an agreement with the Underwriter
restricting the public sale thereof for a period of one year without the
Underwriter's consent.
The Company is registering for resale 250,250 Common Shares
held by certain stockholders. In addition, the Company is registering for resale
the 431,200 Common Shares underlying the Bridge Warrants. Such Common Shares may
be resold at any time following the date of this Prospectus, subject to an
agreement between each of the Bridge Lenders and the Underwriter restricting the
transferability of such Common Shares for a period of six months without the
Underwriter's consent. Prospective investors should be aware that the
possibility of resales by the Selling Stockholders, as well as other
stockholders of the Company, may have a material depressive effect on the market
price of the Company's Common Shares in any market which may develop. See
"Bridge Financing", "Principal and Selling Stockholders" and "Underwriting".
24. Limitations on Director Liability. The Company's Certificate of
Incorporation provides, pursuant to Delaware law, that a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, with certain exceptions.
These provisions may discourage stockholders from bringing suit against a
director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by stockholders on behalf of the Company against
any director. In addition, the Company's Certificate of Incorporation provides
for mandatory indemnification of directors and officers to the fullest extent
permitted or not prohibited by Delaware law. See "Description of Securities
Limitation on Liability of Directors; Indemnification".
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 Common
Shares offered hereby are estimated to be $3,875,000 (after deducting
underwriting discounts of $500,000 and other expenses of this Offering estimated
to be $625,000, including the Underwriter's non-accountable expense allowance in
the amount of 3% of the gross proceeds of the Offering, and a $108,000 financial
consulting fee payable to the Underwriter at the closing) (but not considering
any exercise of the Overallotment Option or the Underwriter's Warrants). The
Company, based upon all currently available information, intends to utilize such
net proceeds approximately as follows:
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Approximate Approximate
Amount of Percentage
Net Proceeds of Net Proceeds
Product enhancement and development(1) $ 1,250,000 32.3%
Repayment of indebtedness (2) 975,000 25.2%
Marketing and advertising (3) 650,000 16.8%
Hiring and training of additional personnel 150,000 3.8%
Purchase of equipment 150,000 3.8%
Payment of accrued compensation, including
signing bonuses, to Chairman of the Board and
Chief Executive Officer and to President(4) 115,000 3.0%
Working capital (5) 585,000 15.1%
--------- -----
Total $ 3,875,000 100.0%
=========== ======
(1) Includes, without limitation, costs to develop a radio modem to be used in
connection with mobile computing software systems. See "Business-Products".
(2) Represents, in part, the repayment of promissory notes (the "Bridge Notes")
in the aggregate principal amount of $770,000 issued in connection with the
Bridge Financing transaction in October 1996. The Bridge Notes are due and
payable upon the closing of the Offering. If such closing occurs on or
before September 15, 1997, no interest will be payable on the Bridge Notes.
If the Offering closes after such date, interest shall accrue on the
principal of the Bridge Notes, from the date such Bridge Notes were issued,
at the rate of 12% per annum. Also represents the repayment of $200,000,
plus interest accrued thereon at the rate of 10% per annum, to Company's
Chairman of the Board and Chief Executive Officer under the Credit
Agreement. Principal and accrued interest under the Credit Agreement is
payable (i) upon the closing of this Offering, if it occurs prior to June
1997, or (ii) otherwise, in equal quarterly installments commencing in June
1997, and ending in June 1999, subject to acceleration in the event of the
closing of this Offering. See "Risk Factors - Broad Discretion in
Application of Proceeds; Repayment of Indebtedness; Payment of Accrued
Compensation", "Bridge Financing" and "Certain Relationships and Related
Transactions".
(3) See "Business - Sales and Marketing".
(4) Represents the payment of accrued and unpaid compensation of approximately
$100,000 to the Company's Chairman of the Board and Chief Executive Officer,
and the payment of an accrued and unpaid signing bonus of $15,000 payable to
the President of the Company, each in connection with the execution of his
employment agreement with the Company which was effective as of October 1,
1996. See "Risk Factors - Broad Discretion in Application of Proceeds;
Repayment of Indebtedness; Payment of Accrued Compensation" and
"Management - Employment Agreements".
19
<PAGE>
(5) To be used for general operating and overhead expenses. Additionally, the
Company may use a portion of the proceeds of this Offering allocated to
working capital to acquire technology or assets to expand or enhance its
product line and business. At present, the Company has not identified any
acquisition candidates, nor can it predict that it will identify any
appropriate acquisition candidates in the future. The Company is not
actively seeking any acquisition candidates at this time. See "Risk Factors
- Challenges to Growth; Unascertainable Risks Related to Possible
Acquisitions" and "Business - Products and Services".
The amounts set forth above are estimates. Should a reapportionment or
redirection of funds be determined to be in the best interests of the Company,
the actual amount expended to finance any category of expenses may be increased
or decreased by the Company's management, at its discretion.
The Company believes that the proceeds of this Offering will enable the
Company to expand its business, which the Company anticipates, but cannot
assure, will result in an increase in annual revenues. The Company believes that
the net proceeds of this Offering, together with anticipated increased revenues
generated from operations, will be sufficient to conduct the Company's
operations for at least 12 months. See "Risk Factors - Dependence on Offering
Proceeds; Possible Need for Additional Financing".
It is anticipated that, to the extent that the Company's expenditures
are less than projected and/or the proceeds of this Offering increase as a
result of the exercise by the Underwriter of its Overallotment Option, the
resulting balances will be retained and used for general working capital
purposes. Conversely, to the extent that such expenditures require the
utilization of funds in excess of the amounts anticipated, additional financing
may be sought from other sources, such as debt financing from financial
institutions, although there can be no assurance that such additional financing,
if available, will be on terms acceptable to the Company. See "Risk Factors -
Dependence on Offering Proceeds; Possible Need for Additional Financing" and
"Risk Factors - Risks Attendant to Expansion".
Pending use of the proceeds, the funds will be invested in certificates
of deposit, high grade commercial paper and government securities, or other low
risk investments.
DILUTION
All references herein to net tangible book value, net tangible book
value per Common Share and the number of Common Shares outstanding assume no
exercise of the Underwriter's Overallotment Option or the Underwriter's
Warrants. See "Bridge Financing" and "Underwriting".
No Exercise of Bridge Warrants or Exercisable Options
20
<PAGE>
The following discussion assumes no exercise of the Bridge Warrants or
the Exercisable Options. See "Bridge Financing" and "Management - Stock Option
Plan".
As of December 31, 1996, the Company had an aggregate of 986,700 Common
Shares outstanding and a net tangible book value (deficit) of ($349,726), or
($.35) per share. Net tangible book value per share represents the total amount
of the Company's tangible assets, less the total amount of its liabilities,
divided by the total number of Common Shares outstanding.
After giving effect to the sale of 1,000,000 Common Shares by the
Company at the Offering price of $5.00 per Common Share, with net proceeds of
$3,875,000, the net tangible book value of the Company as of December 31, 1996
would have been $3,664,600, or $1.84 per Common Share. This amount represents an
immediate dilution (the difference between the price per Common Share to
purchasers in this Offering and the pro forma net tangible book value per Common
Share as of December 31, 1996, after giving effect to the issuance of the
1,000,000 Common Shares) of approximately $3.16 per Common Share to new
investors and an immediate increase (the difference between the pro forma net
tangible book value per Common Share as of December 31, 1996, after giving
effect to the issuance of the 1,000,000 Common Shares, and the net tangible book
value per Common Share as of December 31, 1996, before giving effect to the
Offering) of approximately $2.19 per Common Share to the Company's current
stockholders. Such increase to the Company's current stockholders is solely
attributable to the cash price paid by purchasers of the Common Shares offered
for sale by the Company.
The following table illustrates the per share dilution as of December 31, 1996:
Public offering price per share(1).......................... $5.00
Net tangible book value per share (deficit) before giving
effect to the Offering(2)................................. ($ .35)
Increase per share attributable to the sale of the
Common Shares offered hereby............................. 2.19
-----
Pro forma net tangible book value per share after the
Offering(2) .......................................... 1.84
----
Dilution per share to purchasers in the Offering (3) ....... $3.16
====
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(2) After deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
21
<PAGE>
(3) Does not give effect to the exercise of the Underwriter's Overallotment
Option, the Underwriter's Warrants, the Bridge Warrants, or the Other
Derivative Securities for the purchase of 710,400 Common Shares of the
Company. See "Bridge Financing", "Management - Stock Option Plan",
"Certain Relationships and Related Transactions", "Description of
Securities - Common Shares" and "Underwriting".
The following table sets forth the relative cost and ownership
percentage of the Common Shares offered hereby as compared to the Common Shares
outstanding immediately prior to the Offering.
<TABLE>
<CAPTION>
Common Shares Average
Acquired Total Consideration Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Current Stockholders........ 986,700(1) 49.7% $ 168,425 3.3% $ .17
Purchasers of Common
Shares in the Offering... 1,000,000(2) 50.3% $5,000,000 96.7% $5.00
--------- ---- --------- -----
Total............... 1,986,700(1)(2) 100.0% $5,168,425 100.0%
========= ===== ========= =====
</TABLE>
(1) Does not give effect to the exercise of the Bridge Warrants or the Other
Derivative Securities. See "Bridge Financing", "Management - Stock Option
Plan", "Certain Relationships and Related Transactions" and "Description
of Securities - Common Shares".
(2) Assumes no exercise of the Underwriter's Overallotment Option. See
"Underwriting".
Exercise of Bridge Warrants and Exercisable Options
As indicated above, the foregoing figures do not give effect
to the exercise of the Bridge Warrants for the purchase of an aggregate of
431,200 Common Shares of the Company or the Exercisable Options for the purchase
of an aggregate of 389,950 Common Shares of the Company. The following
discussion assumes such exercises. See "Bridge Financing" and "Management -
Stock Option Plan".
As of December 31, 1996, the Company had an aggregate of 1,807,850
Common Shares outstanding on a pro forma basis and a pro forma net tangible book
value (deficit) of ($45,169), or ($.02) per Common Share.
After giving effect to the sale of 1,000,000 Common Shares by the
Company at the Offering price of $5.00 per Common Share, with net proceeds of
$3,875,000, the pro forma net tangible book value of the Company as of December
31, 1996 would have been $3,969,157, or $1.41 per Common Share. This amount
represents an immediate dilution (the difference between the price per Common
Share to purchasers in this Offering and the pro forma net tangible book value
per Common Share as of December 31, 1996, after giving effect to the issuance of
the 1,000,000 Common Shares) of
22
<PAGE>
approximately $3.59 per Common Share to new investors and an immediate increase
(the difference between the pro forma net tangible book value per Common Share
as of December 31, 1996, after giving effect to the issuance of the 1,000,000
Common Shares, and the pro forma net tangible book value per Common Share as of
December 31, 1996, before giving effect to the Offering) of approximately $1.43
per Common Share to the Company's current stockholders. Such increase to the
Company's current stockholders is solely attributable to the cash price paid by
purchasers of the Common Shares offered for sale by the Company.
The following table illustrates the per share dilution as of December 31, 1996:
Public offering price per share(1)........................ $5.00
Pro forma net tangible book value (deficit) per share
before giving effect to the Offering(2).................. ($ .02)
Increase per share attributable to the sale of the
Common Shares offered hereby........................... 1.43
-----
Pro forma net tangible book value per share after the
Offering(2) (3)........................................ 1.41
----
Dilution per share to purchasers in the Offering (4) ..... $3.59
====
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(2) Gives retroactive effect to the exercise of the Bridge Warrants and the
Exercisable Options.
(3) After deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(4) Does not give effect to the exercise of the Underwriter's Overallotment
Option or the Underwriter's Warrants. See "Underwriting".
The following table sets forth the relative cost and ownership
percentage of the Common Shares offered hereby as compared to the Common Shares
outstanding immediately prior to the Offering.
<TABLE>
<CAPTION>
Common Shares Average
Acquired Total Consideration Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Current Stockholders........ 1,807,850(1) 64.4% $ 501,010 9.1% $ .28
Purchasers of Common
Shares in the Offering... 1,000,000(2) 35.6% $5,000,000 90.9% $ 5.00
--------- ------ --------- -----
Total............... 2,807,850(1)(2) 100.0% $5,501,010 100.0%
========= ===== ========== =====
</TABLE>
23
<PAGE>
(1) Gives effect to the exercise of the Bridge Warrants and the Exercisable
Options. See "Bridge Financing", "Management - Stock Option Plan" and
"Description of Securities - Common Shares".
(2) Assumes no exercise of the Underwriter's Overallotment Option. See
"Underwriting".
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 and as adjusted to give effect to the issuance and sale of the
1,000,000 Common Shares offered by the Company at $5.00 per Common Share, and
the application of net proceeds of approximately $3,875,000 therefrom. This
table should be read in conjunction with the financial statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
December 31, 1996
Actual As Adjusted(1)
------ --------------
Long-Term Debt................................. $ 822,656 $ 52,656
------- ------
Stockholders' Equity:
Preferred Shares, $.01 par value, 1,000,000
shares authorized, none issued................ - -
Common Shares, $.01 par value, 20,000,000
shares authorized, 986,700 shares issued
and outstanding (actual), and 1,986,700
shares issued and outstanding
(as adjusted) (1)............................ 9,867 19,867
Additional paid-in capital..................... 158,558 4,023,558
Retained earnings (Deficit).................... (378,825) (378,825)
-------- ---------
Total Stockholders' Equity (Deficit)........... (210,400) 3,664,600
Total Capitalization........................... $612,256 $3,717,256
======= =========
(1) Reflects the issuance of the 1,000,000 Common Shares of the Company
offered hereby, and the anticipated application of the net proceeds of
$3,875,000 therefrom, after deducting underwriting discounts and
commissions and estimated expenses of the Offering.
24
<PAGE>
DIVIDEND POLICY
Holders of the Company's Common Shares are entitled to dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor. The Company has not declared or paid any dividends in the past and
does not currently anticipate declaring or paying any dividends in the
foreseeable future. The Company intends to retain earnings, if any, to finance
the development and expansion of its business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent upon
future earnings, if any, the Company's financial condition, capital
requirements, general business conditions, and other factors. Therefore, there
can be no assurance that any dividends of any kind will ever be paid.
BRIDGE FINANCING
In October 1996, the Company borrowed an aggregate of $770,000 from 22
lenders (the "Bridge Lenders") in a financing in which the Underwriter acted as
the placement agent. In consideration for making the loans to the Company, each
Bridge Lender received, for each $10,000 loaned, (i) a promissory note in the
principal amount of $10,000 (each a "Bridge Note") and (ii) five year warrants
for the purchase of 5,600 Common Shares of the Company at an exercise price of
$.50 per share (the "Bridge Warrants"). Among the Bridge Lenders were Dong W.
Lew ($70,000), President of the Company, Mark Honigsfeld ($60,000), Chairman of
the Board and Chief Executive Officer of the Company, Murray Gross ($50,000), a
principal stockholder of the Company (Mr. Gross subsequently transferred all his
Common Shares in the Company to his affiliate, About Face, Ltd.), and John P.
Hefferon ($10,000), Executive Vice President - Sales and Marketing of the
Company. See "Management", "Principal and Selling Stockholders" and "Certain
Relationships and Related Transactions".
Each of the Bridge Notes is due and payable upon the closing of the
Offering of the Company's securities described in this Prospectus, or over a 120
month period commencing on September 15, 1999 if the Offering does not close by
then. In the event such closing occurs on or before September 15, 1997, no
interest will be payable on the Bridge Notes. If the Offering closes after
September 15, 1997 but before September 15, 1999, interest shall accrue on the
principal of the Bridge Notes, from the date such Bridge Notes were issued at
the rate of 8% per annum. If the Offering closes after September 15, 1999,
interest shall accrue on the principal of such Bridge Notes, from the date such
Bridge Notes were issued, at the rate of 12% per annum until such date, and the
Bridge Notes shall be payable in 120 equal monthly installments with interest
accruing at the rate of 8% per annum. The Company intends to use a portion of
the proceeds of this Offering to repay the Bridge Lenders in full. See "Risk
Factors - Broad Discretion in Application of Proceeds; Repayment of
Indebtedness; Payment of Accrued Compensation" and "Use of Proceeds".
The Company entered into the Bridge Financing transaction because it
required additional financing to fund costs and expenses relating to this
Offering, for the Common Share Repurchases, to recruit additional personnel and
training costs, to fund product development costs, to relocate and expand its
facilities, and for working capital, and no other sources of financing were
available to the Company at that time. As part of the Bridge Financing
transaction, the Company agreed to register,
25
<PAGE>
and has included in the Registration Statement of which this Prospectus forms a
part, the 431,200 Common Shares underlying the Bridge Warrants issued to the
Bridge Lenders for resale under the Act. See "Principal and Selling
Stockholders" and "Underwriting".
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The Company was incorporated in the State of New York on March 31, 1983
under the name of Coastal Computer Systems, Inc. The Company was reincorporated
in the State of Delaware under its present name Compu-DAWN, Inc., on October 18,
1996. The Company is engaged in the business of designing, developing,
licensing, installing and servicing computer software products and systems for
the law enforcement and public safety industry.
