As filed with the Securities and Exchange Commission on May 19, 1997
Registration No. 333-18667
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-------------------------
COMPU-DAWN, INC.
(Name of Small Business Issuer in its Charter)
Delaware 7373 11-3344575
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code No.)
organization)
77 Spruce Street
Cedarhurst, New York 11516
Telephone : (516) 374-6700
Telecopier: (516) 374-9553
(Address and telephone number of principal executive
offices) (Address of principal place of business or intended
principal place of business)
-------------------------
Mark Honigsfeld
Chairman of the Board and
Chief Executive Officer
COMPU-DAWN, INC.
77 Spruce Street
Cedarhurst, New York 11516
Telephone: (516) 374-6700
Telecopier: (516) 374-9553
(Name, address and telephone number of agent for service)
-------------------------
Copies to:
Fred Skolnik, Esq. Chase A. Caro, Esq.
Gavin C. Grusd, Esq. Caro & Graifman, P.C.
Certilman Balin Adler & Hyman, LLP 60 East 42nd Street
90 Merrick Avenue New York, New York 10165
East Meadow, NY 11554 Telephone: (212) 682-6000
Telephone: (516) 296-7000 Telecopier: (212) 867-4762
Telecopier: (516) 296-7111
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of the registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o ______________
[Cover continued on next page.]
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o ____
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. o
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Amount to be Offering Price Aggregate Offering Amount of
Titles of Each Class of Securities to be Registered Registered (1) per Share (2) Price (2) Registration Fee
- ------------------------------------------------ ------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Common Shares (3) 1,380,000 $5.00 $6,900,000 $2,090.91
Underwriter's Common Share Purchase 120,000 --- $ 120 ---
Warrants (4)
Common Shares (5) 120,000 $8.25 $ 990,000 $300.00
Common Shares (6) 389,200 $5.00 $1,946,000 $589.70
Common Shares (7) 250,250 $5.00 $1,251,250 $379.17
-------------
Total Registration Fee: $3,359.78 (8)
================================================ ======================= ===================== =================== ================
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended
("Securities Act"), this Registration Statement covers such additional
indeterminate number of Common Shares underlying warrants (the "Bridge
Warrants") issued to certain bridge lenders (the "Bridge Lenders") and
Underwriter's Common Share Purchase Warrants (the "Underwriter's
Warrants") as may be issued by reason of adjustments in the number of
Common Shares pursuant to anti-dilution provisions contained in the
Bridge Warrants and Underwriter's Warrants, respectively. Because such
additional Common Shares will, if issued, be issued for no additional
consideration, no registration fee is required.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes 180,000 Common Shares subject to the Underwriter's over-
allotment option.
(4) To be issued to the Underwriter.
(5) Issuable upon exercise of the Underwriter's Warrants.
(6) Issuable upon exercise of the Bridge Warrants and registered on behalf
of the Bridge
Lenders.
(7) Registered on behalf of Selling Stockholders.
(8) $3,112.71 of which was previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 19, 1997
PROSPECTUS
Compu-DAWN, Inc.
1,200,000 Shares of Common Stock, par value $.01 per share
Offering Price Per Share - $5.00
---------------
Compu-DAWN, Inc., a Delaware corporation (the "Company"), hereby offers
1,200,000 shares of Common Stock, par value $.01 per share (the "Common
Shares"). See "Risk Factors" and "Description of Securities". The "Risk Factors"
section begins on page 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", "Risk Factors
- - Impact of Proposed Nasdaq SmallCap Market Rules", "Description of Securities"
and "Underwriting".
The registration statement of which this Prospectus forms a part also
covers the resale of an aggregate of 389,200 Common Shares (the "Warrant
Shares") underlying warrants (the "Bridge Warrants") issued to certain bridge
lenders (the "Bridge Lenders") (see "Bridge Financing") and an aggregate of
250,250 Common Shares held by certain stockholders (collectively with the Bridge
Lenders, the "Selling Stockholders"). The Company will not receive any of the
proceeds from the resale of the Common Shares by the Selling Stockholders. The
Common Shares held by the Selling Stockholders may be resold at any time
following the date of this Prospectus, subject to an agreement between the
Bridge Lenders and the Underwriter restricting the transfer of the Warrant
Shares for a period of two years. The Underwriter has agreed with the Company
not to waive the lock-up restriction. The resale of the Common Shares by the
Selling Stockholders is subject to Prospectus delivery and other requirements of
the Securities Act of 1933, as amended (the "Act"). Sales of such Common Shares
or the potential of such sales at any time may have an adverse effect on the
market price of the Common Shares offered hereby. See "Principal and Selling
Stockholders" and "Risk Factors - Shares Eligible for Future Sale May Adversely
Affect the Market".
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[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)...... $6,000,000 $600,000 $5,400,000
(1) Does not reflect additional compensation to be received by the
Underwriter in the form of (i) a non-accountable expense allowance of
$180,000 ($207,000 if the Overallotment Option (as hereinafter defined)
is exercised in full), $50,000 of which has already been paid, (ii) a
three year financial advisory and investment banking agreement
providing for aggregate fees of $108,000 payable in advance at the
closing of this Offering, and (iii) warrants (to be purchased by the
Underwriter for one mil ($.001) per warrant) to purchase 120,000 Common
Shares (10% of the total number of Common Shares sold pursuant hereto)
(the "Underwriter's Warrants"), exercisable for a period of four years,
commencing one year from the date of this Prospectus. The Company and
the Underwriter have agreed to indemnify each other against certain
liabilities, including liabilities under the Act. The Company has been
informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is
therefore unenforceable. See "Underwriting".
(2) Before deducting expenses of the Offering payable by the Company
estimated at $700,000, including the Underwriter's non-accountable
expense allowance and financial advisory fee referred to in footnote
(1) (not assuming the exercise of the Overallotment Option),
registration fees, transfer agent fees, NASD fees, Blue Sky filing fees
and expenses, legal fees and expenses, and accounting fees and
expenses. See "Use of Proceeds" and "Underwriting".
(3) Does not include 180,000 additional Common Shares to cover
overallotments which the Underwriter has an option to purchase for 45
days from the date of this Prospectus at the initial public offering
price, less the Underwriter's discount (the "Overallotment Option"). If
the Overallotment Option is exercised in full, the total Price to
Public will be $6,900,000, Underwriting Discounts and Commissions will
be $690,000, and Proceeds to Company will be $6,210,000. See
"Underwriting."
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<PAGE>
The Common Shares are offered by the Underwriter on a "firm commitment"
basis, when, as and if delivered to and accepted by the Underwriter, and subject
to prior sale, allotment and withdrawal, modification of the offer with notice,
receipt and acceptance by the Underwriter named herein and subject to its right
to reject orders in whole or in part and to certain other conditions. It is
expected that the delivery of the certificates representing the Common Shares
and payment therefor will be made at the offices of the Underwriter on or about
May__, 1997.
E. C. CAPITAL, LTD.
The date of this Prospectus is May__, 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".
---------------------
INVESTOR SUITABILITY REQUIREMENTS FOR CALIFORNIA OFFEREES
California offerees must meet the following suitability requirements in
order to invest in the Common Shares being offered hereby: the offeree (a) has a
minimum net worth of $250,000 and had during the last tax year, or estimates
that the offeree will have during the current tax year, gross income of $65,000,
or (b) has a minimum net worth of $500,000. Net worth shall be determined
exclusive of home, home furnishings and automobiles.
--------------------
INVESTOR SUITABILITY REQUIREMENTS FOR VIRGINIA OFFEREES
Virginia offerees must meet the following investor suitability
requirements in order to invest in the Common Shares being offered hereby: the
offeree must have (a) a net worth of
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<PAGE>
at least $225,000, or (b) a net worth of at least $60,000 and an annual income
of at least $60,000. Net worth in all cases is exclusive of home, furnishings
and automobiles, in addition, an offeree may not invest more than 10% of the
offeree's readily marketable assets in this Offering.
--------------------
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<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information (including financial
statements and notes thereto) contained in this Prospectus and is qualified in
its entirety by the more detailed information appearing elsewhere herein. In
addition, unless otherwise indicated to the contrary, the information appearing
herein does not give effect to the issuance of (a) 180,000 Common Shares upon
exercise of the Overallotment Option; (b) 120,000 Common Shares upon exercise of
the Underwriter's Warrants; (c) 389,200 Common Shares upon the exercise of the
Bridge Warrants; or (d) 477,400 Common Shares upon the exercise of other
outstanding options and warrants. See "Bridge Financing". However, all
references to Common Shares and prices per share in this Prospectus give
retroactive effect to a 325 for 1 stock split effectuated on October 18, 1996 as
part of the Company's reincorporation in the State of Delaware. See
"Underwriting". Each prospective investor is urged to read this Prospectus in
its entirety.
The Company
Compu-DAWN, Inc. (the "Company") is primarily engaged in the business
of designing, developing, licensing, installing and servicing computer software
products and systems for law enforcement and public safety agencies. The
software systems include computer-aided dispatching, computer interfacing with
state and national crime information databases, advanced mobile on-line radio
computing, automatic vehicle location (employing dynamic map displays), records
management and photo-image database systems. Certain of these applications
utilize telecommunications and space satellite technology, and other
infrastructure, provided by third parties. The Company has developed, licensed
and installed its systems in more than 55 agencies primarily located in the
State of New York.
The Company was incorporated under the name Coastal Computer Systems,
Inc. in New York on March 31, 1983 and was reincorporated in Delaware under its
present name on October 18, 1996.
The Company's executive offices are located at 77 Spruce Street,
Cedarhurst, New York 11516 and its telephone number is (516) 374-6700.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating the Company and its business.
4
<PAGE>
The Offering
Common Shares Being
Offered ............... 1,200,000 shares
Common Shares
Outstanding
Prior to the
Offering (1)........... 1,282,700 shares
Common Shares to be
Outstanding After
the Offering (2)....... 2,482,700 shares
Use of Proceeds........ The net proceeds to the Company from the sale of the
1,200,000 Common Shares offered hereby are estimated to
be $4,700,000. The net proceeds are expected to be
applied in the following approximate percentages for
the following purposes: (i) product enhancement and
development (26.6%); (ii) repayment of indebtedness
(16.4%); (iii) marketing and advertising (13.8%); (iv)
hiring and training of additional personnel (3.2%); (v)
purchase of equipment (3.2%); and (vi) working capital
(36.8%). See "Use of Proceeds".
Risk Factors.......... An investment in the securities offered hereby involves
a high degree of risk and immediate substantial
dilution of the book value of the Common Shares, and
should be considered only by persons who can afford the
loss of their entire investment. See "Risk Factors" and
"Dilution".
Proposed Nasdaq
SmallCap Market
Symbol(3)........... "CODI"
- -----------------
(1) Gives effect to the issuance of 63,000 Common Shares upon the closing of
the Offering pursuant to the conversion, at a price of $5.00 per share, of
$200,000 in indebtedness and $100,000 in accrued and unpaid compensation
owed to Mark Honigsfeld, Chairman of the Board and Chief Executive Officer
of the Company, and $15,000 in accrued and unpaid compensation owed to Dong
W. Lew, President of the Company. See "Use of Proceeds", "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Certain Relationships and Related
Transactions".
(2) Does not give effect to the issuance of (i) 180,000 Common Shares upon
exercise of the Overallotment Option; (ii) 120,000 Common Shares upon
exercise of the Underwriter's Warrants; (iii) 389,200 Common Shares upon
the exercise of the Bridge Warrants; (iv) 156,950 Common Shares upon the
exercise of outstanding options which are currently exercisable (the
"Exercisable Options"); (v) 31,200 Common Shares upon the exercise of other
outstanding warrants (the "Other Warrants"); or (vi) 289,250 Common Shares
upon
5
<PAGE>
the exercise of other outstanding options (collectively with the
Exercisable Options and the Other Warrants, the "Other Derivative
Securities"). See "Bridge Financing", "Management Stock Plans", "Certain
Relationships and Related Transactions" and "Underwriting".
(3) Although the Company will apply for inclusion of the Common Shares on The
Nasdaq SmallCap Market, there can be no assurance that the Company's
securities will be included for quotation, or, if so included, that the
Company will be able to continue to meet the requirements for continued
quotation, or that a public trading market will develop or, if such market
develops, that it will be sustained. See "Risk Factors - Lack of Prior
Market for Common Shares; No Assurance of Public Trading Market".
Summary Financial Information
The following summary financial information has been derived from the
financial statements of the Company included elsewhere in this Prospectus. All
amounts are in dollars except the number of Common Shares. The information
should be read in conjunction with the financial statements and the related
notes thereto. See "Financial Statements".
Statement of Operations Data
Year Ended Three Months Ended
December 31, March 31,
1995 1996 1996 1997
---- ---- ---- ----
Revenues ..................... $1,040,181 $ 477,527 $91,519 $185,801
Operating income (loss)........ 129,981 (609,493) (75,865) (453,897)
Net income (loss) ............. 78,660 (570,769) (57,261) (513,056)
Net income (loss) per share.... .05 (.34) (.03) (.31)
Weighted average number of
Common Shares outstanding..... 1,678,913 1,678,913 1,678,913 1,678,913
Balance Sheet Data
December 31, 1996 March 31, 1997
---------------- -----------------------------------
Pro Forma As
Actual Pro Forma(1) Adjusted(1)(2)
Working capital (deficit)... $ 180,236 ($148,064) $36,836 $ 4,179,204
Total assets ............... 2,433,160 2,598,812 2,668,712 5,041,662
Total liabilities .......... 1,153,459 1,457,667 1,142,667 372,667
Total stockholders' equity.. 1,279,701 1,141,145 1,526,045 4,668,995
- ---------------
6
<PAGE>
(1) Gives effect to (i) the exercise of options to purchase 233,000 Common
Shares by Mark Honigsfeld, Chairman of the Board and Chief Executive
Officer of the Company, at a price of $.30 per share, or an aggregate
of $69,900, in April 1997 (the "Honigsfeld Option Exercise"), (ii) the
conversion of $200,000 in loans made by Mr. Honigsfeld to the Company
into 40,000 Common Shares, effective upon the closing of the Offering
(the "Debt Conversion"), and (iii) the conversion of accrued and unpaid
compensation payable to Messrs. Honigsfeld and Lew in the amounts of
$100,000 and $15,000, respectively, into 20,000 and 3,000 Common
Shares, respectively, effective upon the closing of the Offering (the
"Accrued Compensation Conversion").
(2) Adjusted to give effect to the receipt and application of the net
proceeds of approximately $4,700,000 from the sale of the Common Shares
offered hereby.
RISK FACTORS
An investment in the securities offered hereby is speculative and
involves a high degree of risk and substantial dilution, and should only be
purchased by investors who can afford to lose their entire investment.
Prospective purchasers, prior to making an investment, should consider carefully
the following risks and speculative factors associated with this Offering, as
well as other information set forth elsewhere in this Prospectus, including the
information contained in the financial statements herein.
1. Dependence on Offering Proceeds; Possible Need for Additional Financing.
The Company's cash requirements have been and will continue to be significant.
The Company is dependent on the proceeds from this Offering in order to sustain
and further expand its operations. The Company believes that the net proceeds of
this Offering, together with anticipated increased revenues generated from
operations, will be sufficient to conduct the Company's operations for at least
12 months. In the event that the Company's plans change, or the costs of
operations prove greater than anticipated, the Company could be required to
curtail its expansion or seek additional financing sooner than currently
anticipated. Mark Honigsfeld, Chairman of the Board and Chief Executive Officer
of the Company, has agreed to loan to the Company up to $500,000 as and when
needed during the twenty six-month period ending July 1, 1999. Such line of
credit provides for the grant to Mr. Honigsfeld of a security interest in all of
the Company's assets to secure the repayment of up to $200,000 of such loan
proceeds. See "Use of Proceeds", "Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions".
2. Inexperience of Underwriter. This is the first offering underwritten by
the Underwriter. There can be no assurance that the Underwriter's limited
experience will not adversely affect the development of a trading market for, or
liquidity of, the Company's securities. Therefore, 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".
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3. Downward Trend in Revenues; Current Period and Anticipated Future
Losses. For the years ended December 1996 and 1995, the Company's revenues were
$477,527 and $1,040,181, respectively. For the first quarter of 1997 and 1996,
the Company's revenues were $185,801 and $91,519, respectively. The decline in
revenues between 1995 and 1996 was primarily the result of a decrease in
software sales (i.e. fewer units sold) which occurred due to the Company's focus
on raising capital (commencing in late 1995 and continuing throughout 1996),
strategic planning, and the allocation and devotion of substantial personnel
time to the development of visual computer-aided dispatching (or V-CAD) and new
wireless mobile computing technology. Such actions diverted the Company's
resources away from sales activities. The revenue figures reflect an upturn in
sales activity commencing in early 1997. For the year ended December 31, 1996,
the Company experienced a net loss of $570,769. For the first quarter of 1997
and 1996, the Company had a net loss of $513,056 and $57,261, respectively. The
net loss figures are the result of the incurrence of significant expenses,
including, without limitation, research and development expenses, costs relating
to the enhancement and refining of the Company's current product line, marketing
costs, obligations under new key employee compensation agreements, the lease for
the Company's premises which commenced in September 1996, and general
administrative expenses. The Company believes that, for the foreseeable future,
it will be unable to achieve sufficient additional revenues to offset
anticipated significant operating costs such as the foregoing. Accordingly, the
Company anticipates that operating losses will continue at least for the next 12
months. The Company cannot predict the length of time such operating losses will
continue or the impact such operating losses will have on its financial
condition and results of operations. Additionally, the Company may experience a
nonrecurring deferred financing charge of up to approximately $1,557,050 (which
includes, among other things, the difference between (i) the fair market value,
at the time the Bridge Warrants were issued, of the Common Shares issuable upon
exercisable of the Bridge Warrants ($4.00 per share) and (ii) the original
exercise price ($.50 per share) at the time the promissory notes (the "Bridge
Notes") issued in the Company's bridge financing transaction are repaid (which
will occur on the closing date of the Offering). The Bridge Warrants are
exercisable at any time during the five year period commencing on the closing
date of the Offering at the amended exercise price of $3.00 per share. There can
be no assurance that the Company's technology and products will be able to
compete successfully in the marketplace and/or generate significant revenue, or
that the Company's business will be able to operate profitably. See "Risk
Factors - Competition", "Business - Competition", "Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Results of
Operations".
The Company's quarterly operating results have, in the past,
varied and may in the future vary significantly, depending on facts such as the
size, timing and recognition of revenue from significant software sales and
system integration activity, the time of new product releases and market
acceptance of these new releases, and increases in operating expenses. Thus, the
Company's revenues and results of operations have and may continue to vary
significantly from quarter to quarter, period to period, and year to year based
upon frequency and volume of sales and licensing 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,
8
<PAGE>
including personnel and facilities costs, the decline of revenues in any quarter
typically results in lower profitability in that quarter. There can be no
assurance that the Company will become profitable or avoid losses in any future
period.
4. Immediate and Substantial Dilution; Equity Securities Previously Sold at
Below Offering Price. Upon completion of this Offering, assuming no exercise of
the Overallotment Option, and without giving effect to the exercise of the
Underwriter's Warrant, the pro forma net tangible book value per share of the
Company's Common Shares as of March 31, 1997 would have been $1.88. At the
initial public offering price of $5.00 per share, investors in this Offering
will experience an immediate dilution of approximately $3.12, or 62.4%, in net
tangible book value per share, and existing investors will experience an
increase of approximately $2.07 per share, in each case giving retroactive
effect to the Debt Conversion, the Accrued Compensation Conversion and hte
Honigsfeld Option Exercise. The present stockholders of the Company have
acquired their respective equity interest at costs substantially below the
public offering price. Accordingly, to the extent that the Company incurs
losses, the public investors will bear a disproportionate risk of such losses.
See "Dilution", "Bridge Financing", "Management - Executive Compensation",
"Management - Stock Plans" and "Underwriting".
5. Evolving Market; New Product Development; Technological Obsolescence.
The markets for the Company's products are characterized by evolving industry
requirements, rapid technological change and frequent new product introductions
which may result in product or technology obsolescence. Certain companies may be
developing technologies or products of which the Company is unaware which may be
functionally similar, or superior, to some or all of those offered by the
Company. As a result, the ability of the Company to compete will depend on its
ability to adapt, enhance and improve its existing products and technology and,
if necessary, to develop and introduce new products and technology to the
marketplace in a timely and cost-competitive manner. There can be no assurance
that the Company will be able to compete successfully, that its competitors or
future competitors will not develop technologies or products that render the
Company's products or technology obsolete or less marketable, or that the
Company will be able to successfully enhance its products or technology or adapt
them satisfactorily.
New product development efforts are subject to all of the risks inherent in
the development of new technology and products including unanticipated delays,
expenses, technical problems or difficulties, as well as the possible
insufficiency of funding to complete development. There can be no assurance as
to when, or whether, new products will be successfully developed. In addition,
no assurance can be given that additional technologies can be developed within a
reasonable development schedule, if at all. Further, there can be no assurance
that the Company would have sufficient economic or human resources to complete
such development in a timely manner, or at all, or that it could enter into
economically reasonable arrangements for the completion of such products by
third parties.
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Following the development of additional products, the Company must
successfully complete a testing program for the products before they can be
marketed. Although the Company believes that its testing program is adequate,
unforeseen technical problems arising out of such testing could significantly
and adversely affect the Company's ability to produce and market a commercially
acceptable product. In addition, the Company's success will depend upon its
current and proposed technologies and products meeting acceptable cost and
performance criteria in the marketplace. There can be no assurance that the
technologies and products will meet applicable price or performance objectives
or that unanticipated technical or other problems will not occur which would
result in increased costs or material delays. Also, there can be no assurance
that new technologies will be developed in the future by the Company. If
superior technology is developed by the Company's competitors, such products may
render the Company's present products obsolete, and thus would have a materially
negative impact on the Company. See "Business".
6. Failure to Integrate Various Product Introductions and Offerings. The
Company believes that significant market opportunities exist for a provider of
fully integrated software designed for the public safety marketplace. One of the
Company's business strategies is to provide a "total solution" fully integrated
software product line used in public safety. Although the Company has had some
success in the past integrating its software products with other systems, there
can be no assurance that the Company will be able to fully integrate these
applications, or newly created applications, or that achieving such integration
will enable the Company to improve its competitive position in the software
market. Moreover, the Company's inability to further integrate its products
could have a material adverse effect on the Company's business and results of
operations. See "Business".
7. Dependence on Business Partnerships and Subcontractor Relationships.
Historically, the Company's customers have been in the "small size" and "medium
size" market segments (i.e. public safety departments or agencies with fewer
than 200 sworn officers or personnel). The Company's business strategy includes
the development of systems for the "large size" market segment. In order to
enter such market, the Company, in all likelihood, will need to establish
business partnerships and/or subcontractor relationships with large systems
integrators and public network providers. Although business partnerships have
been entered into with AT&T Corp. ("AT&T"), GTE Corporation ("GTE") and Data
General Corporation ("Data General"), no revenues have been derived to date from
these arrangements and no assurances can be given that any revenues will be
derived from these arrangements in the future. In addition, no assurances can be
given that the Company will enter into any other business partnerships or
subcontractor relationships. The failure of the Company to enter into such
partnerships or relationships would have a material adverse effect upon the
Company's ability to implement its business plan. See "Business - Sales and
Marketing".
8. Intellectual Property Protection and Infringement. The Company's
technology is not patented and the Company has not filed any patent
applications. The Company instead currently relies on trade secrets and
copyright rights to establish and protect certain proprietary rights in its
products. These measures afford limited protection, and there can be no
assurance that the steps taken by the Company to protect these proprietary
rights will be adequate to prevent misappropriation of its technology or the
independent development by others of similar technology especially in view of
the limited resources of the Company and the potential cost of any legal action
to enforce such rights.
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The Company has not obtained any copyright registrations. Registration of a
copyright with the United States copyright office is not a requirement to make a
copyright legally effective, but generally provides a rebuttable presumption of
its validity. In the absence of a registered copyright, the Company will be
unable to bring an action for copyright infringement. A copyright may be
registered at any time prior to bringing an infringement action. If the Company
registers a copyright after the infringement occurs (and prior to bringing the
infringement action), it may be limited in its ability to prove its case and
will be precluded from seeking statutory damages (in lieu of actual damages and
lost profits, and attorney's fees). The Company intends to seek registered
copyright protection under United States law with respect to some of its
software, although no assurance can be given that the Company will obtain such
protection. While the Company believes that it would be impractical and not
cost-effective for a third party to attempt to copy software such as that used
in its products, unauthorized parties, nevertheless, might attempt to copy
aspects, or reverse engineer certain, of the Company's products, or may obtain
and use information that the Company regards as proprietary. The cost of, and
time dedicated to, enforcement by the Company of its rights, if any, could be
significant. Regardless of the outcome of such enforcement proceedings, there
can be no assurance that such proceedings will be effective. In addition,
although the Company believes that there are no infringement or trade secret
misappropriation claims against the Company and no grounds for the assertion of
any such claims, the cost of responding to any such assertion, should it be
made, could be significant and there is no assurance that the Company would
prevail. See "Risk Factors - Competition", "Business Intellectual Property
Rights and Licenses" and "Business - Competition".
9. Competition. The Company's products compete with those of numerous
well-established companies, which design, sell, produce or market software
systems for public safety operations. Many of these companies have substantially
greater financial, technical and other resources than those of the Company, and
they may have established reputations for success in the development, licensing,
sale and service of their products and technology. Certain of those competitors
have the financial resources necessary to enable them to withstand substantial
price competition or downturns in the market for computer software products used
by public safety agencies and organizations. In addition, the Company
anticipates that a material portion of the sale of its products will be made
through the competitive bid process. There can be no assurance that the Company
will be able to compete effectively in such process. See "Business Competition"
and "Business - Products and Services".
10. Limited Sales and Marketing Experience. The Company has limited
experience in the areas of sales, marketing and distribution. The Company's
sales and marketing staff will require additional personnel in the future. There
can be no assurance that the Company will be able to build an adequate sales and
marketing staff, that establishing such a sales and marketing staff will be
cost-effective, or that the Company's sales and marketing efforts will be
successful. See "Risk Factors Challenges to Management of Growth" and "Business
- - Sales and Marketing".
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11. Dependence on Significant Customers. Although the composition of the
Company's largest customers has changed from year to year, historically the
Company's revenues have been materially dependent on a limited number of
customers. Generally, the Company does not receive repeat business from its
customers for the design and installation of software systems. Further revenues
from customers to whom the Company has licensed software systems are usually
derived from maintenance and support contracts. Accordingly, the Company does
not believe that the makeup of its current customers is material to an
understanding of the Company's future business prospects. While the Company
expects its customer base to continue to expand, a limited number of large
customers may continue to account for a significant portion of the Company's
sales during any given period for the foreseeable future. As such, the Company's
financial condition and results of operations may be adversely affected by a
delay, reduction or cancellation of orders from one or more of its current or
future significant customers or the loss of one or more such customers. See
"Risk Factors - Lengthy Sales Cycle" and "Business - Customers".
12. Product Concentration. Licensing of products and the provision of
maintenance and support services to the law enforcement and public safety market
represented substantially all of the Company's revenues for the fiscal years
ended December 31, 1995 and 1996 and the first quarter of 1997, and are expected
to continue to account for all of the Company's revenues for the foreseeable
future. Any factors adversely affecting the Company's products, such as the
introduction of superior competitive products or shifts in the needs of the
marketplace, would have a material adverse effect on the Company's financial
condition and results of operations. See "Risk Factors Competition", "Business
Products and Services" and "Business-Competition".