The Company generates revenues from the granting of non-exclusive,
non-transferable and non-assignable licenses to use software it has developed,
through fixed price contracts. Revenues from such fixed price contracts are
recognized using the percentage of completion method of accounting. The Company
retains title to the software and warrants that it will provide technical
support and repair any defects in the software at no charge. The warranty period
for each contract is negotiated individually, with the periods ranging from 90
days to three years. To date, repair costs have been minimal and, therefore, the
Company has not had to establish a reserve for warranty costs.
The Company also provides post-contract, customer support to licensees
of its software. Revenues from such services are recognized ratably over the
period of performance. Fees billed and/or received prior to performance of
services are reflected as deferred revenues.
The Company's revenues, expenses and operating results have varied
considerably in the past and are likely to vary in the future. Fluctuations in
revenues depend on a number of factors, some of which are beyond the Company's
control. These factors include, among other things, the timing of contracts,
delays in customer acceptance of the Company's software products, and
competition.
See "Risk Factors - Lengthy Sales Cycle".
Currently, the Company's products are marketed primarily in the State
of New York.
Results of Operations
Year Ended December 31, 1996 versus 1995
26
<PAGE>
Revenues
Total revenues for the year ended December 31, 1996 were $477,527 as
compared to $1,040,181 for the prior year, a decrease of $562,654 or 54.1%. This
decrease was primarily a result of the decrease in software sales (due to fewer
units sold). Such decrease occurred due to the Company's focus on raising
capital (since late 1995 and throughout the year ended December 31, 1996) and
developing new wireless mobile computing technology, which diverted the
Company's resources away from sales activities. Management does not believe that
acceptance of the Company's products or timing of contracts significantly
contributed to the decline in revenues during 1996. As a result of the new
systems licensed during 1995, maintenance income for the year ended December 31,
1996 increased by approximately $52,000, from $222,910 to $275,016, when
compared to the year ended December 31, 1995.
The Company expects that it will be successful in obtaining maintenance
contracts for any new systems sold in the future and, therefore, deferred
maintenance revenues may vary accordingly.
There is no assurance that the Company will be able to generate
significant revenues in future periods. In fact, for the foreseeable future,
inherent with the typical length in the sales cycle for the licensing of the
Company's software products, and with the in-process development of new products
which have not been brought to the market, the Company believes that it will
experience difficulties in maintaining historical levels of revenues. However,
management of the Company believes that through the use of the proceeds of this
Offering for, among other things, product enhancement, marketing, and the
introduction of new products to the market, the Company will be able to increase
revenues over the long-term.
Costs and Expenses
Total costs increased from $910,200 to $1,084,076 when comparing the
years ended December 31, 1995 to 1996.
Programming costs decreased from $404,165 for the year ended December
31, 1995 to $268,915 for the year ended December 31, 1996. These costs decreased
as a direct result of the decrease in software sales and primarily encompassed
salaries and wages and license fees for the Company's main computer operating
system. General and administrative expenses increased from $365,760 for 1995 to
$657,062 for 1996. This increase was primarily a result of increased payroll due
to new hires for management and marketing. Research and development costs
increased from $140,275 to $158,099 when comparing 1995 to 1996. This increase
of 12.7% was due to increased payroll and related costs.
Income (Loss)
For the year ended December 31, 1996, the Company had a net loss of
$549,170, or $.29 per share. For the year ended December 31, 1995, the Company
had net income of $78,660, or $.04 per share. The principal reason for this
decrease in earnings is the 54.1% decrease in revenues as discussed above.
27
<PAGE>
Liquidity and Capital Resources
At December 31, 1996, the Company had cash of $286,497, accounts
receivable of $100,010, a current ratio of 1.4:1 and a negative net worth of
$210,400. At December 31, 1995, the Company had cash of $105,962, accounts
receivable of $218,466, a current ratio of 1.8:1 and net worth of $164,845.
Management of the Company attributes the decline in its financial position to
the net loss during the year ended December 31, 1996, as described previously.
In August 1996, the Company sold 480,300 of its Common Shares for
aggregate proceeds of $144,090. Payment for these shares was held in escrow
until the consummation of the Bridge Financing transaction which was completed
in October 1996 (as discussed below).
In October 1996, in a Bridge Financing transaction, the Company
successfully completed the sale of 77 units, each unit consisting of a $10,000
Bridge Note and a Bridge Warrant to acquire 5,600 Common Shares of the Company.
The Bridge Warrants are exercisable only upon the successful completion of an
initial public offering ("IPO") of the Company's Common Shares as discussed
below. Each of the Bridge Notes is due and payable upon the closing of the
contemplated IPO, i.e. this Offering. In the event such closing occurs on or
before September 15, 1997, no interest will be payable on the Bridge Notes. See
"Bridge Financing".
In January 1997, the Company entered into a secured credit facility
loan agreement (the "Credit Agreement") with Mark Honigsfeld, the Chairman of
the Board and Chief Executive Officer of the Company, which provides for the
Company to borrow up to $200,000. The Credit Agreement further provides that all
amounts borrowed shall be repaid in full, together with accrued interest, (i)
upon the closing of this Offering, if the Offering closes prior to June 1997, or
(ii) otherwise, in equal quarterly installments commencing in June 1997 and
ending in June 1999, subject to acceleration in the event of the closing of the
Offering. Interest accrues on the unpaid principal amount at the rate of 10% per
annum. The Company has the option to prepay any outstanding principal and
accrued interest at any time, without penalty, in amounts no less than, and in
multiples of, $5,000. The Credit Agreement is secured by a first priority
security interest in all the assets owned by the Company. At the date of this
Prospectus, the Company has borrowed all $200,000 available under the Credit
Agreement, all of which is outstanding.
A portion of the net proceeds of approximately $3,875,000 from this
Offering will be used for product enhancement and development, to repay the
Bridge Notes, to repay the borrowings under the Credit Agreement, for marketing
and advertising, for hiring and training of additional personnel and for the
purchase of equipment. See "Use of Proceeds".
Even though revenues have been declining and the trend of declining
revenues is expected to continue, in September 1996, the Company moved its
facilities to new and more costly space (see "Business - Facilities" and
"Financial Statements, Note 10a") and has signed new compensation agreements
with certain key employees (see "Management - Employment Agreements" and
"Financial Statements, Note 10d"). Both the new space and the continued
employment of these key
28
<PAGE>
individuals are needed in order for the Company to develop new, and enhance
existing, products and to grow in the future. There can be no assurance,
however, that either of these commitments will result in increased revenues and
earnings. Until such time that the Company significantly increases revenues, the
new lease and compensation agreements are likely to result in continuing
operating losses.
The Company currently has no planned capital commitments.
Cash Flows - Year Ended December 31, 1996 versus 1995
For the year ended December 31, 1996, cash utilized by operating
activities was $289,383 as compared to $50,654 of cash provided by operating
activities for the prior year. This is primarily a result of higher software
sales generated in 1995 as compared to 1996 thereby generating more receipts
from customers.
For the year ended December 31, 1995, $32,712 was utilized for
investing purposes, primarily for the purchase of fixed assets. For the year
ended December 31, 1996, $176,609 was utilized for investing activities
primarily for purchases of fixed assets and for a loan to an officer.
For the year ended December 31, 1996, cash provided by financing
activities aggregated $646,527, primarily due to the completion of the Bridge
Financing in October 1996 in the amount of $770,000. The Company utilized cash
of $98,063 for the year ended December 31, 1995 primarily due to payments of
debt and the repurchase of Common Shares from former shareholders.
Other
The Company believes that the cash it generates from operations, and
the expected net proceeds from this Offering will be sufficient for at least the
ensuing 12 month period.
Inflationary Impact
Since the inception of operations, inflation has not significantly
affected the operating results of the Company. However, inflation and changing
interest rates have had a significant effect on the economy in general and,
therefore, could affect the operating results of the Company in the future.
Forward Looking Statements
Except for historical information contained herein, the matters set
forth above contain forward looking statements that involve certain risks and
uncertainties that could cause actual results to differ from those in the
forward looking statements. Potential risks and uncertainties include such
factors as the level of spending by law enforcement and public safety agencies
for computer application software and hardware, the competitive environment
within the industry, the ability of the Company to expand its operations, the
competency required, and experience, of management to
29
<PAGE>
effectuate the Company's business plan, the level of costs incurred in
connection with the Company's planned expansion efforts, economic conditions in
the industry and the financial strength of the Company's customers and
suppliers.
BUSINESS
Introduction
The Company is primarily engaged in the business of designing,
developing, licensing, installing and servicing computer application software
systems for law enforcement and public safety agencies. The Company's software
systems include computer-aided dispatching ("CAD"), computer interfacing with
local, state and national crime information databases, advanced wireless mobile
on-line communications computing ("AMO") (utilizing radio frequency), automatic
vehicle location ("AVL") (employing dynamic map displays), records management,
and photo-imaging database systems. These modules may be integrated and licensed
as a package, or may be licensed individually.
Certain of these applications utilize telecommunications and space
satellite technology, other infrastructure, and hardware provided by third
parties. The third party providers of such technology and infrastructure with
respect to a particular customer's system, vary depending on the location of the
customer and whether or not the customer has a business relationship with a
third party provider. Accordingly, the Company is not dependent on any
particular third party's technology or infrastructure for its software systems
to function. These third parties are typically major CDPDs (cellular digital
packet data providers) such as AT&T, Bell Atlantic, NYNEX, and GTE, or dedicated
radio frequency data network providers such as RAM Mobile Data and Motorola. The
Company's AMO system requires computer hardware and services from third party
providers, and interfaces with dedicated radio frequencies owned by the
Company's customers which require special radio equipment provided by companies
such as Motorola, Inc. and Dataradio Corp. The Company's customers may purchase
such technology, infrastructure, services and hardware directly from these
providers, and with respect to radio equipment, through authorized dealers as
well.
The Company's software is compatible with virtually all operating
systems. The Company has installed its systems in more than 55 agencies,
primarily law enforcement agencies located in the state of New York. The Company
provides a full range of product support and maintenance services, both on-site
and by remote connection.
30
<PAGE>
Industry Background
The goal of law enforcement and public safety agencies is to maximize
the safety and improve the quality of life of people and communities. The
effectiveness of a law enforcement or public safety agency is dependent on its
personnel and resources. Such effectiveness is enhanced by maximizing the patrol
time of agency personnel, and the availability of timely, accurate and reliable
information. This allows services to be provided in an efficient, cost-effective
manner. Computer technology is an important tool for providing information to
law enforcement and public safety personnel, reducing administrative time and
streamlining procedures, to support an agency's strategic and operational goals.
Generally, a law enforcement or public safety agency's strategy is not
geared to one overall plan for an entire community, but is based on several
individual plans addressing the unique needs of the neighborhoods that comprise
that community. Agencies need the ability to maximize their resources, customize
information, analyze crime information by sector, district and area, and analyze
repeat call areas that tax agencies' resources. Additionally, agencies have a
need to respond to incidents and 911 calls as rapidly, efficiently and cost
effectively as possible.
Computer technology has been developed for the public safety market to
address these needs. CAD systems, integrated with enhanced 911 ("E911") systems,
allow a dispatcher to retrieve information about the 911 caller, and the
location and the individuals involved in the incident being reported. Mobile
wireless communication systems in vehicles provide agency personnel in the field
with the ability to receive information regarding an incident and the people
involved, such as location, "mug shots" and photographs, and arrest and booking
data. Such systems also enable such personnel to go "on-line" with the agency's
database, and with other vehicles, in real time. Wireless communication systems
also provide personnel with the capability to file reports from their vehicles
instead of having to return to the station. This increases personnel time and
visibility in the community. AVL system technology provides a dispatcher with
the capability of immediately identifying the location of the most appropriate
vehicle to investigate an incident, significantly shortening response time.
Without an AVL system, a dispatcher has to alert the vehicles in the field of an
incident and then wait, as they report their location and/or availability,
before determining which vehicle would be the most appropriate to respond to an
incident. Information sharing technology allows agencies to link their databases
to local, state and national crime databases to access information for more
in-depth and efficient investigation of incidents. Records management and
photograph imaging systems for law enforcement agencies make arrest and booking
procedures and incident investigations more efficient, while similar systems for
fire and EMS departments contribute to the efficient deployment of firefighting
and emergency equipment and investigation of incidents. Without a computerized
records management system, records and reports would need to be handwritten or
typed, and physically stored in various filing cabinets, file rooms, or on
microfilm or microfiche. In such form, such reports are comparatively error
prone, and may be misplaced or unavailable, which makes retrieval difficult and
time consuming. Computerized records systems allow for easy entry and retrieval,
and increased productivity, enabling agency personnel to spend more time "on the
beat" in the community.
In essence, the foregoing computer technology enables law enforcement
and public safety agencies to allocate and utilize resources and manpower hours
to maximize their goal of public safety.
The Company believes that the market for application software and
technology products utilized in the law enforcement and public safety market is
growing due to (i) an increased public
31
<PAGE>
and governmental priority for law enforcement and public safety, (ii) an
awareness that specific computer technology for the law enforcement and public
safety market now exists, (iii) the availability of federal funding assistance
to obtain computer equipment and technology, (iv) breakthroughs in development
of new mobile wireless computer communications technology and (v) acknowledgment
by certain agencies that computer-aided law enforcement has contributed to a
recent drop in crime rates, and the ability to effectively handle increasing
incidents of crime without increasing personnel. For example, The New York Times
recently reported that New York City's mayor and top police officials attribute
that city's drop in crime rate, in part, to a series of new police strategies
which includes, among other things, the use of computer technology that has
allowed the police department to identify crime patterns much more quickly and
flood problem streets with undercover and beat officers. Also, the City of
Chicago has installed an E911 dispatch system which has contributed to a recent
decline in crime. In addition, the City of Glens Falls, New York, a customer of
the Company, recently advised the Company that, although incidents of crime had
increased, its computer system enabled the police department to effectively
respond to, and handle, these incidents without increasing personnel.
Development of Technology
The Company's current technology has been developed and enhanced over
approximately an eight year period by Dong H. Lew, the Company's President, Alan
Daniels (the Company's founder and former president) and technicians employed by
the Company. Mr. Daniels no longer has any daily involvement with the operations
or research and development activities of the Company; however, he is available
as needed by the Company, from time to time, pursuant to an informal arrangement
to provide consulting services on technical issues and software programming on
an hourly basis. The Company's technology is not patented or covered by any
registered copyrights; however, its software programs are copyrighted under
common law. The Company does not license any technology from third parties other
than technology for certain operating software. The Company continually
undertakes research and development, under the supervision of Mr. Lew, and Louis
Libin, the Company's Chief Technology Officer, to develop new, and enhance
existing, technology and products. The Company cannot, however, give any
assurance that it will develop any new products or technology, or enhancements
for existing products and technology, or that the Company will have the services
of Mr. Lew or Mr. Libin indefinitely. If it does develop or enhance any products
or technology, the Company cannot predict the pace or time period of such new
developments or enhancements, the costs relating to such research and
development (which could be significant or prohibitive), or the availability of
qualified technical personnel. See "Risk Factors Evolving Market; New Product
Development; Technological Obsolescence", "Risk Factors Intellectual Property
Protection and Infringement", "Risk Factors - New Management Team; Dependence on
Executive Management; Need to Retain Key Personnel" , "Risk Factors Dependence
on Licensors" and "Business - Intellectual Property Rights and Licenses".
Products and Services
Products
The Company's software products consist of CAD systems, computer inter-
face systems which connect the customer's computer system to local, state and
national crime information databases, AMO communication systems utilizing radio
frequency, AVL systems employing dynamic map displays, records management
systems, and photo-imaging database systems. Certain
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of the Company's software systems also interface with and utilize space
satellite technology, telecommunications technology, computer hardware and other
infrastructure provided by third parties. The Company's software is compatible
with virtually all operating systems, utilizing a variety of software, including
Windows(R) and Unix(R). The Company's software also allows linkage of its
products to mainframe systems and is adaptable to both small and large hardware
systems.
The Company markets its products to law enforcement agencies under the
ALECS 2000(TM) (Advanced Law Enforcement Computer System) product line and to
fire and EMS departments under its AFFECT(TM) (Advanced Firefighter Computer
Technology) product line.
The Company licenses its software to customers in modules pursuant to a
perpetual license. Customers may acquire all the modules as an integrated "total
solution" package, or any of the modules individually, on a stand alone basis or
as an addition to, or as a replacement for, an existing system. The software
modules licensed from the Company can be integrated with the customer's other
software systems. The Company's "total solution" package of integrated modules
maximizes efficiency since data entered into one module will be available in all
modules in real time. A hybrid network comprised of certain of the Company's
modules and other software systems may require data to be entered into the
Company modules and other software systems separately.
The price to the customer of the Company's products, whether a "total
solution" package or individual modules, varies depending on several factors,
including the need for, and existence of, communication infrastructure in the
customer's jurisdiction (such as radio towers necessary for AMO radio frequency
modules), volume of use of telecommunications systems (such as telephone lines
and radio cells), and the customer's computer hardware requirements to implement
the software system.
The Company's ALECS 2000(TM) product line for law enforcement and its
AFFECT(TM) product line for fire and EMS are similar in many respects. Both
address the reporting of incidents, the dispatch of resources and the deployment
of personnel.
The Company's modules are described below. See "Business - Customers".
Computer-Aided Dispatching - CAD and AVL
The Company's CAD system, under both the ALECS 2000(TM) and AFFECT (TM)
product lines, integrates several software and communications technologies, such
as E911 dispatch systems, mapping software integrated with global positioning
systems for vehicle tracking, and geo-based mapping systems, which include
street addresses and intersections, longitude/latitude, and other information to
identify the locations and addresses of incidents. The integration of these
systems with the Company's CAD software provides to police and other public
safety agencies the capability to respond rapidly and efficiently to incidents,
and streamlines record management, enhancing productivity and accuracy of record
keeping. The Company is currently developing visual CAD software (known as
V-CAD, or Visual Computer-Aided Dispatching), which provides the dispatcher with
touch screen graphical interfacing, allowing for a more user-friendly
environment.
The CAD system allows the dispatcher receiving the E911 call to
immediately identify the caller's telephone number, the related address, and the
name of the telephone number owner (unless the call is made from a cellular
phone). The CAD system enables the dispatcher to access any
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records maintained in the agency's database relative to that person or the
location of the incident (e.g. gun permit issued, prior domestic violence or
prank calls).
Once a decision is made to dispatch a vehicle to an incident, a record
is created and the location of the incident appears on a computer-generated map
of the area. Using AVL software, which links the customer's system and a
receiver in each of the customer's vehicles to GPSs (global positioning
satellites), the map also shows the position of vehicles "in the field" which
are available to respond to the incident. The dispatcher can then select the
closest available vehicle to respond to the incident and can observe the
movement of that vehicle as it responds to the call.
Wireless Mobile Data Communications System - AMO
The Company has recently developed and begun to market a wireless AMO
data communications system which permits "on-line" real time access between
vehicles in the field and the central database, between the central database and
local, state or national databases, crime information centers and other
centralized computer records, and between vehicles. The Company's AMO system
employs radio frequency networks (i.e. private radio networks, public radio
networks, and cellular and short range spread spectrum technology) to provide
complete communication and access from the vehicle to the central databases as
well as vehicle to vehicle. The Company's AMO system allows the agency's
personnel to log onto the customer's central database directly from their
vehicles and have access to all information in such central database.
Additionally, the AMO technology provides capability for the agency's personnel
to input information into the agency's database directly from their vehicles,
and transfer or access information from vehicle to vehicle. In comparison, other
currently existing competitive mobile data access systems do not provide for
on-line and real time access to information between vehicles and the central
databases, but only allow for the transmittal of batch data from the central
databases to vehicles and vice versa. AMO employs unique "text to voice"
technology which converts data received by the vehicles' systems from text into
voice data, and, by voice recognition, converts voice commands into text to be
sent to the dispatcher. This enhances the safety of vehicle operators since they
can receive and give information without having to divert their attention to
read a computer screen or input information by keyboard. Furthermore, the main
police, fire and EMS radio channels are not employed and remain available.
AMO, through the use of photo imaging technology, allows "mug shots" to
be rapidly made available at a crime or incident scene, or the personnel at the
scene can create a permanent computer photograph record of the accident or crime
scene and transmit it directly into the agency's central database or to other
vehicles.
The Company intends to use a portion of the net proceeds from this
Offering to develop a radio modem to be used in connection with the Company's
AMO system and other mobile computing software systems. However, the Company
cannot assure that it will be successful in developing such a radio modem. See
"Use of Proceeds".
The Company has sold AMO systems to, and installed such AMO systems in,
Onondaga County (New York) for its E911 department which covers multiple
agencies such as police, fire and EMS departments, the Putnam County (New York)
Sheriff's Department, the Johnson City Police Department (in Broome County, New
York), the Glens Falls Police Department (in Warren County, New York) and the
Long Beach and Garden City Police Departments (in Nassau County, New York). See
"Business - Customers".
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As a recently developed product, AMO is subject to the risks inherent
in the development of new technology, including unanticipated delays in
implementing the system, expenses, technical problems or difficulties and the
possible insufficiency of funding to complete development. See "Risk Factors -
Evolving Market; New Product Development; Technological Obsolescence".
Records Management
The Company's records management systems for law enforcement and other
public safety agencies offers a wide range of options and flexibility to fit an
agency's needs and budget. The ALECS 2000(TM) records management system
processes data from the incident report through prosecution, and is made up of
component sub-modular units, including a records management system, a
photograph/"mug shot" imaging system, a parking violation system, and a false
alarm billing system. The AFFECT(TM) records management system processes data
from the incident report through closing the investigation, and also provides
information such as the location of resources, including, without limitation,
hydrants and secondary sources of water (such as ponds, lakes, rivers, and
seawater access), foam and other chemical fire extinguishing material, hoses and
jaws-of-life.
As discussed above, the Company's records management systems obviate
the need for handwritten or typed reports and physical filing systems which are
cumbersome, error prone, and make for difficult and time consuming information
retrieval.
Local Court Records Management and Sheriff's Records Management
The Company's products also include records management systems which
are specifically designed for local courts and sheriff departments. The local
court records management system records summonses, tracks fines payable and
enters the appropriate dates on court calendars. The sheriff's records
management system provides several functions through the following sub-modules:
civil warrants/attachment records management, pistol permit records management,
photo imaging/booking for county jails, property records management, jewelry
recovery and pawn shop records management, and police academy records
management. One of the goals of this technology is to streamline procedures and
allow for more efficient allocation of resources and manpower hours.
Services
Installation
System installation is an integral part of the Company's services. The
Company's installation procedure commences with an in-depth consultation with
the customer to determine the appropriate modules needed to meet the customer's
particular requirements within budgetary parameters. Once the customer's needs
have been identified, the Company provides customized system design and file
creation. The Company then implements the system, undertakes system start-up and
provides training for the customer's personnel in the operation of the Company's
software products. Customer training is conducted either at the customer's site
or at a remote location, and can range up to several days, depending on the
customer's particular system.
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Support and Maintenance
The Company provides post-installation system software maintenance and
training support for all of its software products. The Company's systems support
teams, which include communications and software technicians and program
developers, are available to assist customers via telephone access, 24 hours a
day, seven days a week, 52 weeks a year, and provide on-site support, pursuant
to a software maintenance agreement. Software updates and enhancements to the
modules are included under maintenance contracts. Customers pay the Company a
set monthly service fee (currently ranging between 1% and 2% of the installation
contract value) which is dependent on the extent and complexity of the
customer's system. Currently, the Company has maintenance agreements with all of
its customers. During the fiscal years ended December 31, 1995 and 1996, support
and maintenance income represented approximately 21% and 58%, respectively, of
the Company's revenues. See "Business-Customers".
Possible Future Acquisitions
In addition to the foregoing products and services, the Company intends
to explore opportunities to add, through acquisition or licensing, technology or
products to enhance or add to its current product line, or to acquire a customer
base or sales organization to augment the Company's infrastructure. The Company
is not actively seeking any acquisition at this time. In exploring a potential
acquisition or license, the Company will consider, among other criteria, the
comparative cost to the Company in capital, resources and personnel to create
the identified technology or product, or establish the targeted customer base or
sales organization, restrictions on the Company developing similar technology or
products arising from patent or other intellectual property protection, and the
synergy of the identified technology or products with the Company's products and
organization. At present, the Company has not identified any acquisition or
license candidates and it does not have any current plans, proposals or
arrangements with respect to any acquisitions; however, it is actively seeking
such candidates. There can be no assurance that the Company will identify any
acquisition or licensing candidates or, if it does, that it will be able to
reach any agreements to acquire or license technology or products, or acquire
assets, on terms acceptable to the Company. With respect to possible
acquisitions or licensing agreements, the Company may, from time to time, enter
into agreements with related parties (of which none are presently contemplated).
In such case, the Company anticipates that the terms of such agreements will be
commercially reasonable and no less favorable to the Company than the Company
could obtain from unrelated third parties. Additionally, the Company intends
that such agreements will be approved by a majority of disinterested directors.
See "Risk Factors - Challenges to Growth; Unascertainable Risks Related to
Possible Acquisitions" and "Use of Proceeds".
Intellectual Property Rights and Licenses
The Company's products are based on approximately 3,000 interdependent
software application programs and system utility modules, including software
developed for creating applications of the modules. The Company's technology is
not patented; however, its software programs are copyrighted under common law.
The Company has not registered any of its common law copyrights with the United
States Copyright Office. The Company believes that it takes at least two to
three months of training for a programmer to grasp the complete structure of the
Company's software. The Company requires every employee to sign an agreement of
nondisclosure and assignment of development rights. While large software vendors
have instituted lawsuits to protect intellectual property rights to software
against infringers, the Company believes that, in its case, the complexity and
total system integration of the Company's products best protects its trade
secrets.
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There can be no assurance that the intellectual property and contractual rights
on which the Company relies to protect its intellectual property and
confidential and proprietary information will provide it with meaningful
protections. See "Risk Factors - Intellectual Property Protection and
Infringement".
The Company utilizes certain operating system software (written in the
"M" computer programming language and owned by Intersystems, Inc.
("Intersystems")), in the development of its software systems. The Company uses
such operating system software pursuant to a perpetual license which allows the
Company to use such software to create its software modules, and, in some cases,
to "bundle" such operating system software with its own software as part of its
software products. The Company pays Intersystems a monthly fee to sublicense
such operating software (based on the number of product units in which
Intersystem's operating system software is included), and an annual fee to use
such operating software to create software (based on the number of product units
for which the third party's operating system software is used to create). The
termination of this license could have a material adverse effect on the
Company's ability to produce and deliver its software products on a timely
basis. If such license is terminated, the Company would be required to license
alternative operating system software. The Company believes alternative
operating system software written in different versions of the "M" computer
programming language is owned by, and currently available from, other sources.
However, the Company would have to revise its software to make it compatible
with such alternative operating system software, which the Company believes
would result in production and delivery delays of approximately three to six
months. See "Risk Factors - Dependence on Licensors".
Sales and Marketing
According to the National Directory of Fire Chiefs and Emergency
Department (1993) and the National Directory of Law Enforcement Administration
(1996), the national law enforcement and public safety market is estimated to
have more than 18,000 law enforcement agencies and more than 35,000 fire
departments. Based on management's exposure to the marketplace, the Company
believes that the majority of such agencies currently have limited or no
computerization of their law enforcement and public safety activities. The
Company believes that mobile wireless computer communications, computer-aided
dispatching, integrated mapping and photo-imaging technology have not been
marketed extensively to a majority of these agencies.
The Company intends to implement the following marketing strategy with a
portion of the proceeds of this Offering, although no assurances can be given
that, if such marketing strategy is implemented, it will be successful. See
"Risk Factors - Limited Sales and Marketing Experience" and "Use of Proceeds".
Direct Marketing
The Company currently participates to a limited extent in public safety
conferences and trade shows, holds regional seminars, presents and conducts
demonstrations, and conducts targeted mailings and phone campaigns. The Company
intends to expand such direct marketing significantly following the consummation
of this Offering.
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Current Customers
Generally, once a system is designed and installed for a customer, there
is little repeat business other than maintenance and support, and the provision
of software enhancements or updates. Accordingly, the Company intends to
intensify sales efforts to current customers for add-on products and to obtain
references for other prospective customers, a strategy which has been somewhat
successful with current sales resources. See "Business-Customers".
Subcontracting and Business Partnership Opportunities
The Company is pursuing a strategy whereby it would create business
co-ventures and subcontractor relationships with large system integrators and
public network service providers such as IBM, AT&T, Bell Atlantic, Motorola, RAM
and GTE, in order to have the resources needed to establish a presence in the
"large size" market segment (i.e. departments or agencies with more than 200
sworn officers or personnel). See "Business - Customers". No assurances can be
given that the Company will develop such relationships or derive future revenues
from any such affiliations. The Company monitors governmental announcements of
officially published requests for proposals ("RFPs") to find business co-venture
or subcontracting opportunities. The selection of the appropriate large system
integrator by the Company as a potential business co-venturer or prime
contractor often depends on the specifications in the RFP. The Company intends
to contact large system integrators to demonstrate its product capabilities and,
more importantly, to establish a credible presence for participating in "large
size" market segment projects. Although, in the past, the Company has had some
success in partnering with large system integrators, no assurance can be given
that the Company will be viewed by these entities as an acceptable business
co-venturer or subcontractor in the future. If the Company is unable to
establish such a business relationship, its plans to expand into the "large
size" market segment may be delayed or hindered due to a limitation of resources
needed to respond competitively to RFPs or to meet "large size" market segment
agency requirements. See "Risk Factors - Limited Sales and Marketing Experience"
and "Business - Competition".
Increase in Sales Staff
Until recently, the Company had no sales staff and sales efforts were
conducted by one of the Company's principals and its project manager. Since the
closing of its Bridge Financing, the Company has retained two full-time sales
associates. The Company intends to use a portion of the proceeds of this
Offering to increase sales staff in order to penetrate geographic markets beyond
New York. In addition, the Company intends to engage a marketing support person,
a technical training specialist, a technical writer and other individuals to
coordinate installations, handle subcontract relations with large system
integrators, and provide technical sales support. See "Risk Factors Challenges
of Growth; Unascertainable Risks Related to Possible Acquisitions", "Risk
Factors Limited Sales and Marketing Experience" and "Use of Proceeds".
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Customers
The Company has installed software systems for, and provides maintenance
and support services to, 57 customers, 53 of which are law enforcement agencies
and four of which include fire and EMS departments. The following customers
accounted for the following percentage of software sales revenues for the fiscal
year ended December 31, 1995: Onondaga County (New York), 42.8% and the Queens
County (New York) District Attorney, 21.4%. No other customer accounted for 10%
or more of the Company's software sales during such period. The following
customers accounted for the following percentages of software sales for the year
ended December 31, 1996: Madison County (New York), 28.2% and Westchester County
(New York), 18.6%. No other customer accounted for 10% or more of the Company's
software sales during such period. The project undertaken by the Company for
Onondaga County is described below. The Company provided consulting services to
the Queens County District Attorney's Office with respect to the conversion of
an early dialect of the "M" Computer programming language running on that
agency's old hardware system to a current standard version of "M" running on a
high-speed multi-processor Unix(R) computer. The Company sold to, and installed
in, Madison County a records management system, a CAD system, and a specialized
version of a network wireless radio system between fixed points, for that
County's fire department. The Company sold to, and installed in, Westchester
County a records management system, a CAD system, a photo imaging system and
special modules such as civil warrant processing, jury duty processing, pawn
shop records and police academy records. The Company does not rely on past
customers for future revenues from sales and installations of software systems.
Accordingly, the Company will not suffer any material adverse effect if the
Company does not sell software systems to such customers in the future.
Based on the experience of management in the marketplace, management's
discussions with a senior New York State Division of Criminal Justice Services
official and an E911 consultant to a major telecommunications company, a recent
referendum in Bergen County, New Jersey supporting the regionalized sharing of
services by towns and municipalities, and the specifications of RFPs received by
the Company soliciting bids for law enforcement and public safety software
systems, the Company believes that there is a trend away from town and
municipality dispatching and toward county-wide dispatching. As a result of this
trend, the Company believes that there will be a need in the future for
comprehensive public safety systems which will address and integrate the needs
of police, fire and EMS departments. As a "total solution" software system
provider, the Company believes that, with the proceeds of this Offering and the
successful implementation of its marketing plan, it will be in a position to
meet such needs. See "Risk Factors - Dependence on Significant Customers", "Use
of Proceeds" and "Business - Sales and Marketing".
Typically, a customer will procure a software system from the Company
under a perpetual license, pursuant to which the Company will be paid a
percentage of the license fee at the time the contract is entered into, and then
will receive further installments as certain performance milestones are met,
until completion of the contract. After the contract is completed, any further
revenues from that customer are usually derived from a maintenance and support
contract. From time to time, however, the Company may receive additional
contracts from an existing customer for add-on modules, an aspect of business
which the Company intends to market more aggressively in the future. See
"Business-Sales and Marketing".
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The length of time that it takes to complete a systems installation
contract varies (generally from three to twelve months), depending on the nature
and complexity of the system and the customer's internal procurement procedures.
During the period of time that installments are being paid, the customer, or a
small number of customers with contracts in progress, may account for a
significant percentage of the Company's revenues. However, once those contracts
are completed, such customers will no longer represent a material portion of the
Company's future revenues. Accordingly, the Company does not rely on such
customers for a continuing revenue stream and the Company does not believe that
the make-up of its current significant customers is material to an understanding
of the Company's future business prospects. However, the Company anticipates
that at any particular time a limited number of large customers will continue to
represent a significant portion of its revenues for the foreseeable future. See
"Risk Factors - Lengthy Sales Cycle", "Risk Factors - Evolving Market; New
Product Development; Technological Obsolescence", "Risk Factors - Significant
Customers" and "Business - Sales and Marketing".