13. Lengthy Sales Cycle. Licensing of the Company's software products
typically involves a detailed technical evaluation and a commitment of capital,
technical, marketing and other resources, with the attendant delays frequently
associated with customers' internal procedures to approve large capital
expenditures and to test and accept new technologies that affect the customer's
operations infrastructure. For those and other reasons, the sales cycle
associated with the Company's products is typically lengthy and subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance procedure, that are beyond the Company's control. Because of
the lengthy sales cycle and the generally large size of customer orders, if
revenues forecasted from a specific customer for a particular fiscal quarter are
not realized in that quarter, the Company's operating results for that quarter
could be materially adversely affected. See "Risk Factors - Dependence on
Significant Customers".
14. New Management Team; Dependence on Executive Management; Need to Retain
Key Personnel. The Company's executive management team, Mark Honigsfeld,
Chairman of the Board and Chief Executive Officer of the Company, Dong W. Lew,
President and Chief Operating Officer of the Company, and Louis Libin, Chief
Technology Officer of the Company, have worked together for only a brief period.
Mr. Honigsfeld was elected Chairman of the Board of the Company in August 1996
and was elected Chief Executive Officer of the Company effective as of October
1, 1996. Mr. Libin was elected as a director of the Company and became the
Company's Chief Technology Officer in January 1997 and only began serving as
Chief Technology Officer on a full-time basis in March 1997.
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<PAGE>
The Company has a three-year employment agreement with each of Messrs.
Honigsfeld, Lew and Libin, each of which includes, among other things, a
non-competition and non-solicitation provision. However, each agreement provides
that the employee can terminate his agreement with the Company at any time upon
30 days notice for any reason. Additionally, Mr. Honigsfeld's employment
agreement allows him to devote up to 10% of his working time, and Mr. Libin's
employment agreement allows him to devote up to one day a week, to other
endeavors which are not competitive with the Company. The loss of the services
of either Mr. Honigsfeld, Mr. Lew or Mr. Libin would have a material adverse
effect on the Company's business.
The Company has obtained "key-man" life insurance policies on the lives of
Messrs. Honigsfeld and Libin, each of which provides for a death benefit to the
Company of $1,000,000. The Company has been unable to secure life insurance
coverage for Mr. Lew in light of his age and history as a smoker. With regard to
Messrs. Honigsfeld and Libin, there can be no assurance that the death benefit
would be adequate to fund the Company's needs until a replacement could be
found.
The success of the Company is also dependent upon its ability to hire and
retain additional qualified and talented executive, technical and marketing
personnel. There is always intense competition for qualified personnel in the
Company's business and its inability to recruit qualified personnel could have a
material adverse effect on its business and results of operations. There can be
no assurance that the Company will be able to retain the members of its current
management or personnel, or that it will be able to successfully attract and
retain qualified management, engineering and sales or other personnel in the
future. See "Management Employment Agreements".
15. Dependence on Licensors. The Company currently relies on operating
system software owned by certain third parties for certain software and platform
operating systems which the Company uses to create its products, and in some
cases to bundle with its own software in its products. The licenses are
perpetual in duration subject to the payment of an annual maintenance and
enhancement fee, which is based on the number of end users of such operating
system software, or a monthly sublicense fee, which is based upon the number of
customers to which the Company's products (which includes such licensed
operating system software) are licensed. Although the Company believes that
there are alternatives to the operating system software that the Company
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".
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<PAGE>
16. Challenges to Management of Growth. The Company anticipates a period of
rapid growth that is expected to place a strain on the Company's administrative,
financial and operational resources. The Company's ability to manage any growth
effectively will require it to continue to improve its operational, financial
and management controls, reporting systems and procedures, install new
management information and control systems, and train, motivate and manage its
employees. There can be no assurance that the Company will install such
management information and control systems in an efficient and timely manner or
that the new systems will be adequate to support the Company's operations.
Because of the complexity of its products, the Company has in the past
experienced, and expects in the future to experience, a time lag between the
date on which technical and sales personnel are hired and the time at which such
persons become fully productive. In addition, customer satisfaction could be
substantially affected by the quality of the Company's post-sales system
implementation process and, in many cases, its maintenance and service
capabilities. If the Company is unable to hire, train and retain qualified
personnel and consultants to implement these services or is unable to manage the
post-sales process effectively, its ability to attract repeat sales or obtain
references for new prospective sales could be adversely affected. Such result
could limit the Company's growth opportunities. Additionally, many of the
challenges of growth may be unforeseeable and beyond the control of the Company.
If the Company is unable to manage growth effectively, such that the Company's
sales and marketing efforts exceed its capacity to design, develop, install,
maintain and service its products, or if new employees are unable to achieve
adequate performance levels, the Company's business, operating results and
financial condition could be adversely affected.
17. Unascertainable Risks Related to Possible Unspecified Acquisitions. The
Company intends to explore opportunities to add, through acquisition or
licensing, technology or products to enhance or add to its current product line,
or to acquire a customer base or sales organization to augment the Company's
infrastructure. The Company is not actively seeking any acquisition at this
time. 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
14
<PAGE>
based on innovative technologies or processes. Furthermore, future acquisition
transactions may require the Company to obtain additional financing from banks
or other financial institutions or to undertake debt or equity financing. No
assurance can be given that the Company would be able to obtain financing upon
commercially reasonable terms, or at all. Furthermore, equity financing will
result in a dilution of existing stockholders of the Company, which may be
significant. If debt financing ultimately proves to be available, any borrowings
may subject the Company to various risks traditionally associated with the
incurring of indebtedness, including the risks of interest rate fluctuations and
insufficiency of cash flow to pay principal and interest. To the extent any such
transaction involves the acquisition of a business, there can be no assurance
that the Company will successfully integrate the operations of the acquired
business with those of the Company, or that all of the benefits expected from
such integration will be realized. Any delays or unexpected costs incurred in
connection with such integration could have an adverse effect on the combined
company's business, operating results or financial condition. Furthermore, there
can be no assurance that the operations, management and personnel of the
companies will be compatible or that the Company will not experience the loss of
key personnel. The amount of net proceeds of this Offering, if any, expended
with respect to an acquisition will be determined by the Board of Directors of
the Company. In most cases each acquisition may be consummated without seeking
and obtaining stockholder approval, in which case, the stockholders will not
have an opportunity to review the financial statements of an acquisition
candidate. Although the Company will endeavor to evaluate the risks inherent in
a particular acquisition, there can be no assurance that the Company will
properly ascertain or assess such significant risk factors. See "Risk Factors
Limited Sales and Marketing Experience", "Business - Products and Services" and
"Business - Sales and Marketing".
18. International Expansion. As part of the Company's long range marketing
plan, the Company intends, in the future, to explore opportunities to expand its
operations into international markets which could require significant management
attention and financial resources. Currently, the Company has not developed any
international marketing strategy, has not given any significant attention to
international marketing, and has no timetable in mind to implement an
international marketing plan. For the foreseeable future, the Company does not
expect international marketing activities to be material nor does it have any
current plans to devote significant capital or resources to international
marketing. There can be no assurance that the Company's efforts to develop
international sales and support channels will be successful. International sales
are subject to a number of risks, including potentially longer payment cycles,
unexpected changes in regulatory requirements, import and export restrictions
and tariffs, difficulties in staffing and managing foreign operations, the
burden of complying with a variety of foreign laws, greater difficulty in
accounts receivable collection, potentially adverse tax consequences, currency
fluctuations and potential political and economic instability. Additionally, the
protection of intellectual property may be more difficult and costly to enforce
outside of the United States. In the event that the Company is successful in
expanding its sales and operations internationally, the imposition of, or change
in, price controls or other restrictions on foreign currencies could materially
affect the Company's business, operating results and financial condition.
15
<PAGE>
19. Control by Existing Management and Stockholders; Effect of Certain
Anti-Takeover Considerations. Upon completion of the Offering, the Company's
directors, executive officers and certain principal stockholders and their
affiliates will own beneficially approximately 39.3% of the Common Shares
(giving effect to the exercise of the Bridge Warrants and sales of Common Shares
by the Selling Stockholders, and without giving effect to the exercise of the
Overallotment Option). Accordingly, such holders, if acting together, will have
the ability to exert significant influence over the election of the Company's
Board of Directors and other matters submitted to the Company's stockholders for
approval. The voting power of these holders may discourage or prevent any
proposed takeover of the Company unless the terms thereof are approved by such
holders. Pursuant to the Company's Certificate of Incorporation, Preferred
Shares may be issued by the Company in the future without stockholder approval
and upon such terms as the Board of Directors may determine. The rights of the
holders of Common Shares will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Shares that may be issued in the
future. The issuance of Preferred Shares could have the effect of discouraging a
third party from acquiring a majority of the outstanding Common Shares of the
Company and preventing stockholders from realizing a premium on their Common
Shares. The Certificate of Incorporation also provides for staggered terms for
the members of the Board of Directors. A staggered Board of Directors, and
certain provisions of the Company's by-laws and of Delaware law applicable to
the Company (which law prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless it is approved in a prescribed manner), could delay or make
more difficult a merger, tender offer or proxy contest involving the Company.
See "Management", "Principal and Selling Stockholders" and "Description of
Securities".
20. Broad Discretion in Application of Proceeds; Repayment of Indebtedness.
While the Company intends to use the net proceeds of this Offering as described
in the "Use of Proceeds" section of this Prospectus, the Company has broad
discretion to adjust the application and allocation of such net proceeds in
order to address changed circumstances and opportunities. In addition, a
significant portion of the net proceeds of the Offering (36.8%) is allocated for
working capital purposes. As a result of the foregoing, the success of the
Company will be substantially dependent upon the discretion and judgment of its
management with respect to the application and allocation of the net proceeds of
this Offering. Pending use of the proceeds, the funds will be invested in
certificates of deposit, high grade commercial paper and government securities
or other low risk investments. See "Use of Proceeds".
The Company intends to utilize an aggregate of $770,000, or approximately
16.4% of the net proceeds of this Offering, to repay promissory notes issued in
connection with the Company's bridge financing transaction in October 1996. As a
result, these proceeds will not be available to fund future business activities.
See "Use of Proceeds", "Bridge Financing" and "Management".
16
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21. Lack of Prior Market for Common Shares; Nasdaq SmallCap Market Listing
or 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 completion of this Offering, the Common Shares will be
eligible for inclusion on The Nasdaq SmallCap Market, no assurance can be given
that the Common Shares will be listed thereon. Under prevailing rules of The
Nasdaq Stock Market, Inc., in order to qualify for initial quotation of
securities on The Nasdaq SmallCap Market, a company, among other things, must
have at least $4,000,000 in total assets, $2,000,000 in total capital and
surplus, $1,000,000 in market value of public float and a minimum bid price of
$3.00 per share. Although the Company may, upon the completion of this Offering,
qualify for initial quotation of the Common Shares on The Nasdaq SmallCap
Market, in order for the Common Shares to continue to be listed thereon, the
Company, among other things, generally must have $2,000,000 in total assets,
$1,000,000 in total capital and surplus, $1,000,000 in market value of public
float and a minimum bid price of $1.00 per share.
Although it has no legal obligation to do so, the Underwriter may from time
to time act as a market maker and may otherwise effect and influence
transactions in the Company's securities. However, there is no assurance that
the Underwriter will continue to effect and influence transactions in the
Company's securities. The prices and liquidity of the Company's Common Shares
may be significantly affected by the degree, if any, of the Underwriter's
participation in the market. The Underwriter may voluntarily discontinue such
participation at any time. Further, the market for, and liquidity of, the
Company's Common Shares may be materially adversely affected by the fact that a
significant portion of the Common Shares may be sold to customers of the
Underwriter. See "Risk Factors - Inexperience of Underwriter", "Risk Factors -
Impact of Proposed Nasdaq SmallCap Market Rules", "Risk Factors - 'Penny Stock'
Regulations May Impose Certain Restrictions on Marketability of Securities" and
"Underwriting".
22. Impact of Proposed Nasdaq SmallCap Market Rules. The Nasdaq Stock
Market, Inc. has proposed a rule change which, if adopted, would impose
substantially more stringent criteria for the initial and continued listing of
securities on The Nasdaq SmallCap Market. The proposed new rules provide that,
for initial listing on The Nasdaq SmallCap Market, a company would need to have,
among other things, (i) either net tangible assets (i.e., net of goodwill) of
$4,000,000, a market capitalization of $50,000,000 or net income for two of the
last three fiscal years of $750,000, (ii) a minimum market value of public float
of $5,000,000, (iii) a minimum bid price of $4.00 per share, and (iv) either one
year of operating history or a market capitalization of $50,000,000. For
continued listing on The Nasdaq SmallCap Market, a company would need to have,
among other things, (i) either net tangible assets of $2,000,000, a market
capitalization of $35,000,000, or net income for two of the last three fiscal
years of $500,000, and (ii) a minimum market value of public float of
$1,000,000. Additionally, for both initial listing and continued listing on The
Nasdaq SmallCap Market, companies would be required to have at least two
independent directors, and an Audit Committee, a majority of the members of
which would need to be independent directors.
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<PAGE>
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 -
Lack of Prior Market for Common Shares; No Assurance of Public Trading".
23. Arbitrary Offering Price; Possible Volatility of Stock Price. The
initial public offering price of the Common Shares was determined by negotiation
between the Company and the Underwriter, may not be indicative of the market
price for such securities in the future, and does not necessarily bear any
relationship to the Company's assets, book value, net worth or results of
operations of the Company or any other established criteria of value. Among the
factors considered in determining the price of the Common Shares were the
history of, and prospects for, the industry in which the Company operates,
estimates of the business potential of the Company, the present state of the
development of the Company's business, the Company's financial condition, an
assessment of the Company's management, the general condition of the securities
markets at the time of this Offering, and the demand for similar securities of
comparable companies. It should be noted that the stock market in recent years
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of many smaller companies. Frequently, such
fluctuations have been unrelated or disproportionate to the operating
performance of such companies. These fluctuations, as well as general economic
and market conditions, may have a material adverse effect on the market price of
the Common Shares. See "Underwriting", "Description of Securities" and
"Financial Statements".
24. "Penny Stock" Regulations May Impose Certain Restrictions on
Marketability of Securities. The Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. If, as anticipated,
the Common Shares offered hereby are authorized for quotation on The Nasdaq
SmallCap Market upon the completion of this Offering, such securities will
initially be exempt from the definition of "penny stock". If the Common Shares
offered hereby are removed from listing on The Nasdaq SmallCap Market at any
time, the Company's Common Shares may become subject to rules that impose
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse).
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For transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's Common Shares and
may affect the ability of purchasers in this Offering to sell the Company's
Common Shares in the secondary market as well as the price at which such
purchasers can sell any such Common Shares.
25. No Dividends. The Company has never paid any dividends on its Common
Shares and does not intend to pay dividends on its Common Shares in the
foreseeable future. Any earnings which the Company may realize in the
foreseeable future are anticipated to be retained to finance the growth of the
Company. See "Dividend Policy" and "Description of Securities".
26. Shares Eligible for Future Sale May Adversely Affect the Market. All of
the Company's outstanding Common Shares are "restricted securities" and, in the
future, may be sold upon compliance with Rule 144 or pursuant to registration
under the Act (see discussion below with respect to the registration of Common
Shares held by certain stockholders of the Company and underlying the Bridge
Warrants held by the Bridge Lenders). Rule 144 currently provides, in essence,
that a person holding "restricted securities" for a period of one year may sell
an amount every three months up to the greater of (a) 1% of the Company's issued
and outstanding securities of that class of securities or (b) the average weekly
volume of sales of such securities during the four calendar weeks preceding the
sale if there is adequate current public information available concerning the
Company. Additionally, non-affiliates (who have not been affiliates of the
Company for at least three months) may sell their "restricted securities" in
compliance with Rule 144 without volume limitations after they have held such
securities for a period of two years. An aggregate of 406,250 Common Shares have
been owned by Mr. Lew for more than one year. However, such shares are subject
to an agreement with the Underwriter restricting the public sale thereof for a
period of one year without the Underwriter's consent.
The Company is registering for resale 250,250 Common Shares held by certain
stockholders. In addition, the Company is registering for resale the 389,200
Common Shares underlying the Bridge Warrants. Such Common Shares may be resold
at any time following the date of this Prospectus, subject to an agreement
between each of the Bridge Lenders and the Underwriter restricting the
transferability of the Warrant Shares for a period of two years. Prospective
investors should be aware that the possibility of resales by the Selling
Stockholders, as well as other stockholders of the Company, may have a material
depressive effect on the market price of the Company's Common Shares in any
market which may develop. See "Bridge Financing", "Principal and Selling
Stockholders" and "Underwriting".
19
<PAGE>
27. Limitations on Director Liability. The Company's Certificate of
Incorporation provides, pursuant to Delaware law, that a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, with certain exceptions.
These provisions may discourage stockholders from bringing suit against a
director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by stockholders on behalf of the Company against
any director. In addition, the Company's Certificate of Incorporation provides
for mandatory indemnification of directors and officers to the fullest extent
permitted or not prohibited by Delaware law. See "Description of Securities
Limitation on Liability of Directors; Indemnification".
28. Impact of Inflation and Changing Interest Rates. Since the inception of
operations, inflation has not significantly affected the operating results of
the Company. However, inflation and changing interest rates have a significant
effect on the economy in general and, therefore, could affect the operating
results of the Company in the future.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,200,000 Common
Shares offered hereby are estimated to be $4,700,000 (after deducting
underwriting discounts of $600,000 and other expenses of this Offering estimated
to be $700,000, including the Underwriter's non-accountable expense allowance in
the amount of 3% of the gross proceeds of the Offering, and a $108,000 financial
consulting fee payable to the Underwriter at the closing) (but not considering
any exercise of the Overallotment Option or the Underwriter's Warrants). The
Company, based upon all currently available information, intends to utilize such
net proceeds approximately as follows:
<TABLE>
<CAPTION>
Approximate Approximate
Amount of Percentage
Net Proceeds of Net Proceeds
------------ ---------------
<S> <C> <C>
Product enhancement and development(1) $ 1,250,000 26.6%
Repayment of indebtedness (2) 770,000 16.4%
Marketing and advertising (3) 650,000 13.8%
Hiring and training of additional personnel 150,000 3.2%
Purchase of equipment 150,000 3.2%
Working capital (4) 1,730,000 36.8%
----------- ------
Total $ 4,700,000 100.0%
=========== ======
</TABLE>
20
<PAGE>
(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 the repayment of the Bridge Notes in the aggregate principal
amount of $770,000 issued in connection with the Company's bridge financing
transaction in October 1996. The Bridge Notes are due and payable upon the
closing of the Offering. If such closing occurs on or before September 15,
1997, no interest will be payable on the Bridge Notes. If the Offering
closes after such date, interest shall accrue on the principal of the
Bridge Notes, from the date such Bridge Notes were issued, at the rate of
12% per annum. See "Risk Factors - Broad Discretion in Application of
Proceeds; Repayment of Indebtedness" and "Bridge Financing".
(3) See "Business - Sales and Marketing".
(4) To be used for general operating and overhead expenses. Additionally, the
Company may use a portion of the proceeds of this Offering allocated to
working capital to acquire technology or assets to expand or enhance its
product line and business. At present, the Company has not identified any
acquisition candidates, nor can it predict that it will identify any
appropriate acquisition candidates in the future. The Company is not
actively seeking any acquisition candidates at this time. See "Risk Factors
- Unascertainable Risks Related to Possible Unspecified Acquisitions" and
"Business - Products and Services".
The amounts set forth above are estimates. Should a reapportionment or
redirection of funds be determined to be in the best interests of the Company,
the actual amount expended to finance any category of expenses may be increased
or decreased by the Company's management, at its discretion.
The Company believes that the proceeds of this Offering will enable the
Company to expand its business, which the Company anticipates, but cannot
assure, will result in an increase in annual revenues. The Company believes that
the net proceeds of this Offering, together with anticipated increased revenues
generated from operations, will be sufficient to conduct the Company's
operations for at least 12 months. See "Risk Factors - Dependence on Offering
Proceeds; Possible Need for Additional Financing".
It is anticipated that, to the extent that the Company's expenditures are
less than projected and/or the proceeds of this Offering increase as a result of
the exercise by the Underwriter of its Overallotment Option, the resulting
balances will be retained and used for general working capital purposes.
Conversely, to the extent that such expenditures require the utilization of
funds in excess of the amounts anticipated, additional financing may be sought
from other sources, including Mr. Honigsfeld pursuant to the line of credit
discussed under "Certain Relationships and Related Transactions". There can be
no assurance that any additional financing will be available on terms acceptable
to the Company or otherwise. See "Risk Factors - Dependence on Offering
Proceeds; Possible Need for Additional Financing" and "Risk Factors - Risks
Attendant to Expansion".
21
<PAGE>
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
"Underwriting".
As of March 31, 1997, the Company had an aggregate of 986,700 Common Shares
outstanding and a net tangible book value (deficit) of ($628,273), or ($.64) per
share. After giving retroactive effect to the Debt Conversion, the Accrued
Compensation Conversion, and the Honigsfeld Option Exercise (collectively the
"Pro Forma Transactions"), the Company's net tangible book value (deficit) as of
March 31, 1997 would have decreased by $384,900 to ($243,373) and its net
tangible book value (deficit) per share as of March 31, 1997 would have
decreased by $.45 per share to $(.19) per share. Net tangible book value per
share represents the total amount of the Company's tangible assets, less the
total amount of its liabilities, divided by the total number of Common Shares
outstanding.
After giving retroactive effect to the Pro Forma Transactions, and the sale
of 1,200,000 Common Shares by the Company at the Offering price of $5.00 per
Common Share, with net proceeds of $4,700,000, the net tangible book value of
the Company as of March 31, 1997 would have been $4,668,995, or $1.88 per Common
Share. This amount represents an immediate dilution (the difference between the
price per Common Share to purchasers in this Offering and the pro forma net
tangible book value per Common Share as of March 31, 1997, after giving
retroactive effect to the Pro Forma Transactions and the issuance of the
1,200,000 Common Shares) of approximately $3.12, or 62.4%, per Common Share to
new investors and an immediate increase (the difference between the pro forma
net tangible book value per Common Share as of March 31, 1997, after giving
effect to the issuance of the 1,200,000 Common Shares, and the pro forma net
tangible book value per Common Share as of March 31, 1997, before giving effect
to the Offering), in each case giving retroactive effect to the Pro Forma
Transactions of approximately $2.07, or 41.4%, per Common Share to the Company's
current stockholders. Such increase to the Company's current stockholders is
solely attributable to the cash price paid by purchasers of the Common Shares
offered for sale by the Company.
22
<PAGE>
<TABLE>
The following table illustrates the per share dilution as of March 31, 1997:
<S> <C> <C>
Public offering price per share (1)......................... $5.00
Net tangible book value (deficit) per share
historical at March 31, 1997.............................. ($.64)
Increase per share attributable to the
Pro Forma Transactions(2)................................ .45
-----
Net tangible book value per share (deficit) before
giving effect to the Offering(2)......................... (.19)
Increase per share attributable to the sale of the
Common Shares offered hereby ............................. 2.07
-----
Pro forma net tangible book value per share after the
Offering (2) (3) ......................................... 1.88
----
Dilution per share to purchasers in the Offering (4) ....... $3.12
====
</TABLE>
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(2) Gives effect to the Debt Conversion, and the Accrued Compensation
Conversion and the Honigsfeld Option Exercise.
(3) After deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(4) Does not give effect to the exercise of the Underwriter's Overallotment
Option, the Underwriter's Warrants, the Bridge Warrants, or the Other
Derivative Securities for the purchase of 477,400 Common Shares of the
Company. See "Bridge Financing", "Management - Stock Option Plan", "Certain
Relationships and Related Transactions", "Description of Securities -
Common Shares" and "Underwriting".
The following table sets forth the relative cost and ownership percentage
of the Common Shares offered hereby as compared to the Common Shares outstanding
immediately prior to the Offering.
<TABLE>
<CAPTION>
Common Shares Average
Acquired Total Consideration Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Current Stockholders........ 1,282,700(1) 51.7% $ 553,325 8.4% $.43
Purchasers of Common
Shares in the Offering... 1,200,000(2) 48.3% $6,000,000 91.6% $5.00
--------- ------ --------- -----
Total............... 2,482,700(1)(2) 100.0% $6,553,325 100.0%
========= ===== ========= =====
</TABLE>
23
<PAGE>
(1) Gives effect to the issuance of 63,000 Common Shares upon the closing of
the Offering pursuant to the Debt Conversion and the Accrued Compensation
Conversion. Does not give effect to the exercise of the Bridge Warrants or
the Other Derivative Securities. See "Bridge Financing", "Management -
Stock Plans", "Certain Relationships and Related Transactions" and
"Description of Securities - Common Shares".
(2) Assumes no exercise of the Underwriter's Overallotment Option. See
"Underwriting".
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 and as adjusted to give effect to the issuance and sale of the
1,200,000 Common Shares offered by the Company at $5.00 per Common Share, and
the application of net proceeds of approximately $4,700,000 therefrom. This
table should be read in conjunction with the financial statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1997
Pro Forma
Actual Pro Forma (1) As Adjusted(2)(3)
<S> <C> <C> <C>
Long-Term Debt................................................. $ 1,024,291 $824,291 $ 54,291
--------- ------- -------
Stockholders' Equity:
Preferred Shares, $.01 par value, 1,000,000
shares authorized, none issued................................ - - -
Common Shares, $.01 par value, 20,000,000 shares authorized,
986,700 shares issued and outstanding (actual), 1,282,700
shares issued and outstanding (pro forma)(1) and 2,482,700
shares issued and outstanding (pro forma, as adjusted)(1)(2).. 9,867 12,827 24,827
Additional paid-in capital...................................... 2,044,758 2,426,698 7,114,698
Retained earnings (Deficit)..................................... (913,480) (913,480) (2,470,530)
------- ------- ---------
Total Stockholders' Equity...................................... 1,141,145 1,526,045 4,668,995
--------- ---------- ---------
Total Capitalization............................................ $2,165,436$ 2,350,336 $4,723,286
========== ========== =========
</TABLE>
(1) Gives retroactive effect to the Honigsfeld Option Exercise in April 1997,
the Debt Conversion and Accrued Compensation Conversion. See
"Management-Stock Plans" and "Certain Relationships and Related
Transactions".
24
<PAGE>
(2) Reflects the issuance of the 1,200,000 Common Shares of the Company offered
hereby, and the anticipated application of the net proceeds of $4,700,000
therefrom, after deducting underwriting discounts and commissions and
estimated expenses of the Offering.
(3) Reflects, a nonrecurring deferred financing charge of $1,557,050 (which
includes, among other things, the difference between the fair market value,
at the time the Bridge Warrants were issued, of the Common Shares issuable
upon exercise of the Bridge Warrants ($4.00 per share) and (ii) the
original exercise price of ($.50 per share) at the time the Bridge Notes
are repaid. See "Financial Statements, Note 7".
DIVIDEND POLICY
Holders of the Company's Common Shares are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company has not declared or paid any dividends in the past and
does not currently anticipate declaring or paying any dividends in the
foreseeable future. The Company intends to retain earnings, if any, to finance
the development and expansion of its business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent upon
future earnings, if any, the Company's financial condition, capital
requirements, general business conditions, and other factors. Therefore, there
can be no assurance that any dividends of any kind will ever be paid.
BRIDGE FINANCING
In October 1996, the Company borrowed an aggregate of $770,000 from 22
lenders (the "Bridge Lenders") in a financing (the "Bridge Financing
Transaction") in which the Underwriter acted as the placement agent. In
consideration for making the loans to the Company, each Bridge Lender received,
for each $10,000 loaned, (i) a promissory note in the principal amount of
$10,000 (each a "Bridge Note") and (ii) five year warrants for the purchase of
5,600 Common Shares of the Company at an exercise price of $.50 per share (the
"Bridge Warrants"). Among the Bridge Lenders were Dong W. Lew ($70,000),
President of the Company, Mark Honigsfeld ($60,000), Chairman of the Board and
Chief Executive Officer of the Company, Murray Gross ($50,000), a principal
stockholder of the Company (Mr. Gross subsequently transferred all his Common
Shares in the Company to his affiliate, About Face, Ltd.), Robert H. Solomon
($45,000), a principal stockholder of the Company, and John P. Hefferon
($10,000), Executive Vice President - Sales and Marketing of the Company.