The following two examples are illustrative of the diverse application of
the Company's products and services:
(i) The Onondaga County Police Department utilizes an AMO
application, designed, developed and installed by the Company, which links over
700 police, fire and EMS vehicles. For this project, the Company was retained by
International Business Machines Corp. ("IBM") as a subcontractor to design,
develop, install and service all the required AMO software. The project included
integration by the Company of IBM and Digital Equipment Corp. hardware which
already contained application software provided by other subcontractors for both
records management and computer-aided dispatch; and
(ii) The Company, as prime contractor, designed, developed and
installed a "total solution" system for the Putnam County Sheriff's Office, a
comparatively small agency of seven vehicles. The system consisted of a records
management system, a CAD system and an AMO system.
Competition
The Company faces competition in the "small size" market segment (which
the Company views as departments or agencies with 20 or fewer sworn officers or
personnel) and the "medium size" market segment (which the Company views as
departments or agencies with 21 to 200 sworn officers or personnel) from
companies such as NewWorld Systems, Pamet Systems, Inc. and Software Corporation
of America. Although such competitors have significantly greater financial,
technical and other resources than those of the Company, the Company feels that
it has been able to compete successfully in such market due to its "total
solution" system integration technology and local presence, the Company having
installed systems in over 50 "small size" and "medium size" law enforcement
agencies in the state of New York. The Company believes further that, as it
expands its presence to other geographical areas and market segments, sales to
such agencies are likely to develop outside of its current primary market of New
York.
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The Company believes that more intense competition exists in the "large
size" market segment in which the system price ranges widely (between $1 million
and $100 million) depending on the size of the customer and the complexity of
the system (as compared to the Company's typical sale in the "small size" and
"medium size" market segments, which historically has ranged between $25,000 and
$350,000). The "large size" market is dominated by software vendors, such as PRC
Public Safety, Inc. and Systemhouse, Ltd., and large system integrators such as
IBM, Andersen Consulting, Electronic Data Systems and Harris Corporation. In
order to penetrate the "large size" market segment, the Company intends to
pursue business co-ventures or subcontracting relationships with large systems
integrators having greater financial resources and name recognition than the
Company. The Company believes that, in the future, through an extensive
marketing plan, it can build brand name awareness for its products and services.
The Company cannot, however, assure that it will be successful in this strategy.
See "Risk Factors - Competition" and "Business - Sales and Marketing".
The Company believes that the mobile wireless computer communication
technology sub- market is in its infancy. With the development of the Company's
AMO system utilizing radio frequency networks as discussed above, the Company
believes that, with sufficient resources, it will be capable of increasing its
sale price range to between $75,000 and $1 million per installation, depending
on the customer size and the extent and complexity of the system.
The Company further believes that large software companies, communication
equipment companies and computer hardware companies are currently not
concentrating their resources on the law enforcement and public safety market
because of that market's special requirements for secure radio operations and
the particular applications and expertise needed to meet those special
requirements. Additionally, most "large size" agencies have a general need for
highly specific customized systems and systems integration. Generally, such
companies that do have an interest in pursuing the law enforcement and public
safety markets look for a business partner, like the Company, that has the
necessary expertise to design and install law enforcement and public safety
systems. The Company also believes that, as a "total solution" provider in the
field of law enforcement and public safety computer technology, it is, subject
to obtaining the appropriate resources, positioned to develop generic
communications software protocols for secure on-line radio frequency mobile data
transmission basic to almost all mobile computers for police, fire and EMS
departments. See "Business - Products and Services" and "Business - Sales and
Marketing".
Employees
The Company currently has 16 full-time employees and one part-time
employee, including six software developers/programmers, one technical writer,
one marketing employee, three sales persons, and six executive and
administrative personnel. The Company also has two part-time industry
consultants. Management believes that its relations with its employees are
satisfactory.
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The Company's Product Development Group performs research and development
activities and its Customer Service Support Group handles installations,
maintenance and service. The Company's new customers are trained by consultants
who generally are retired and active-duty police officers from police
departments that have systems installed by the Company. The Company's daily
operations are managed by a software development manager, a manager of
operations, and a director of technology.
Facilities
The Company's executive offices are located at 77 Spruce Street,
Cedarhurst, New York where it leases approximately 5,000 square feet of space.
The premises are held pursuant to a five year double net lease expiring in
September 2001 that provides for a base annual rental of approximately $85,000.
The Company believes that its premises are adequate for its needs for the
foreseeable future.
MANAGEMENT
Executive Officers and Directors
The names and ages of, and the positions held by, the executive officers
and directors of the Company are set forth below.
Class of
Name Age Positions Held Directorship(1)
---- --- -------------- ---------------
Dong W. Lew 67 President, Chief Operating I
Officer, Treasurer and Director
Mark Honigsfeld 42 Chairman of the Board, Chief II
Executive Officer, Secretary
and Director
Louis Libin 38 Chief Technology Officer and III
Director
John P. Hefferon 51 Executive Vice President - Sales -
and Marketing
William D. Rizzardi 54 Director I
Harold Lazarus 70 Director II
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(1) The Company's Certificate of Incorporation provides for three classes of
directors. The term of each class is three years except that the initial term of
office of the Class I directors will expire at the Company's annual meeting of
stockholders in 1997 and the initial term of office of the Class II directors
will expire at the Company's annual meeting in 1998.
Dong W. Lew
Mr. Lew joined the Company in 1988. He was elected a director
and the President in August 1992 and was elected Treasurer in August
1996. He graduated from the Massachusetts Institute of Technology
("M.I.T.") with a Bachelor of Arts Degree in Business and Engineering
Administration, and has over 25 years of experience in the computer
industry. From 1981 to 1988, Mr. Lew was an independent computer
consultant providing turnkey computer systems with custom software to the
manufacturing and publishing industries. Prior to 1981, he was employed
in computer systems design and managerial capacities by such firms as
Mergenthaler, Inc., Harris-Intertype, Inc., and Codesco International,
Inc.
Mark Honigsfeld
Mr. Honigsfeld joined the Company as Chairman of the Board,
Secretary and a director in August 1996 and, effective October 1, 1996,
he was elected Chief Executive Officer of the Company. In 1978, he
founded Facelifters Home Systems, Inc. ("FACE"), a cabinet manufacturing
and installation company for which he served as Chief Executive Officer
and Chairman of the Board until April 25, 1996. On such date, FACE, a
publicly-traded company, was acquired by a New York Stock Exchange
company in a transaction valued at approximately $70 million to FACE's
stockholders. Prior to the merger, FACE's revenues on an annualized basis
approached $50 million. As the founder, Chief Executive Officer and
Chairman of the Board, Mr. Honigsfeld was directly involved in the
planning and development of almost all areas of FACE's business,
including corporate finance, public offerings, investor relations,
mergers and acquisitions, licensing, product design and engineering,
sales and marketing, manufacturing, field installation, customer service,
management information services and management training. Prior to the
sale transaction, FACE had approximately 600 employees and associates
representing its products and services at 28 locations in 14 states,
approximately 135 telemarketing personnel, 180 direct sellers, 120
manufacturing employees and 165 supervisory, management and
administrative personnel. In addition, FACE had working arrangements with
approximately 175 independent contracting companies nationwide. Mr.
Honigsfeld holds a Bachelor of Science Degree in Industrial Arts, magna
cum laude, and a Master of Science Degree in Industrial Arts, with
honors, from City College of the City University of New York.
43
<PAGE>
Louis Libin
Mr. Libin joined the Company in January 1997 on a per diem basis
as Chief Technology Officer and a director. Effective March 10, 1997, he
began to serve as the Company's Chief Technology Officer on a full-time
basis. Since 1989, Mr. Libin has represented the United States on
satellite and transmission issues at the International Telecommunications
Union (the "ITU") in Geneva, Switzerland. Mr. Libin has also been
Chairman of the Expert Group On Broadcast Interactive Services of the ITU
since 1991. Since 1987, Mr. Libin has served as the Director of
Technology specializing in broadcast transmission systems for the General
Electric Corporation ("GE") and the National Broadcasting Corporation.
Since 1995, Mr. Libin has also served as Assistant Secretary of all
GE's wholly-owned subsidiaries that are involved in broadcast media,
with the responsibility for technical developments and all Federal
Communications Commission (the "FCC") issues and licenses. From 1983 to
1986, Mr. Libin was a project manager for Radio Corporation of America
("RCA") until RCA's acquisition by GE. From 1981 to 1982, Mr. Libin was
employed by the Loral Corporation as an electronic design engineer where
he designed radio frequency systems for the United States military.
From 1980 to 1981, Mr. Libin was a design engineer for the Chryon
Corporation, a computer graphics company. From 1979 to 1980 he worked for
Burroughs Computer Systems, Inc.(now part of Unisys) as a field engineer.
Additionally, since 1988, Mr. Libin has acted as a consultant and advisor
to the FCC in connection with the planning of communications systems and
logistics for major events in the United States and abroad, including
political conventions, presidential inaugurations, and the Olympics. Mr.
Libin is an active member of the National Society of Professional
Engineers and the Association of Federal Communications Consulting
Engineers. He also sits on the Engineering Advisory Board of the
National Association of Broadcasters. Mr. Libin received a B.S.E.E.
Degree in Electrical Engineering from the Pratt Institute and completed
his graduate studies in optical electronics at M.I.T.'s Executive Program
in 1991. Mr. Libin has planned and managed telecommunications projects
in the United States and in Europe. Mr. Libin was responsible for the
planning and implementation of a new television and telecommunications
network in New Zealand in 1990. Mr. Libin has also provided expert
consulting on satellite issues in certain of the republics of the former
Soviet Union. Mr. Libin was also instrumental in the development of the
new transmission technology and the algorithms for software modeling of
the new North American digital terrestrial television system which was
approved by the FCC in 1996. Mr. Libin has published numerous scientific
papers in radio frequency and telecommunications.
John P. Hefferon
Mr. Hefferon joined the Company in October 1996 as Executive
Vice President - Sales and Marketing. From January 1973 to January 1987,
he served in various positions with Wang Laboratories, Inc. ("Wang
Laboratories"), including sales representative, branch manager, district
manager, Atlantic area director and Eastern Regional Vice President -
Sales and Marketing of Wang Financial Information Services Corporation, a
subsidiary of Wang Laboratories (a position he held for eleven years).
From January 1987 to November 1988, Mr. Hefferon worked for Computer
Leasing, Inc. where he was involved in arranging lease financing for
multi-million dollar IBM mainframes in the Fortune 500 marketplace. From
late 1988 through March 1990, Mr. Hefferon was Eastern Regional Director
for Imnet, Inc., a start-up imaging software company. From March 1990 to
August 1995, Mr. Hefferon served in several executive sales and marketing
positions with Allerion, Inc., a network systems integrator. From August
1995 to October 1996, Mr. Hefferon served as Vice President - Sales of
Ultradata Inc., an application software company.
44
<PAGE>
William D. Rizzardi
Mr. Rizzardi joined the Company in January 1997 as a director.
Since December 1996, Mr. Rizzardi has been the President of Environmental
Solutions Corporation, a bio- remediation company. From 1995 to 1996, Mr.
Rizzardi was an independent management consultant to the Long Island
Research Institute, a not-for-profit technology development laboratory.
From 1979 to 1994, Mr. Rizzardi held various positions with Northrop
Grumman Corporation and its affiliates, including a Vice President of
Grumman Data Systems Division, where he was responsible for the
development, operations and support of all information systems for the
Grumman Corporation, Corporate Vice President of Information Management
and Chief Information Officer of Grumman Data Systems Division, and a
Vice President of Northrop Grumman Corporation - Data Systems and
Services Division following the acquisition of Grumman Corporation by
Northrop Corporation. Mr. Rizzardi received a Bachelor of Science Degree
in Nuclear Physics from City College of the City University of New York
and a B.S.E.E. Degree in Management from the Sloan School of M.I.T.
Harold Lazarus, Ph.D
Dr. Lazarus joined the Company as a director in March 1997. Dr.
Lazarus has been a professor of Hofstra University School of Business
since 1980. Prior to that, from 1973 to 1980, Dr. Lazarus also served
as dean of Hofstra University School of Business. Dr. Lazarus is also an
organization development consultatnt who lectures in Europe, Asia, North
America and South America on leadership, time management, total quality
management, managing change, effective meetings, problem solving,
decision making, missions statements, management by objectives,
communications, and self development. Dr. Lazarus was professor of
management at New York University Graduate School of Business
Administration for a period of ten years, and he also taught at
Columbia University Graduate School of Business and Harvard University
Graduate School of Business. Dr. Lazarus currently serves as a director
of Graham-Field Health Products, Inc. New York Stock Exchange
manufacturer and wholesaler with $200 million in sales. Dr. Lazarus has
served on several boards of directors of public companies in the past,
including FACE, Ideal Toy Corporation, Superior Surgical Manufacturing
Company, Continental Plastics Corporation, Ideal International, Inc.,
Interstate Molding and Hobbing Co., Crown Recreation, Inc., Rust
Warehousing Corporation, and Alabe Products, Inc. Dr. Lazarus has
published seven books and 65 articles on business management. He also
chairs the board of Phi Beta Kappa Alumni of Long Island (New York). Dr.
Lazarus received a Masters of Science Degree and a Doctor of Philosphy
Degree in management and marketing from Columbia University.
Each director will hold office until the next annual meeting of
stockholders during the year in which the term of his class of directorship
expires and until his successor is elected and qualified. Executive officers
serve at the pleasure of the Board of Directors. See "Risk Factors - Control of
the Company" and "Certain Relationships and Related Transactions".
There is no family relationship among any of the Company's executive
officers and directors.
45
<PAGE>
Executive Compensation
The following table provides summary information concerning cash and
certain other compensation paid or accrued by the Company to, or on behalf of,
Mr. Lew, the Company's President, and Mr. Honigsfeld, the Company's Chairman of
the Board and Chief Executive Officer, during the last three fiscal years. Mr.
Honigsfeld was elected Chairman of the Board and Chief Executive Officer in
August 1996 and October 1996, respectively. No other executive officer of the
Company had a combined salary and bonus in excess of $100,000 for the year ended
December 31, 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
----------------------------------- ----------------------
Awards Payouts
---------------------- -------
Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principal Positions Year Salary Bonus Compensation Award(s) Options Payout Compensation
- ------------------- ---- ------ ----- ------------ -------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark Honigsfeld (1) 1996 $62,500(2) - - - 233,000 - -
Chairman of the Board, 1995 - - - - - - -
Chief Executive Officer 1994 - - - - - - -
and Secretary
Dong W. Lew (3) 1996 $87,500(4) $15,000(5) - - 156,950 - -
President and 1995 $70,980 - - - - - -
Treasurer 1994 $70,980 - - - - - -
- --------------
</TABLE>
(1) Mr. Honigsfeld was elected Chief Executive Officer of the Company and was
entitled to compensation effective as of October 1, 1996.
(2) Represents accrued and unpaid salary relating to 1996 (based on a salary
of $250,000 per annum) which is payable on the earlier of the closing
date of this Offering or on December 15, 1997. In the event this Offering
is not closed by December 15, 1997, the amount payable to Mr. Honigsfeld
will be deferred over a 120 month period (subject to acceleration in the
event of a subsequent consummation of the Offering). See "Management -
Employment Agreements".
(3) Mr. Lew acted as the Company's Chief Executive Officer during 1994, 1995 and
the period January 1, 1996 to September 30, 1996.
(4) Based upon a salary of $75,000 per annum from January 1, 1996 to September
30, 1996 and $125,000 per annum from October 1, 1996 to December 31, 1996.
46
<PAGE>
(5) Represents an accrued and unpaid signing bonus relating to the execution
of Mr. Lew's employment agreement in October 1996 which is payable on the
closing date of this Offering. See "Management - Employment Agreements".
Each non-employee director of the Company is entitled to receive a
director's fee of $500 per meeting (other than telephonic meetings) and options
to purchase 5,000 Common Shares of the Company each year, which options will be
exercisable for a period of ten years from the date of grant, at an exercise
price equal to the market price of the Company's Common Shares on the date of
the grant. Additionally, each non-employee director will be reimbursed for
reasonable out-of-pocket expenses incurred in attending meetings of the Board of
Directors of the Company. The members of the Board of Directors intend to meet
regularly, as needed.
The following table sets forth certain information concerning individual
grants of stock options during the fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996
Number of Percentage of Total
Securities Underlying Options Granted To
Name Options Granted Employees in Fiscal Year Exercise Price Expiration Date
- ---- --------------- ------------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Mark Honigsfeld 233,000 46.9% $.30 July 31, 2001
Dong W. Lew 156,950 31.6% $.30 July 31, 2001
</TABLE>
No options were exercised during the fiscal year ended December 31, 1996.