Subsequent to the closing of the Bridge Financing Transaction, two of the Bridge
Lenders agreed to cancel their Bridge Warrants for the purchase of an aggregate
of 42,000 Common Shares (including Mr. Lew who agreed to cancel his Bridge
Warrant for the purchase of 39,200 Common Shares). In addition, subsequent to
such closing, the Company and the Bridge Lenders agreed that the exercise price
of the Bridge Warrants would be $3.00 per share. See "Management", "Principal
and Selling Stockholders" and "Certain Relationships and Related Transactions".
25
<PAGE>
Each of the Bridge Notes is due and payable upon the closing of the
Offering of the Company's securities described in this Prospectus, or over a 120
month period commencing on September 15, 1999 if the Offering does not close by
then. In the event such closing occurs on or before September 15, 1997, no
interest will be payable on the Bridge Notes. If the Offering closes after
September 15, 1997 but before September 15, 1999, interest shall accrue on the
principal of the Bridge Notes, from the date such Bridge Notes were issued at
the rate of 8% per annum. If the Offering closes after September 15, 1999,
interest shall accrue on the principal of such Bridge Notes, from the date such
Bridge Notes were issued, at the rate of 12% per annum until such date, and the
Bridge Notes shall be payable in 120 equal monthly installments with interest
accruing at the rate of 8% per annum. The Company intends to use a portion of
the proceeds of this Offering to repay the Bridge Lenders in full. See "Risk
Factors - Broad Discretion in Application of Proceeds; Repayment of
Indebtedness" and "Use of Proceeds".
The Company entered into the Bridge Financing Transaction because it
required additional financing to fund costs and expenses relating to this
Offering, for certain Common Share repurchases that occurred upon the closing of
the Bridge Financing Transaction, to recruit additional personnel and training
costs, to fund product development costs, to relocate and expand its facilities,
and for working capital, and no other sources of financing were available to the
Company at that time. As part of the Bridge Financing Transaction, the Company
agreed to register, and has included in the Registration Statement of which this
Prospectus forms a part, the Common Shares underlying the Bridge Warrants issued
to the Bridge Lenders for resale under the Act. See "Principal and Selling
Stockholders" and "Underwriting".
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The Company was incorporated in the State of New York on March 31, 1983
under the name of Coastal Computer Systems, Inc. The Company was reincorporated
in the State of Delaware under its present name Compu-DAWN, Inc. on October 18,
1996. The Company is engaged in the business of designing, developing,
licensing, installing and servicing computer software products and systems for
the law enforcement and public safety industry.
The Company generates revenues from the granting of non-exclusive,
non-transferable and non-assignable licenses to use software it has developed,
through fixed price contracts. Revenues from such fixed price contracts are
recognized using the percentage of completion method of accounting. The Company
retains title to the software and warrants that it will provide technical
support and repair any defects in the software at no charge. The warranty period
for each contract 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.
26
<PAGE>
The Company also provides post-contract, customer support to licensees of
its software. Revenues from such services are recognized ratably over the period
of performance. Fees billed and/or received prior to performance of services are
reflected as deferred revenues.
The Company's revenues, expenses and operating results have varied
considerably in the past and are likely to vary in the future. Fluctuations in
revenues depend on a number of factors, some of which are beyond the Company's
control. These factors include, among other things, the timing of contracts,
delays in customer acceptance of the Company's software products, and
competition. See "Risk Factors - Lengthy Sales Cycle".
Historically, the Company's products were marketed primarily in the State
of New York.
Results of Operations
Three Months Ended March 31, 1997 versus 1996 (unaudited)
Revenues
Total revenues for the three months ended March 31, 1997 were $185,801 as
compared to $91,519 for the corresponding period of the prior year, an increase
of $94,282 or 103%. The revenue results reflect an upturn in software sales
activity while maintenance income remained relatively stable.
The Company expects that it will be successful in obtaining maintenance
contracts for any new systems sold in the future and, therefore, deferred
maintenance revenues may vary accordingly.
There is no assurance that the Company will be able to generate significant
revenues in future periods. In fact, for the foreseeable future, inherent with
the typical length in the sales cycle for the licensing of the Company's
software products, and with the in-process development of new products which
have not been brought to the market, the Company believes that it may experience
difficulties in generating increased revenues from new sales. However,
management of the Company believes that through the use of the proceeds of this
Offering for, among other things, product enhancement, marketing, and the
introduction of new products to the market, the Company will be able to increase
revenues over the long-term.
Costs and Expenses
Total costs for the three month periods ended March 31, 1997, as compared
to 1996, increased to $639,698 from $167,384. This increase was primarily the
result of the costs relating to the enhancement and refining of the Company's
current product line, marketing costs, obligations under new key employee
compensation agreements, and the lease for the Company's new premises. In
addition, research and development costs increased to $47,913 from $30,914 when
comparing the three months ended March 31, 1997 to 1996.
27
<PAGE>
Income (Loss)
For the three months ended March 31, 1997, the Company had a net loss of
$513,056, or $.31 per share. For the three months ended March 31, 1996, the
Company had a net loss of $57,261, or $.03 per share. The increased loss was due
to the increased costs, as described above, as well as the effect of the
amortization of the deferred financing costs which were recognized in connection
with the Bridge Financing Transaction. Additionally, the Company may experience
a deferred financing charge of up to approximately $1,557,050 at the time the
Bridge Notes are repaid. See "Financial Statements, Note 7".
Year Ended December 31, 1996 versus 1995
Revenues
Total revenues for the year ended December 31, 1996 were $477,527 as
compared to $1,040,181 for the prior year, a decrease of $562,654 or 54.1%. This
decrease was primarily a result of the decrease in software sales (due to fewer
units sold). Such decrease occurred due to the Company's focus on raising
capital (since late 1995 and throughout the year ended December 31, 1996) and
developing new technology, which diverted the Company's resources away from
sales activities. Such development includes, among other things, the revising of
computer-aided dispatching (CAD) and visual computer-aided dispatching (V-CAD)
(which provides for visual graphic interface), and new wireless mobile computing
technology. The decision to focus on development activities rather than sales of
existing product was made in furtherance of the Company's long-term interest and
future competitiveness rather than to satisfy short-term goals. The Company
believes that the development of enhanced and improved technology will allow the
Company to move away from customer specific one-time sales and enable it to mass
market certain of its products. Management does not believe that acceptance of
the Company's products or timing of contracts significantly contributed to the
decline in revenues during 1996. In addition, management of the Company does not
believe that product obsolescence is a significant factor in the Company's
business since it is continually updating and enhancing its software products.
As a result of the new systems licensed during 1995, maintenance income for the
year ended December 31, 1996 increased by approximately $52,000, from $222,910
to $275,016, when compared to the year ended December 31, 1995.
Costs and Expenses
Total costs increased from $910,200 to $1,087,020 when comparing the years
ended December 31, 1995 to 1996.
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
28
<PAGE>
system. General and administrative expenses increased from $365,760 for 1995 to
$660,006 for 1996. This increase was primarily a result of increased payroll due
to new hires for management and marketing. Research and development costs
increased from $140,275 to $158,099 when comparing 1995 to 1996. This increase
of 12.7% was due to increased payroll and related costs.
Income (Loss)
For the year ended December 31, 1996, the Company had a net loss of
$570,769, or $.34 per share. For the year ended December 31, 1995, the Company
had net income of $78,660, or $.05 per share. The principal reason for this
decrease in earnings is the 54.1% decrease in revenues as discussed above and
the amortization of the deferred financing costs which were recognized in
connection with the Bridge Financing Transaction. Additionally, the Company may
experience a deferred financing charge of up to approximately $1,557,050 at the
time the Bridge Notes are repaid. See "Financial Statements, Note 7".
Liquidity and Capital Resources
At March 31, 1997, the Company had cash of $30,016, accounts receivable of
$197,011, a current ratio of .7:1 and a net worth of $1,141,145. At December 31,
1996, the Company had cash of $286,497, accounts receivable of $100,010, a
current ratio of 1.5:1 and net worth of $1,279,701. Management of the Company
attributes the decline in its financial position to the net loss during the
three month period ended March 31, 1997.
In August 1996, the Company sold 480,300 of its Common Shares for aggregate
proceeds of $144,090. Payment for these shares was held in escrow until the
consummation of the Bridge Financing Transaction which was completed in October
1996 (as discussed below).
In October 1996, in the Bridge Financing Transaction, the Company
successfully completed the sale of 77 units, each unit consisting of a $10,000
Bridge Note and a Bridge Warrant to acquire 5,600 Common Shares of the Company
(Bridge Warrants to acquire 42,000 Common Shares were canceled subsequent to the
closing of the Bridge Financing Transaction as discussed under "Bridge
Financing"). The Bridge Warrants are exercisable only upon the successful
completion of an initial public offering ("IPO") of the Company's Common Shares
as discussed below. Each of the Bridge Notes is due and payable upon the closing
of the Offering. In the event such closing occurs on or before September 15,
1997, no interest will be payable on the Bridge Notes. See "Use of Proceeds" and
"Bridge Financing".
In January 1997, the Company entered into a secured credit facility loan
agreement (the "Credit Agreement") with Mark Honigsfeld, the Chairman of the
Board and Chief Executive Officer of the Company. Pursuant to the Credit
Agreement, the Company borrowed $200,000, all of which is currently outstanding.
The Company and Mr. Honigsfeld have agreed to convert the outstanding loan into
40,000 Common Shares (an effective conversion price of $5.00 per share) upon the
closing of the Offering. In April 1997, the Company and Mr. Honigsfeld amended
29
<PAGE>
the Credit Agreement to provide for an additional line of credit of $500,000. In
May 1997, the Company borrowed an additional $100,000 under the Credit
Agreement. The repayment of up to $200,000 under the Credit Agreement is secured
by a first priority security interest in all the assets owned by the Company.
See "Certain Relationships and Related Transactions".
A portion of the net proceeds of approximately $4,700,000 from the Offering
will be used for product enhancement and development, to repay the Bridge Notes,
for marketing and advertising, for hiring and training of additional personnel
and for the purchase of equipment. See "Use of Proceeds".
Even though revenues declined substantially during 1996, in such year, the
Company moved its facilities to new and more costly space (see "Business
Facilities" and "Financial Statements, Note 12a") and signed new compensation
agreements with certain key employees (see "Management - Employment Agreements"
and "Financial Statements, Note 12d"). Both the new space and the continued
employment of these key individuals are needed in order for the Company to
develop new, and enhance existing, products and to grow in the future. There can
be no assurance, however, that either of these commitments will result in
increased revenues and earnings. Until such time that the Company significantly
increases revenues, the new lease and compensation agreements are likely to
result in continuing operating losses.
The Company currently has no planned capital commitments.
Cash Flows - Three Months Ended March 31, 1997 versus 1996 (Unaudited)
For the three months ended March 31, 1997, cash utilized by operating
activities was $359,898 as compared to $27,998 of cash provided by operating
activities for the three months ended March 31, 1996. This is primarily a result
of the increased operating costs incurred during the three months ended March
31, 1997.
For the three months ended March 31, 1997, $12,617 was provided by
investing activities, primarily from the purchase by Mr. Honigsfeld from the
Company of the promissory note of Dong Lew (as described under "Certain
Relationships and Related Transactions"), net of fixed asset purchases. For the
three months ended March 31, 1996, no funds were provided or utilized by
investing activities.
For the three months ended March 31, 1997, cash provided by financing
activities aggregated $90,800 due to the Company borrowing $200,000 from Mr.
Honigsfeld under the Credit Agreement, net of certain equity purchases and
expenses in connection with the Offering. The Company utilized cash of $10,774
in financing activities for the three months ended March 31, 1996 primarily due
to certain equity transactions.
30
<PAGE>
Cash Flows - Year Ended December 31, 1996 versus 1995
For the year ended December 31, 1996, cash utilized by operating activities
was $289,383 as compared to $50,654 of cash provided by operating activities for
the prior year. This is primarily a result of higher software sales generated in
1995 as compared to 1996 thereby generating more receipts from customers.
For the year ended December 31, 1995, $32,712 was utilized by investing
activities, primarily for the purchase of fixed assets. For the year ended
December 31, 1996, $176,609 was utilized by investing activities primarily for
purchases of fixed assets and for a loan to an officer.
For the year ended December 31, 1996, cash provided by financing activities
aggregated $646,527, primarily due to the completion of the Bridge Financing
Transaction in October 1996 in the amount of $770,000. The Company utilized cash
of $98,063 in financing activities for the year ended December 31, 1995
primarily due to payments of debt and the repurchase of Common Shares from
former shareholders.
Other
The Company believes that the cash it generates from operations, and the
expected net proceeds from the Offering, will be sufficient for at least the
ensuing 12 month period.
Forward Looking Statements
Except for historical information contained herein, the matters set forth
above contain forward looking statements that involve certain risks and
uncertainties that could cause actual results to differ from those in the
forward looking statements. Potential risks and uncertainties include such
factors as the level of spending by law enforcement and public safety agencies
for computer application software and hardware, the competitive environment
within the industry, the ability of the Company to expand its operations, the
competency required, and experience, of management to effectuate the Company's
business plan, the level of costs incurred in connection with the Company's
planned expansion efforts, economic conditions in the industry and the financial
strength of the Company's customers and suppliers.
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
31
<PAGE>
location ("AVL") (employing dynamic map displays), records management, and
photo-imaging database systems. These modules may be integrated and licensed as
a package, or may be licensed individually.
Certain of these applications utilize telecommunications and space
satellite technology, other infrastructure, and hardware provided by third
parties. The third party providers of such technology and infrastructure, with
respect to a particular customer's system, vary depending on the location of the
customer and whether or not the customer has a business relationship with a
third party provider. Accordingly, the Company is not dependent on any
particular third party's technology or infrastructure for its software systems
to function. These third parties are typically major CDPDs (cellular digital
packet data providers) such as AT&T, Bell Atlantic Corporation ("Bell
Atlantic"), NYNEX Corp. ("NYNEX"), and GTE, or dedicated radio frequency data
network providers such as RAM Mobile Data USA Limited Partnership ("RAM Mobile
Data") and Motorola Inc. ("Motorola"). The Company's AMO system requires
computer hardware and services from third party providers, and interfaces with
dedicated radio frequencies owned by the Company's customers which require
special radio equipment provided by companies such as Motorola and Dataradio
Corp. The Company's customers may purchase such technology, infrastructure,
services and hardware directly from these providers, and, with respect to radio
equipment, through authorized dealers as well.
The Company's software is compatible with virtually all operating systems.
The Company has installed its systems in more than 55 agencies, primarily law
enforcement agencies located in the state of New York. The Company provides a
full range of product support and maintenance services, both on-site and by
remote connection.
Industry Background
The goal of law enforcement and public safety agencies is to maximize the
safety and improve the quality of life of people and communities. The
effectiveness of a law enforcement or public safety agency is dependent on its
personnel and resources. Such effectiveness is enhanced by maximizing the patrol
time of agency personnel, and the availability of timely, accurate and reliable
information. This allows services to be provided in an efficient, cost-effective
manner. Computer technology is an important tool for providing information to
law enforcement and public 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.
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Computer technology has been developed for the public safety market to
address these needs. CAD systems, integrated with enhanced 911 ("E911") systems,
allow a dispatcher to retrieve information about the 911 caller, and the
location and the individuals involved in the incident being reported. Mobile
wireless communication systems in vehicles provide agency personnel in the field
with the ability to receive information regarding an incident and the people
involved, such as location, "mug shots" and photographs, and arrest and booking
data. Such systems also enable such personnel to go "on-line" with the agency's
database, and with other vehicles, in real time. Wireless communication systems
also provide personnel with the capability to file reports from their vehicles
instead of having to return to the station. This increases personnel time and
visibility in the community. AVL system technology provides a dispatcher with
the capability of immediately identifying the location of the most appropriate
vehicle to investigate an incident, significantly shortening response time.
Without an AVL system, a dispatcher has to alert the vehicles in the field of an
incident and then wait, as they report their location and/or availability,
before determining which vehicle would be the most appropriate to respond to an
incident. Information sharing technology allows agencies to link their databases
to local, state and national crime databases to access information for more
in-depth and efficient investigation of incidents. Records management and
photograph imaging systems for law enforcement agencies make arrest and booking
procedures and incident investigations more efficient, while similar systems for
fire and EMS departments contribute to the efficient deployment of firefighting
and emergency equipment and investigation of incidents. Without a computerized
records management system, records and reports would need to be handwritten or
typed, and physically stored in various filing cabinets, file rooms, or on
microfilm or microfiche. In such form, such reports are comparatively error
prone, and may be misplaced or unavailable, which makes retrieval difficult and
time consuming. Computerized records systems allow for easy entry and retrieval,
and increased productivity, enabling agency personnel to spend more time "on the
beat" in the community.
In essence, the foregoing computer technology enables law enforcement and
public safety agencies to allocate and utilize resources and manpower hours to
maximize their goal of public safety.
The Company believes that the market for application software and
technology products utilized in the law enforcement and public safety market is
growing due to (i) an increased public and governmental priority for law
enforcement and public safety, (ii) an awareness that specific computer
technology for the law enforcement and public safety market now exists, (iii)
the availability of federal funding assistance to obtain computer equipment and
technology, (iv) breakthroughs in development of new mobile wireless computer
communications technology and (v) acknowledgment by certain agencies that
computer-aided law enforcement has contributed to a recent drop in crime rates,
and the ability to effectively handle increasing incidents of crime without
increasing personnel. For example, The New York Times recently reported that New
York City's mayor and top police officials attribute that city's drop in crime
rate, in part, to a series of new police strategies which includes, among other
things, the use of computer technology that has allowed the police department to
identify crime patterns much more quickly and flood problem streets with
undercover and beat officers. Also, the city of Chicago has installed an E911
dispatch system which has contributed to a recent decline in crime. In addition
to New York City and Chicago (which do not utilize Company systems), the city of
Glens Falls, New York, a customer of the Company, recently advised the Company
that, although incidents of crime had increased, its computer system enabled the
police department to effectively respond to, and handle, these incidents without
increasing personnel.
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Development of Technology
The Company's current technology has been developed and enhanced over
approximately an eight year period by Dong H. Lew, the Company's President, Alan
Daniels (the Company's founder and former President) and technicians employed by
the Company. Mr. Daniels no longer has any daily involvement with the operations
or research and development activities of the Company; however, he is available
as needed by the Company, from time to time, pursuant to an informal arrangement
to provide consulting services on technical issues and software programming on
an hourly basis. The Company's technology is not patented or covered by any
registered copyrights; however, the Company believes that its software programs
have copyright protection under common law. The Company does not license any
technology from third parties other than technology for certain operating
software. The Company continually undertakes research and development, under the
supervision of Mr. Lew, and Louis Libin, the Company's Chief Technology Officer,
to develop new, and enhance existing, technology and products. The Company
cannot, however, give any assurance that it will develop any new products or
technology, or enhancements for existing products and technology, or that the
Company will have the services of Mr. Lew or Mr. Libin indefinitely. If it does
develop or enhance any products or technology, the Company cannot predict the
pace or time period of such new developments or enhancements, the costs relating
to such research and development (which could be significant or prohibitive), or
the availability of qualified technical personnel. See "Risk Factors - Evolving
Market; New Product Development; Technological Obsolescence", "Risk Factors
Intellectual Property Protection and Infringement", "Risk Factors - New
Management Team; Dependence on Executive Management; Need to Retain Key
Personnel" , "Risk Factors - Dependence on Licensors" and "Business Intellectual
Property Rights and Licenses".
Products and Services
Products
The Company's software products consist of CAD systems, computer interface
systems which connect the customer's computer system to local, state and
national crime information databases, AMO communication systems utilizing radio
frequency, AVL systems employing dynamic map displays, records management
systems, and photo-imaging database systems. Certain of the Company's software
systems also interface with and utilize space satellite technology,
telecommunications technology, computer hardware and other infrastructure
provided by third parties. The Company's software is compatible with virtually
all operating systems, utilizing a 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
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maximizes efficiency since data entered into one module will be available in all
modules in real time. A hybrid network comprised of certain of the Company's
modules and other software systems may require data to be entered into the
Company modules and other software systems separately.
The price to the customer of the Company's products, whether a "total
solution" package or individual modules, varies depending on several factors,
including the need for, and existence of, communication infrastructure in the
customer's jurisdiction (such as radio towers necessary for AMO radio frequency
modules), volume of use of telecommunications systems (such as telephone lines
and radio cells), and the customer's computer hardware requirements to implement
the software system.
The Company's ALECS 2000(TM) product line for law enforcement and its
AFFECT(TM) product line for fire and EMS are similar in many respects. Both
address the reporting of incidents, the dispatch of resources and the deployment
of personnel.
In May 1997, the Company received the 1997 Long Island Software Awards
("LISA") software product of the year award for its ALECS 2000(TM) software. The
Company competed with 15 finalists for this award including, among others, Long
Island Lighting Company ("LILCO"), Henry Schein, Inc., Life Sciences Associates,
Lightstone Group, and Quantum Research and Technologies, Inc. The 1997 LISA was
sponsored by the Long Island Research Institute, State University of New York at
Stony Brook, Cheyenne Software, Inc., Computer Associates, Inc., LILCO,
Renaissance Technologies and Symbol Technologies, Inc., among others.
The Company's modules are described below. See "Business - Customers".
Computer-Aided Dispatching - CAD and AVL
The Company's CAD system, under both the ALECS 2000(TM) and AFFECT (TM)
product lines, integrates several software and communications technologies, such
as E911 dispatch systems, mapping software integrated with global positioning
systems for vehicle tracking, and geo-based mapping systems, which include
street addresses and intersections, longitude/latitude, and other information to
identify the locations and addresses of incidents. The integration of these
systems with the Company's CAD software provides to police and other public
safety agencies the capability to respond rapidly and efficiently to incidents,
and streamlines record management, enhancing productivity and accuracy of record
keeping. The Company is currently developing, and readying for beta site
testing, visual CAD software (known as V-CAD, or Visual Computer-Aided
Dispatching), which, in addition to having greater functionality than the
current CAD system, is more user-friendly and provides the dispatcher with touch
screen graphical interfacing and the ability to dispatch police, fire and/or EMS
agencies at the same time.
The CAD system allows the dispatcher receiving the E911 call to immediately
identify the caller's telephone number, the related address, and the name of the
telephone number owner (unless the call is made from a cellular phone). The CAD
system enables the dispatcher to access any records maintained in the agency's
database relative to that person or the location of the incident (e.g. gun
permit issued, prior domestic violence or prank calls) as well as in local,
state and national crime information databases.
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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".
As a recently developed product, AMO is subject to the risks inherent in
the development of new technology, including unanticipated delays in
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implementing the system, expenses, technical problems or difficulties and the
possible insufficiency of funding to complete development. See "Risk Factors -
Evolving Market; New Product Development; Technological Obsolescence".
Records Management
The Company's records management systems for law enforcement and other
public safety agencies offers a wide range of options and flexibility to fit an
agency's needs and budget. The ALECS 2000(TM) records management system
processes data from the incident report through prosecution, and is made up of
component sub-modular units, including a records management system, a
photograph/"mug shot" imaging system, a parking violation system, and a false
alarm billing system. The AFFECT(TM) records management system processes data
from the incident report through closing the investigation, and also provides
information such as the location of resources, including, without limitation,
hydrants and secondary sources of water (such as ponds, lakes, rivers, and
seawater access), foam and other chemical fire extinguishing material, hoses and
jaws-of-life.
As discussed above, the Company's records management systems obviate the
need for handwritten or typed reports and physical filing systems which are
cumbersome, error prone, and make for difficult and time consuming information
retrieval.
Local Court Records Management and Sheriff's Records Management
The Company's products also include records management systems which are
specifically designed for local courts and sheriff departments. The local court
records management system records summonses, tracks fines payable and enters the
appropriate dates on court calendars. The sheriff's records management system
provides several functions through the following sub-modules: civil
warrants/attachment records management, pistol permit records management, photo
imaging/booking for county jails, property records management, jewelry recovery
and pawn shop records management, and police academy records management. One of
the goals of this technology is to streamline procedures and allow for more
efficient allocation of resources and manpower hours.
Services
Installation and Training
System installation is an integral part of the Company's services. The
Company's installation procedure commences with an in-depth consultation with
the customer to determine the appropriate modules needed to meet the customer's
particular requirements within budgetary parameters. Once the customer's needs
have been identified, the Company provides customized system design and file
creation. The Company then implements the system, undertakes system start-up and
provides training for the customer's personnel in the operation of the Company's
software products. Customer training is conducted either at the customer's site
or at a remote location, and can range up to several days, depending on the
customer's particular system.
Support and Maintenance
The Company provides post-installation system software maintenance and
training support for all of its software products. The Company's systems support
teams, which include communications and software technicians and program
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developers, are available to assist customers via telephone access, 24 hours a
day, seven days a week, 52 weeks a year, and provide on-site support, pursuant
to a software maintenance agreement. Software updates and enhancements to the
modules are included under maintenance contracts. Customers pay the Company a
set monthly service fee (currently ranging between 1% and 2% of the installation
contract value) which is dependent on the extent and complexity of the
customer's system. Currently, the Company has maintenance agreements with all of
its customers. During the fiscal years ended December 31, 1995 and 1996, support
and maintenance income represented approximately 21% and 58%, respectively, of
the Company's revenues. See "Business-Customers".
Possible Future Acquisitions
In addition to the foregoing products and services, the Company intends to
explore opportunities to add, through acquisition or licensing, technology or
products to enhance or add to its current product line, or to acquire a customer
base or sales organization to augment the Company's infrastructure. The Company
is not actively seeking any acquisition at this time. In exploring a potential
acquisition or license, the Company will consider, among other criteria, the
comparative cost to the Company in capital, resources and personnel to create
the identified technology or product, or establish the targeted customer base or
sales organization, restrictions on the Company developing similar technology or
products arising from patent or other intellectual property protection, and the
synergy of the identified technology or products with the Company's products and
organization. At present, the Company has not identified any acquisition or
license candidates and it does not have any current plans, proposals or
arrangements with respect to any acquisitions; however, it is actively seeking
such candidates. There can be no assurance that the Company will identify any
acquisition or licensing candidates or, if it does, that it will be able to
reach any agreements to acquire or license technology or products, or acquire
assets, on terms acceptable to the Company. With respect to possible
acquisitions or licensing agreements, the Company may, from time to time, enter
into agreements with related parties (of which none are presently contemplated).
In such case, the Company anticipates that the terms of such agreements will be
commercially reasonable and no less favorable to the Company than the Company
could obtain from unrelated third parties. Additionally, the Company intends
that such agreements will be approved by a majority of disinterested directors.
See "Risk Factors - Unascertainable Risks Related to Possible Unspecified
Acquisitions" and "Use of Proceeds".
Intellectual Property Rights and Licenses
The Company's products are based on approximately 3,000 interdependent
software application programs and system utility modules, including software
developed for creating applications of the modules. The Company's technology is
not patented and the Company has not obtained, or applied for, copyright
registration for any of its software. Although the registration of a copyright
in the United States copyright office provides a rebuttable presumption of the
copyright's validity, such registration is not required to make a copyright
legally effective, and the Company believes that its software programs have
copyright protection.
The Company believes that it takes at least two to three months of training
for a programmer to grasp the complete structure of the Company's software. The
Company requires every employee to sign an agreement of nondisclosure and
assignment of development rights. While large software vendors often institute
lawsuits to protect software property rights against infringers, the Company
believes that, in its case, the complexity and total system integration of the
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Company's products best protects its trade secrets. There can be no assurance
that the intellectual property and contractual rights on which the Company
relies to protect its intellectual property and confidential and proprietary
information will provide it with meaningful protections. See "Risk Factors -
Intellectual Property Protection and Infringement".