Employment Agreements
The Company is a party to Employment Agreements with Mark Honigsfeld and
Dong W. Lew, each for a term of three years commencing as of October 1, 1996,
subject to continuing, automatic one-year extensions, unless either the Company
or the individual notifies the other, at least 90 days prior to any annual
anniversary date, of its desire not to extend the term thereof. Each Employment
Agreement provides for earlier termination as discussed below.
Pursuant to their respective Employment Agreements, Mr. Honigsfeld serves
as Chairman of the Board and Chief Executive Officer of the Company and Mr. Lew
serves as President and Chief Operating Officer of the Company.
The Employment Agreements provide for base annual compensation of
$250,000 and $125,000 for Messrs. Honigsfeld and Lew, respectively. No amounts
due Mr. Honigsfeld under his Employment Agreement have been paid to date; all
such amounts will be due and payable to him on the earlier of December 15, 1997
or the closing date of this Offering. In the event the Offering is not
consummated by December 15, 1997, the payment obligation will be deferred over a
120 month period (subject to acceleration in the event of a subsequent
consummation of the Offering).
47
<PAGE>
The Employment Agreement for Mr. Lew provides for a signing bonus in the amount
of $15,000 which will be paid to him on the closing date of this Offering.
See "Use of Proceeds".
In addition to base compensation, each of Messrs. Honigsfeld and Lew is
entitled to receive (i) an annual bonus amount equal to a percentage of base
salary (ranging from 7 1/2% to 20%) based upon the Company achieving certain
sales levels (ranging from $3,750,000 to $6,000,000 in the initial year with
$1,000,000 increased thresholds per year if the bonus is earned in a particular
year) and (ii) an annual bonus based on the Company's earnings, if any, before
income taxes (excluding, among other items, any one time non-recurring charges)
("EBITANC"). Such latter bonus for each ranges from 5% to 10% of EBITANC based
on EBITANC thresholds ranging from $250,000 to $1,500,000.
The Employment Agreements for Messrs. Honigsfeld and Lew provide that
each is entitled to receive, for each year thereof, options for the purchase of
5,000 Common Shares of the Company for each $100,000 of EBITANC. Such options
would be exercisable for a five year period at an exercise price of no less than
110% of the market value of the Common Shares on the date of the grant. Messrs.
Honigsfeld and Lew are also entitled to receive an expense allowance of up to
$500 per month and an automobile allowance in the amount of $1,000 per month.
Each Employment Agreement provides that, notwithstanding the rolling
three year term thereof, it may be terminated prior to such expiration date
under the following circumstances: (i) death; (ii) total disability (as provided
for in the Employment Agreements); (iii) termination by the Company for "cause"
(as defined in the Employment Agreements); (iv) termination by the Company at
any time upon written notice to the employee; (v) termination by the employee
upon 30 days written notice to the Company; (vi) termination by the employee at
any time for "good reason" (as defined in the Employment Agreements); or (vii)
termination by the Company at any time within 12 months after a "change in
control" (as defined in the Employment Agreements). Additionally, Mr.
Honigsfeld's Employment Agreement allows him to devote up to 10% of his working
time to other endeavors which are not in competition with the Company.
The Employment Agreements provide for compensation under certain
circumstances upon termination of employment (in addition to accrued but unpaid
compensation) as follows: (i) in the event of the employee's death, the
employee's estate or spouse shall be entitled to receive an amount equal to the
employee's monthly salary as of the date of death multiplied by the number of
full years that he was an employee of the Company or a subsidiary or a
predecessor in interest thereof; (ii) in the event of termination of an
Employment Agreement due to disability, the employee shall be entitled to
receive an amount equal to his monthly salary as of the date of termination of
such Employment Agreement, multiplied by the number of full years that he was an
employee of the Company or a subsidiary or a predecessor in interest thereof
(but, in no event, would the disabled employee be entitled to an amount equal to
less than six months of salary); and (iii) in the event of termination of
employment by the Company following a "change of control" or for any reason
other than death, disability or "cause", or in the event of termination of an
Employment Agreement by the employee for "good reason", the employee shall be
entitled to receive his full salary for the
48
<PAGE>
unexpired term of such agreement, without mitigation of damages based upon
employment obtained elsewhere.
The Employment Agreements provide for a restriction on the solicitation
of customers of the Company for a period of two years following termination
thereof, and a covenant not to compete with the Company for a period of six
months following termination of employment for cause. See "Risk Factors - New
Management Team; Dependence on Executive Management; Need to Retain Key
Personnel".
Effective January 6, 1997, the Company and Louis Libin entered into a
three-year employment agreement, providing for Mr. Libin to serve as the
Company's Chief Technology Officer on a non- full-time per diem basis until
March 10, 1997, and on a full-time basis commencing on such date. Such
employment agreement provides for a salary of $200,000, $225,000 and $250,000
per annum in the first, second and third years, respectively. Additionally, Mr.
Libin's Employment Agreement allows him to devote up to one day a week to other
endeavors which are not in competition to the Company. Other terms of Mr.
Libin's employment agreement conform in structure to the material provisions of
Messrs. Honigsfeld's and Lew's Employment Agreements such as bonuses, benefits,
restrictive covenants and termination.
Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") provides for the
grant of options intended to qualify as "incentive stock options" ("ISOs") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
options that are not intended to so qualify ("Nonstatutory Stock Options"). The
total number of Common Shares reserved for issuance under the 1996 Plan is
2,000,000 (subject to adjustment in the event of a stock split, stock dividend,
recapitalization or similar capital change) plus an indeterminate number of
Common Shares issuable upon the exercise of "reload options".
The 1996 Plan is presently administered by the Board of Directors of the
Company, which selects the eligible persons to whom options shall be granted,
determines the number of Common Shares subject to each option, the exercise
price therefor and the periods during which options are exercisable, interprets
the provisions of the 1996 Plan and, subject to certain limitations, may amend
the 1996 Plan. Each option granted under the 1996 Plan is evidenced by a written
agreement between the Company and the optionee.
Options may be granted to all full-time employees (including officers)
and directors of, and certain consultants and advisors to, the Company or any
subsidiary of the Company.
The exercise price for ISOs granted under the 1996 Plan may not be less
than the fair market value of the Common Shares on the date the option is
granted, except for ISOs granted to 10% stockholders which must have an exercise
price of not less than 110% of the fair market value of the Common Shares on the
date the option is granted. The exercise price for Nonstatutory Stock
49
<PAGE>
Options is determined by the Board of Directors. ISOs granted under the 1996
Plan have a maximum term of ten years, except for 10% stockholders who are
subject to a maximum term of five years. The term of Nonstatutory Stock Options
is determined by the Board of Directors. Options granted under the 1996 Plan are
not transferable, except by will and the laws of descent and distribution. The
total amount of ISOs that may be granted to any individual person in any
calendar year is limited; however, there is no limit as to Nonstatutory Stock
Options. The Company and the Underwriter have agreed that, for a period of one
year after the date of this Prospectus, there shall not be outstanding more than
1,100,000 options and warrants (excluding the Bridge Warrants and Underwriter's
Warrants).
As of the date of this Offering, there are outstanding under the 1996
Plan (i) currently exercisable options for the purchase of an aggregate of
389,950 Common Shares with exercise prices at $.30 per share (comprised of five
year options held by Messrs. Honigsfeld and Lew for the purchase of 233,000 and
156,950 Common Shares, respectively, as described in the "Option Grants In
Fiscal Year Ended December 31, 1996" table above); (ii) ten year options held by
Messrs. Honigsfeld and Hefferon for the purchase of 100,000 and 5,000 Common
Shares, respectively, at an exercise price of $3.00 per share, which vest in
January 1998; (iii) ten year options held by Messrs. Libin and Rizzardi for the
purchase of 50,000 and 5,000 Common Shares, respectively, at an exercise price
of $3.00 per share, which vest in one-third increments in January 1998, 1999,
and 2000; (iv) ten year options held by Dr. Lazarus for the purchase of 5,000
Common Shares, at an exercise price of $3.00 per share, which vest in one-third
increments in March 1998, 1999 and 2000; and (v) various options granted to
certain non-executive employees of the Company to purchase an aggregate of
124,250 Common Shares. All grants were at exercise prices at least equal to the
fair market value of the Company's Common Shares on the date of grant, as
determined by the Board of Directors.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of the date of this
Prospectus with respect to the beneficial ownership of the outstanding Common
Shares of the Company by (i) any holder of more than 5% of the outstanding
Common Shares; (ii) the Company's directors; (iii) the directors and executive
officers of the Company as a group; and (iv) the Selling Stockholders. The
number of Common Shares under the column below entitled "Number of Common Shares
Beneficially Owned Before the Offering" includes Common Shares underlying the
Bridge Warrants (which become exercisable upon the consummation of the Offering)
held by certain persons as indicated in the footnotes following the table.
50
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Common Number of Common
of Beneficial Owner; Shares Beneficially Number of Shares Beneficially Percentage of Class(1)
Name of Selling Owned Before the Common Shares Owned After the Before After
Stockholder Offering Offered Hereby Offering Offering Offering
<S> <C> <C> <C> <C> <C>
Dong W. Lew(2) 1,502,650(3)(4)(5) 39,200 563,200(3) 100.0% 26.3%
Mark Honigsfeld(2) 596,800(3)(6) 33,600 563,200 47.6% 25.4%
About Face, Ltd. (7 ) 103,075(3)(5)(8) 103,075 0 10.2% -
Robert H. Solomon(9) 100,275(3)(10) 100,275 0 9.9% -
Robert LoRusso(11) 100,100(3) 100,100 0 10.1% -
Harvey Bibicoff(12) 70,000(13) 70,000 0 6.9% -
Apollo Equities(14) 56,000(13) 56,000 0 5.4% -
James Favia 42,000(13) 42,000 0 4.1% -
Sydney Gluck 22,400(13) 22,400 0 2.2% -
Steven Wallitt 16,800(13) 16,800 0 1.7% -
John Eckhoff 14,000(13) 14,000 0 1.4% -
Kenneth Moschetto 14,000(13) 14,000 0 1.4% -
Lawrence Levine 11,200(13) 11,200 0 1.1% -
Maretza Jimenez
Campos 11,200(13) 11,200 0 1.1% -
Lori Siegal 11,200(13) 11,200 0 1.1% -
Horizon Acquisitions 8,400(13) 8,400 0 * -
Stuart Copperman 5,600(13) 5,600 0 * -
Teddy Selinger 5,600(13) 5,600 0 * -
John P. Hefferon 5,600(13) 5,600 0 * -
Scott Cohen 2,800(13) 2,800 0 * -
Peter Guardino 2,800(13) 2,800 0 * -
James Portnof 2,800(13) 2,800 0 * -
Windsor L. P. 2,800(13) 2,800 0 * -
Louis Libin (2) 0 0 0 - -
William D. Rizzardi (2) 0 0 0 - -
Harold Lazarus (16) 0 0 0 - -
Directors and executive
officers as a group
(6 persons) 1,508,250(3)(4)(5)(6) 78,400 1,126,400 100.0% 47.8%
(15)
</TABLE>
* Less than 1%.
(1) Does not give effect to the exercise of the Underwriter's Overallotment
Option or the Underwriter's Warrants. See "Underwriting".
(2) The address for Messrs. Lew, Honigsfeld, Libin and Rizzardi is 77 Spruce
Street, Cedarhurst, New York.
(3) The number of Shares reflected as being owned by Mr. Lew before the
Offering includes all shares beneficially owned by Messrs. Honigsfeld,
LoRusso, Solomon and About Face, Ltd., as such shares are subject to a
limited irrevocable proxy which will expire upon consummation of this
Offering. See "Certain Relationships and Related Transactions".
(4) Includes 156,950 shares issuable upon the exercise of options granted
under the 1996 Plan and 39,200 shares issuable upon exercise of the
Bridge Warrants.
(5) In October 1996, the Company made a $70,000 loan to Mr. Lew, the proceeds
of which were utilized by him to participate in the Bridge Financing.
In March 1997, Mr. Honigsfeld purchased from the Company the promissory
note evidencing the loan. Mr. Lew has pledged 28,000 shares to secure
the repayment of the loan to Mr. Honigsfeld. Mr. Lew retains voting
rights to such shares unless and until there is a default under the terms
of the loan. See "Certain Relationships and Related Transactions".
51
<PAGE>
(6) Includes 233,000 shares issuable upon the exercise of options granted
under the 1996 Plan and 33,600 shares issuable upon the exercise of
Bridge Warrants. Also includes 330,200 shares held by the Mark Honigsfeld
Living Trust dated March 27, 1996 whose sole beneficiary is Mr.
Honigsfeld's wife. Mr. Honigsfeld, the settlor and trustee of the trust,
has the right to terminate the trust and receive the shares.
(7) About Face, Ltd.'s address is 6539 Waggoner Drive, Dallas, Texas. About
Face, Inc., a Texas corporation, is the general partner of About Face,
Ltd., a Texas limited partnership. Murray Gross is the principal
stockholder of About Face, Inc. Mr. Gross is also a limited partner of
About Face, Ltd.
(8) Includes 28,000 shares issuable upon the exercise of the Bridge Warrants.
(9) Mr. Solomon's address is 68 West Park Avenue, Long Beach, New York.
(10) Includes 25,200 shares issuable upon the exercise of the Bridge Warrants.
(11) Mr. LoRusso's address is 410 Jericho Turnpike, Jericho, New York.
(12) Mr. Bibicoff's address is 55 Maple Run Drive, Jericho, New York.
(13) Represents shares issuable upon the exercise of the Bridge Warrants.
(14) Apollo Equities' address is 30 Broad Street, New York, New York.
(15) Includes 5,600 shares issuable to Mr. Hefferon upon the exercise of the
Bridge Warrants.
(16) The address for Dr. Lazarus is Management, 228 Weller, 134 Hofstra
University, Hempstead, New York.
The Company will not receive any of the proceeds from the resale of the
Common Shares by the Selling Stockholders. The Common Shares held by the Selling
Stockholders may be resold at any time following the date of this Prospectus,
subject to an agreement between each of the Bridge Lenders and the Underwriter
restricting the transfer of the Common Shares for a period of six months without
the Underwriter's consent. The sale of such Common Shares or the potential of
such sales at any time may have an adverse effect on the market prices of the
Common Shares offered hereby. The Underwriter has advised the Company that it
will not waive the transfer restrictions for at least 30 days following the date
of this Prospectus, and, in any event, it does not have any plans to waive any
transfer restrictions prior to their respective expiration dates. See "Risk
Factors Shares Eligible For Future Sale May Adversely Affect the Market" and
"Underwriting".
The Common Shares offered may be sold from time to time directly by the
Selling Stockholders. Alternatively, the Selling Stockholders may from time to
time offer such Common Shares through underwriters, dealers, or agents. The
distribution of Common Shares by the Selling
52
<PAGE>
Stockholders may be effected in one or more transactions that may take place on
the over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more broker-dealers
for resale of such shares as principals, at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Stockholders in connection with such
sales of Common Shares. The Common Shares offered by the Selling Stockholders
may be sold by one or more of the following methods, without limitation: (i) a
block trade in which a broker or dealer so engaged will attempt to sell the
Common Shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (ii) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus; (iii) ordinary brokerage transactions in which the broker solicits
purchasers; and (iv) face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or dealers engaged by the
Selling Stockholders may arrange for other brokers or dealers to participate.
The Selling Stockholders and intermediaries through whom such Common Shares are
sold may be deemed "underwriters" within the meaning of the Act with respect to
the Common Shares offered, and any profits realized or commissions received may
be deemed underwriting compensation.
At the time a particular offer of Common Shares is made by or on behalf
of a Selling Stockholder, to the extent required, a Prospectus Supplement will
be distributed which will set forth the number of Common Shares being offered
and the terms of the offering, including the name or names of any underwriters,
dealers or agents, the purchase price paid by any underwriter for Common Shares
purchased from the Selling Stockholder and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective August 1996, the Company issued 330,200 Common Shares to the
Mark Honigsfeld Living Trust dated March 27, 1996 (the "Honigsfeld Trust") in
consideration for $.30 per share or an aggregate price of $99,060. Mr.
Honigsfeld, the settlor and trustee of the Honigsfeld Trust, has the right to
terminate it and receive the Common Shares. Mr. Honigsfeld's wife is the sole
beneficiary of the Honigsfeld Trust. Upon Mr. Honigsfeld accepting the position
as Chairman of the Board, he was issued a five year option, which expires in
August 2001, to acquire up to 233,000 Common Shares of the Company pursuant to
the 1996 Plan at an exercise price of $.30 per share. See "Management - Stock
Option Plan".
In September 1996, the Company entered into a certain consulting
agreement with Alan Daniels and Geraldine Lum Daniels, the Company's founders
and two of the Minority Stockholders (as defined below), providing for Alan
Daniels and Geraldine Lum Daniels to assist the Company with technical and
marketing issues until the Bridge Financing closed (which occurred in October
1996) in consideration for a one-time payment of $25,290 at such closing.