The Company utilizes certain operating system software (written in the "M"
computer programming language and owned by Intersystems, Inc. ("Intersystems")),
in the development of its software systems. The Company uses such operating
system software pursuant to a perpetual license which allows the Company to use
such software to create its software modules, and, in some cases, to "bundle"
such operating system software with its own software as part of its software
products. The Company pays Intersystems a monthly fee to sublicense such
operating software (based on the number of product units in which Intersystem's
operating system software is included), and an annual fee to use such operating
software to create software (based on the number of product units for which the
third party's operating system software is used to create). The termination of
this license could have a material adverse effect on the Company's ability to
produce and deliver its software products on a timely basis. If such license is
terminated, the Company would be required to license alternative operating
system software. The Company believes alternative operating system software
written in different versions of the "M" computer programming language is owned
by, and currently available from, other sources. However, the Company would have
to revise its software to make it compatible with such alternative operating
system software, which the Company believes would result in production and
delivery delays of approximately three to six months. See "Risk Factors -
Dependence on Licensors".
Sales and Marketing
According to the National Directory of Fire Chiefs and Emergency Department
(1993) and the National Directory of Law Enforcement Administration (1996), the
national law enforcement and public safety market is estimated to have more than
18,000 law enforcement agencies and more than 35,000 fire departments. Based on
management's exposure to the marketplace, the Company believes that the majority
of such agencies currently have limited or no computerization of their law
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 seeks to create business
partnerships and subcontractor relationships with large system integrators and
public network providers in order to have the resources needed to establish a
presence in the "large size" market segment (i.e. departments or agencies with
more than 200 sworn officers or personnel). Business partnerships are currently
in place with AT&T Wireless Data, Inc., GTE Mobilnet Service Corp., and Data
General. The Company is also seeking subcontractor relationships with system
integrators and network providers including International Business Machines
Corp. ("IBM") (with which the Company has acted as a subcontractor in the past,
as described below), Bell Atlantic, Motorola and RAM Mobile Data. No revenues
have been derived to date from the Company's established business partnerships
(which set forth the relationship of the parties in the event of a system
installation and do not relate to any particular customer contracts) and no
assurances can be given that the Company will derive revenues therefrom. In
addition, no assurances can be given that the Company will enter into any other
business partnerships or subcontractor relationships.
The Company monitors governmental announcements of officially published
requests for proposals ("RFPs") to find business partnership or subcontracting
opportunities. The selection of the appropriate large system integrator by the
Company as a potential business partner or prime contractor often depends on the
specifications in the RFP. The Company's strategy includes contact with large
system integrators to demonstrate the Company's product capabilities and, more
importantly, to establish a credible presence for participating in "large size"
market segment projects. Although, in the past, the Company has had some success
in partnering with large system integrators, no assurance can be given that the
Company will be viewed by these entities as an acceptable business partner or
subcontractor in the future. If the Company is unable to establish such a
business relationship, its plans to expand into the "large size" market segment
may be delayed or hindered due to a limitation of resources needed to respond
competitively to RFPs or to meet "large size" market segment agency
requirements. See "Risk Factors-Dependence on Business Partnerships and
Subcontractor Relationships", "Risk Factors - Limited Sales and Marketing
Experience" and "Business - Competition".
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Increase in Sales Staff
Until recently, the Company had no sales staff and sales efforts were
conducted by one of the Company's principals and its project manager. Since the
closing of the Bridge Financing Transaction, the Company has retained four
full-time sales associates. The Company intends to use a portion of the proceeds
of this Offering to increase sales staff in order to penetrate geographic
markets beyond New York. In addition, the Company has engaged a marketing
support person, a technical writer and other individuals to coordinate
installations, handle subcontract relations with large system integrators, and
provide technical sales support. See "Risk Factors - Challenges to Management of
Growth", "Risk Factors - Limited Sales and Marketing Experience" and "Use of
Proceeds".
Customers
The Company has installed various modules of its software systems for, and
provides maintenance and support services to, 58 customers, 54 of which are law
enforcement agencies and four of which include fire and EMS departments. The
following customers accounted for the following percentage of software sales
revenues for the fiscal year ended December 31, 1995: Onondaga County (New
York), 42.8% and the Queens County (New York) District Attorney, 21.4%. No other
customer accounted for 10% or more of the Company's software sales during such
period. The following customers accounted for the following percentages of
software sales for the year ended December 31, 1996: Madison County (New York),
28.2% and Westchester County (New York), 18.6%. No other customer accounted for
10% or more of the Company's software sales during such period. The project
undertaken by the Company for Onondaga County is described below. The Company
provided consulting services to the Queens County District Attorney's Office
with respect to the conversion of an early dialect of the "M" computer
programming language running on that agency's old hardware system to a current
standard version of "M" running on a high-speed multi-processor Unix(R)
computer. The Company sold to, and installed in, Madison 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
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municipality dispatching and toward county-wide dispatching. As a result of this
trend, the Company believes that there will be a need in the near future for
comprehensive public safety systems which will address and integrate the needs
of police, fire and EMS departments. As a "total solution" software system
provider, the Company believes that, with the proceeds of this Offering and the
successful implementation of its marketing and product development plan, it will
be in a position to meet such needs. See "Risk Factors - Dependence on
Significant Customers", "Use of Proceeds" and "Business - Sales and Marketing".
Typically, a customer will procure a software system from the Company under
a perpetual license, pursuant to which the Company will be paid a percentage of
the license fee at the time the contract is entered into, and then will receive
further installments as certain performance milestones are met, until completion
of the contract. After the contract is completed, any further revenues from that
customer are usually derived from a maintenance and support contract. From time
to time, however, the Company may receive additional contracts from an existing
customer for add-on modules, an aspect of business which the Company intends to
market more aggressively in the future. See "Business-Sales and Marketing".
The length of time that it takes to complete a systems installation
contract varies (generally from three to twelve months), depending on the nature
and complexity of the system and the customer's internal procurement procedures.
During the period of time that installments are being paid, the customer, or a
small number of customers with contracts in progress, may account for a
significant percentage of the Company's revenues. However, once those contracts
are completed, such customers will no longer represent a material portion of the
Company's future revenues. Accordingly, the Company does not rely on such
customers for a continuing revenue stream and the Company does not believe that
the make-up of its current significant customers is material to an understanding
of the Company's future business prospects. However, the Company anticipates
that at any particular time a limited number of large customers will continue to
represent a significant portion of its revenues for the foreseeable future. See
"Risk Factors - Lengthy Sales Cycle", "Risk Factors - Evolving Market; New
Product Development; Technological Obsolescence", "Risk Factors - Significant
Customers" and "Business - Sales and Marketing".
The following two examples are illustrative of the diverse application of
the Company's products and services:
(i) The Onondaga County Police Department utilizes an AMO application,
designed, developed and installed by the Company, which links over 700
police, fire and EMS vehicles. For this project, the Company was
retained by IBM as a subcontractor to design, develop, install and
service all the required AMO software. The project included
integration by the Company of IBM and Digital Equipment Corp. hardware
which already contained application software provided by other
subcontractors for both records management and computer-aided
dispatch; and
(ii) The Company, as prime contractor, designed, developed and installed a
"total solution" system for the Putnam County Sheriff's Office, a
comparatively small agency of seven vehicles. The system consisted of
a records management system, a CAD system and an AMO system.
42
<PAGE>
Competition
The Company faces competition in the "small size" market segment (which the
Company views as departments or agencies with 20 or fewer sworn officers or
personnel) and the "medium size" market segment (which the Company views as
departments or agencies with 21 to 200 sworn officers or personnel) from
companies such as NewWorld Systems, Pamet Systems, Inc. and Software Corporation
of America. Although such competitors have significantly greater financial,
technical and other resources than those of the Company, the Company feels that
it has been able to compete successfully in such market due to its "total
solution" system integration technology and local presence, the Company having
installed systems in over 50 "small size" and "medium size" law enforcement
agencies in the state of New York. The Company believes further that, as it
expands its presence to other geographical areas and market segments, sales to
such agencies are likely to develop outside of its current primary market of New
York.
The Company believes that more intense competition exists in the "large
size" market segment in which the system price ranges widely (between $1 million
and $100 million) depending on the size of the customer and the complexity of
the system (as compared to the Company's typical sale in the "small size" and
"medium size" market segments, which historically has ranged between $25,000 and
$350,000). The "large size" market is dominated by software vendors, such as PRC
Public Safety, Inc. and Systemhouse, Ltd., and large system integrators such as
IBM, Andersen Consulting, Electronic Data Systems and Harris Corporation. In
order to penetrate the "large size" market segment, the Company is pursuing
business partnerships 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
43
<PAGE>
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 24 full-time employees and one part-time
employee, including eight software developers/programmers, one technical writer,
one marketing employee, four sales persons, and 12 executive and administrative
personnel. The Company also has two part-time industry consultants. Management
believes that its relations with its employees are satisfactory.
The Company's Product Development Group performs research and development
activities and its Customer Service Support Group handles installations,
maintenance and service. The Company's new customers are trained by consultants
who generally are retired and active-duty police officers from police
departments that have systems installed by the Company. The Company's daily
operations are managed by a software development manager, a manager of
operations, and a director of technology.
Facilities
The Company's executive offices are located at 77 Spruce Street,
Cedarhurst, New York where it leases approximately 5,000 square feet of space.
The premises are held pursuant to a five year double net lease expiring in
September 2001 that provides for a base annual rental of approximately $85,000.
The Company believes that its premises are adequate for its needs for the
foreseeable future.
44
<PAGE>
<TABLE>
<CAPTION>
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.
<S> <C> <C> <C>
Class of
Name Age Positions Held Directorship(1)
Dong W. Lew 67 President, Chief Operating I
Officer, Treasurer and Director
Mark Honigsfeld 43 Chairman of the Board, Chief II
Executive Officer, Secretary
and Director
Louis Libin 38 Chief Technology Officer and III
Director
John P. Hefferon 51 Executive Vice President - Sales -
and Marketing
William D. Rizzardi 54 Director I
Harold Lazarus, Ph.D. 70 Director II
</TABLE>
- ------------------
(1) The Company's Certificate of Incorporation provides for three classes of
directors. The term of each class is three years except that the initial term of
office of the Class I directors will expire at the Company's annual meeting of
stockholders in 1997 and the initial term of office of the Class II directors
will expire at the Company's annual meeting in 1998.
Dong W. Lew
Mr. Lew joined the Company in 1988. He was elected a director
and the President in August 1992 and was elected Treasurer in August
1996. He graduated from the Massachusetts Institute of Technology
("M.I.T.") with a Bachelor of Arts Degree in Business and Engineering
Administration, and has over 25 years of experience in the computer
industry. From 1981 to 1988, Mr. Lew was an independent computer
consultant providing turnkey computer systems with custom software to the
manufacturing and publishing industries. Prior to 1981, he was employed
in computer systems design and managerial capacities by such firms as
Mergenthaler, Inc., Harris-Intertype, Inc., and Codesco International,
Inc.
45
<PAGE>
Mark Honigsfeld
Mr. Honigsfeld joined the Company as Chairman of the Board,
Secretary and a director in August 1996 and, effective October 1, 1996,
he was elected Chief Executive Officer of the Company. In 1978, he
founded Facelifters Home Systems, Inc. ("FACE"), a cabinet manufacturing
and installation company for which he served as Chief Executive Officer
and Chairman of the Board until April 25, 1996. On such date, FACE, a
publicly-traded company, was acquired by a New York Stock Exchange
company in a transaction valued at approximately $70 million to FACE's
stockholders. Prior to the merger, FACE's revenues on an annualized basis
approached $50 million. As the founder, Chief Executive Officer and
Chairman of the Board, Mr. Honigsfeld was directly involved in the
planning and development of almost all areas of FACE's business,
including corporate finance, public offerings, investor relations,
mergers and acquisitions, licensing, product design and engineering,
sales and marketing, manufacturing, field installation, customer service,
management information services and management training. Prior to the
sale transaction, FACE had approximately 600 employees and associates
representing its products and services at 28 locations in 14 states,
approximately 135 telemarketing personnel, 180 direct sellers, 120
manufacturing employees and 165 supervisory, management and
administrative personnel. In addition, FACE had working arrangements with
approximately 175 independent contracting companies nationwide. Mr.
Honigsfeld holds a Bachelor of Science Degree in Industrial Arts, magna
cum laude, and a Master of Science Degree in Industrial Arts, with
honors, from City College of the City University of New York.
Louis Libin
Mr. Libin joined the Company in January 1997 on a per diem basis
as Chief Technology Officer and a director. Effective March 10, 1997, he
began to serve as the Company's Chief Technology Officer on a full-time
basis. Since 1989, Mr. Libin has represented the United States on
satellite and transmission issues at the International Telecommunications
Union (the "ITU") in Geneva, Switzerland. Mr. Libin has also been
Chairman of the Expert Group On Broadcast Interactive Services of the ITU
since 1991. From 1987 to 1997, Mr. Libin served as the Director of
Technology (specializing in broadcast transmission systems) for the
General Electric Corporation ("GE") and the National Broadcasting
Corporation. From 1995 to 1997, Mr. Libin also served as Assistant
Secretary of all GE's wholly-owned subsidiaries that are involved in
broadcast media, with the responsibility for technical developments and
all Federal Communications Commission (the "FCC") issues and licenses.
From 1983 to 1986, Mr. Libin was a project manager for Radio Corporation
of America ("RCA") until RCA's acquisition by GE. From 1981 to 1982, Mr.
Libin was employed by the Loral Corporation as an electronic design
engineer where he designed radio frequency systems for the United States
military. From 1980 to 1981, Mr. Libin was a design engineer for the
Chryon Corporation, a computer graphics company. From 1979 to 1980, he
worked for Burroughs Computer Systems, Inc. (now part of Unisys) as a
field engineer. Additionally, since 1988, Mr. Libin has acted as a
consultant and advisor to the FCC in connection with the planning of
communications systems and logistics for major events in the United
States and abroad, including political conventions, presidential
inaugurations, and
46
<PAGE>
the Olympics. Mr. Libin is an active member of the National Society of
Professional Engineers and the Association of Federal Communications
Consulting Engineers. He also sits on the Engineering Advisory Board of the
National Association of Broadcasters. Mr. Libin received a B.S.E.E. Degree
in Electrical Engineering from the Pratt Institute and completed his
graduate studies in optical electronics at M.I.T.'s Executive Program in
1991. Mr. Libin has planned and managed telecommunications projects in the
United States and in Europe. Mr. Libin was responsible for the planning and
implementation of a new television and telecommunications network in New
Zealand in 1990. Mr. Libin has also provided expert consulting on satellite
issues in certain of the republics of the former Soviet Union. Mr. Libin
was also instrumental in the development of the new transmission technology
and the algorithms for software modeling of the new North American digital
terrestrial television system which was approved by the FCC in 1996. Mr.
Libin has published numerous scientific papers in radio frequency and
telecommunications.
John P. Hefferon
Mr. Hefferon joined the Company in October 1996 as Executive
Vice President - Sales and Marketing. From January 1973 to January 1987,
he served in various positions with Wang Laboratories, Inc. ("Wang
Laboratories"), including sales representative, branch manager, district
manager, Atlantic area director and Eastern Regional Vice President Sales
and Marketing of Wang Financial Information Services Corporation, a
subsidiary of Wang Laboratories (a position he held for eleven years).
From January 1987 to November 1988, Mr. Hefferon worked for Computer
Leasing, Inc. where he was involved in arranging lease financing for
multi-million dollar IBM mainframes in the Fortune 500 marketplace. From
late 1988 through March 1990, Mr. Hefferon was Eastern Regional Director
for Imnet, Inc., a start-up imaging software company. From March 1990 to
August 1995, Mr. Hefferon served in several executive sales and marketing
positions with Allerion, Inc., a network systems integrator. From August
1995 to October 1996, Mr. Hefferon served as Vice President - Sales of
Ultradata Inc., an application software company.
William D. Rizzardi
Mr. Rizzardi joined the Company in January 1997 as a director.
Since December 1996, Mr. Rizzardi has been the President of Environmental
Solutions Corporation, a bio-remediation company. From 1995 to 1996, Mr.
Rizzardi was an independent management consultant to the Long Island
Research Institute, a not-for-profit technology development laboratory.
From 1979 to 1994, Mr. Rizzardi held various positions with Northrop
Grumman Corporation and its affiliates, including a Vice President of
Grumman Data Systems Division, where he was responsible for the
development, operations and support of all information systems for the
Grumman Corporation, Corporate Vice President of Information Management
and Chief Information Officer of Grumman Data Systems Division, and a
Vice President of Northrop Grumman Corporation - Data Systems and
Services Division following the acquisition of Grumman Corporation by
Northrop Corporation. Mr. Rizzardi received a Bachelor of Science Degree
in Nuclear Physics from City College of the City University of New York
and a B.S.E.E. Degree in Management from the Sloan School of M.I.T.
47
<PAGE>
Harold Lazarus, Ph.D
Dr. Lazarus joined the Company as a director in March 1997. Dr.
Lazarus has been a Professor of Management at the Hofstra University
Frank G. Zarb School of Business (the "Hofstra Business School") since
1980. From 1973 to 1980, Dr. Lazarus served as Dean of the Hofstra
Business School. Dr. Lazarus is an organization development consultant
who lectures in Europe, Asia, North America and South America on
leadership, time management, total quality management, managing
change, effective meetings, problem solving, decision making, mission
statements, management by objectives, and communications. Dr. Lazarus
was Professor of Management at the New York University Leonard N.
Stern School of Business for ten years, and he also taught at Columbia
University Graduate School of Business and Harvard University Business
School. Dr. Lazarus currently serves as a director of Graham-Field
Health Products, Inc., a New York Stock Exchange - listed manufacturer
and wholesaler with $200 million in annual sales. Dr. Lazarus has
served on several boards of directors of public companies in the past,
including FACE, Ideal Toy Corporation, Superior Surgical Manufacturing
Company, and Stage II Apparel Corporation. Dr. Lazarus has published
seven books and 65 articles on business management. He also chairs the
board of Phi Beta Kappa Alumni of Long Island (New York). Dr. Lazarus
received a Masters of Science Degree and a Doctor of Philosophy Degree
in Management and Marketing from Columbia University.
Each director will hold office until the next annual meeting of
stockholders during the year in which the term of his class of directorship
expires and until his successor is elected and qualified. Executive officers
serve at the pleasure of the Board of Directors. See "Risk Factors - Control of
the Company" and "Certain Relationships and Related Transactions".
There is no family relationship among any of the Company's executive
officers and directors.
Executive Compensation
The following table provides summary information concerning cash and
certain other compensation paid or accrued by the Company to, or on behalf of,
Mr. Lew, the Company's President, and Mr. Honigsfeld, the Company's Chairman of
the Board and Chief Executive Officer, during the last three fiscal years. Mr.
Honigsfeld was elected Chairman of the Board and Chief Executive Officer in
August 1996 and October 1996, respectively. No other executive officer of the
Company had a combined salary and bonus in excess of $100,000 for the year ended
December 31, 1996.
48
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principal Positions Year Salary Bonus Compensation Award(s) Options Payout Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark Honigsfeld (1) 1996 $62,500(2) - - - 233,000 - -
Chairman of the Board, 1995 - - - - - - -
Chief Executive Officer 1994 - - - - - - -
and Secretary
Dong W. Lew (3) 1996 $87,500(4)$15,000 (5) - - 156,950 - -
President and 1995 $70,980 - - - - - -
Treasurer 1994 $70,980 - - - - - -
- -----------
</TABLE>
(1) Mr. Honigsfeld was elected Chief Executive Officer of the Company and was
entitled to compensation effective as of October 1, 1996.
(2) Represents accrued and unpaid salary relating to 1996 (based on a salary
of $250,000 per annum) which is being converted into 12,500 Common Shares
at the closing of the Offering. See "Management - Employment Agreements".
(3) Mr. Lew acted as the Company's Chief Executive Officer during 1994,
1995 and the period January 1, 1996 to September 30, 1996.
(4) Based upon a salary of $75,000 per annum from January 1, 1996 to
September 30, 1996 and $125,000 per annum from October 1, 1996 to
December 31, 1996.
(5) Represents an accrued and unpaid signing bonus (relating to the execution
of Mr. Lew's employment agreement in October 1996) which is being
converted into 3,000 Common Shares at the closing of the Offering. See
"Management - Employment Agreements".
Each non-employee director of the Company is entitled to receive a
director's fee of $500 per meeting (other than telephonic meetings) and options
to purchase 5,000 Common Shares of the Company each year, which options will be
exercisable for a period of ten years from the date of grant, at an exercise
price equal to the market price of the Company's Common Shares on the date of
the grant. Additionally, each non-employee director will be reimbursed for
reasonable out-of-pocket expenses incurred in attending meetings of the Board of
Directors of the Company. The members of the Board of Directors intend to meet
regularly, as needed.
49
<PAGE>
The following table sets forth certain information concerning individual
grants of stock options during the fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996
Number of Percentage of Total
Common Shares Underlying Options Granted To
Name Options Granted Employees in Fiscal Year Exercise Price Expiration Date
- ---- --------------- ------------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Mark Honigsfeld 233,000 46.9% $.30 July 31, 2001
Dong W. Lew 156,950 31.6% $.30 July 31, 2001
</TABLE>
No options were exercised during the fiscal year ended December 31, 1996;
however, in April 1997, Mr. Honigsfeld exercised his options for the purchase of
233,000 Common Shares.
Employment Agreements
The Company is a party to Employment Agreements with Mark Honigsfeld and
Dong W. Lew, each for a term of three years commencing as of October 1, 1996,
subject to continuing, automatic one-year extensions, unless either the Company
or the individual notifies the other, at least 90 days prior to any annual
anniversary date, of its desire not to extend the term thereof. Each Employment
Agreement provides for earlier termination as discussed below.
Pursuant to their respective Employment Agreements, Mr. Honigsfeld serves
as Chairman of the Board and Chief Executive Officer of the Company and Mr. Lew
serves as President and Chief Operating Officer of the Company.
The Employment Agreements provide for base annual compensation of
$250,000 and $125,000 for Messrs. Honigsfeld and Lew, respectively. No amounts
due Mr. Honigsfeld under his Employment Agreement have been paid to date. The
Employment Agreement for Mr. Lew provides for a signing bonus in the amount of
$15,000, none of which has been paid to date. Of the accrued and unpaid
compensation payable to Mr. Honigsfeld, $100,000 is being converted into 20,000
Common Shares at the closing of the Offering. In addition, the $15,000 signing
bonus payable to Mr. Lew is being converted into 3,000 Common Shares at the
closing of the Offering.
In addition to base compensation, each of Messrs. Honigsfeld and Lew is
entitled to receive (i) an annual bonus amount equal to a percentage of base
salary (ranging from 7 1/2% to 20%) based upon the Company achieving certain
sales levels (ranging from $3,750,000 to $6,000,000 in the initial year, with
$1,000,000 increased sales level thresholds per year if the bonus is earned in a
particular year) and (ii) an annual bonus based on the Company's EBITANC (as
defined below), if any. Such latter bonus for each ranges from 5% to 10% of
EBITANC based on EBITANC thresholds ranging from $250,000 to $1,500,000. EBITANC
is an amount equal to the Company's earnings before deducting the following:
interest expense, taxes, and any one time nonrecurring charges resulting from
divestitures, acquisitions, consolidations, restructurings and changes in
50
<PAGE>
accounting principles. The use of EBITANC, as opposed to earnings, has the
effect of increasing the earnings base (by the amount of the excluded
deductions) for the purpose of calculating the bonus.
The Employment Agreements for Messrs. Honigsfeld and Lew also provide
that each is entitled to receive, for each year thereof, options for the
purchase of 5,000 Common Shares of the Company for each $100,000 of EBITANC.
Such options would be exercisable for a five year period at an exercise price of
no less than 110% of the market value of the Common Shares on the date of the
grant. Messrs. Honigsfeld and Lew are also entitled to receive an expense
allowance of up to $500 per month and an automobile allowance in the amount of
$1,000 per month.
Each Employment Agreement provides that, notwithstanding the rolling
three year term thereof, it may be terminated prior to such expiration date
under the following circumstances: (i) death; (ii) total disability (as provided
for in the Employment Agreements); (iii) termination by the Company for "cause"
(as defined in the Employment Agreements); (iv) termination by the Company at
any time upon written notice to the employee; (v) termination by the employee
upon 30 days written notice to the Company; (vi) termination by the employee at
any time for "good reason" (as defined in the Employment Agreements); or (vii)
termination by the Company at any time within 12 months after a "change in
control" (as defined in the Employment Agreements). Additionally, Mr.
Honigsfeld's Employment Agreement allows him to devote up to 10% of his working
time to other endeavors which are not in competition with the Company.
The Employment Agreements provide for compensation under certain
circumstances upon termination of employment (in addition to accrued but unpaid
compensation) as follows: (i) in the event of the employee's death, the
employee's estate or spouse shall be entitled to receive an amount equal to the
employee's monthly salary as of the date of death multiplied by the number of
full years that he was an employee of the Company or a subsidiary or a
predecessor in interest thereof; (ii) in the event of termination of an
Employment Agreement due to disability, the employee shall be entitled to
receive an amount equal to his monthly salary as of the date of termination of
such Employment Agreement, multiplied by the number of full years that he was an
employee of the Company or a subsidiary or a predecessor in interest thereof
(but, in no event, would the disabled employee be entitled to an amount equal to
less than six months of salary); and (iii) in the event of termination of
employment by the Company following a "change of control" or for any reason
other than death, disability or "cause", or in the event of termination of an
Employment Agreement by the employee for "good reason", the employee shall be
entitled to receive his full salary for the unexpired term of such agreement,
without mitigation of damages based upon employment obtained elsewhere.
The Employment Agreements provide for a restriction on the solicitation
of customers of the Company for a period of two years following termination
thereof, and a covenant not to compete with the Company for a period of six
months following termination of employment for cause. See "Risk Factors - New
Management Team; Dependence on Executive Management; Need to Retain Key
Personnel".
51
<PAGE>
Effective January 6, 1997, the Company and Louis Libin entered into a
three-year employment agreement, providing for Mr. Libin to serve as the
Company's Chief Technology Officer on a non-full-time per diem basis until March
10, 1997, and on a full-time basis commencing on such date. Such employment
agreement provides for a salary of $200,000, $225,000 and $250,000 per annum in
the first, second and third years, respectively. Additionally, Mr. Libin's
Employment Agreement allows him to devote up to one day a week to other
endeavors which are not in competition with the Company. Other terms of Mr.
Libin's employment agreement conform in structure to the material provisions of
Messrs. Honigsfeld's and Lew's Employment Agreements such as bonuses, benefits,
restrictive covenants and termination.
Stock Plans
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") provides for the
grant of options intended to qualify as "incentive stock options" ("ISOs") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
options that are not intended to so qualify ("Nonstatutory Stock Options"). The
total number of Common Shares reserved for issuance under the 1996 Plan is
2,000,000 (subject to adjustment in the event of a stock split, stock dividend,
recapitalization or similar capital change) plus an indeterminate number of
Common Shares issuable upon the exercise of "reload options".
The 1996 Plan is presently administered by the Board of Directors of the
Company, which selects the eligible persons to whom options shall be granted,
determines the number of Common Shares subject to each option, the exercise
price therefor and the periods during which options are exercisable, interprets
the provisions of the 1996 Plan and, subject to certain limitations, may amend
the 1996 Plan. Each option granted under the 1996 Plan is evidenced by a written
agreement between the Company and the optionee.
Options may be granted to all full-time employees (including officers)
and directors of, and certain consultants and advisors to, the Company or any
subsidiary of the Company.
The exercise price for ISOs granted under the 1996 Plan may not be less
than the fair market value of the Common Shares on the date the option is
granted, except for ISOs granted to 10% stockholders which must have an exercise
price of not less than 110% of the fair market value of the Common Shares on the
date the option is granted. The exercise price for Nonstatutory Stock Options is
determined by the Board of Directors. ISOs granted under the 1996 Plan have a
maximum term of ten years, except for 10% stockholders who are subject to a
maximum term of five years. The term of Nonstatutory Stock Options is determined
by the Board of Directors. Options granted under the 1996 Plan are not
transferable, except by will and the laws of descent and distribution. The total
amount of ISOs that may be granted to any individual person in any calendar year
is limited; however, there is no limit as to Nonstatutory Stock Options. The
Company and the Underwriter have agreed that, for a period of one year after the
date of this Prospectus, there shall
52
<PAGE>
not be outstanding more than 1,100,000 options and warrants (excluding the
Bridge Warrants and Underwriter's Warrants).
As of the date of this Offering, there are outstanding under the 1996
Plan (i) currently exercisable options held by Mr. Lew for the purchase of an
aggregate of 156,950 Common Shares at an exercise price of $.30 per share;
above); (ii) ten year options held by Messrs. Honigsfeld and Hefferon for the
purchase of 100,000 and 5,000 Common Shares, respectively, at an exercise price
of $3.00 per share, which vest in January 1998; (iii) ten year options held by
Messrs. Libin and Rizzardi for the purchase of 50,000 and 5,000 Common Shares,
respectively, at an exercise price of $3.00 per share, which vest in one-third
increments in January 1998, 1999, and 2000; (iv) ten year options held by Dr.
Lazarus for the purchase of 5,000 Common Shares at an exercise price of $3.00
per share, which vest in one-third increments in March 1998, 1999 and 2000; (v)
various options granted to certain non-executive employees of the Company to
purchase an aggregate of 124,250 Common Shares; and (vi) reload options, which
apply to all the options granted under the 1996 Plan. Most grants were at
exercise prices at least equal to the fair market value of the Company's Common
Shares on the date of grant, as determined by the Board of Directors.
Compensation expense has been reflected for certain options granted at exercise
prices which were below the deemed fair value at date of grant.
1997 Qualified Employee Stock Purchase Plan
The Company's 1997 Qualified Employee Stock Purchase Plan (the "1997
Plan") provides for the grant of options intended to qualify as "employee stock
options" under Sections 421,423 and 424 of the Code. A total of 250,000 Common
Shares are reserved for issuance under the 1997 Plan (subject to adjustment in
the event of a stock split, stock dividend or similar capital change).
The 1997 Plan is presently administered by the Board of Directors of the
Company. Any person who has been an employee of the Company for at least one
year, who works at least 20 hours per week continuously, or full-time for at
least five months in each calendar year, and who does not have more than 5% or
more of the total combined voting power or value of all classes of capital stock
of the Company, is eligible to participate in the 1997 Plan. The exercise price
of the options shall be the lesser of 85% of the fair market value of the Common
Shares at the time of the grant, or 85% of the fair market value of the Common
Shares at the time the option is exercised. No employee can be granted options
to buy more than 5,000 Common Shares, or a number of Common Shares valued in
excess of $25,000, per year. As of the date of this Offering, no options have
been granted under the 1997 Plan.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of the date of this
Prospectus with respect to the beneficial ownership of the outstanding Common
Shares of the Company by (i) any holder of more than 5% of the outstanding
Common Shares; (ii) the Company's directors; (iii) the directors and executive
officers of the Company as a group; and (iv) the Selling Stockholders. The
number of Common Shares under the column below entitled "Number of Common Shares
Beneficially
53
<PAGE>
Owned Before the Offering" includes, for the holders of the Bridge Warrants, the
Common Shares underlying the Bridge Warrants (which become exercisable upon the
consummation of the Offering).
<TABLE>
<CAPTION>
Percentage of Class(1)
Name and Address Number of Common Number of Common ----------------------
of Beneficial Owner; Shares Beneficially Number of Shares Beneficially
Name of Selling Owned Before the Common Shares Owned After the Before After
Stockholder Offering Offered Offering Offering Offering(2)
<S> <C> <C> <C> <C> <C>
Dong W. Lew(3) 869,650(4)(5)(6) 0 566,200(4) 58.3% 18.7%
Mark Honigsfeld(3) 656,800(7) 33,600 623,200 49.9% 21.7%
About Face, Ltd. (8 ) 103,075(4)(9) 103,075 0 7.9% -
Robert H. Solomon(10) 100,275(4)(11) 100,275 0 7.7% -
Robert LoRusso(12) 100,100(4) 100,100 0 7.8% -
Harvey Bibicoff(13) 70,000(14) 70,000 0 5.2% -
Apollo Equities(15) 56,000(14) 56,000 0 4.2% -
James Favia 42,000(14 42,000 0 3.2% -
Sydney Gluck 22,400(14) 22,400 0 1.7% -
Steven Wallitt 16,800(14) 16,800 0 1.3% -
John Eckhoff 14,000(14) 14,000 0 * -
Kenneth Moschetto 14,000(14) 14,000 0 * -
Lawrence Levine 11,200(14 11,200 0 * -
Maretza Jimenez
Campos 11,200(14) 11,200 0 * -
Lori Siegal 11,200(14) 11,200 0 * -
Horizon Acquisitions 8,400(14) 8,400 0 * -
Stuart Copperman 5,600(14) 5,600 0 * -
Teddy Selinger 5,600(14) 5,600 0 * -
John P. Hefferon 5,600(14) 5,600 0 * -
Peter Guardino 2,800(14) 2,800 0 * -
James Portnof 2,800(14) 2,800 0 * -
Windsor L. P. 2,800(14) 2,800 0 * -
Louis Libin (3) 0 0 0 - -
William D. Rizzardi (3) 0 0 0 - -
Harold Lazarus (16) 0 0 0 - -
Directors and executive
officers as a group
(6 persons) 1,532,050(4)(5)(6) 39,200 1,189,40 100.0% 39.3%
(7)(17)
</TABLE>
* Less than 1%.
(1) Does not give effect to the exercise of the Underwriter's Overallotment
Option or the Underwriter's Warrants. See "Underwriting".
(2) Gives effect to the issuance and sale of 389,200 Common Shares issuable
upon the exercise of the Bridge Warrants.
(3) The address for Messrs. Lew, Honigsfeld, Libin and Rizzardi is 77 Spruce
Street, Cedarhurst, New York.
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(4) The number of Shares reflected as being owned by Mr. Lew before the
Offering includes all of the shares beneficially owned by Messrs. LoRusso
and Solomon and About Face, Ltd., as such shares are subject to a limited
irrevocable proxy which will expire upon consummation of this Offering. See
"Certain Relationships and Related Transactions".
(5) Includes 156,950 shares issuable upon the exercise of options granted under
the 1996 Plan and 3,000 shares issuable at the closing of the Offering
pursuant to the conversion of accrued and unpaid compensation in the amount
of $15,000. See "Management - Stock Plans" and "Management Employment
Agreements".
(6) In October 1996, the Company made a $70,000 loan to Mr. Lew, the proceeds
of which were utilized by him to participate in the Bridge Financing
Transaction. In March 1997, Mr. Honigsfeld purchased from the Company the
promissory note evidencing the loan. Mr. Lew has pledged 28,000 shares to
secure the repayment of the loan to Mr. Honigsfeld. Mr. Lew retains voting
rights to such shares unless and until there is a default under the terms
of the loan. See "Certain Relationships and Related Transactions".
(7) Represents (i) 33,600 shares issuable upon the exercise of Bridge Warrants,
(ii) 563,200 shares held by the Mark Honigsfeld Living Trust dated March
27, 1996 (the "Honigsfeld Trust") whose sole beneficiary is Mr.
Honigsfeld's wife and (iii) 60,000 shares issuable to the Honigsfeld Trust
at the closing of the Offering pursuant to the conversion of indebtedness
in the amount of $200,000, and accrued and unpaid compensation in the
amount of $100,000, owed by the Company to Mr. Honigsfeld. Mr. Honigsfeld,
the settlor and trustee of the Honigsfeld Trust, has the right to terminate
the Honigsfeld Trust and receive the shares. See "Bridge Financing",
"Management-Employment Agreements" and "Certain Relationships and Related
Transactions".
(8) About Face, Ltd.'s address is 6539 Waggoner Drive, Dallas, Texas. About
Face, Inc., a Texas corporation, is the general partner of About Face,
Ltd., a Texas limited partnership. Murray Gross is the principal
stockholder of About Face, Inc. Mr. Gross is also a limited partner of
About Face, Ltd.
(9) Includes 28,000 shares issuable upon the exercise of the Bridge Warrants.
(10) Mr. Solomon's address is 68 West Park Avenue, Long Beach, New York.
(11) Includes 25,200 shares issuable upon the exercise of the Bridge Warrants.
(12) Mr. LoRusso's address is 410 Jericho Turnpike, Jericho, New York.
(13) Mr. Bibicoff's address is 55 Maple Run Drive, Jericho, New York.
(14) Represents shares issuable upon the exercise of the Bridge Warrants.
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<PAGE>
(15) Apollo Equities' address is 30 Broad Street, New York, New York.
(16) The address for Dr. Lazarus is Management, 228 Weller, 134 Hofstra
University, Hempstead, New York.
(17) Includes 5,600 shares issuable to Mr. Hefferon upon the exercise of the
Bridge Warrants.
The Company will not receive any of the proceeds from the resale of the
Common Shares by the Selling Stockholders. The Common Shares held by the Selling
Stockholders may be resold at any time following the date of this Prospectus,
subject to an agreement between each of the Bridge Lenders and the Underwriter
restricting the transfer of the Warrant Shares for a period of two years. The
sale of such Common Shares or the potential of such sales at any time may have
an adverse effect on the market prices of the Common Shares offered hereby. The
Underwriter has agreed with the Company that it will not waive the transfer
restrictions with respect to the Warrant Shares prior to the expiration date.
See "Risk Factors - Shares Eligible For Future Sale May Adversely Affect the
Market"and "Underwriting".
The Common Shares offered may be sold from time to time directly by the
Selling Stockholders. Alternatively, the Selling Stockholders may from time to
time offer such Common Shares through underwriters, dealers, or agents. The
distribution of Common Shares by the Selling Stockholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Stockholders in connection with such sales of Common Shares. The Common Shares
offered by the Selling Stockholders may be sold by one or more of the following
methods, without limitation: (i) a block trade in which a broker or dealer so
engaged will attempt to sell the Common Shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (ii)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (iii) ordinary brokerage
transactions in which the broker solicits purchasers; and (iv) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. The Selling Stockholders
and intermediaries through whom such Common Shares are sold may be deemed
"underwriters" within the meaning of the Act with respect to the Common Shares
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
At the time a particular offer of Common Shares is made by or on behalf
of a Selling Stockholder, to the extent required, a Prospectus Supplement will
be distributed which will set forth the number of Common Shares being offered
and the terms of the offering, including the name or names of any underwriters,
dealers or agents, the purchase price paid by any underwriter for
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<PAGE>
Common Shares purchased from the Selling Stockholder and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, and the
proposed selling price to the public.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective August 1996, the Company issued 330,200 Common Shares to the
Honigsfeld Trust in consideration for $.30 per share or an aggregate price of
$99,060. Upon Mr. Honigsfeld accepting the position as Chairman of the Board, he
was issued a five year option for the purchase of up to 233,000 Common Shares of
the Company pursuant to the 1996 Plan at an exercise price of $.30 per share.
This option was exercised in full in April 1997 and the underlying Common Shares
were issued to the Honigsfeld Trust. See "Management - Stock Plans".
In September 1996, the Company entered into a certain consulting
agreement with Alan Daniels and Geraldine Lum Daniels, the Company's founders
and two of the Minority Stockholders (as defined below), providing for Alan
Daniels and Geraldine Lum Daniels to assist the Company with technical and
marketing issues until the Bridge Financing Transaction closed (which occurred
in October 1996) in consideration for a one-time payment of $25,290 at such
closing.
In October 1996, the Company repurchased 65,000 Common Shares and
canceled warrants for the purchase of 50,700 Common Shares (the "Repurchase
Agreements") from 13 individuals (the "Minority Stockholders"), such repurchases
occurring upon the consummation of the Bridge Financing Transaction. Pursuant to
the Repurchase Agreements, the Minority Stockholders were paid $.30 per share
and received new warrants exercisable for a five year period to purchase an
aggregate of 31,200 Common Shares at an exercise price of $5.00 per share.
In October 1996, the Company loaned $70,000 to Dong W. Lew, President and
Chief Operating Officer of the Company, for purposes of his participation in the
Bridge Financing Transaction. Such loan was evidenced by a promissory note (the
"Lew Note"), providing for the payment of principal and interest at the rate of
8% per annum in 120 equal monthly installments, subject to acceleration on the
closing date of this Offering. Payment of the Lew Note is secured by a pledge of
28,000 Common Shares of the Company. All voting rights to such shares remain
with Mr. Lew except in the event of a default on the payment of the Lew Note. In
March 1997, Mr. Honigsfeld purchased the Lew Note from the Company in
consideration for the payment in cash of the outstanding principal amount of the
Lew Note. Mr. Honigsfeld concurrently received an assignment of the Company's
rights as pledgee of Mr. Lew's Common Shares. In May 1997, the Lew Note was
amended to make it nonrecourse except to the pledged Common Shares and to
conform the payment terms to those of the Bridge Notes. See "Bridge Financing".
In January 1997, the Company entered into the secured Credit Agreement
with Mr. Honigsfeld. Pursuant to the Credit Agreement, the Company borrowed
$200,000, all of which is outstanding. The Company entered into the Credit
Agreement because it required additional financing to fund the Company's working
capital needs and no other sources of financing were available at that time. The
Company and Mr. Honigsfeld have agreed that, at the closing of the Offering, the
$200,000
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<PAGE>
indebtedness will be converted into 40,000 Common Shares. In April 1997, the
Company and Mr. Honigsfeld amended the Credit Agreement to provide for an
additional line of credit of $500,000. In May 1997, the Company borrowed an
additional $100,000 under the Credit Agreement. The repayment of up to $200,000
under the Credit Agreement is secured by a first priority security interest in
all the assets of the Company. The Company believes that the terms of the Credit
Agreement are commercially reasonable and are at least as favorable to the
Company as the Company could have obtained from an unrelated third party. The
Credit Agreement was approved by, among others, all the disinterested directors
of the Company.
Reference is made to "Management - Employment Agreements" for a
discussion of certain conversions into Common Shares of accrued and unpaid
compensation that are to occur at the
closing of the Offering.
To the extent that the Company may enter into any agreements with related
parties in the future (of which none are presently contemplated), the Board of
Directors of the Company has determined that the terms of such agreements must
be commercially reasonable and no less favorable to the Company than the Company
could obtain from unrelated third parties. Additionally, the Board of Directors
of the Company has further determined that such agreements must be approved by a
majority of disinterested directors. See "Risk Factors - Challenges to Growth;
Unascertainable Risks Related to Possible Acquisitions".
DESCRIPTION OF SECURITIES
Common Shares
The Company is authorized to issue up to 20,000,000 Common Shares, par
value $.01 per share, of which 1,282,700 shares are issued and outstanding as of
the date of this Prospectus (giving effect to the Debt Conversion and Accrued
Compensation Conversion that will occur upon the closing of the Offering, as
discussed under "Management - Employment Agreements"). The Common Shares are
currently owned by five stockholders of record. All of the issued and
outstanding Common Shares are validly issued, fully paid and non-assessable. An
additional 866,600 Common Shares are reserved for issuance upon the exercise of
outstanding options and warrants, including the Bridge Warrants.
Holders of the Common Shares of the Company are entitled to share equally
on a per share basis in such dividends as may be declared by the Board of
Directors out of funds legally available therefor. There are presently no plans
to pay dividends with respect to the Common Shares. See "Dividend Policy". Upon
liquidation, dissolution or winding up of the Company, after payment of
creditors and the holders of any senior securities of the Company, including
Preferred Shares, if any, the assets of the Company will be divided pro rata on
a per share basis among the holders of the Common Shares. The Common Shares are
not subject to any liability for further assessments. There are no conversion or
redemption privileges, nor any sinking fund provisions, with respect to the
Common Shares, and the Common Shares are not subject to call. The holders of the
Common Shares do not have any preemptive or other subscription rights.
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<PAGE>
Holders of the Common Shares are entitled to cast one vote for each share
held at all stockholders' meetings including the annual meeting for the election
of directors. The Common Shares do not have cumulative voting rights.
Preferred Shares
The Company's Certificate of Incorporation authorizes 1,000,000 "blank
check" Preferred Shares, par value $.01 per share, whereby the Board of
Directors of the Company shall have the authority, without further action by the
holders of the outstanding Common Shares, to issue Preferred Shares from time to
time in one or more series, to fix the number of shares constituting any series
and the stated value thereof, if different from the par value, and to fix the
terms of any such series, including dividend rights, dividend rates, conversion
or exchange rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price and the liquidation preference of
such series. As of the date of this Prospectus, there are no Preferred Shares
issued and outstanding, and the Company has no plans to issue any Preferred
Shares.
Delaware Anti-Takeover Law; Staggered Board of Directors
The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law enacted in 1988. In general,
the law prohibits a Delaware public corporation from engaging in a 'business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless it is approved in a prescribed manner.
The Company's Certificate of Incorporation provides for staggered terms
for the Board of Directors in three classes. The term of each class is three
years (except that the initial term of office of the Class I directors will
expire at the Company's annual meeting of stockholders in 1997 and the initial
term of office of the Class II directors will expire at the Company's annual
meeting of stockholders in 1998). Each director holds office until the next
annual meeting of stockholders during the year in which the term of his class of
directorship expires and until his successor is elected and qualified. The
Company currently has five directors (two in Classes I and II and one in Class
III). Accordingly, based on the current size of the Board and the makeup of the
classes of directors, the term of no more than two directors will expire in any
given year.
As a result of Section 203 of the General Corporation Law of Delaware and
the Company's staggered Board of Directors, potential acquirors of the Company
may be discouraged from attempting to effect acquisition transactions with the
Company, thereby possibly depriving holders of the Company's securities of
certain opportunities to sell or otherwise dispose of such securities at
above-market prices pursuant to such transactions.
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Limitation on Liability of Directors; Indemnification
Article X of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by Section 102 of the Delaware General Corporation Law, provided that
this provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) arising under Section 174 of the
Delaware General Corporation Law (with respect to unlawful dividend payments and
unlawful stock purchases or redemptions); or (iv) for any transaction from which
the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of
Incorporation and its by-laws provisions to indemnify its directors, officers,
employees and agents and to purchase insurance with respect to liability arising
out of the performance of their duties as directors, officers, employees and
agents as permitted by Section 145 of the Delaware General Corporation Law. The
Delaware General Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors, officers, employees and agents may be entitled under the
Company's by-laws, any agreement, vote of stockholders or otherwise.
Furthermore, the Company has entered into an indemnification agreement to
indemnify its directors and officers, under certain circumstances, to the extent
provided in the Certificate of Incorporation and Bylaws of the Company, subject
to Delaware General Corporation Law, against any claim or action against, or
involving, any of them in their respective capacities as a director or an
officer of the Company or its affiliates.
The effect of the foregoing is to require the Company, to the extent
permitted by law, to indemnify the officers, directors, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to indemnify
the Company, its directors, officers, and each person who controls the Company
within the meaning of Section 15 of the Act with respect to any statement in or
omission from the Registration Statement or the Prospectus or any amendment or
supplement thereto if such statement or omission was made in reliance upon
information furnished in writing to the Company by the Underwriter specifically
for or in connection with the preparation of the Registration Statement, the
Prospectus, or any such amendment or supplement thereto.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
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The Company intends to obtain directors and officers insurance in the
approximate amount of $1,000,000.
Transfer Agent
The transfer agent for the Company's Common Shares is American Stock
Transfer Company.
UNDERWRITING
General
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriter has agreed to purchase the 1,200,000
Common Shares offered hereby from the Company on a "firm commitment" basis, if
any are purchased. The Underwriter has advised the Company that it proposes to
offer the Common Shares to the public at a price of $5.00 per Common Share, as
set forth on the cover page of this Prospectus, and that it may allow to certain
dealers who are NASD members concessions not to exceed $___ per Common Share, of
which an amount not in excess of $___ per Common Share may be reallowed to other
dealers who are members of the NASD. After the Offering, the public offering
price, concession and reallowance may be changed by the Underwriter.
The Company has granted an Overallotment Option to the Underwriter,
exercisable during the 45 day period from the date of this Prospectus, to
purchase up to a maximum of 180,000 additional Common Shares at the Offering
price, less the underwriting discount, to cover overallotments, if any.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with the Registration Statement, including liabilities arising under
the Act. Insofar as indemnification for liabilities arising under the Act may be
provided to officers, directors or persons controlling the Company, the Company
has been informed that, in the opinion of the Commission, such indemnification
is against public policy and is therefore unenforceable.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance of 3% of the aggregate Offering price of the Common Shares
offered hereby, including any Common Shares purchased pursuant to the
Overallotment Option, $50,000 of which has already been paid.
The Company has agreed to sell to the Underwriter, or its designees,
warrants to purchase an aggregate of 10% of the Common Shares sold pursuant to
this Offering, exclusive of the exercise of the Underwriter's Overallotment
Option, for a purchase price of one mil ($.001) per warrant (the "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
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<PAGE>
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.
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.
Notwithstanding the foregoing, Robert LoRusso, About Face, Ltd., and Robert H.
Solomon, principal stockholders of the Company, are exempt from such consent
requirement with respect to the 100,100 75,075 and 75,075 Common Shares,
respectively owned by them. The Underwriter has advised the Company that it has
no current plans, proposals, arrangements or understandings with, and it knows
of no plans, proposals, arrangements or understandings with respect to, or
related to, the offering of such 250,250 Common Shares by Messrs. LoRusso and
Solomon and About Face, Ltd. The holders of the Bridge Warrants have
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<PAGE>
agreed with the Underwriter that they will not transfer any of the Warrant
Shares for a period of two years following the date of this Prospectus. The
Underwriter has agreed with the Company that it will not waive the transfer
restriction with respect to the Warrant Shares prior to the expiration of the
lock-up period. In the event the Underwriter enters into transactions with any
of the Selling Stockholders involving (i) from 5% up to 10% of the Selling
Stockholders' Common Shares, the Company will file a "sticker" supplement to the
Prospectus and (ii) over 10% of the Selling Stockholders' Common Shares, the
Company will file a post-effective amendment to the Registration Statement of
which this Prospectus is a part. See "Principal and Selling Stockholders".
The Company has agreed not to issue any equity securities, or securities
convertible into, or exchangeable or exercisable for, equity securities, for a
period of twelve months from the date of this Prospectus, except that the
Company may issue (i) Common Shares upon the exercise of the Bridge Warrants and
the Underwriter's Warrants; (ii) Common Shares upon the exercise of the Other
Derivative Securities that are currently outstanding, as well as upon the
exercise of options hereafter granted, of up to 867,000 Common Shares in the
aggregate; and (iii) Common Shares and Preferred Shares in connection with a
merger or acquisition transaction.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and Underwriter's Warrants which have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
The Underwriter, a registered broker-dealer, purchases and sells
securities on behalf of its customers. The Underwriter also engages in
investment banking activities and provides companies with financial advisory
services. The Underwriter has been in business for approximately two years. This
is the first offering underwritten by the Underwriter. There is no affiliation
or material relationship between any promoter of the Company and the
Underwriter. See "Risk Factors Inexperience of Underwriter".
Determination of Public Offering Price
Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price for the Common Shares has been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in the negotiations were an analysis of the areas of activity
in which the Company is engaged, the present state of the Company's business,
the Company's financial condition, the Company's prospects, an assessment of
management, the general condition of the securities market at the time of this
Offering and the demand for similar securities of comparable companies. The
public offering price of the Common Shares does not necessarily bear any
relationship to assets, earnings, book value or other criteria of value
applicable to the Company.
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
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<PAGE>
market will develop, even if the securities are accepted for quotation. The
Underwriter intends to make a market in the Common Shares of the Company.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon
for the Company by Certilman Balin Adler & Hyman, LLP, 90 Merrick Avenue, East
Meadow, New York 11554. Certain legal matters will be passed upon for the
Underwriter by Caro & Graifman, P.C., 60 East 42nd Street, New York, New York
10165.
EXPERTS
The financial statements of the Company as of December 31, 1996 and for
the years ended December 31, 1996 and 1995 included in this Prospectus have been
audited by Lazar, Levine & Company LLP, independent certified public
accountants, as set forth in their report thereon appearing elsewhere herein and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the Act
with the Commission in Washington, D.C. with respect to the Common Shares
offered hereby. This Prospectus, which is part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto. For further information with respect to the Company
and the Common Shares offered hereby, reference is hereby made to the
Registration Statement and such exhibits, which may be inspected without charge
at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Reports and other information filed by the Company with the Commission
can be inspected and copied at the public reference facilities maintained by the
Commission at the following addresses: New York Regional Office, Seven World
Trade Center, New York, New York 10048; and Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Furthermore,
the Commission maintains a Web site that will contain reports, proxy and
information statements and other information regarding the Company. The address
of such Web site is http://www.sec.gov.
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- INDEX TO FINANCIAL STATEMENTS -
<TABLE>
Page(s)
<S> <C>
Independent Auditors' Report F - 2
Financial Statements:
Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 and F - 3
1995
Statements of Operations for the Three Month Periods Ended March 31, 1997 F - 4
and 1996 (unaudited) and for the Years Ended December 31, 1996 and 1995
Statement of Shareholders' Equity for the Two Years in the Period Ended F - 5
December 31, 1996 and for the Three Month Period Ended March 31, 1997
(unaudited)
Statements of Cash Flows for the Three Month Periods Ended March 31, 1997 F - 6
and 1996 (unaudited) and for the Years Ended December 31, 1996 and 1995
Notes to Financial Statements F - 8
</TABLE>
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Compu-DAWN, Inc.
Cedarhurst, New York
We have audited the accompanying balance sheets of Compu-DAWN, Inc. as of
December 31, 1996 and 1995 and the statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Compu-DAWN, Inc. as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the years ended December 31, 1996 and 1995, in conformity with generally
accepted accounting principles.
LAZAR, LEVINE & COMPANY LLP
New York, New York
February 13, 1997
F - 2
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
BALANCE SHEETS
- ASSETS (Note 8) -
March 31, December 31,
1997 1996
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash (Note 2b) $ 30,016 $ 286,497
Accounts receivable, net of allowances for doubtful accounts of $35,000 and
$30,000 for 1997 and 1996, respectively (Note 2b) 197,011 100,010
Prepaid expenses 22,281 19,281
Loan receivable from officer (Note 3) - 69,247
Income tax refund receivable (Notes 2f and 11) 36,004 36,004
----------- -----------
TOTAL CURRENT ASSETS 285,312 511,039
----------- -----------
FIXED ASSETS (Notes 2c, 4 and 6) 182,597 138,814
----------- -----------
OTHER ASSETS:
Deferred offering costs (Note 13) 212,368 139,326
Deferred compensation 339,960 34,056
Financing costs (Note 7) 1,557,050 1,588,400
Security deposits 21,525 21,525
----------- -----------
2,130,903 1,783,307
----------- -----------
$2,598,812 $2,433,160
========== ==========
- LIABILITIES AND SHAREHOLDERS' EQUITY - CURRENT LIABILITIES: Accounts
payable $ 92,037 $ 123,473 Accrued expenses and other current liabilities (Note
5) 300,759 136,661 Deferred revenue (Note 2d) 32,282 28,100 Due to former
shareholders (Note 9) - 34,710 Capitalized lease payable - current (Note 6)
8,298 7,859 ------------ ----------- TOTAL CURRENT LIABILITIES 433,376 330,803
- ------------ -----------
NON-CURRENT LIABILITIES:
Note payable - officer (Note 8) 200,000 -
Capitalized lease payable (Note 6) 27,654 29,541
Deferred rent liability (Note 12a) 26,637 23,115
Promissory notes payable (Note 7) 770,000 770,000
------------ ------------
1,024,291 822,656
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 10, 12, 13 and 14)
SHAREHOLDERS' EQUITY (Note 9):
Preferred stock, $.01 par value; 1,000,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 20,000,000 shares authorized, 986,700
shares issued for 1997 and 1996, respectively 9,867 9,867
Additional paid-in capital 2,044,758 1,670,258
Retained earnings (deficit) (913,480) (400,424)
------------ ------------
1,141,145 1,279, 701
------------ -----------
$2,598,812 $2,433,160
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 3
<PAGE>
<TABLE>
Compu-DAWN, Inc.