53
<PAGE>
In October 1996, the Company repurchased 65,000 Common Shares and
canceled warrants for the purchase of 50,700 Common Shares (the "Repurchase
Agreements") from 13 individuals (the "Minority Stockholders"), such repurchases
occurring upon the consummation of the Bridge Financing. Pursuant to the
Repurchase Agreements, the Minority Stockholders were paid $.30 per share and
received new warrants exercisable for a five year period to purchase an
aggregate of 31,200 Common Shares at an exercise price of $5.00 per share.
In October 1996, the Company loaned $70,000 to Dong W. Lew, President and
Chief Operating Officer of the Company, for purposes of his participation in the
Bridge Financing. Such loan is evidenced by a promissory note, providing for the
payment of principal and interest at the rate of 8% per annum in 120 equal
monthly installments, subject to acceleration on the closing date of this
Offering if the Offering closes by October 1999 and such Offering yields gross
proceeds of $4,500,000 or more. Payment of the promissory note is secured by a
pledge of 28,000 Common Shares of the Company. All voting rights to such shares
remain with Mr. Lew except in the event of a default on the payment of the
promissory note. In March 1997, Mr. Honigsfeld purchased from the Company the
promissory note in consideration for the payment in cash of the outstanding
amount of such note. Mr. Honigsfeld concurrently received an assignment of the
Company's rights as pledgee of Mr. Lew's Common Shares.
In January 1997, the Company entered into the secured Credit Agreement
with Mark Honigsfeld, Chairman of the Board and Chief Executive Officer of the
Company, which permits the Company to borrow up to $200,000. The Credit
Agreement further provides that all amounts borrowed shall be repaid in full,
together with accrued interest, (i) upon the closing of the Offering, if the
Offering closes before June 1997, or (ii) otherwise, in equal quarterly
installments commencing in June 1997 and ending in June 1999 subject to
acceleration in the event of the closing of the Offering. Interest accrues on
the unpaid principal amount at the rate of 10% per annum. The Company has the
option to prepay any outstanding principal and accrued interest at any time
without penalty in amounts no less than, and in multiples of, $5,000. The Credit
Agreement is secured by a first priority security interest in all the assets
owned by the Company. At the date of this Prospectus, the Company has borrowed
all $200,000 available under the Credit Agreement, all of which is outstanding.
The Company entered into the Credit Agreement because it required additional
financing to fund the Company's working capital needs and no other sources of
financing were available at that time. The Company believes that the terms of
the Agreement are commercially reasonable and are at least as favorable to the
Company as the Company could have obtained from an unrelated third party. The
Credit Agreement was approved by, among others, all the disinterested directors
of the Company. See "Risk Factors - Broad Discretion in Application of Proceeds;
Repayment of Indebtedness; Payment of Accrued Compensation".
To the extent that the Company may enter into any agreements with related
parties in the future (of which none are presently contemplated), the Company
anticipates that the terms of such agreements will be commercially reasonable
and no less favorable to the Company than the Company could obtain from
unrelated third parties. Additionally, the Company intends that such agreements
would be approved by a majority of disinterested directors. See "Risk Factors
Challenges to Growth; Unascertainable Risks Related to Possible Acquisitions".
54
<PAGE>
DESCRIPTION OF SECURITIES
Common Shares
The Company is authorized to issue up to 20,000,000 Common Shares, par
value $.01 per share, of which 986,700 shares are issued and outstanding as of
the date of this Prospectus and owned by five stockholders of record. All of the
issued and outstanding Common Shares are validly issued, fully paid and
non-assessable. An additional 1,141,600 Common Shares are reserved for issuance
upon the exercise of outstanding options and warrants, including the Bridge
Warrants.
Holders of the Common Shares of the Company are entitled to share equally
on a per share basis in such dividends as may be declared by the Board of
Directors out of funds legally available therefor. There are presently no plans
to pay dividends with respect to the Common Shares. See "Dividend Policy". Upon
liquidation, dissolution or winding up of the Company, after payment of
creditors and the holders of any senior securities of the Company, including
Preferred Shares, if any, the assets of the Company will be divided pro rata on
a per share basis among the holders of the Common Shares. The Common Shares are
not subject to any liability for further assessments. There are no conversion or
redemption privileges, nor any sinking fund provisions, with respect to the
Common Shares, and the Common Shares are not subject to call. The holders of the
Common Shares do not have any preemptive or other subscription rights.
Holders of the Common Shares are entitled to cast one vote for each share
held at all stockholders' meetings including the annual meeting for the election
of directors. The Common Shares do not have cumulative voting rights.
Preferred Shares
The Company's Certificate of Incorporation authorizes 1,000,000 "blank
check" Preferred Shares, par value $.01 per share, whereby the Board of
Directors of the Company shall have the authority, without further action by the
holders of the outstanding Common Shares, to issue Preferred Shares from time to
time in one or more series, to fix the number of shares constituting any series
and the stated value thereof, if different from the par value, and to fix the
terms of any such series, including dividend rights, dividend rates, conversion
or exchange rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price and the liquidation preference of
such series. As of the date of this Prospectus, there are no Preferred Shares
issued and outstanding, and the Company has no plans to issue any Preferred
Shares.
Delaware Anti-Takeover Law; Staggered Board of Directors
The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law enacted in 1988. In general,
the law prohibits a Delaware public corporation from engaging in a "business
combination" with an "interested stockholder" for a period
55
<PAGE>
of three years after the date of the transaction in which the person became an
interested stockholder, unless it is approved in a prescribed manner.
The Company's Certificate of Incorporation provides for staggered terms
for the Board of Directors in three classes. The term of each class is three
years (except that the initial term of office of the Class I directors will
expire at the Company's annual meeting of stockholders in 1997 and the initial
term of office of the Class II directors will expire at the Company's annual
meeting of stockholders in 1998). Each director holds office until the next
annual meeting of stockholders during the year in which the term of his class of
directorship expires and until his successor is elected and qualified. The
Company currently has five directors (two in Classes I and II and one in Class
III). Accordingly, based on the current size of the Board and the makeup of the
classes of directors, the term of no more than two directors will expire in any
given year.
As a result of Section 203 of the General Corporation Law of Delaware and
the Company's staggered Board of Directors, potential acquirors of the Company
may be discouraged from attempting to effect acquisition transactions with the
Company, thereby possibly depriving holders of the Company's securities of
certain opportunities to sell or otherwise dispose of such securities at
above-market prices pursuant to such transactions.
Limitation on Liability of Directors; Indemnification
Article X of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by Section 102 of the Delaware General Corporation Law, provided that
this provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) arising under Section 174 of the
Delaware General Corporation Law (with respect to unlawful dividend payments and
unlawful stock purchases or redemptions); or (iv) for any transaction from which
the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of
Incorporation and its by-laws provisions to indemnify its directors, officers,
employees and agents and to purchase insurance with respect to liability arising
out of the performance of their duties as directors, officers, employees and
agents as permitted by Section 145 of the Delaware General Corporation Law. The
Delaware General Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors, officers, employees and agents may be entitled under the
Company's by-laws, any agreement, vote of stockholders or otherwise.
Furthermore, the Company has entered into an indemnification agreement to
indemnify its directors and officers, under certain circumstances, to the extent
provided in the Certificate of Incorporation and Bylaws of the Company, subject
to Delaware General Corporation Law, against
56
<PAGE>
any claim or action against, or involving, any of them in their respective
capacities as a director or an officer of the Company or its affiliates.
The effect of the foregoing is to require the Company, to the extent
permitted by law, to indemnify the officers, directors, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to indemnify
the Company, its directors, officers, and each person who controls the Company
within the meaning of Section 15 of the Act with respect to any statement in or
omission from the Registration Statement or the Prospectus or any amendment or
supplement thereto if such statement or omission was made in reliance upon
information furnished in writing to the Company by the Underwriter specifically
for or in connection with the preparation of the Registration Statement, the
Prospectus, or any such amendment or supplement thereto.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
The Company intends to obtain directors and officers insurance in the
approximate amount of $1,000,000.
Transfer Agent
The transfer agent for the Company's Common Shares is American Stock
Transfer Company.
UNDERWRITING
General
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriter has agreed to purchase the 1,000,000
Common Shares offered hereby from the Company on a "firm commitment" basis, if
any are purchased. The Underwriter has advised the Company that it proposes to
offer the Common Shares to the public at a price of $5.00 per Common Share, as
set forth on the cover page of this Prospectus, and that it may allow to certain
dealers who are NASD members concessions not to exceed $___ per Common Share, of
which an amount not in excess of $___ per Common Share may be reallowed to other
dealers who are members of the NASD. After the Offering, the public offering
price, concession and reallowance may be changed by the Underwriter.
57
<PAGE>
The Company has granted an Overallotment Option to the Underwriter,
exercisable during the 45 day period from the date of this Prospectus, to
purchase up to a maximum of 150,000 additional Common Shares at the Offering
price, less the underwriting discount, to cover overallotments, if any.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with the Registration Statement, including liabilities arising under
the Act. Insofar as indemnification for liabilities arising under the Act may be
provided to officers, directors or persons controlling the Company, the Company
has been informed that, in the opinion of the Commission, such indemnification
is against public policy and is therefore unenforceable.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance of 3% of the aggregate Offering price of the Common Shares
offered hereby, including any Common Shares purchased pursuant to the
Overallotment Option, $50,000 of which has already been paid.
The Company has agreed to sell to the Underwriter, or its designees,
warrants to purchase an aggregate of 10% of the Common Shares sold pursuant to
this Offering, exclusive of the exercise of the Underwriter's Overallotment
Option, for a purchase price of one mil ($.001) per warrant (the "Underwriter's
Warrants"). The Underwriter's Warrants shall be exercisable during a four year
period commencing one year from the closing date of this Offering. Any profits
realized upon the sale of the Common Shares issuable upon exercise of the
Underwriter's Warrants may be deemed to be additional underwriting compensation.
The exercise price of the Common Shares issuable upon exercise of the
Underwriter's Warrant shall be $8.25 per share (165% of the initial public
offering price of the Common Shares). The exercise price of the Underwriter's
Warrants and the number of Common Shares covered thereby are subject to
adjustment in certain events to prevent dilution. For the life of the
Underwriter's Warrants, the holders thereof are given, at a nominal cost, the
opportunity to profit from a rise in the market price of the Company's Common
Shares with a resulting dilution in the interest of other stockholders. The
Company may find it more difficult to raise capital for its business if the need
should arise while the Underwriter's Warrants are outstanding. At any time when
the holders of the Underwriter's Warrants might be expected to exercise them,
the Company would probably be able to obtain additional capital on more
favorable terms. The Company has granted the Underwriter certain "demand" and
"piggyback" registration rights with respect to the Underwriter's Warrants and
the underlying Common Shares.
At the closing of the sale of the Common Shares offered hereby, the
Company will enter into a three year financial advisory and investment banking
agreement with the Underwriter, pursuant to which the Company will be obligated
to pay the Underwriter $108,000 in advance for financial and investment advisory
services to the Company.
At the closing of this Offering, the Company and the Underwriter will
enter into a non-exclusive merger and acquisition agreement pursuant to which
the Underwriter would be compensated at the rate of between 2% - 5% of the value
of any consummated transaction with respect to which the Company was introduced
to the other party by the Underwriter.
58
<PAGE>
Additionally, for a period of three years following the date of this
Prospectus, the Underwriter has been granted the right to sell, for the account
of any officer, director or holder of 5% or more of the Company's Common Shares
(collectively, the "Insiders"), any of the Company's securities which the
Insiders propose to sell pursuant to Rule 144 promulgated under the Act, on
terms at least as favorable as the Insiders can secure elsewhere.
The Company has also agreed to have a designee of the Underwriter serve
as a director of the Company, or as an observer of the Board of Directors, for a
period of three years following the date of this Prospectus.
The Company's current stockholders, have agreed that, except with respect
to the Common Shares underlying the Bridge Warrants owned by them, they will not
transfer any of their Common Shares publicly for a period of one year following
the date of this Prospectus without the prior consent of the Underwriter.
Additionally, the Selling Stockholders (including current stockholders with
respect to the Common Shares underlying Bridge Warrants owned by them) have
agreed that they will not transfer any of their Common Shares publicly for a
period of six months following the date of this Prospectus without the consent
of the Underwriter. Notwithstanding the foregoing, Robert LoRusso, About Face,
Ltd. and Robert H. Solomon, principal stockholders of the Company, are exempt
from such consent requirement with respect to the 100,100, 75,075 and 75,075
Common Shares, respectively, owned by them. The Underwriter has advised the
Company that it will not waive the transfer restrictions with respect to the
Selling Stockholders for at least thirty days following the date of this
Prospectus and that, in any event, it has no plans to waive such transfer
restrictions prior to its expiration. However, the Underwriter has informed the
Company that it may contemplate the waiver of such transfer restriction in the
future if the sale of the Selling Stockholders' Common Shares would not have an
adverse effect on the market price of the Company's Common Shares and the market
could sustain such sale. The Underwriter has further advised the Company that it
has no current plans, proposals, arrangements or understandings with, and it
knows of no plans, proposals, arrangements or understandings with respect to, or
related to, the offering of 250,250 Common Shares by certain of the Selling
Stockholders who are not subject to any transfer restriction agreement. See
"Principal and Selling Stockholders".
The Company has agreed not to issue any equity securities, or securities
convertible into, or exchangeable or exercisable for, equity securities, for a
period of twelve months from the date of this Prospectus, except that the
Company may issue (i) Common Shares upon the exercise of the Bridge Warrants and
the Underwriter's Warrants; (ii) Common Shares upon the exercise of the Other
Derivative Securities, that are currently outstanding, as well as upon the
exercise of options hereafter granted, of up to 1,100,000 Common Shares in the
aggregate; and (iii) Common Shares and Preferred Shares in connection with a
merger or acquisition transaction.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and Underwriter's Warrants which have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
59
<PAGE>
The Underwriter, a registered broker-dealer, purchases and sells
securities on behalf of its customers. The Underwriter also engages in
investment banking activities and provides companies with financial advisory
services. The Underwriter has been in business for approximately two years. This
is the first offering underwritten by the Underwriter. There is no affiliation
or material relationship between any promoter of the Company and the
Underwriter. See "Risk Factors Inexperience of Underwriter".
Determination of Public Offering Price
Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price for the Common Shares has been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in the negotiations were an analysis of the areas of activity
in which the Company is engaged, the present state of the Company's business,
the Company's financial condition, the Company's prospects, an assessment of
management, the general condition of the securities market at the time of this
Offering and the demand for similar securities of comparable companies. The
public offering price of the Common Shares does not necessarily bear any
relationship to assets, earnings, book value or other criteria of value
applicable to the Company.
The Company anticipates that the Common Shares will be listed for
quotation on The Nasdaq SmallCap Market under the symbol "CODI", but there can
be no assurance that an active trading market will develop, even if the
securities are accepted for quotation. The Underwriter intends to make a market
in the Common Shares of the Company.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon
for the Company by Certilman Balin Adler & Hyman, LLP, 90 Merrick Avenue, East
Meadow, New York 11554. Certain legal matters will be passed upon for the
Underwriter by Blodnick, Blodnick & Zelin, P.C., 2 Expressway Plaza, Suite 200,
Roslyn Heights, New York 11577.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1995
and for the years then ended included in this Prospectus have been audited by
Lazar, Levine & Company LLP, independent certified public accountants, as set
forth in their report thereon appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the Act
with the Commission in Washington, D.C. with respect to the Common Shares
offered hereby. This
60
<PAGE>
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Common
Shares offered hereby, reference is hereby made to the Registration Statement
and such exhibits, which may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Reports and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at the following
addresses: New York Regional Office, Seven World Trade Center, New York, New
York 10048; and Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661-2511. Copies of such material can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Furthermore, the Commission
maintains a Web site that will contain reports, proxy and information statements
and other information regarding the Company. The address of such Web site is
http://www.sec.gov.
61
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
INDEX TO FINANCIAL STATEMENTS
Page(s)
<S> <C>
Independent Auditors' Report F - 2
Financial Statements:
Balance Sheets as of December 31, 1996 and 1995 F - 3
Statements of Operations for the Years Ended December 31, 1996 and 1995 F - 4
Statement of Shareholders' Equity for the Two Years in the Period Ended December 31, 1996 F - 5
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 F - 6
Notes to Financial Statements F - 8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Compu-DAWN, Inc.