STATEMENTS OF OPERATIONS
<CAPTION>
For the Three Months Ended For the Year Ended
March 31, December 31,
------------------------------ -------------------------
1997 1996 1996 1995
-------------- ----------- ------------ ---------
(Unaudited) (Unaudited)
REVENUES (Notes 2d and 10):
<S> <C> <C> <C> <C>
Software sales $ 98,484 $ 18,925 $ 202,511 $ 817,271
Maintenance income 87,317 72,594 275,016 222,910
----------- --------- ----------- -----------
185,801 91,519 477,527 1,040,181
----------- --------- ----------- -----------
COSTS AND EXPENSES:
Programming costs and expenses 76,837 51,902 268,915 404,165
General and administrative expenses 514,948 84,568 660,006 365,760
Research and development (Note 2e) 47,913 30,914 158,099 140,275
----------- --------- ----------- -----------
639,698 167,384 1,087,020 910,200
----------- --------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (453,897) (75,865) (609,493) 129,981
----------- --------- ------------ -----------
OTHER INCOME (EXPENSES):
Interest and other income 1,342 780 4,845 1,367
Interest expense and financing costs (Note 7) (60,501) (176) (36,274) (993)
Loss on abandonment of leasehold improvements
(Note 12a) - - (5,378) -
------------ --------- ----------- -----------
(59,159) 604 (38,807) 374
----------- --------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION (CREDIT)
FOR INCOME TAXES (513,056) (75,261) (646,300) 130,355
Provision (credit) for income taxes (Notes 2f and 11) - (18,000) (75,531) 51,695
----------- --------- ----------- -----------
NET INCOME (LOSS) $(513,056) $ (57,261) $ (570,769) $ 78,660
========= ========= =========== ===========
EARNINGS (LOSS) PER COMMON SHARE
(Note 2g) $(.31) $(.03) $(.34) $.05
===== ===== ====== ====
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING (Note 2g) 1,678,913 1,678,913 1,678,913 1,678,913
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 4
<PAGE>
<TABLE>
Compu-DAWN, Inc.
STATEMENT OF SHAREHOLDERS' EQUITY
<CAPTION>
Additional Retained Total
Preferred Common Stock Paid-in Earnings Treasury Shareholders'
Stock Shares Amount Capital (Deficit) Stock Equity (Deficit)
--------- --------- ------- ---------- -------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (Note 9) - 1,157,000 $11,570 $ 54,430 $ 91,685 $(38,500) $ 119,185
Purchases of treasury stock, 107,250
shares at cost (Note 9) - - - - - (33,000) (33,000)
Net income - - - - 78,660 - 78,660
------ --------- ------ --------- ------ ------ ------
Balance at December 31, 1995 - 1,157,000 11,570 54,430 170,345 (71,500) 164,845
Cancellation of shares held in treasury
(Note 9) - (685,750) (6,858) (64,642) - 71,500 -
Issuances of common stock (Note 9) - 580,450 5,805 168,330 - - 174,135
Warrants issued pursuant to debt offering
(Note 7) - - - 1,509,200 - - 1,509,200
Options issued below fair value (Note 9) - - - 37,000 - - 37,000
Purchase of outstanding options (Note 9) - - - (15,210) - - (15,210)
Purchases and cancellation of outstanding
shares (Note 9) - (65,000) (650) (18,850) - - (19,500)
Net loss - - - - (570,769) - (570,769 )
------ --------- ------ --------- -------- ----- --------
BALANCE AT DECEMBER 31, 1996 - 986,700 9,867 1,670,258 (400,424) - 1,279,701
Options issued below fair value (Note 9) - - - 374,500 - - 374,500
Net loss (unaudited) - - - - (513,056) - (513,056)
----- --------- ------ --------- ------- ----- ---------
BALANCE AT MARCH 31, 1997 (Unaudited) - 986,700 $ 9,867 $2,044,758 $(913,480) $ - $1,141,145
===== ========= ====== ========= ======= ===== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 5
<PAGE>
<TABLE>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 1 of 2
------------------------
<CAPTION>
For the Three Months Ended For the Year Ended
March 31, December 31,
1997 1996 1996 1995
------------- --------------- ----------- -----------
(Unaudited) (Unaudited)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 87,982 $ 192,154 $ 582,053 $1,027,473
Cash paid to suppliers and employees (447,827) (164,254) (825,948) (977,193)
Interest paid (1,395) (176) (1,995) (993)
Interest and other income received 1,342 780 3,791 1,367
Income taxes paid - (506) (47,284) -
----------- ---------- -------- --------
Net cash provided (utilized) by operating activities (359,898) 27,998 (289,383) 50,654
----------- ---------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to officer - - (70,000) -
Principal repayments of officer's loan 69,247 - 753 -
Purchase of fixed assets (56,630) - (95,117) (29,232)
Proceeds from sale of fixed assets - - 2,500 -
Payment of security deposits - - (14,745) (3,480)
----------- --------- --------- --------
Net cash provided (utilized) by investing activities 12,617 - (176,609) (32,712)
----------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan received from officer 200,000 - - -
Proceeds from debt offering - - 770,000 -
Expenses associated with debt offering - - (100,100) -
Payments for common stock and options acquired (34,710) (10,164) (21,583) (29,167)
Principal payments of other long-term debt - - (3,726) (67,235)
Payments of capital lease obligations (1,448) (610) (2,828) (1,661)
Expenses associated with initial public offering (73,042) - (139,326) -
Proceeds from sale of shares - - 144,090 -
----------- --------- -------- -------
Net cash provided (utilized) by financing activities 90,800 (10,774) 646,527 (98,063)
----------- --------- -------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (256,481) 17,224 180,535 (80,121)
Cash and cash equivalents, at beginning of year 286,497 105,962 105,962 186,083
---------- --------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 30,016 $ 123,186 $ 286,497 $105,962
========== ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F - 6
<PAGE>
<TABLE>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 2 of 2
------------------------
<CAPTION>
For the Three Months Ended For the Year Ended
March 31, December 31,
1997 1996 1996 1995
-------------- ---------- ------------ ----------
(Unaudited) (Unaudited)
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH (UTILIZED) PROVIDED BY
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income (loss) $(513,056) $(57,261) $(570,769) $ 78,660
Adjustments to reconcile net income (loss) to net cash
(utilized) provided by operating activities:
Allowance for doubtful accounts 5,000 - 12,000 13,000
Depreciation and amortization 44,196 9,565 45,947 12,370
Deferred tax expense (benefit) - - 6,200 (4,450)
Deferred rent liability 3,522 (3,558) (3,315) 26,430
Compensatory stock 68,596 - 32,988 -
Loss on disposal of fixed assets - - 7,617 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (102,000) 126,635 106,456 (28,139)
(Increase) decrease in prepaid expenses (3,000) 468 (16,714) 501
(Increase) in tax refund receivable - - (36,004) -
Increase (decrease) in accounts payable and
accrued expenses 132,662 (3,347) 221,692 (119,715)
(Increase) decrease in deferred revenue 4,182 (26,000) (1,930) 15,430
(Decrease) increase in income taxes payable - (18,504) (93,551) 56,567
---------------- --------------- ----------- ---------
NET CASH (UTILIZED) PROVIDED BY
OPERATING ACTIVITIES $(359,898) $ 27,998 $(289,383) $ 50,654
========= ========== ========= ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
(a) During 1996 and 1995, the Company incurred capital lease obligations of
$33,595 and $7,271, respectively in connection with the purchase of
office equipment.
The accompanying notes are an integral part of these financial statements.
F - 7
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 1 - DESCRIPTION OF COMPANY:
Compu-DAWN, Inc., the Company, was incorporated under the name of Coastal
Computer Systems, Inc., in New York on March 31, 1983, and was
reincorporated in Delaware under its present name on October 18, 1996. The
Company is engaged in the business of designing, developing, licensing,
installing and servicing computer software products and systems
predominantly for public safety and law enforcement agencies. The Company's
customers, to date, are primarily located in New York State.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with generally accepted
accounting principles. Outlined below are those policies which are
considered particularly significant.
(a) Use of Estimates:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain estimates and
assumptions, where applicable, that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period.
While actual results could differ from those estimates, management
does not expect such variances, if any, to have a material effect on
the financial statements.
(b) Concentration of Credit Risk /Fair Value:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash investments
and accounts receivable.
The Company maintains, at times, deposits in federally insured
financial institutions in excess of federally insured limits.
Management monitors the soundness of these financial institutions and
feels the Company's risk is negligible.
Management believes that concentrations of credit risk with respect to
accounts receivable are limited due to the Company's methods of
progress billings and collections.
As of March 31, 1997 and December 31, 1996, the fair value of cash and
cash equivalents, receivables, obligations under accounts payable and
debt instruments approximate the carrying value.
(c) Fixed Assets:
Fixed assets are recorded at cost. Depreciation of fixed assets is
provided on a straight-line basis as follows:
Computer equipment 3 years
Furniture and fixtures 5 years
Motor vehicles 5 years
F - 8
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(c) Fixed Assets:
Maintenance and repairs are expensed as incurred. Leasehold
improvements are amortized over the useful life of the asset or the
lease, whichever is shorter. Capital leases are amortized over the
term of the respective leases or the useful lives of the related
assets, whichever is shorter.
Depreciation and amortization expense for the years ended December 31,
1996 and 1995 aggregated $25,046 and $12,370, respectively.
Depreciation and amortization expense for the three month periods
ended March 31, 1997 and 1996 aggregated $12,847 and $9,565,
respectively.
(d) Revenue Recognition:
The Company generates revenues from the granting of nonexclusive,
non-transferable and non-assignable licenses to use software it has
developed, through fixed price contracts. Revenues from such fixed
price contracts are recognized using the percentage of completion
method of accounting. The Company retains title to the software and
warranties that it will provide technical support and repair any
defects in the software at no charge. The warranty period for each
contract is negotiated individually, for periods ranging from 90 days
to three years. To date, repair costs have been minimal and therefore
the Company has not established a reserve for such warranty costs.
In addition, the Company provides post-contract customer support to
licensees of its software. Revenues from such services are recognized
ratably over the period of performance. Fees billed and/or received
prior to performance of services are reflected as deferred revenue.
(e) Software Development Costs:
The Company reflects costs incurred in establishing the technological
feasibility of a computer software product to be leased or sold, as
research and development costs, and expenses such costs in the period
incurred. Research and development costs for the years ended December
31, 1996 and 1995 aggregated $158,099 and $140,275, respectively.
Research and development costs for the three month periods ended March
31, 1997 and 1996 aggregated $47,913 and $30,914, respectively.
After technological feasibility has been established, all costs
incurred on the software product are to be capitalized and amortized
on a product by product basis. Capitalization of computer software
costs is discontinued when the product is available to be sold or
leased.
To date, the Company has only sold or leased software which has been
developed for specific customers. As such, all costs incurred have
been expensed as research and development costs.
Costs associated with post-contract customer support (maintenance) are
charged to expense when related revenue is recognized or when those
costs are incurred, whichever occurs first.
F - 9
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(f) Income Taxes:
The Company has adopted Financial Accounting Standards Board Statement
No. 109 "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets
and liabilities and are measured by applying enacted tax rates and
laws to taxable years in which such differences are expected to
reverse.
(g) Earnings Per Share:
Earnings per share has been computed on the basis of the weighted
average number of common shares and common equivalent shares
outstanding during each period presented. In accordance with the rules
of the Securities and Exchange Commission, all shares issued and
"cheap" options and warrants are being treated as outstanding for all
periods presented.
(h) Statements of Cash Flows:
For purposes of the statements of cash flows, the Company considers
all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
NOTE 3 - LOAN RECEIVABLE - OFFICER:
In October 1996, the Company made a loan of $70,000 to an officer for the
purpose of such officer's participation in a debt offering (see Note 7).
Such loan is evidenced by a promissory note requiring 120 equal monthly
payments, at an annual interest rate of 8% and is secured by shares of
common stock owned by the individual with a value equal to 120% of the
outstanding balance. This note which may be prepaid at any time is also due
and payable upon the closing of a public offering of the Company's common
stock should such occur within three years of the date of the note and
yield gross proceeds of at least $4,500,000.
In March 1997, the Chairman of the Board of the Company purchased this note
from the Company in consideration for the payment in cash of the then
outstanding amount. The Chairman of the Board concurrently received an
assignment of the Company's collateral for this note.
NOTE 4 - FIXED ASSETS:
Fixed assets consist of the following:
March 31, December 31,
1997 1996
Computer equipment $183,948 $139,916
Furniture and fixtures 16,877 16,499
Motor vehicles 12,597 12,597
Leasehold improvements 57,565 45,345
Assets under capitalized leases 41,484 41,484
------- -------
312,471 255,841
Less: accumulated depreciation and amortization 129,874 117,027
------- -------
$182,597 $138,814
======= =======
F - 10
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 5 - ACCRUED EXPENSES:
Accrued expenses is comprised of the following:
March 31, December 31,
1997 1996
Payroll and payroll taxes $258,132 $121,037
Interest 42,627 15,624
-------- --------
$300,759 $136,661
======== ========
NOTE 6 - CAPITALIZED LEASE OBLIGATIONS:
The Company has entered into various capital leases for furniture, fixtures
and equipment which expire in years through 2001. The assets and liability
under these capital leases are recorded at the lower of the present value
of the minimum lease payments or the fair market value of the assets. The
assets are depreciated over their estimated useful lives. Depreciation of
assets under capital leases for the years ended December 31, 1996 and 1995
aggregated $5,989 and $1,315, respectively.
Minimum future lease payments under capital leases as of December 31, 1996
are as follows:
1997 $11,711
1998 10,049
1999 8,388
2000 8,388
2001 7,689
-------
Total minimum lease payments 46,225
Less: amount representing interest 8,825
-------
$37,400
=======
Depreciation of assets under capital leases for the three month periods
ended March 31, 1997 and 1996 aggregated $2,337 and $658, respectively.
NOTE 7 - DEBT OFFERING:
In October 1996, the Company successfully completed the sale of 77 units in
a private offering, each unit consisting of a $10,000 principal amount 12%
promissory note ("bridge note") and a redeemable stock purchase warrant to
acquire 5,600 shares of the Company's common stock for aggregate gross
proceeds of $770,000. The warrants are exercisable at a price of $.50 per
share only upon the successful completion of an Initial Public Offering
("IPO"), see Note 13, of the Company's common stock. See Note 14(b) re:
Subsequent Events.
Each of the bridge notes is due and payable upon the closing of the IPO. In
the event such closing occurs on or before September 15, 1997, no interest
will be payable on these notes. In the event that the Company closes an IPO
after September 15, 1997 but before September 15, 1999, the notes shall
bear interest at a rate of 8% per annum and be payable upon the closing of
the IPO. In the event the Company does not close an IPO by September 15,
1999, interest shall accrue at a rate of 12% per annum through such date
and the notes shall be payable in 120 equal monthly installments with
interest at a rate of 8% per annum beginning September 16, 1999.
F - 11
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 7 - DEBT OFFERING (Continued):
In accordance with APB No. 14, the proceeds of debt issued with stock
purchase warrants should be allocated based on the fair values of the debt
without the warrants and of the warrants themselves when issued.
Accordingly, the Company has reflected deferred financing costs and
additional paid-in capital based upon the difference between the deemed
fair value of the warrants ($4.00) and the warrant exercise price.
Financing costs, which represent costs incurred in connection with this
private offering, are being charged to operations as additional interest
expense over the term of the bridge notes.
In September 1996, prior to the closing of this private offering, the
Company entered into a consulting agreement with one of its founding
shareholders which provided for a one-time payment at closing of $25,290.
NOTE 8 - NOTE PAYABLE - OFFICER:
In January 1997, the Company entered into a secured credit agreement with
its Chairman of the Board which provides for up to $200,000 of borrowings.
These borrowings are secured by all the assets of the Company, bear
interest at a rate of 10% per annum and mature upon the closing of an IPO
(see Note 13).
See Note 14(c) re: Subsequent Events.
NOTE 9 - CAPITAL STOCK AND EQUIVALENTS:
In October 1996, simultaneously with its reincorporation in the State of
Delaware, (see Note 1) the Company increased its authorized capital to
20,000,000 shares of common stock, $.01 par value, and 1,000,000 shares of
preferred stock, $.01 par value. The Company also effected a stock split of
its issued and outstanding common stock on a 325 for 1 basis, resulting in
1,157,000 shares. This stock split has been reflected retroactively in the
accompanying financial statements and accordingly, all references to the
number of common shares issued and outstanding have been restated. No
preferred shares are issued and outstanding.
During 1994 the Company repurchased 578,500 shares of its common stock from
certain shareholders at an aggregate cost of $38,500. These shares are
reflected as shares held in treasury for 1995 and as being cancelled in
1996.
During 1995 the Company repurchased an additional 107,250 shares of its
common stock from certain shareholders at an aggregate cost of $33,000.
These shares are also reflected as treasury stock for 1995 and as being
cancelled in 1996.
In August 1996, the Company sold 480,300 shares of its common stock at a
price of $.30 per share, for cash proceeds of $144,090 and issued 100,150
shares of its common stock in lieu of payment of legal and consulting fees
of $30,045, for an aggregate amount of $174,135.
F - 12
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 9 - CAPITAL STOCK AND EQUIVALENTS (Continued):
The Company had also granted, to certain former shareholders, options to
purchase an aggregate of 50,700 shares of common stock (post-split) at an
aggregate exercise price of $156. In October 1996, following the successful
completion of a debt offering (see Note 7), the Company entered into
agreements with the former shareholders, canceling these unexercised
options in consideration of payment of $.30 for each underlying share and
the issuance of warrants to purchase an aggregate of 31,200 shares of stock
at an exercise price of $5.00 per share. The payment for these options
aggregating $15,210 has been charged against additional paid-in capital.
The Company also purchased, in October 1996, 65,000 shares held by these
former shareholders at a per share price of $.30. These shares were
cancelled upon the repurchase, and accordingly, common stock and additional
paid-in capital have been reduced by $650 and $18,850, respectively.
In addition, in October 1996, the Company established a Stock Option Plan
under which options (including non-statutory options) to purchase up to
2,000,000 shares may be granted to eligible persons. As of December 31,
1996, the Company had granted options to purchase an aggregate of 491,950
shares of common stock at prices ranging from $.30 to $4.00, aggregating
$221,485. In connection therewith the Company recorded deferred
compensation (measured as the excess of the fair value of the underlying
stock over the exercise price of the option at date of grant) of $37,000.
As of March 31, 1997, the Company granted additional options to purchase an
aggregate of 187,250 shares of common stock at an exercise price of $3.00
aggregating $561,750. Accordingly, the Company recorded additional deferred
compensation costs of $374,500. Deferred compensation costs are being
amortized over the vesting period of the related options. Amortization of
such costs for the year ended December 31, 1996 and the three-month period
ended March 31, 1997, aggregated $2,943 and $68,597, respectively.
In April 1997, subsequent to the balance sheet date, options were exercised
to purchase 233,000 shares of common stock for which the Company received
$69,900 in gross proceeds. (See also Note 2g regarding earnings per share).
In 1997, the Company established the 1997 Qualified Employee Stock Purchase
Plan which provides for the grant of up to a total of 250,000 options
intended to qualify as employee stock options. The exercise price of
options granted under this plan shall be the lesser of 85% of fair market
value of the Company's common shares at date of grant or 85% of the fair
market value on the exercise date. To date, no options have been granted
under the 1997 plan.
NOTE 10 - ECONOMIC DEPENDENCY:
To date, the Company's revenues have been materially dependent on a limited
number of customers. The nature of the Company's business (see Note 1) is
such that during any individual accounting period it will license its
software products to a limited number of significant customers. In
addition, revenues from the Company's products are primarily from the
public safety and law enforcement markets.
Also, the Company currently relies on a limited number of (two or three)
software licensors of its main computer operating system. The Company
cannot assure that if any of these licenses are terminated, it will be able
to replace those licenses on a timely basis.
F - 13
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 11 - INCOME TAXES:
The income tax expense (benefit) is comprised of the following:
For the Three Months Ended For the Year Ended
March 31, December 31,
--------------------------- -------------------
1997 1996 1996 1995
------------ ---------- ------- -------
CURRENT:
Federal $ - $ (7,735) $(50,709) $39,050
State - (4,065) (18,622) 17,095
DEFERRED:
Federal - (4,165) (4,165) (3,000)
State - (2,035) (2,035) (1,450)
------------ ---------- --------- -------
$ - $(18,000) $(75,531) $51,695
============ ========== ========= =======
The Company has net operating losses carryforwards as of December 31, 1996,
of approximately $400,000, which may be applied against future taxable
income, and which expire in various years beginning after 2011. Since there
is no assurance that the Company will generate future taxable income to
utilize the deferred tax asset resulting from its net operating loss
carryforwards, the Company has not recognized this asset.
Due to the carryback of the 1996 loss to previous years, the Company will
recoup the maximum amount refundable for taxes it paid. The following is a
reconciliation of the maximum statutory federal tax rate to the Company's
effective tax rate:
For the Year Ended
December 31,
1996 1995
Federal statutory rate (34.0%) 34.0%
State income taxes (7.0) 7.9
Other - benefit from tax loss carryback 28.9 (2.0)
------ -----
(12.1%) 39.7%
====== =====
NOTE 12 - COMMITMENTS:
(a) In October 1996, the Company entered into a lease, for its current
executive offices, which provides for base annual rental of $85,000.
This lease, which is for an initial term of five years, has scheduled
annual increases, and can be renewed for an additional five year
period. The total amount of the base rent payments is being charged to
expenses using the straight-line method over the term of the lease.
The Company has recorded a deferred credit to reflect the excess of
rent expense over cash payments since the inception of this lease.
Previously, the Company was occupying space pursuant to a lease which
expires in March 1997. The Company elected to write-off the remaining
balance of unamortized leasehold improvements on this old space of
$5,378 during 1996.
F - 14
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 12 - COMMITMENTS (Continued):
The Company also sublets to an unaffiliated third party, space which
was previously utilized as its executive offices under a lease which
expires in February 1998. As of March 31, 1997 and December 31, 1996,
the Company had a remaining accrued liability of $9,584 and $12,198
which represents the net cost to the Company in excess of rental
income.
Total net rent expense for operating leases, consisted of the
following:
<TABLE>
<CAPTION>
For the Three Months For the Year Ended
Ended March 31, December 31,
----------------------- -----------------------
1997 1996 1996 1995
---------- --------- ----------- -------
<S> <C> <C> <C> <C>
Minimum rentals $32,918 $10,050 $ 48,677 $39,544
Sublease rentals (4,500) (4,500) (18,000) (1,500)
---------- --------- ---------- -------
Total net rent expense $28,418 $ 5,550 $ 30,677 $38,044
========== ========= ========== ======
</TABLE>
At December 31, 1996, future minimum rentals (based upon the new
space) and sublease income are as follows:
Total Sublease
Rent Income Net
1997 $ 95,428 $18,000 $ 77,428
1998 87,616 3,000 84,616
1999 87,975 - 87,975
2000 93,075 - 93,075
2001 72,675 - 72,675
-------- ------ -------
Total $436,769 $21,000 $415,769
======== ======= ========
(b) The Company also leases certain types of equipment under operating
leases which expire at various dates through 1999. Lease payments,
which are charged to operations, aggregate approximately $1,100 per
month.
(c) The Company is also committed to provide post-contract customer
support, to two of its customers through a third-party provider. The
agreement with the third party provides for monthly payments of $483
and expires in July 1997.
(d) Effective October 1, 1996, the Company entered into a three-year
employment agreement with the Chairman of its Board of Directors,
whereby he will also serve as Chief Executive Officer of the Company.
This agreement provides for annual compensation of $250,000 and a
signing bonus based on a fixed formula. See Note 14(a) re: Subsequent
Events.
Effective October 1, 1996, the Company entered into a three-year
employment agreement with its President and Chief Operating Officer.
This agreement provides for annual compensation of $125,000 and a
signing bonus of $15,000. See Note 14(a) re: Subsequent Events.
F - 15
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Information as of and for the Periods Ended
March 31, 1997 and 1996 is unaudited)
NOTE 12 - COMMITMENTS (Continued):
The agreements with both of these officers provide for continuing
automatic one year extensions, increases as determined by the Board of
Directors, annual bonuses based on sales and pretax income and include
provisions for termination and covenants not to compete. In addition,
the agreements provide for common stock option grants based upon
levels of Company earnings.
In January 1997, the Company entered into a three-year employment
agreement with an employee to serve as the Company's Chief Technology
Officer. Such agreement provides for annual base salaries of $200,000,
$225,000 and $250,000 in the first, second and third years,
respectively. Other terms of this employment agreement conform in
structure to the material provisions of the employment agreements
described above.
NOTE 13 - PROPOSED INITIAL PUBLIC OFFERING:
The Company is preparing to undertake an initial public offering ("IPO") of
1,200,000 shares of its common stock at a price of $5.00 per share, or an
aggregate of approximately $4,700,000 of net proceeds. The net proceeds
from this offering will be used to repay the promissory notes from the
private offering (see Note 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 389,200
(see Note 14b) shares of common stock underlying the warrants issued in
connection with the debt offering and an aggregate of 250,250 shares
currently held by certain shareholders. The Company will not receive any of
the proceeds from the resale of these shares.
NOTE 14 - SUBSEQUENT EVENTS:
(a) The Company had accrued compensation payable to two officers (the
President and the Chairman of the Board) in the aggregate amount of
$125,000 as of March 31, 1997. In April 1997, the officers agreed to
convert $115,000 of such compensation into common shares at a
conversion price of $5.00 per share (the IPO price), such conversion
to occur upon the consummation of the IPO. See Note 13.
(b) In April 1997, the holders of the bridge notes (see Note 6) agreed to
(i) increase the exercise price of the five year warrants issued to
them from $.50 per warrant to $3.00 per warrant and (ii) increase the
holding period of these warrants from six months to two years from the
effective date of the IPO.
In connection with an agreement reached with certain of the bridge
noteholders, the Company canceled bridge warrants to purchase 42,000
shares. The number of shares underlying the bridge warrants has
therefore been reduced from 431,200 to 389,200 common shares.
(c) In April 1997, the Chairman of the Board of the Company agreed to
convert a note payable to him by the Company (see Note 8) into common
shares at a conversion price of $5.00 per share (the IPO price) upon
the consummation of such IPO. In addition, this officer agreed to
provide a $500,000 credit line to the Company (at terms similar to the
$200,000 loan) for a period of two years. To date, the Company has
borrowed $100,000 against this new $500,000 credit line which is
payable in eight equal quarterly installments.
F - 16
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by
the Company or the Underwriter. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
there has been no change in the affairs of the Company since the date hereof.
This Prospectus does not constitute an offer of any securities other than the
securities to which it relates or an offer to any person in any jurisdiction in
which such an offer would be unlawful.
--------------
TABLE OF CONTENTS
Page
Prospectus Summary......................................................
Risk Factors............................................................
Use of Proceeds.........................................................
Dilution................................................................
Capitalization..........................................................
Dividend Policy.........................................................
Bridge Financing........................................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...........................................................
Business................................................................
Management..............................................................
Principal and Selling Stockholders......................................
Certain Relationships and Related Transactions..........................
Description of Securities...............................................
Underwriting............................................................
Legal Matters...........................................................
Experts.................................................................
Additional Information..................................................
Financial Statements....................................................
--------------
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
1,200,000 Shares of Common Stock
COMPU-DAWN, INC.
PROSPECTUS
E. C. Capital, Ltd.
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Article X of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by Section 102 of the Delaware General Corporation Law, provided that
this provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) arising under Section 174 of the
Delaware General Corporation Law (with respect to unlawful dividend payments and
unlawful stock purchases or redemptions), or (iv) for any transaction from which
the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of
Incorporation and its by-laws provisions to indemnify its directors, officers,
employees and agents and to purchase insurance with respect to liability arising
out of the performance of their duties as directors, officers, employees and
agents as permitted by Section 145 of the Delaware General Corporation law. The
Delaware General Corporation law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors, officers, employees and agents may be entitled under the
Company's by-laws, any agreement, vote of stockholders or otherwise.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers, directors, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to
indemnify the Company, its directors, and each person who controls it within the
meaning of Section 15 of the Act with respect to any statement in or omission
from the registration statement or the Prospectus or any amendment or supplement
thereto if such statement or omission was made in reliance upon information
furnished in writing to the Company by the Underwriter specifically for or in
connection with the preparation of the registration statement, the Prospectus,
or any such amendment or supplement thereto.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses to be incurred by the Company in connection with
the issuance and distribution of the securities being registered, other than
underwriting discounts and commissions, are estimated as follows:
SEC Registration Fee 3,359.78
NASD Filing Fee 2,000.00
Blue Sky Fees and Expenses 25,000.00
Registrant's Counsel Fees and Expenses 150,000.00
Accountant's Fees and Expenses 85,000.00
Underwriter's Non-Accountable Expense Allowance 180,000.00
Underwriter's Consulting Fee 108,000.00
Printing and Engraving Expenses 50,000.00
NASDAQ Listing Fees 10,000.00
Blue Sky Counsel Fees 35,000.00
Transfer Agent and Registrar's Fees and Expenses 15,000.00
Miscellaneous Expenses 36,640.22
-----------
Estimated Total $700,000.00
==========
Item 26. Recent Sales of Unregistered Securities.
The Company sold the following Common Shares during the past three
years. The number of Common Shares referred to herein gives effect to a 325 for
1 stock split effectuated on October 18, 1996 in connection with the Company's
reincorporation in the State of Delaware.
In October 1996, the Company borrowed $770,000 from the following
bridge lenders (the "Bridge Lenders") in a bridge financing transaction. In
consideration for making the loans, the Company issued Bridge Warrants to the
Bridge Lenders for the purchase of an aggregate of 431,200 Common Shares at a
price of $.50 per share.
II-2
<PAGE>
Number of
Common Shares
Name Underlying Warrants
Dong W. Lew 39,200
Mark Honigsfeld 33,600
Robert H. Solomon 25,200
Murray Gross 28,000
Harvey Bibicoff 70,000
Apollo Equities 56,000
James Favia 42,000
Sydney Gluck 22,400
Steven Wallitt 16,800
John Eckhoff 14,000
Kenneth Moschetto 14,000
Lawrence Levine 11,200
Maretza Jimenez
Campos 11,200
Lori Siegal 11,200
Horizon Acquisitions 8,400
Stuart Copperman 5,600
Teddy Selinger 5,600
John P. Hefferon 5,600
Scott Cohen 2,800
Peter Guardino 2,800
James Portnof 2,800
Windsor L. P. 2,800
---------
Total 431,200
Subsequent to the closing of the bridge financing transaction, the
exercise price of the Bridge Warrants was increased to $3.00 per share and
Messrs. Lew and Cohen agreed to the cancellation of the Bridge Warrants issued
to them.
In August 1996, the Company sold an aggregate of 480,300 Common Shares
at a price of $.30 per share to the following persons for the following
consideration:
Number of Aggregate
Name Common Shares Consideration
Murray Gross 50,000 $15,000.00
Robert LoRusso 100,100 30,030.00
Mark Honigsfeld
Living Trust 330,200 99,060.00
------- ---------
Total 480,300 $129,090.00
======= ==========
Additionally, in August 1996, the Company issued 25,075 Common Shares
to Mr. Gross in payment of consulting fees of $7,522.50 in connection with the
Company's marketing activities and 75,075 Common Shares to Robert H. Solomon in
payment of legal and consulting fees of $22,522.50.
In April 1997, the Company issued 233,000 Common Shares to the Mark
Honigsfeld Living Trust upon the exercise of a certain option by Mr. Honigsfeld
for the purchase of such shares at an exercise price of $.30 per share.
II-3
<PAGE>
All the foregoing transactions were private transactions not involving
a public offering and were exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof. The bridge financing securities
were sold only to accredited investors. The Company determined that the
stockholders to whom the Company issued Common Shares in the August 1996 and
April 1997 transactions discussed above were sophisticated investors. Except as
otherwise indicated below, sales of the securities were without the use of an
underwriter, and the certificates evidencing the securities relating to the
foregoing transactions bear restrictive legends permitting the transfer thereof
only upon registration of such securities or an exemption under the Securities
Act.
The Underwriter of this Offering acted as placement agent for the
Company in connection with the bridge financing transaction on a "best efforts,
all or none" basis. The Underwriter received a placement fee of 10% of the gross
proceeds of the Bridge Financing transaction, or $77,000, and a non-accountable
expense allowance of 3% of the gross proceeds of the Bridge Financing
transaction or $23,100. The Company also paid the fees and disbursements of the
Underwriter's counsel in connection with representing the Underwriter in its
capacity of placement agent in the Bridge Financing transaction.
Item 27. Exhibits.
Exhibit
Number Title of Exhibit
1.1 Form of Underwriting Agreement by and between the Company and the
Underwriter.
1.2 Form of Financial Consulting Agreement between the Underwriter and the
Company.*
2.1 Agreement of Merger between the Company and Coastal Computer Systems, Inc.,
a New York corporation.*
3.1 Articles of Incorporation of the Company.*
3.2 By-Laws of the Company.*
4.1 Specimen Common Share Certificate.*
4.2 Form of Underwriter's Common Share Purchase Warrant.*
5.1 Opinion of Certilman Balin Adler & Hyman, LLP, counsel for the Company.
10.1 Restated and Amended Employment Agreement dated as of October 1, 1996
between the Company and Dong W. Lew.*
10.2 Restated and Amended Employment Agreement dated as of October 1, 1996
between the Company and Mark Honigsfeld.*
II-4
<PAGE>
10.3 $70,000 Promissory Note dated October 30, 1996 from Dong W. Lew to the
Company.*
10.4 Form of Warrant between the Company and each of the Bridge Lenders.*
10.5 1996 Stock Option Plan.*
10.6 Lease dated October 1, 1996 between Summit Equities Corp. and the Company.*
10.7 Pledge and Hypothecation Agreement dated October 30, 1996 between the
Company and Dong W. Lew.*
10.8 Credit Agreement dated January 20, 1997 between the Company and Mark
Honigsfeld.*
10.9 $100,000 Promissory Note dated January 20, 1997 from the Company to Mark
Honigsfeld.*
10.10$50,000 Promissory Note dated February 19, 1997 from the Company to Mark
Honigsfeld.*
10.11$50,000 Promissory Note dated March 5, 1997 from the Company to Mark
Honigsfeld.*
10.12Form of Indemnification Agreement between the Company and the Company's
directors and officers.*
10.13Consulting Agreement dated September 27, 1996 between the Company and Alan
Daniels and Geraldine Lum Daniels.*
10.14Employment Agreement dated January 6, 1997 between the Company and Louis
Libin.*
10.15Amended and Restated Credit Agreement dated April 30, 1997 between the
Company and Mark Honigsfeld.
10.16$100,000 Promissory Note dated May 8, 1997 from the Company to Mark
Honigsfeld.
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.
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,
II-6
<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.
II-7
<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 May__, 1997.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
Mark Honigsfeld, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
/s/ Mark Honigsfeld Chairman of the Board, May ___, 1997
- --------------------------
Mark Honigsfeld Chief Executive Officer,
Secretary and Director
(Principal Financial Officer
and Principal Accounting Officer)
* President, Chief Operating May ___, 1997
- ------------------------- Officer, Treasurer and
Dong W. Lew Director
* Director May ___, 1997
- -------------------------
Louis Libin
* Director May ___, 1997
- -------------------------
William D. Rizzardi
* Director May ___, 1997
- -------------------------
Harold Lazarus, Ph.D.
*By: /s/ Mark Honigsfeld
--------------------
Mark Honigsfeld
Attorney-in Fact
II-8
<PAGE>
COMPU-DAWN, INC.
1,200,000 Shares of Common Stock
UNDERWRITING AGREEMENT
Mineola, New York
_______, 1997
E.C. Capital, Ltd.
One Expressway Plaza
Roslyn Heights, New York 11577
Ladies and Gentlemen:
The undersigned, COMPU-DAWN, INC., a Delaware corporation (the "Company"),
hereby confirms its agreement with E. C. Capital, Ltd. (being referred to herein
variously as "you" or the "Underwriter"), as follows:
1. Purchase and Sale of Securities.
1.1 Firm Securities.
1.1.1 Purchase of Firm Securities. On the basis of the
representations and warranties herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to issue and
sell to the Underwriter, and the Underwriter agrees to purchase from
the Company, 1,200,000 shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), at a purchase price of $5.00 per
share (or $4.50 per share net of discounts and commissions). (such
shares of Common Stock being also referred to herein as the "Firm
Securities").
1.1.2 Payment and Delivery. Delivery of, and payment for the Firm
Securities shall be made at 10:00 A.M., New York time, on the fifth
business day following the Effective Date (as that term is hereinafter
defined) of the Registration Statement (as that term is hereinafter
defined) or at such earlier time as the Underwriter shall determine,
or at such other time as shall be agreed upon by the Underwriter and
the Company, at the offices of the Underwriter or at such other place
as shall be agreed upon by the Underwriter and the Company. The hour
and date of delivery and payment for the Firm Securities are called
the "Closing Date." Payment for the Firm Securities shall be made on
the Closing Date at the Underwriter's election by certified or
1
<PAGE>
bank cashier's check(s) in immediately available New York
Clearing House funds, payable to the order of the Company upon
delivery to you of certificates (in form and substance complying with
applicable law and satisfactory to the Underwriter) representing the
Firm Securities for the account of the Underwriter. The Firm
Securities shall be registered in such name or names and in such
authorized denominations as the Underwriter may request in writing at
least three full business days prior to the Closing Date. The Company
will permit the Underwriter to examine and package the Firm Securities
for delivery, at the Company's transfer agent or correspondent at
least one full business day prior to the Closing Date. The Company
shall not be obligated to sell or deliver the Firm Securities except
upon tender of payment by the Underwriter for all the Firm Securities.
1.2 Over-Allotment Option.
1.2.1 Option Securities. For the purposes only of covering any
over-allotments in connection with the distribution and sale of the
Firm Securities, the Underwriter is hereby granted a non-transferable
option to purchase up to an additional 180,000 shares of Common Stock
from the Company ("Over-allotment Option"). Such additional shares of
Common Stock are hereinafter referred to as the "Option Securities."
The Firm Securities and the Option Securities are, hereinafter
referred to collectively as the "Public Securities." The purchase
price to be paid for the Option Securities will be the same price per
Option Security as the price per Firm Security set forth in Section
1.1.1 hereof.
1.2.2 Exercise of Option. The Over-allotment Option granted
pursuant to Section 1.2.1 hereof may be exercised by the Underwriter
as to all or any part of the Option Securities at any time, from time
to time, within forty-five days after the effective date of the
Registration Statement ("Effective Date"). The Underwriter will not be
under any obligation to purchase any Option Securities prior to the
exercise of the Over-allotment Option. The Over-allotment Option
granted hereby may be exercised by the giving of oral or written
notice to the Company from the Underwriter (any such oral notice which
must be confirmed by a letter or telecopier notice within twenty-four
hours or such oral notice) setting forth the number of Option
Securities to be purchased, the date and time for delivery of, and
payment for, the Option Securities, and stating that the Option
Securities referred to therein are to be used only for the purpose of
covering over-allotments in connection with the distribution and sale
of the Firm Securities. If such notice is given at least two full
business days prior to the Closing Date, the date set forth therein
for such delivery and payment will be the Closing Date. If such notice
is given thereafter, the date set forth therein for such delivery and
payment will not be earlier than five full business days after the
date of the notice. If such delivery and payment for the Option
Securities does not occur on the Closing Date, the date and time of
the closing for such Option Securities will be as set forth
2
<PAGE>
in the notice (hereinafter the "Option Closing Date"). Upon
exercise of the Over-allotment Option, the Company will become
obligated to convey to the Underwriter, and, subject to the terms and
conditions set forth herein, the Underwriter will become obligated to
purchase, the number of Option Securities specified in such notice.
1.2.3 Payment and Delivery. Payment for the Option Securities
shall be made on the Option Closing Date at the Underwriter's election
by certified or bank cashier's check(s) in immediately available New
York Clearing House funds, payable to the order of the Company, at the
offices of the Underwriter or at such other place as shall be agreed
upon by the Underwriter and the Company upon delivery to you of
certificates representing such securities for the account of the
Underwriter. The certificates representing the Option Securities to be
delivered will be in such authorized denominations and registered in
such names as the Underwriter requests in writing not less than three
full business days prior to the Closing Date or the Option Closing
Date, as the case may be. The Company will permit the Underwriter to
examine and package the Option Securities for delivery at the
aforesaid office of the Company's transfer agent or correspondent at
least one full business day prior to such Option Closing Date.
1.3 Underwriter's Warrants.
1.3.1 Warrants. The Company hereby agrees to issue and sell to
the Underwriter (and/or its designees) on the Closing Date, in
exchange for a check in the amount of $100, an aggregate of 120,000
Warrants ("Underwriter's Warrants"), each Underwriter's Warrant to
purchase one share of Common Stock of the Company at an initial
exercise price of $8.25 per share. The Underwriter's Warrants are
exercisable for a four-year period commencing on the one-year
anniversary of the Effective Date and shall be substantially in the
form attached thereto as Exhibit A. The Underwriter's Warrants and the
shares of Common Stock issuable upon exercise of the Underwriter's
Warrants are hereinafter referred to collectively as the
"Underwriter's Securities." The Public Securities and the
Underwriter's Securities are hereinafter referred to collectively as
the "Securities."
1.3.2 Payment and Delivery. Delivery and Payment for the
Underwriter's Warrants in the authorized names and authorized
denominations designated by the Underwriter shall be made on the
Closing Date.
2. Representations and Warranties of the Company. The Company represents
and warrants to the Underwriter as follows:
2.1 Filing of Registration Statement.
2.1.1 Pursuant to the Act.The Company has filed with the
Securities and Exchange Commission ("Commission") a registration
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statement and an amendment or amendments thereto, on Form SB-2
(Reg. No. 333-18667), including any related prospectus subject to
completion ("Preliminary Prospectus"), for the registration of the
Public Securities under the Securities Act of 1933, as amended
("Act"), which registration statement and amendment or amendments have
been prepared by the Company in conformity with the requirements of
the Act, and the rules and regulations ("Regulations") of the
Commission under the Act. Except as the context may otherwise require,
such registration statement, as amended, on file with the Commission
at the time the registration statement becomes effective (including
the prospectus, financial statements, schedules, exhibits and all
other documents filed as a part thereof or incorporated therein and
all information deemed to be a part thereof as of such time pursuant
to paragraph (b) of Rule 430A of the Regulations), is hereinafter
called the "Registration Statement," and the form of the final
prospectus dated the Effective Date (or, if applicable, the form of
final prospectus filed with the Commission pursuant to Rule 424 of the
Regulations), is hereinafter called the "Prospectus." The Registration
Statement will be declared effective by the Commission on the date
hereof.
2.1.2 Pursuant to the Exchange Act. The Company has filed with
the Commission a registration statement on Form 8-A (File No.
)providing for the registration under the Securities
Exchange Act of 1934, as amended ("Exchange Act"), of the Public
Securities.Such registration of the Public Securities will be declared
effective by the Commission on or prior to the thirtieth day following
the Closing date.
2.2 No Stop Orders, Etc. Neither the Commission nor, to the Company's
knowledge, any state regulatory authority has issued any order preventing
or suspending the use of any Preliminary Prospectus or has instituted or,
to the Company's knowledge, threatened to institute any proceedings with
respect to such an order.
2.3 Disclosures in Registration Statement. At the time the
Registration Statement became effective and at all times subsequent thereto
up to the Closing Date:
2.3.1 Securities Act Representation and 10b-5 Representation: The
Registration Statement and the Prospectus will contain, with respect
to the Company and the persons listed on Schedule 2.3.1 attached
hereto, all material statements which are required to be stated
therein in accordance with the Act and the Regulations, and will in
all material respects conform to the requirements of the Act and the
Regulations. Neither the Registration Statement nor any amendment or
supplement thereto, on the Effective Date, contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading and that on the Closing Date, the Prospectus
and any amendment or supplement thereto will not contain any untrue
statement of a material
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fact or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading. When any Preliminary Prospectus was
first filed with the Commission (whether filed as part of the
Registration Statement for the registration of the Securities or any
amendment thereto or pursuant to Rule 424(a) of the Regulations) and
when any amendment thereof or supplement thereto was first filed with
the Commission, such Preliminary Prospectus and any amendments thereof
and supplements thereto, at the time such filing was made, complied in
all material respects with the applicable provisions of the Act and
the Regulations. The representation and warranty made in this Section
2.3.1 does not apply to statements made or statements omitted in
reliance upon and in conformity with written information furnished to
the Company by the Underwriter expressly for use in the Registration
Statement, Preliminary Prospectus, or Prospectus or any amendment
thereof or supplement thereto ("Underwriter's Information").
2.3.2 Disclosure of Contracts. The description in the Registration
Statement and the Prospectus of contracts and other documents is accurate
and presents fairly the information required to be disclosed and there are
no contracts or other documents required to be described in the
Registration Statement or the Prospectus or to be filed with the Commission
as exhibits to the Registration Statement which have not been so described
or filed. Each contract or other instrument (however characterized or
described) to which the Company is a party or by which its property or
business is or may be bound or affected and (i) which is referred to in the
Prospectus, or (ii) is material to the business of the Company has been
duly and validly executed, is in full force and effect in all material
respects and is enforceable in accordance with its terms, and none of such
contracts or instruments has been assigned by the Company and the Company,
to the best of its knowledge, is not in default thereunder and, to the
Company's knowledge, no event has occurred which, with the lapse of time or
the giving of notice, or both, would constitute a default thereunder except
as otherwise disclosed in the Prospectus). None of the material provisions
of such contracts or instruments violates or will result in a violation of
any existing applicable law, rule, regulation, judgment, order or decree of
any governmental agency or court having jurisdiction over the Company, or
any of its respective assets, including, without limitation, those relating
to environmental laws and regulations.
2.3.3 Prior Securities Transactions. No securities of the Company
have been sold by the Company or by or on behalf of, or for the
benefit of, any person or persons controlling, controlled by, or under
common control with the Company within the three years prior to the
date hereof, except as disclosed in the Registration Statement.
2.4 Changes After Dates in Registration Statement.
2.4.1 No Material Adverse Change. Since the
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respective dates as of which information is given in the
Registration Statement and the Prospectus, except as otherwise
specifically stated therein, (i) there has been no material adverse
change in the condition, financial or otherwise, or in the results of
operation, business or business prospects of the Company ("Material
Adverse Change"), including, but not limited to, a material loss of,
or interference with, its business from fire, storm, explosion, flood
or other casualty, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree,
whether or not arising in the ordinary course of business, and (ii)
there have been no transactions entered into by the Company, other
than those in the ordinary course of business, which are material with
respect to the condition, financial or otherwise, or the results of
its operations, business or business prospects.
2.4.2 Recent Securities Transactions. Etc. Subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, and except as may otherwise be indicated
or contemplated herein or therein, the Company has not (i) issued any
securities or incurred any liability or obligation, direct or
contingent, for borrowed money; or (ii) declared or paid any dividend
or made any other distribution on or in respect to its capital stock.
2.5 Independent Accountants. Lazar, Levine & Company, LLP, whose
reports are filed with the Commission as part of the Registration
Statement, are independent accountants as required by the Act and the
Regulations.
2.6 Financial Statements. The financial statements, including the
notes thereto and supporting schedules included in the Registration
Statement and Prospectus, fairly present the financial condition and the
results of operations of the Company at the dates and for the periods to
which they apply; such financial statements have been prepared in
conformity with generally accepted accounting principles, consistently
applied; and the supporting schedules, if any, included in the Registration
Statement present fairly the information required to be stated therein.
2.7 Authorized Capital; Options: Etc. The Company had at the date or
dates indicated in the Prospectus, the duly authorized, issued and
outstanding capitalization as set forth in the Registration Statement and
the Prospectus. Based on the assumptions stated in the Registration
Statement and the Prospectus, the Company will have on the Closing Date the
adjusted stock capitalization set forth therein. Except as set forth in the
Registration Statement and the Prospectus, on the Effective Date there are,
and on the Closing Date there will be, no options, warrants, or other
rights to purchase or otherwise acquire any authorized but unissued shares
of Common Stock of the Company or any security convertible into shares of
Common Stock of the Company, or any contracts or commitments to issue or
sell shares of Common Stock or any such
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options, warrants, rights or convertible securities.
2.8 Valid Issuance of Securities; Etc.
2.8.1 Outstanding Securities. All issued and outstanding
securities of the Company have been duly authorized and validly issued
and are fully paid and non-assessable; the holders thereof have no
rights of rescission with respect thereto; and none of such securities
were issued in violation of the preemptive rights of any holders of
any security of the Company or similar contractual rights granted by
the Company. The outstanding options and warrants to purchase shares
of Common Stock constitute the valid and binding obligations of the
Company, enforceable in accordance with their terms, except (i) such
enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, marshaling and/or similar laws,
now or hereafter in effect affecting creditors' rights and remedies
(including such as may deny giving effect to waivers of debtor's
rights), (ii) as enforceability of any indemnification provision may
be limited under Federal and State laws, and (iii) that the remedy of
specific performance and injunction and other forms of equitable
relief may be subject to the equitable defenses and to the discretion
of the courts before which any proceeding therefor may be brought
(regardless of whether such enforceability is considered a proceeding
in equity or in law). The authorized Common Stock and outstanding
options and warrants to purchase shares of Common Stock conform to all
statements relating thereto contained in the Registration Statement
and the Prospectus. The offers and sales of the outstanding Common
Stock, options and warrants to purchase shares of Common Stock were at
all relevant times either registered under the Act and registered or
qualified under the applicable state securities or Blue Sky Laws or
exempt from such registration requirements.
2.8.2 Securities Sold Pursuant to this Agreement. The Securities
have been duly authorized and, when issued and paid for, will be
validly issued, fully paid and non-assessable; the Securities are not
and will not be subject to the preemptive rights of any holders of any
security of the Company or similar contractual rights granted by the
Company; and all corporate actions required to be taken for the
authorization, issuance and sale of the Securities have been duly and
validly taken. When issued, the Underwriter's Warrants will constitute
valid and binding obligations of the Company to issue and sell, upon
exercise thereof and payment therefor, the number of shares of Common
Stock of the Company called for thereby and the Underwriter's Purchase
Options, the Underwriter's Warrants and the Warrants are enforceable
against the Company in accordance with their respective terms, except
(i) such enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, marshaling and/or similar laws,
now or hereafter in effect affecting creditors' rights and remedies
(including such as may deny giving effect to waivers of debtor's
rights), (ii) as enforceability of any indemnification provision may
be limited under Federal and State laws, and (iii) that the remedy of
specific
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performance and injunction and other forms of equitable relief
may be subject to the equitable defenses and to the discretion of the
courts before which any proceeding therefor may be brought (regardless
of whether such enforceability is considered a proceeding in equity or
in law).
2.9 Registration Rights of Third Parties. Except as set forth in the
Prospectus, no holders of any securities of the Company or of any options
or warrants of the Company exercisable for or convertible or exchangeable
into securities of the Company have the right to require the Company to
register any such securities of the Company under the Act or to include any
such securities in a registration statement to be filed by the Company
except as set forth in the letter of intent dated September 16, 1996
between the Company and the Underwriter.
2.10 Validity and Binding Effect of Agreements. This Agreement, the
employment agreements with each of Dong W. Lew ("Lew") and Mark Honigsfeld
("Honigsfeld") ("Employment Agreements"), and the Underwriter's Warrant
have been duly and validly authorized by the Company and constitute, or
when executed and delivered will constitute, the valid and binding
agreements of each of the Company, Lew and Honigsfeld, as the case may be,
enforceable against each of them in accordance with their respective terms,
except (i) such enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, marshaling and/or similar laws, now
or hereafter in effect affecting creditors' rights and remedies (including
such as may deny giving effect to waivers of debtor's rights), (ii) as
enforceability of any indemnification provision may be limited under
Federal and State laws, and (iii) that the remedy of specific performance
and injunction and other forms of equitable relief may be subject to the
equitable defenses and to the discretion of the courts before which any
proceeding therefor may be brought (regardless of whether such
enforceability is considered a proceeding in equity or in law).
2.11 No Conflicts, Etc. The execution, delivery, and performance by
the Company of this Agreement, the consummation by the Company of the
transactions herein contemplated and the compliance by the Company with the
terms hereof do not and will not, with or without the giving of notice or
the lapse of time or both, (i) result in a breach of, or conflict with any
of the terms and provisions of, or constitute a default under, or result in
the creation, modification, termination or imposition of any lien, charge
or encumbrance upon any of its property or assets pursuant to the terms of
any indenture, mortgage, deed of trust, note, loan or credit agreement or
any other agreement or instrument evidencing an obligation for borrowed
money, or any other agreement or instrument to which it is a party or by
which it may be bound or to which any of its property or assets is subject;
(ii) result in any violation of the provisions of its Certificate of
Incorporation or By-Laws; and (iii) violate any existing applicable law,
rule, regulation, judgment, order or decree of any governmental agency or
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court, domestic or foreign, having jurisdiction over it or its
operations or any of its properties or business; or (iv) have a material
adverse effect on any permit, license, certificate, registration, approval,
consent, license or franchise concerning it or its operations; except in
the case of (i) or (iii), where such default, breach, violation or effect,
either singly or in the aggregate, would not have a material adverse effect
on its financial condition or results of operations.
2.12 No Defaults: Violations. Except as described in the Prospectus,
no default exists in the due performance and observance of any term,
covenant or condition of any material license, contract, indenture,
mortgage, deed of trust, note, loan or credit agreement, or any other
agreement or instrument evidencing an obligation for borrowed money, or any
other material agreement or instrument to which the Company, or any of its
subsidiaries, if any, is a party or by which the Company may be bound or to
which any of the properties or assets of the Company is subject, except in
each case where such default would not have a material adverse effect on
the Company's financial condition or results of operations. Neither the
Company nor any of its subsidiaries, if any, is in violation of any term or
provision of its Certificate Incorporation or By-Laws or in violation of
any franchise, license, permit, applicable law, rule, regulation, judgment
or decree of any governmental agency or court, domestic or foreign, having
jurisdiction over it or its operations, properties or business, except as
described in the Prospectus and except where such violation would not have
a material adverse effect on its financial condition, results of
operations, business, prospect or properties.