Cedarhurst, New York
We have audited the accompanying balance sheets of Compu-DAWN, Inc. as of
December 31, 1996 and 1995 and the statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Compu-DAWN, Inc. as of December
31, 1996 and 1995 and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
LAZAR, LEVINE & COMPANY LLP
New York, New York
February 13, 1997 except as to Note 12(c)
which is dated March 11, 1997
F-2
<PAGE>
Compu-DAWN, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
- ASSETS (Note 12) -
December 31, December 31,
1996 1995
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash (Note 2b) $ 286,497 $105,962
Accounts receivable, net of allowances for doubtful accounts of
$30,000 and $18,000 for 1996 and 1995, respectively (Note 2b) 100,010 218,466
Prepaid expenses 19,281 2,567
Loan receivable from officer - current portion (Note 3) 4,828 -
Income tax refund receivable (Notes 2f and 9) 36,004 -
------------- ---------
TOTAL CURRENT ASSETS 446,620 326,995
FIXED ASSETS (Notes 2c, 4 and 5) 138,814 45,265
------------ ----------
OTHER ASSETS:
Deferred offering costs (Note 10) 139,326 -
Deferred income taxes (Notes 2f and 9) - 6,200
Loan receivable from officer (Note 3) 64,419 -
Financing costs (Note 6) 132,355 -
Security deposits 21,525 6,780
------------- ----------
357,625 12,980
------------ ----------
$ 943,059 $385,240
============ ==========
- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 260,134 $ 38,442
Deferred revenue (Note 2d) 28,100 30,030
Due to former shareholders (Note 7) 34,710 -
Current portion of long-term debt (Note 5a) - 22,351
Capitalized lease payable - current (Note 5b) 7,859 2,442
Income taxes payable (Note 2f and 9) - 93,551
------------ ----------
TOTAL CURRENT LIABILITIES 330,803 186,816
NON-CURRENT LIABILITIES:
Equipment loans payable (Note 5a) - 2,958
Capitalized lease payable (Note 5b) 29,541 4,191
Deferred rent liability (Note 10a) 23,115 26,430
Promissory notes payable (Note 6) 770,000 -
------------ ----------
822,656 33,579
------------ ----------
COMMITMENTS AND CONTINGENCIES (Notes 10, 11 and 12)
SHAREHOLDERS' EQUITY (DEFICIT) (Note 7):
Preferred stock, $.01 par value; 1,000,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 20,000,000 shares authorized, 986,700
and 1,157,000 shares issued for 1996 and 1995, respectively 9,867 11,570
Additional paid-in capital 158,558 54,430
Retained earnings (deficit) (378,825) 170,345
------------ ---------
(210,400) 236,345
Less: treasury stock, 685,750 shares at cost for 1995 - (71,500)
------------ ---------
(210,400) 164,845
------------ ---------
$ 943,059 $385,240
============ ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
1996 1995
--------------- ---------
<C> <C>
REVENUES (Notes 2d and 8):
Software sales $ 202,511 $ 817,271
Maintenance income 275,016 222,910
------------ ------------
477,527 1,040,181
------------ -----------
COSTS AND EXPENSES:
Programming costs and expenses 268,915 404,165
General and administrative expenses 657,062 365,760
Research and development (Note 2e) 158,099 140,275
------------ ------------
1,084,076 910,200
----------- ------------
INCOME (LOSS) FROM OPERATIONS (606,549) 129,981
OTHER INCOME (EXPENSES):
Interest and other income 4,845 1,367
Interest expense (17,619) (993)
Loss on abandonment of leasehold improvements (Note 10a) (5,378) -
-------------- -----------
(18,152) 374
------------- -----------
INCOME (LOSS) BEFORE PROVISION (CREDIT)
FOR INCOME TAXES (624,701) 130,355
Provision (credit) for income taxes (Notes 2f and 9) (75,531) 51,695
------------- ------------
NET INCOME (LOSS) $ (549,170) $ 78,660
=========== ============
EARNINGS (LOSS) PER COMMON SHARE (Note 2g) $(.29) $.04
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING (Note 2g) 1,894,933 1,894,933
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
STATEMENT OF SHAREHOLDERS' EQUITY
Additional Retained Total
Preferred Common Stock Paid-in Earnings Treasury Shareholders'
Stock Shares Amount Capital (Deficit) Stock Equity (Deficit)
----- ------ ------ ------- --------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (Note 7) - 1,157,000 $11,570 $ 54,430 $ 91,685 $(38,500) $119,185
Purchases of treasury stock, 107,250
shares at cost (Note 7) - - - - - (33,000) (33,000)
Net income - - - - 78,660 - 78,660
------- --------- ------- -------- --------- -------- --------
Balance at December 31, 1995 - 1,157,000 11,570 54,430 170,345 (71,500) 164,845
Cancellation of shares held
in treasury - (685,750) (6,858) (64,642) - 71,500 -
Issuances of common stock (Note 7) - 580,450 5,805 168,330 - - 174,135
Warrants issued pursuant to debt
offering (Note 6) - - - 34,500 - - 34,500
Purchase of outstanding options
(Note 7) - - - (15,210) - - (15,210)
Purchases and cancellation of
outstanding shares (Note 7 ) - (65,000) (650) (18,850) - - (19,500)
Net loss - - - - (549,170) - (549,170)
--------- --------- ------- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1996 - 986,700 $ 9,867 $158,558 $(378,825) $ - $(210,400)
========= ========= ======= ======== ========= ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 1 of 2
For the Year Ended
December 31,
1996 1995
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $582,053 $1,027,473
Cash paid to suppliers and employees (825,948) (977,193)
Interest paid (1,995) (993)
Interest and other income received 3,791 1,367
Income taxes paid (47,284) -
-------- ---------
Net cash (utilized) provided by
operating activities (289,383) 50,654
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to officer (70,000) -
Principal repayments of officer's loan 753 -
Purchase of fixed assets (95,117) (29,232)
Proceeds from sale of fixed assets 2,500 -
Payment of security deposits (14,745) (3,480)
-------- ---------
Net cash (utilized) by investing activities (176,609) (32,712)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt offering 770,000 -
Expenses associated with debt offering (100,100) -
Payments for common stock and options acquired (21,583) (29,167)
Principal payments of other long-term debt (3,726) (67,235)
Payments of capital lease obligations (2,828) (1,661)
Expenses associated with initial public offering (139,326) -
Proceeds from sale of shares 144,090 -
-------- ---------
Net cash provided (utilized) by financing
activities 646,527 (98,063)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 180,535 (80,121)
Cash and cash equivalents, at beginning of year 105,962 186,083
-------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $286,497 $105,962
======== =========
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 2 of 2
------------------------
For the Year Ended
December 31,
1996 1995
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
(UTILIZED) PROVIDED BY OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $(549,170) $ 78,660
Adjustments to reconcile net income (loss) to net cash (utilized) provided
by operating activities:
Allowance for doubtful accounts 12,000 13,000
Depreciation and amortization 27,291 12,370
Deferred tax expense (benefit) 6,200 (4,450)
Deferred rent liability (3,315) 26,430
Compensatory stock 30,045 -
Loss on disposal of fixed assets 7,617 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 106,456 (28,139)
(Increase) decrease in prepaid expenses (16,714) 501
(Increase) in tax refund receivable (36,004) -
Increase (decrease) in accounts payable and accrued expenses 221,692 (119,715)
(Increase) decrease in deferred revenue (1,930) 15,430
(Decrease) increase in income taxes payable (93,551) 56,567
-------- -------
NET CASH (UTILIZED) PROVIDED BY OPERATING ACTIVITIES $(289,383) $ 50,654
======== =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
(a)During 1996 and 1995, the Company incurred capital lease obligations of
$33,595 and $7,271, respectively in connection with the purchase of office
equipment.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - DESCRIPTION OF COMPANY:
Compu-DAWN, Inc., the Company, was incorporated under the name
of Coastal Computer Systems, Inc., in New York on March 31,
1983, and was reincorporated in Delaware under its present name
on October 18, 1996. The Company is engaged in the business of
designing, developing, licensing, installing and servicing
computer software products and systems predominantly for public
safety and law enforcement agencies. The Company's customers, to
date, are primarily located in New York State.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with
generally accepted accounting principles. Outlined below are
those policies which are considered particularly significant.
(a) Use of Estimates:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain
estimates and assumptions, where applicable, that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period. While actual results could
differ from those estimates, management does not expect such
variances, if any, to have a material effect on the financial
statements.
(b) Concentration of Credit Risk /Fair Value:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash
investments and accounts receivable.
The Company maintains, at times, deposits in federally insured
financial institutions in excess of federally insured limits.
Management monitors the soundness of these financial
institutions and feels the Company's risk is negligible.
Management believes that concentrations of credit risk with
respect to accounts receivable are limited due to the Company's
methods of progress billings and collections.
As of December 31, 1996 and 1995, the fair value of cash and
cash equivalents, receivables, obligations under accounts
payable and debt instruments approximate the carrying value.
F-8
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(c) Fixed Assets:
Fixed assets are recorded at cost. Depreciation of fixed assets
is provided on a straight-line basis as follows:
Computer equipment 3 years
Furniture and fixtures 5 years
Motor vehicles 5 years
Maintenance and repairs are expensed as incurred. Leasehold
improvements are amortized over the useful life of the asset or
the lease, whichever is shorter. Capital leases are amortized
over the term of the respective leases or the useful lives of
the related assets, whichever is shorter.
Depreciation and amortization expense for the years ended
December 31, 1996 and 1995 aggregated $25,046 and $12,370,
respectively.
(d) Revenue Recognition:
The Company generates revenues from the granting of
nonexclusive, non-transferable and non- assignable licenses to
use software it has developed, through fixed price contracts.
Revenues from such fixed price contracts are recognized using
the percentage of completion method of accounting. The Company
retains title to the software and warranties that it will
provide technical support and repair any defects in the software
at no charge. The warranty period for each contract is
negotiated individually, for periods ranging from 90 days to
three years. To date, repair costs have been minimal and
therefore the Company has not established a reserve for such
warranty costs.
In addition, the Company provides post-contract customer support
to licensees of its software. Revenues from such services are
recognized ratably over the period of performance. Fees billed
and/or received prior to performance of services are reflected
as deferred revenue.
(e) Software Development Costs:
The Company reflects costs incurred in establishing the
technological feasibility of a computer software product to be
leased or sold, as research and development costs, and expenses
such costs in the period incurred. Research and development
costs for the years ended December 31, 1996 and 1995 aggregated
$158,099 and $140,275, respectively.
After technological feasibility has been established, all costs
incurred on the software product are to be capitalized and
amortized on a product by product basis. Capitalization of
computer software costs is discontinued when the product is
available to be sold or leased.
To date, the Company has only sold or leased software which has
been developed for specific customers. As such, all costs
incurred have been expensed as research and development costs.
Costs associated with post-contract customer support
(maintenance) are charged to expense when related revenue is
recognized or when those costs are incurred, whichever occurs
first.
F-9
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(f) Income Taxes:
The Company has adopted Financial Accounting Standards Board
Statement No. 109 "Accounting for Income Taxes" ("SFAS 109").
Under SFAS 109, deferred tax assets and liabilities are
determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured by
applying enacted tax rates and laws to taxable years in which
such differences are expected to reverse.
(g) Earnings Per Share:
Earnings per share has been computed on the basis of the
weighted average number of common shares and common equivalent
shares outstanding during each period presented. In accordance
with the rules of the Securities and Exchange Commission, all
shares issued and "cheap" options and warrants are being treated
as outstanding for all periods presented.
(h) Statements of Cash Flows:
For purposes of the statements of cash flows, the Company
considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
NOTE 3 - LOAN RECEIVABLE - OFFICER:
In October 1996, the Company made a loan of $70,000 to an
officer for the purpose of such officer's participation in a
debt offering (see Note 6). Such loan is evidenced by a
promissory note requiring 120 equal monthly payments, at an
annual interest rate of 8% and is secured by 28,000 shares of
common stock owned by the individual. This note which may be
prepaid at any time is also due and payable upon the closing of
a public offering of the Company's common stock should such
occur within three years of the date of the note and yield gross
proceeds of at least $4,500,000. See Note 11.
NOTE 4 - FIXED ASSETS:
Fixed assets consist of the following:
December 31,
1996 1995
Computer equipment $139,916 $100,254
Furniture and fixtures 16,499 6,389
Motor vehicles 12,597 24,445
Leasehold improvements 45,345 10,756
Assets under capitalized leases 41,484 7,889
------- --------
255,841 149,733
Less: accumulated depreciation and
amortization 117,027 104,468
------- --------
$138,814 $ 45,265
======= ========
F-10
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 5 - LONG-TERM DEBT:
(a) Notes Payable:
Term notes payable consisted of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Installment notes payable re: purchases of treasury
stock, non-interest bearing $ - $21,583
Equipment notes payable in monthly installments of
$258, with interest at an annual rate of 6% - 3,726
------- -------
- 25,309
Less: current maturities - 22,351
------- -------
$ - $ 2,958
======= =======
</TABLE>
(b) Capitalized Lease Obligations:
The Company has entered into various capital leases for
furniture, fixtures and equipment which expire in years through
2001. The assets and liability under these capital leases are
recorded at the lower of the present value of the minimum lease
payments or the fair market value of the assets. The assets are
depreciated over their estimated useful lives. Depreciation of
assets under capital leases for the years ended December 31,
1996 and 1995 aggregated $5,989 and $1,315, respectively.
Minimum future lease payments under capital leases as of
December 31, 1996 are as follows:
1997 $11,711
1998 10,049
1999 8,388
2000 8,388
2001 7,689
------
Total minimum lease payments 46,225
Less: amount representing interest 8,825
------
$37,400
======
F-11
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 6 - DEBT OFFERING:
In October 1996, the Company successfully completed the sale of
77 units in a private offering, each unit consisting of a
$10,000 principal amount 12% promissory note ("bridge note") and
a redeemable stock purchase warrant to acquire 5,600 shares of
the Company's common stock for aggregate gross proceeds of
$770,000. The warrants are exercisable at a price of $.50 per
share only upon the successful completion of an Initial Public
Offering ("IPO"), (see Note 11), of the Company's common stock.
Each of the bridge notes is due and payable upon the closing of
the IPO. In the event such closing occurs on or before September
15, 1997, no interest will be payable on these notes. In the
event that the Company closes an IPO after September 15, 1997
but before September 15, 1999, the notes shall bear interest at
a rate of 8% per annum and be payable upon the closing of the
IPO. In the event the Company does not close an IPO by September
15, 1999, interest shall accrue at a rate of 12% per annum
through such date and the notes shall be payable in 120 equal
monthly installments with interest at a rate of 8% per annum
beginning September 16, 1999.
In accordance with APB No. 14, the proceeds of debt issued with
stock purchase warrants should be allocated based on the fair
values of the debt without the warrants and of the warrants
themselves when issued. Utilizing the provisions of SFAS No.
123, the fair value of the above-mentioned warrants has been
calculated to be an aggregate of $34,500. Accordingly, this
amount is reflected as additional paid-in capital and as
financing costs.
Financing costs, which represent costs incurred in connection
with this private offering, are being charged to operations as
additional interest expense over the term of the bridge notes.
In September 1996, prior to the closing of this private
offering, the Company entered into a consulting agreement with
one of its founding shareholders which provided for a one-time
payment at closing of $25,290.
NOTE 7 - CAPITAL STOCK AND EQUIVALENTS:
In October 1996, simultaneously with its reincorporation in the
State of Delaware, (see Note 1) the Company increased its
authorized capital to 20,000,000 shares of common stock, $.01
par value, and 1,000,000 shares of preferred stock, $.01 par
value. The Company also effected a stock split of its issued and
outstanding common stock on a 325 for 1 basis, resulting in
1,157,000 shares. This stock split has been reflected
retroactively in the accompanying financial statements and
accordingly, all references to the number of common shares
issued and outstanding have been restated. No preferred shares
are issued and outstanding.
During 1994 the Company repurchased 578,500 shares of its common
stock from certain shareholders at an aggregate cost of $38,500.
These shares are reflected as shares held in treasury for 1995
and as being canceled in 1996.
F-12
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 7 - CAPITAL STOCK AND EQUIVALENTS (Continued):
During 1995 the Company repurchased an additional 107,250 shares
of its common stock from certain shareholders at an aggregate
cost of $33,000. These shares are also reflected as treasury
stock for 1995 and as being canceled in 1996.
In August 1996, the Company sold 480,300 shares of its common
stock at a price of $.30 per share, for cash proceeds of
$144,090 and issued 100,150 shares of its common stock in lieu
of payment of legal and consulting fees of $30,045, for an
aggregate amount of $174,135.
The Company had also granted, to certain former shareholders,
options to purchase an aggregate of 50,700 shares of common
stock (post-split) at an aggregate exercise price of $156.
In October 1996, following the successful completion of a debt
offering (see Note 6), the Company entered into agreements with
the former shareholders, canceling these unexercised options in
consideration of payment of $.30 for each underlying share and
the issuance of warrants to purchase an aggregate of 31,200
shares of stock at an exercise price of $5.00 per share. The
payment for these options aggregating $15,210 has been charged
against additional paid-in capital.
The Company also purchased, in October 1996, 65,000 shares held
by these former shareholders at a per share price of $.30. These
shares were canceled upon the repurchase, and accordingly,
common stock and additional paid-in capital have been reduced by
$650 and $18,850, respectively.
In addition, in October 1996, the Company established a Stock
Option Plan under which options (including non-statutory
options) to purchase up to 2,000,000 shares may be granted to
eligible persons. The Company has since granted options to
purchase an aggregate of 679,200 shares of common stock
(including options to purchase an aggregate of 181,250 shares
which were granted subsequent to the balance sheet date) at
prices ranging from $.30 to $4.00 per share, aggregating
$783,235. To date, none of these options have been exercised.
(See also Note 2g regarding earnings per share).
NOTE 8 - ECONOMIC DEPENDENCY:
To date, the Company's revenues have been materially dependent
on a limited number of customers. The nature of the Company's
business (see Note 1) is such that during any individual
accounting period it will license its software products to a
limited number of significant customers. In addition, revenues
from the Company's products are primarily from the public safety
and law enforcement markets.
Also, the Company currently relies on a limited number of (two
or three) software licensors of its main computer operating
system. The Company cannot assure that if any of these licenses
are terminated, it will be able to replace those licenses on a
timely basis.
F-13
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 9 - INCOME TAXES:
The income tax expense (benefit) is comprised of the following:
For the Year Ended
December 31,
1996 1995
CURRENT:
Federal $(50,709) $39,050
State (18,622) 17,095
DEFERRED:
Federal (4,165) (3,000)
State (2,035) (1,450)
---------- --------
$(75,531) $51,695
The component of the Company's deferred tax asset, pursuant to
SFAS 109, is as follows:
December 31, December 31,
1996 1995
Allowance for doubtful accounts $ - $6,200
======= ======
The Company has net operating losses carryforwards of
approximately $400,000, which may be applied against future
taxable income, and which expire in various years beginning
after 2011. Since there is no assurance that the Company will
generate future taxable income to utilize the deferred tax asset
resulting from its net operating loss carryforwards, the Company
has not recognized this asset as of December 31, 1996.
The following is a reconciliation of the maximum statutory
federal tax rate to the Company's effective tax rate:
For the Year Ended
December 31,
1996 1995
---------- ---------
Federal statutory rate (34.0%) 34.0%
State income taxes (7.0) 7.9
Other 28.9 (2.0)
(12.1%) 39.7%
====== ====
F-14
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 10 - COMMITMENTS:
(a) In October 1996, the Company entered into a lease, for its current
executive offices, which provides for base annual rental of $85,000. This
lease, which is for an initial term of five years, has scheduled annual
increases, and can be renewed for an additional five year period.
The total amount of the base rent payments is being charged to expenses
using the straight-line method over the term of the lease. The Company
has recorded a deferred credit to refect the excess of rent expense over
cash payments since the inception of this lease. Previously, the
Company was occupying space pursuant to a lease which expires in March
1997. The Company has elected to write-off the remaining balance of
unamortized leasehold improvements on this old space of $5,378 during the
current year.
The Company also sublets to an unaffiliated third party, space
which was previously utilized as its executive offices under a
lease which expires in February 1998. As of December 31, 1996,
the Company had a remaining accrued liability of $12,198 which
represents the net cost to the Company in excess of rental
income.
Total net rent expense for operating leases, consisted of the
following:
For the Year Ended
December 31,
1996 1995
Minimum rentals $48,677 $39,544
Sublease rentals (18,000) (1,500)
------ ------
Total net rent expense $30,677 $38,044
====== ======
At December 31, 1996, future minimum rentals (based upon the new
space) and sublease income are as follows:
Total Sublease
Rent Income Net
1997 $ 95,428 $18,000 $77,428
1998 87,616 3,000 84,616
1999 87,975 - 87,975
2000 93,075 - 93,075
2001 72,675 - 72,675
------ ------ -------
Total $436,769 $21,000 $415,769
======= ====== =======
(b) The Company also leases certain types of equipment under
operating leases which expire at various dates through 1999.
Lease payments, which are charged to operations, aggregate
approximately $1,100 per month.
F-15
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 10 - COMMITMENTS (Continued):
(c) The Company is also committed to provide post-contract customer
support, to two of its customers through a third-party provider.
The agreement with the third party provides for monthly payments
of $483 and expires in July 1997.
(d) Effective October 1, 1996, the Company entered into an
employment agreement with the Chairman of its Board of
Directors, whereby he will also serve as chief executive officer
of the Company, which becomes effective upon the closing date of
the contemplated IPO (see Note 11), to continue until September
30, 1999. This agreement provides for annual compensation of
$250,000 and a signing bonus based on a fixed formula.
Effective October 1, 1996, the Company entered into a three-year
employment agreement with its President and Chief Operating
Officer. This agreement provides for annual compensation of
$125,000 and a signing bonus of $15,000.
The agreements with both of these officers provide for
continuing automatic one year extensions, increases as
determined by the Board of Directors, annual bonuses based on
sales and pretax income and include provisions for termination
and covenants not to compete. In addition, the agreements
provide for common stock option grants based upon levels of
Company earnings.
NOTE 11 - PROPOSED INITIAL PUBLIC OFFERING:
The Company is preparing to undertake an initial public offering
("IPO") of 1,000,000 shares of its common stock at a price of
$5.00 per share, or an aggregate of approximately $3,875,000 of
net proceeds. The net proceeds from this offering will be used
to repay the promissory notes from the private offering (see
Note 6), build a staff of regional sales managers to cover the
United States and for marketing, product development, etc.
The proposed offering also covers the resale of an aggregate of
431,200 shares of common stock underlying the warrants issued in
connection with the debt offering and an aggregate of 250,250
shares currently held by certain shareholders. The Company will
not receive any of the proceeds from the resale of these shares.
NOTE 12 - SUBSEQUENT EVENTS:
(a) In January 1997, the Company entered into a secured credit
agreement with its chairman of the board which provides for up
to $200,000 of borrowings. These borrowings are secured by all
the assets of the Company, bear interest at a rate of 10% per
annum and mature upon the closing of an IPO (see Note 11). If an
IPO does not close prior to June 1997, the borrowings are
payable in eight equal quarterly installments, beginning in June
1997. To date, the Company has borrowed $200,000.
F-16
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 12 - SUBSEQUENT EVENTS (Continued):
(b) In January 1997, the Company entered into a three year
employment agreement with an employee to serve as the Company's
chief technology officer. Such agreement provides for annual
base salaries of $200,000, $225,000 and $250,000 in the first,
second and third years, respectively. Other terms of this
employment agreement conform in structure to the material
provisions of the employment agreements described in Note 10(d)
above.
(c) In March 1997, the chairman of the board of the Company
purchased from the Company the $70,000 promissory note (see Note
3) in consideration for the payment in cash of the outstanding
amount of such note. The chairman of the board concurrently
received an assignment of the Company's collateral security for
the note.
F-17
<PAGE>
<TABLE>
<S> <C>
No dealer, salesman or other person has been
authorized to give any information or to make
any representations not contained in this
Prospectus and, if given or made, such
information or representations must not be relied 1,000,000 Shares of Common Stock
upon as having been authorized by the Company
or the Underwriter. Neither the delivery of this
Prospectus nor any sale made hereunder shall
under any circumstances create any implication
that there has been no change in the affairs
of the Company since the date hereof. This Prospectus
does not constitute an offer of any securities other
than the securities to which it relates or an offer
to any person in any jurisdiction in which such an COMPU-DAWN, INC.
offer would be unlawful.
-----------
TABLE OF CONTENTS
Page
Prospectus Summary...................................
Risk Factors.........................................
Use of Proceeds......................................
Dilution.............................................
Capitalization.......................................
Dividend Policy......................................
Bridge Financing.....................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................
Business.............................................
Management........................................... PROSPECTUS
Principal and Selling Stockholders...................
Certain Relationships and Related Transactions.......
Description of Securities............................
Underwriting.........................................
Legal Matters........................................
Experts..............................................
Additional Information...............................
Financial Statements.................................
------------- E. C. Capital, Ltd.
Until , 1997 (25 days after the date of this
Prospectus), all dealers effecting transactions in
the registered securities, whether or not participating
in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation
of dealers to deliver a Prospectus when acting
as underwriters and with respect to their
unsold allotments or subscriptions.
, 1997
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Article X of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by Section 102 of the Delaware General Corporation Law, provided that
this provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) arising under Section 174 of the
Delaware General Corporation Law (with respect to unlawful dividend payments and
unlawful stock purchases or redemptions), or (iv) for any transaction from which
the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of Incorporation
and its by-laws provisions to indemnify its directors, officers, employees and
agents and to purchase insurance with respect to liability arising out of the
performance of their duties as directors, officers, employees and agents as
permitted by Section 145 of the Delaware General Corporation law. The Delaware
General Corporation law provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors, officers, employees and agents may be entitled under the Company's
by-laws, any agreement, vote of stockholders or otherwise.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers, directors, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to indemnify
the Company, its directors, and each person who controls it within the meaning
of Section 15 of the Act with respect to any statement in or omission from the
registration statement or the Prospectus or any amendment or supplement thereto
if such statement or omission was made in reliance upon information furnished in
writing to the Company by the Underwriter specifically for or in connection with
the preparation of the registration statement, the Prospectus, or any such
amendment or supplement thereto.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses to be incurred by the Company in connection with the
issuance and distribution of the securities being registered, other than
underwriting discounts and commissions, are estimated as follows:
SEC Registration Fee $ 3,112.71
NASD Filing Fee 2,000.00
Blue Sky Fees and Expenses 25,000.00
Registrant's Counsel Fees and Expenses 125,000.00
Accountant's Fees and Expenses 75,000.00
Underwriter's Non-Accountable Expense Allowance 150,000.00
Underwriter's Consulting Fee 108,000.00
Printing and Engraving Expenses 50,000.00
NASDAQ Listing Fees 10,000.00
Blue Sky Counsel Fees 25,000.00
Transfer Agent and Registrar's Fees and Expenses 15,000.00
Miscellaneous Expenses 36,887.29
----------
Estimated Total $625,000.00
Item 26. Recent Sales of Unregistered Securities.
The Company sold the following Common Shares during the past three
years. The number of Common Shares referred to herein gives effect to a 325 for
1 stock split effectuated on October 18, 1996 in connection with the Company's
reincorporation in the State of Delaware.
In October 1996, the Company borrowed $770,000 from the following
bridge lenders (the "Bridge Lenders") in a Bridge Financing transaction. In
consideration for making the loans, the Company issued Bridge Warrants to the
Bridge Lenders for the purchase of an aggregate of 431,200 Common Shares at a
price of $0.50 per share.
II-2
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Number of
Common Shares
Name Underlying Warrants
Dong W. Lew 39,200
Mark Honigsfeld 33,600
Robert H. Solomon 25,200
Murray Gross 28,000
Harvey Bibicoff 70,000
Apollo Equities 56,000
James Favia 42,000
Sydney Gluck 22,400
Steven Wallitt 16,800
John Eckhoff 14,000
Kenneth Moschetto 14,000
Lawrence Levine 11,200
Maretza Jimenez
Campos 11,200
Lori Siegal 11,200
Horizon Acquisitions 8,400
Stuart Copperman 5,600
Teddy Selinger 5,600
John P. Hefferon 5,600
Scott Cohen 2,800
Peter Guardino 2,800
James Portnof 2,800
Windsor L. P. 2,800
-------
Total 431,200
In August 1996, the Company sold an aggregate of 480,300 Common Shares
at a price of $.30 per share to the following persons for the following
consideration:
Number of Aggregate
Name Common Shares Consideration
- ---- ------------- -------------
Murray Gross 50,000 $15,000.00
Robert LoRusso 100,100 30,030.00
Mark Honigsfeld
Living Trust 330,200 99,060.00
------- ----------
Total 480,300 $129,090.00
======= ==========
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Additionally, in August 1996, the Company issued 25,075 Common Shares
to Mr. Gross in payment of consulting fees of $7,522.50 in connection with the
Company's marketing activities and 75,075 Common Shares to Robert H. Solomon in
payment of legal and consulting fees of $22,522.50.
All the foregoing transactions were private transactions not involving
a public offering and were exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof. The Bridge Financing Securities
were sold only to accredited investors. The Company determined that the
stockholders to whom the Company issued Common Shares in the August 1996
transactions discussed above were sophisticated investors. Except as otherwise
indicated below, sales of the securities were without the use of an underwriter,
and the certificates evidencing the securities relating to the foregoing
transactions bear restrictive legends permitting the transfer thereof only upon
registration of such securities or an exemption under the Securities Act.
The Underwriter of this Offering acted as placement agent for the
Company in connection with the Bridge Financing transaction on a "best efforts,
all or none" basis. The Underwriter received a placement fee of 10% of the gross
proceeds of the Bridge Financing transaction, or $77,000, and a non-accountable
expense allowance of 3% of the gross proceeds of the Bridge Financing
transaction or $23,100. The Company also paid the fees and disbursements of the
Underwriter's counsel in connection with representing the Underwriter in its
capacity of placement agent in the Bridge Financing transaction.
Item 27. Exhibits.
Exhibit
Number Title of Exhibit
1.1 Form of Underwriting Agreement by and between the Company and the
Underwriter.*
1.2 Form of Financial Consulting Agreement between the Underwriter and the
Company.*
2.1 Agreement of Merger between the Company and Coastal Computer Systems,
Inc., a New York corporation.*
3.1 Articles of Incorporation of the Company.*
3.2 By-Laws of the Company.*
4.1 Specimen Common Share Certificate.*
4.2 Form of Underwriter's Common Share Purchase Warrant.*
5.1 Opinion of Certilman Balin Adler & Hyman, LLP, counsel for the
Company.**
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10.1 Restated and Amended Employment Agreement dated as of October 1, 1996
between the Company and Dong W. Lew.*
10.2 Restated and Amended Employment Agreement dated as of October 1, 1996
between the Company and Mark Honigsfeld.*
10.3 $70,000 Promissory Note dated October 30, 1996 from Dong W. Lew to the
Company.*
10.4 Form of Warrant between the Company and each of the Bridge Lenders.*
10.5 1996 Stock Option Plan.*
10.6 Lease dated October 1, 1996 between Summit Equities Corp. and the
Company.*
10.7 Pledge and Hypothecation Agreement dated October 30, 1996 between the
Company and Dong W. Lew.*
10.8 Credit Agreement dated January 20, 1997 between the Company and Mark
Honigsfeld.*
10.9 $100,000 Promissory Note dated January 20, 1997 from the Company to Mark
Honigsfeld.*
10.10 $50,000 Promissory Note dated February 19, 1997 between the Company and
Mark Honigsfeld.*
10.11 $50,000 Promissory Note dated March 5, 1997 between the Company and Mark
Honigsfeld.*
10.12 Form of Indemnification Agreement between the Company and the Company's
directors and officers.*
10.13 Consulting Agreement dated September 27, 1996 between the Company and
Alan Daniels and Geraldine Lum Daniels.*
10.14 Employment Agreement dated January 6, 1997 between the Company and Louis
Libin.*
23.1 Consent of Lazar, Levine & Company LLP, independent auditors.*
23.2 Consent of Certilman Balin Adler & Hyman, LLP (included in its opinion
filed as Exhibit 5.1 hereto).
27.1 Financial Data Schedule.*
*Previously filed.
**To be filed by amendment.
II-5
<PAGE>
Item 28. Undertakings.
(a) Rule 415 Offering.
The undersigned Company will:
(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information
set forth in the registration statement; and
(iii) include any additional or changed material information on the
plan of distribution.
(2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Equity Offerings of Nonreporting Small Business Issuers.
The undersigned Company will provide to the Underwriter, at the closing
specified in the underwriting agreement, Common Share certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
(c) Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions referred to in Item 24 of this Registration
Statement, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling persons of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will,
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<PAGE>
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(d) Rule 430A.
The undersigned Company will:
(1) for determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company under Rule 424(b)(1) or (4) or
497(h) under the Securities Act, as part of this Registration Statement
as of the time the Commission declared it effective;
(2) for determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration
Statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
(e) Rule 424(c) Supplement; Post Effective Amendment.
The undersigned Company will, in the event the Underwriter in this
Offering enters into transactions with the Selling Stockholders or
waives the lock-up restrictions applicable to such Selling
Stockholders' Common Shares:
(1) involving from 5% up to 10% of the Selling Stockholders' Common Shares,
file "sticker" supplements to the Prospectus pursuant to Rule 424(c)
under the Securities Act; or
(2) involving over 10% of the Selling Stockholders' Common Shares, file a
post-effective amendment to the Registration Statement.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Company certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
County of Nassau, State of New York, on March 18, 1997.
COMPU-DAWN, INC.
By:/s/ Dong W. Lew
Dong W. Lew, President
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
* Chairman of the Board, March 18, 1997
Mark Honigsfeld Chief Executive Officer,
Secretary and Director
(Principal Financial Officer
and Principal Accounting Officer)
/s/ Dong W. Lew President, Chief Operating March 18, 1997
Dong W. Lew Officer, Treasurer and
Director
* Director March 18, 1997
Louis Libin
* Director March 18, 1997
William D. Rizzardi
/s/ Harold Lazarus Director March 18, 1997
Harold Lazarus
By: /s/ Dong. W. Lew
Dong W. Lew
Attorney-in Fact
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POWER OF ATTORNEY
Know all men by these presents, that the person whose signature
appears below constitutes and appoints Mark Honigsfeld and Dong W. Lew, and each
of them, 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, and each of his substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Date
/s/ Harold Lazarus March 18, 1997
Harold Lazarus
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