2.13 Corporate Power; Licenses; Consents.
2.13.1 Conduct of Business. The Company has all requisite
corporate power and authority, and has all necessary authorizations,
approvals, orders, licenses, certificates and permits of and from all
governmental regulatory officials and bodies to own or lease its
properties and conduct its business as described in the Prospectus,
and is and has been doing business in compliance with all such
material authorizations, approvals, orders licenses, certificates and
permits and all federal, state and local laws, rules and regulations,
except where failure to so comply would not have a material adverse
effect on the condition (financial or otherwise), business prospect or
properties of the Company.
2.13.2 Transactions Contemplated Herein. The Company has all
corporate power and authority to enter into this Agreement and to
carry out the provisions and conditions hereof, and all consents,
authorizations, approvals and orders required in connection therewith
have been obtained. No consent, authorization or order of, and no
filing with, any court, government agency or other body is required
for the valid issuance, sale and delivery of the Securities pursuant
to this Agreement, the warrant Agreement and the Underwriter's
Purchase Options,
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and as contemplated by the Prospectus, except with respect to
applicable federal and state securities laws.
2.14 Title to property: Insurance. The Company has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real
and personal property (tangible and intangible) owned or leased by it,
respectively free and clear of all liens, encumbrances, Claims security
interests, defects and restrictions of any material nature whatsoever,
other than those referred to in the Prospectus, liens for taxes not yet due
and payable and liens of an immaterial nature arising by operation of law.
The Company has insured its properties against loss or damage by fire,
other casualty and other insurance in amounts and on terms as is usually
maintained by similarly situated companies engaged in the same or similar
business.
2.15 Litigation; Governmental Proceedings. Except as set forth in the
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or, to the
Company's knowledge, threatened against, or involving the properties or
business of the Company which might materially and adversely affect the
financial position, prospects, value or the operation of the properties or
the business of the Company or which question the validity of the capital
stock of the Company or this Agreement or of any action taken or to be
taken by the Company pursuant to, or in connection with, this Agreement.
There are no outstanding orders, judgments or decrees of any court,
governmental agency or other tribunal naming the Company and enjoining the
Company from taking, or requiring the Company, to take, any action, or to
which the Company, or its respective properties or business, is bound or
subject.
2.16 Good Standing. The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of its
state of incorporation. The Company is duly qualified and licensed and in
good standing as a foreign corporation in each jurisdiction in which
ownership or leasing of any properties or the character of its operations
requires such qualification or licensing, except where the failure to
qualify would not have a material adverse effect on its financial condition
or results of operations.
2.17 Taxes. The Company has filed all returns (as hereinafter defined)
required to be filed with taxing authorities prior to the date hereof or
has duly obtained extensions of time for the filing thereof. The Company
has paid all taxes (as hereinafter defined) shown as due on such returns
that were filed and has paid all taxes imposed on or assessed against it,
other than any which the Company is contesting in good faith. The
provisions for taxes payable, if any, shown on the financial statements
filed with, or as part of the Registration Statement are sufficient for all
accrued and unpaid taxes, whether or not disputed, and for all periods to
and including the dates of such consolidated financial statements.
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Except as disclosed in writing to the Underwriter, (i) no issues have
been raised (and are currently pending) by any taxing authority in
connection with any of the returns or taxes asserted as due from the
Company, and (ii) no waivers of statutes of limitation with respect to the
returns or collection of taxes have been given by or requested from the
Company. The term "taxes" mean all federal, state, local, foreign, and
other net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property, windfall profits, customs, duties or other taxes, fees,
assessments, or charges of any kind whatever, together with any interest
and any penalties, additions to tax, or additional amounts with respect
thereto. The term "returns" means all returns, declarations, reports,
statements, and other documents required to be filed in respect of taxes.
2.18 Employee Options. No shares of Common Stock are eligible for sale
pursuant to Rule 701 promulgated under the Act in the 12-month period
following the Effective Date.
2.19 Transactions Affecting Disclosure to NASD.
2.19.1 Finder's Fees. There are no claims, payments, issuances,
arrangements or understandings for services in the nature of a
finder's or origination fee with respect to the sale of the Securities
hereunder or any other arrangements, agreements, understandings,
payments or issuance with respect to the Company that may affect the
Underwriter's compensation, as determined by the National Association
of Securities Dealers, Inc. ("NASD"), other than payments or future
payments to the Underwriter, as a placement agent fee with respect to
the Company's private placement of promissory notes in the aggregate
principal amount of $770,000.00 and 431,200.00 Common Stock Purchase
Warrants (the "Bridge Warrants") which closed on October 28, 1996.
2.19.2 Payments Within Twelve Months. Except as set forth in the
Registration Statement, the Company has not made any direct or
indirect payments (in cash, securities or otherwise) to (i) any
person, as a finder's fee, investing fee or otherwise, in
consideration of such person raising capital for the Company or
introducing to the Company persons who provided capital to the
Company, (ii) to any NASD member, or (iii) to any person or entity
that has any direct or indirect affiliation or association with any
NASD member, within the twelve month period prior to the date on which
the Registration Statement was filed with the Commission ("Filing
Date") or thereafter, other than payments to the Underwriter.
2.19.3 Use of Proceeds. None of the net proceeds of the offering
will be paid by the Company to any NASD member or any affiliate or
associate of any NASD member, except as specifically authorized
herein.
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2.19.4 Insiders' NASD Affiliation. No officer or director of the
Company or holder of five percent (5%) or more of any class of the
Company's securities has any direct or indirect affiliation or
association with any NASD member. The Company will advise the
Underwriter and the NASD if any 5% or greater stockholder of the
Company is or becomes an affiliate or associated person of an NASD
member participating in the distribution.
2.20 Foreign Corrupt Practices Act. Neither the Company nor any of its
subsidiaries, officers, directors, employees, agents or any other person
acting on behalf of the Company has, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, or
official or employee of any governmental agency or instrumentality of any
government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or any political party or candidate for office
(domestic or foreign) or other person who was, is, or may be in a position
to help or hinder the business of the Company (or assist it in connection
with any actual or proposed transaction) which (i) might subject the
Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (ii) if not given in the past, might have a
materially adverse effect on the assets, business or operations of the
Company as reflected in any of the financial statements contained in the
Prospectus or (iii) if not continued in the future, might adversely affect
the assets, business, operations or prospects of the Company. The Company's
internal accounting controls and procedures are sufficient to cause the
Company to comply with the Foreign Corrupt Practices Act of 1977, as
amended.
2.21 Nasdaq Eligibility. As of the Effective Date, the Public
Securities have been approved for quotation on The Nasdaq SmallCap Market.
2.22 Intangibles. The Company owns or possesses the requisite licenses
or rights to use all trademarks, service marks, service names, trade names,
patents and patent applications, copyrights and other rights (collectively,
"Intangibles") described as being licensed to, or owned by, it in the
Registration Statement. The Intangibles which have been registered by the
Company, if any, in the United States Patent and Trademark Office have been
fully maintained and are in full force and effect. There is no claim or
action by any person pertaining to, or proceeding pending or threatened and
the Company has not received any notice
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of conflict with the asserted rights of others which challenges its exclusive
right with respect to any Intangibles used in the conduct of its business except
as described in the Prospectus. To the Company's knowledge, the Intangibles and
the Company's current products, services and processes do not infringe on any
intangibles held by any third party. To the Company's knowledge, no others have
infringed upon the Intangibles of the Company.
2.23 Relations with Employees.
2.23.1 Employee Matters. The Company is in compliance in all
material respects with all federal, state and local laws and
regulations respecting the employment of its employees and employment
practices, terms and conditions of employment and wages and hours
relating thereto. There are no pending investigations involving the
Company by the U.S. Department of Labor or any other governmental
agency responsible for the enforcement of such federal, state or local
laws and regulations. There is no unfair labor practice charge or
complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, showdown
or stoppage pending or threatened against or involving the Company or
any predecessor entity, and none has ever occurred. No question
concerning representation exists respecting the employees of the
Company and no collective bargaining agreement or modification thereof
is currently being negotiated by the Company. No grievance or
arbitration proceeding is pending under any expired or existing
collective bargaining agreements, if any, of the Company.
2.23.2 Employee Benefit Plans. Other than as set forth in the
Registration Statement, the Company does not maintain, sponsor or
contribute to, or is it required to contribute to, any program or
arrangement that is an "employee pension benefit plan," an "employee
welfare benefit plan," or a, "multi-employer plan" as such terms are
defined in Sections 3(2), 3(1) and 3(37), respectively, of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")
("ERISA Plans"). The Company has not, at any time, maintained or
contributed to a defined benefit plan, as defined in Section 3(35) of
ERISA. If the Company does maintain or contribute to a defined benefit
plan, any termination of the plan on the date hereof would not give
rise to liability under Title IV of ERISA. No ERISA Plan (or any trust
created thereunder) has engaged in any prohibited transactions within
the meaning of Section 406 of ERISA or Section 4975 of the Internal
Revenue Code of 1986, as amended ("Code"), which could subject the
Company to
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any tax penalty for prohibited transactions and which has not
adequately been corrected. Any ERISA Plan is in compliance with all
material reporting, disclosure and other requirements of the Code and
ERISA as they relate to any such ERISA Plan. Determination letters
have been received from the Internal Revenue Service with respect to
each ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified
thereunder. The Company has never completely or partially withdrawn
from a "multi-employer plan."
2.24 Officers' Certificate. Any certificate signed by any duly
authorized officer of the Company and delivered to you or to your counsel
shall be deemed a representation and warranty by the Company to the
Underwriter as to the matters covered thereby.
2.25 [Reserved]
2.26 Agreements With Insiders and Others. The Company has caused to be
duly executed lock-up agreements, in substantially the form provided by the
Underwriter, pursuant to which (i) all of the officers and directors of the
Company agree not to sell any shares of Common Stock for twelve (12) months
following the Effective Date of the Registration Statement, except with
respect to shares of Common Stock underlying Bridge Warrants,(ii) certain
persons who beneficially own or hold five percent (5%) or more of the
outstanding Common Stock of the Company agree not to sell any shares of
Common Stock owned by them or their family members and affiliates (either
pursuant to Rule 144 of the Regulations or otherwise) for a period of
twelve (12) months following the Effective Date, except with respect to
shares of Common Stock underlying Bridge Warrants, and (iii) all persons
(including persons who own Bridge Warrants who are covered by subsections
(i) and (ii) of this Section 2.26) who beneficially own or hold Bridge
Warrants to purchase shares of Common Stock agree not to sell any shares of
Common Stock underlying the Bridge Warrants owned by them or their family
members and affiliates (either pursuant to Rule 144 of the Regulations or
otherwise) for a period of twenty-four (24) months following the Effective
Date.
2.27 Employment Agreements. The Company has entered into an Employment
Agreement with each of Messrs. Lew and Honigsfeld in substantially the same
form as set forth in an exhibit to the Registration Statement, for a term
of three (3) years commencing on the Effective Date.
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2.28 [Reserved]
2.29 Sale, Disposal or Conversion of Securities. For the twelve (12)
month period commencing on the Effective Date, the Company will not sell or
otherwise dispose of any equity securities or securities convertible into,
or exchangeable or exercisable for, equity securities of the Company,
except for (i) the issuance of stock options, or shares of Common Stock
issuable upon the exercise thereof, which have been or may be granted up to
an aggregate of 1,100,000 shares of Common Stock, (ii) the issuance of
Public Securities, (iii) shares of Common Stock issuable directly, or
indirectly, upon the exercise of the Underwriter's Warrants, (iv) the
issuance of common or preferred securities in connection with a merger or
acquisition by the Company, (v) issuance of shares upon exercise of the
Bridge Warrants, (vi) the issuance of common or preferred securities in
connection with the establishment of any joint venture relationship with a
third party to manufacture products or develop products or technology, and
(vii) the issuance of common or preferred securities to raise capital
specifically for the manufacture of products or the development of products
or technology of Common Stock upon the exercise of the Bridge Warrants,
issuances for purposes described in subsections (vi) and (vii) shall be
withheld.
3. Covenants of the Company. The Company covenants and agrees as follows:
3.1 Amendments to Registration Statement. The Company will deliver to
the Underwriter, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the
Effective Date and not file any such amendment or supplement to which the
Underwriter shall reasonably object.
3.2 Federal Securities Laws.
3.2.1 Compliance. During the time when a Prospectus is required
to be delivered under the Act, the Company will use all reasonable
efforts to comply with all requirements imposed upon it by the Act,
the Regulations and the Exchange Act and by the regulations under the
Exchange Act, as from time to time in force, in accordance with the
provisions hereof and the Prospectus which requires the Company to
keep the Registration Statement effective until the Termination Date.
If at any time when a Prospectus or a Warrant Exercise Prospectus
relating to the Public Securities or the Underwriter's Securities is
required to be
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delivered under the Act and, in any event, until the Termination
Date, any event shall have occurred as a result of which, in the
feasible opinion of counsel for the Company or counsel for the
Underwriter, such Prospectus, as then amended or supplemented,
includes an untrue statement of material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading, or if it is necessary at any time to amend
the Prospectus to comply with the Act, the Company will notify the
Underwriter promptly and prepare and file with the Commission, subject
to Section 3.1 hereof, an appropriate amendment or supplement in
accordance with Section 10 of the Act.
3.2.2 [Reserved]
3.2.3 Exchange Act Registration. For a period of five (5) years
from the Effective Date, the Company will use its best efforts to
maintain the registration of the Common Stock and the Warrants under
the provisions of the Exchange Act.
3.3 Blue Sky Filing. The Company will endeavor in good faith, in
cooperation with the Underwriter, at or prior to the time the Registration
Statement becomes effective, to qualify the Public Securities and the
Underwriter's Securities for offering and sale under the securities laws of
such jurisdictions as the Underwriter may reasonably designate, provided
that no such qualification shall be required in any jurisdiction where, as
a result thereof, the Company would be subject to service of general
process or to taxation as a foreign corporation doing business in such
jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriter agrees that such action
is not at the time necessary or advisable, use all reasonable efforts to
file and make such statements or report at such times as are or may be
required by the laws of such jurisdiction.
3.4 Delivery to Underwriter of Prospectuses. The Company will deliver
such number of Prospectuses to the Underwriter as reasonably needed,
without charge, from time to time, during the period when such prospectuses
are required to be delivered under the Act. Additionally, the Company will
deliver, as soon as the Registration Statement or any amendment or
supplement thereto becomes effective, two original executed Registration
Statements, including exhibits, and all post-effective amendments thereto
and copies of all exhibits file therewith or incorporated therein by
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reference and all original executed consents of certified experts.
3.5 Events Requiring Notice to Underwriter. The Company will notify
the Underwriter immediately and confirm the notice in writing (i) filing of
any post-effective amendment or supplement to the Registration Statement or
Prospectus, (ii) of the issuance by the Commission of any stop order or of
the initiation, or the threatening, of any proceeding for that purpose,
(iii) of the issuance by any state securities commission of any proceedings
for the suspension of the qualification of the Public Securities for
offering of sale in any jurisdiction or of the initiation, or the
threatening, of any proceeding for that purpose, (iv) of the receipt of any
comments or request for any additional information from the Commission and
the Company's response thereto, if any, and (v) of the happening of any
event during the period described in Section 3.4 hereof which, in the
judgment of the Company, makes any statement of a material fact made in the
Registration Statement or the Prospectus untrue or which requires the
making of any changes in the Prospectus in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading or which requires the making of any changes in the Registration
Statement in order to make the statements therein not misleading. If the
Commission or any state securities commission shall enter a stop order or
suspend such qualification at any time, the Company will make every
reasonable effort to obtain promptly the lifting of such order.
3.6 Review of Financial Statements. For a period of five years from
the Effective Date, the Company, at its expense, shall cause its regularly
engaged independent certified public accountants to review (but not audit)
the Company's financial statements for each of the first three fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's Form 10-Q quarterly report and the mailing of
quarterly financial information to stockholders.
3.7 Unaudited Financials. The Company will furnish to the Underwriter
as early as practicable subsequent to the date hereof and at least two full
business days prior to the Closing Date, a copy of the latest available
unaudited interim financial statements ("Unaudited Financials") of the
Company (which in no event shall be as of a date more than thirty days
prior to the Effective Date) which have been read by the Company's
independent accountants, as stated in their letter to be furnished pursuant
to Section 4.3 hereof.
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3.8 Secondary Market Trading, Moody's OTC Industrial Manual and
Standard & Poor's. The Company will use its best efforts and take all
necessary and appropriate actions to achieve accelerated publication in
Standard and Poor's Corporation Records Corporate Descriptions or Moody's
OTC Industrial Manual within ten (10) days after the Effective Date, and to
maintain such publication with updated quarterly information for a period
of five years from the Effective Date, including the payment of any
necessary fees and expenses. This obligation shall exist only so long as
the Company qualifies for such listing and shall be at the reasonable
discretion of the Underwriter. The Company shall take such action as may be
reasonably requested by the Underwriter to obtain a secondary market
trading exemption in such States as may be requested by the Underwriter,
including the payment of any necessary fees and expenses.
3.9 [Reserved]
3.10 [Reserved]
3.11 [Reserved]
3.12 Reports to the Underwriter.
3.12.1 Periodic Reports, Etc. For a period of five years from the
Effective Date, the Company will furnish to the Underwriter copies of
such financial statements and other periodic and special reports as
the Company from time to time furnishes generally to holders of any
class of its securities, and promptly furnish to the Underwriter (i) a
copy of each periodic report to the Company shall be required to file
with the Commission, (ii) a copy of every press release released by
the Company, (iii) copies of each Form SR, (iv) a copy of each Form
8-K or Schedules 13D, 13G, 14D-1 or 13E-4 received or prepared by the
Company, and (v) such additional documents and information with
respect to the Company and the affairs of any future subsidiaries of
the Company, which may be properly disclosed to the Underwriter, as
the Underwriter may from time to time, reasonably request.
3.12.2 [Reserved]
3.13 [Reserved]
3.14 Application of Net Proceeds. The Company will apply
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the net proceeds from the offering received by it in a manner
consistent with the application described under the caption "USE OF
PROCEEDS" in the Prospectus.
3.15 Payment of Expenses.
3.15.1 General Expenses. The Company hereby agrees to pay on each
of the Closing Date and the Option Closing Date, if any, to the extent
not paid at Closing Date, all expenses incident to the performance of
the obligations of the Company under this Agreement, including but not
limited to (i) the preparation, printing, filing, delivery and mailing
(including the payment of postage with respect to such mailing) of the
Registration Statement, the Prospectus and the Preliminary
Prospectuses and the printing and mailing of this Agreement and
related documents, including the cost of all copies thereof and any
amendments thereof or supplements thereto supplied to the Underwriter
in quantities as may be required by the Underwriter, (ii) the
printing, engraving, issuance and delivery of the shares of Common
Stock and the Underwriter's Warrants, including any transfer or other
taxes payable thereon, (iii) the qualification of the Public
Securities and Bridge Securities under state or foreign securities or
Blue Sky laws, including the filing fees under such Blue Sky laws the
costs of printing and mailing the "Preliminary Blue Sky Memorandum,"
and all amendments and supplements thereto, fees of Underwriter's Blue
Sky counsel, which fees shall not exceed an aggregate of $25,000.00
($10,000.00 of which has already been paid) and disbursements of such
counsel, and fees and disbursements of local counsel, if any, retained
for such purpose and approved by the Company, (iv) costs associated
with applications for assignments of a rating of the Public Securities
by qualified rating agencies, (v) filing fees, costs and expenses
(including fees and disbursements for the Underwriter's counsel)
incurred in registering the offering with the NASD, (vi) costs not to
exceed, in the aggregate, $10,000 for placing "tombstone"
advertisements in The Wall Street Journal, the Northeast editions of
The New York Times, or the Investment Dealer Digest, (vii) fees and
disbursements of the transfer and warrant agent, (viii) the Company's
expenses associated with "due diligence" meetings arranged by the
Underwriter, (ix) the preparation, binding and delivery of four sets
of transactions "bibles," in form and style satisfactory to the
Underwriter, (x) any listing of the Public Securities on the Nasdaq
SmallCap Market, or any listing in Standard & Poor's Corporation
Records or Moody's OTC Industrial Manual, and (xi) all other costs and
expenses incident to the performance of its obligations hereunder
which are
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not otherwise specifically provided for in this Section 3.15.1.
Since an important part of the public offering process is for the
Company to appropriately and accurately describe both the background
of the principals of the Company and the Company's competitive
position in its industry, the Company will engage as reasonably
requested by the Underwriter, and will pay for, an investigative
search firm of the Underwriter's choice to conduct an investigation of
principals of the Company mutually selected by the Underwriter and the
Company (this amount will be credited against the Underwriter's
non-accountable expense allowance if the offering is consummated as
provided herein). The Underwriter may deduct from the net proceeds of
the Public Offering payable to the Company on the Closing Date, or the
Option Closing Date, if any, the expenses set forth herein to be paid
by the Company to the Underwriter and/or to third parties, only to the
extent such deduction does not conflict with the description or "Use
of Proceeds" in the Registration Statement and Prospectus.
3.15.2 Non-Accountable Expenses. The Company further agrees
that, in addition to the expenses payable pursuant to Section
3.15.1, it will pay to the Underwriter a non-accountable expense
allowance equal to three (3%) percent of the gross proceeds
received by the Company from the sale of the Public Securities,
of which $50,000.00 has been paid to date, and the Company will
pay the balance on the Closing Date and any additional monies
owed attributable to the Option Securities or otherwise on the
Option Closing Date by certified or bank cashier's check or, at
the election of the Underwriters by deduction from the proceeds
of the offering contemplated herein. If the offering contemplated
by this Agreement is not consummated for any reason whatsoever
then the Company's liability for payment to the Underwriter of
the non-accountable expense allowance shall be equal to the sum
of the Underwriter's actual out-of-pocket expenses (including,
but not limited to, counsel fees, "roadshow" and due diligence
expenses). The Underwriter shall retain such part of the
non-accountable expense allowance previously paid as shall equal
its actual out-of-pocket expenses. If the amount previously paid
is insufficient to cover such actual out-of-pocket expenses, the
Company shall remain liable for and promptly pay any other actual
out-of-pocket expenses. If the amount previously paid exceeds the
amount of the actual out-of-pocket expenses, the Underwriter
shall promptly remit to the Company any such excess.
3.16 Financial Consulting Agreement. At the closing of the Public
Offering, the Company shall engage the Underwriter as
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its non-exclusive financial consultant pursuant to a Financial
Consulting Agreement for a period of three (3) years following the date of
Closing, providing for a monthly consulting fee of $3,000 with the payment
of the aggregate of said monthly fees in the amount of $108,000 to be paid
at the closing of the Public Offering.
3.17 Non-exclusive Merger and Acquisition Agreement. At the Close of
the Public Offering, the Company shall enter into a non-exclusive merger
and acquisition agreement with the Underwriter, compensating the
Underwriter at the rate of 5% for the first $1,000,000, 4% of the next
$1,000,000, 3% of the next $1,000,000, and 2% thereafter, of the value of
any transaction that was introduced by the Underwriter to the Company, and
consummated by the Company and such introduced party, in connection with
any merger, acquisition, business combination or like transaction. Such fee
shall be payable in cash at the Closing of said transaction.
3.18 Stabilization. Neither the Company, nor, to its knowledge, any of
its employees, directors or stockholders has taken or will take, directly
or indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result in, under the Exchange Act
or otherwise, stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Public Securities.
3.19 Internal Controls. The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance
with management's general or specific authorization, (ii) transactions are
recorded as necessary in order to permit preparation of financial
statements in accordance with generally accepted accounting principles and
to maintain accountability for assets, (iii) access to assets is permitted
only in accordance with management's general or specific authorization, and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences.
3.20 Printer. The Company agrees to use a printer for the printing of
the Preliminary Prospectus and Prospectus with an office located in New
York which is reasonably acceptable to the Underwriter.
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3.21 Transfer Agent. The Company shall retain American Stock Transfer
Company as its transfer agent for the Common Stock. For a period of five
years following the Effective Date, the Company will not switch transfer
agents without the Underwriter's consent, which shall not be unreasonably
withheld.
3.22 Sale of Securities. To the extent that the Company is legally
permitted to do so, it shall not permit or cause a private or public sale
or private or public offering of any of its securities (in any manner,
including pursuant to Rule 144 under the Act) owned nominally or
beneficially by the officers, directors and shareholders owning
beneficially more than one (1%) percent of the outstanding shares of Common
Stock of the company (the Insiders) if such offering or sale would be in
violation of the Insider's "lockup" agreement with the Underwriter.
3.23 DTC Securities Position Reports. For a period of five (5) years,
the Company, at its expense, shall provide the Underwriter with copies of
the Company's DTC Securities Position Reports on a monthly basis, if
requested by the Underwriter to do so.
3.24 Public Relations Firm. The Company agrees if requested that they
will engage a public relations firm reasonably acceptable to the
Underwriter and the Company for a minimum of 12 months from the Effective
Date.
3.25 CUSIP Numbers. The Company shall obtain CUSIP numbers for the
Public Securities as promptly as practicable after the initial filing of
the Registration Statement with the Commission.
4. Conditions of Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Securities, as provided herein, shall be
subject to the continuing accuracy of the representations and warranties of the
Company as of the date hereof and as of each of the Closing Date and the Option
Closing Date, if any, to the accuracy of the statements of officers of the
Company made pursuant to the provisions hereof, and to the performance by the
Company of its obligations hereunder and to the following conditions:
4.1 Regulatory Matters.
4.1.1 Effectiveness of Registration Statement.
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The Registration Statement shall have become effective not later
than 5:00 P.M., New York time, on the next day following the date of
this Agreement, or such other time and date, not later than 5:00 p.m.
New York City time, on the seventh (7th) day thereafter, as may be
approved by you, and such Registration Statement shall be effective at
each of the Closing Date and the Option Closing Date, and no stop
order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or contemplated by the Commission at
the Closing Date and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Blodnick, Blodnick & Zelin, P.C., counsel to the
Underwriter.
4.1.2 NASD Clearance. By the Closing Date, the Underwriter shall
have received clearance from the NASD as to the amount of compensation
allowable or payable to the Underwriter as described in the
Registration Statement.
4.1.3 No Blue Sky Stop Orders. No order suspending the sale of
the Securities in any jurisdiction designated by you pursuant to
Section 3.3 hereof shall have been issued either on the Closing Date
or the Option Closing Date, and no proceedings for that purpose shall
have been instituted or shall be contemplated.
4.1.4 NASDAQ SmallCap Market; Other Markets. The Company will
apply to include the Public Securities for quotation on the Nasdaq
SmallCap Market and other such markets as the Underwriter shall
reasonably request, including, without limitation, the Boston Stock
Exchange, the Chicago Stock Exchange, and the Pacific Stock Exchange,
as soon as reasonably practicable following the filing of the
registration statement relating to the Public Offering with the
Commission.
4.2 Company Counsel Matters.
4.2.1 Opinion of Counsel. On the Closing Date, the Underwriter
shall have received the favorable opinion of Certilman Balin Adler &
Hyman, LLP, counsel to the Company, dated the Closing Date, addressed
to the Underwriter, and in form and substance satisfactory to
Blodnick, Blodnick & Zelin, P.C., counsel to the Underwriter, to the
effect that:
(i) The Company has been duly organized and
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is validly existing as a corporation and is in good
standing under the laws of its state of incorporation and to
such counsel's knowledge, is duly qualified and licensed and
in good standing as a foreign corporation in New York, which
to the knowledge of such counsel is the only jurisdiction in
which it owns or leases any real property or the character
of its operations requires such qualification or licensing,
except where the failure to qualify would not have a
material adverse effect on its financial condition or
results of operations.
(ii) The Company has all requisite corporate power and
authority, to own or lease its properties and conduct its
business as described in the Prospectus. The Company has all
corporate power and authority to enter into this Agreement
and to carry out the provisions and conditions hereof, and
to such counsel's knowledge, all consents, authorizations,
approvals and orders hereof required in connection with the
execution and delivery of, and entry into, this Agreement
have been obtained. To such counsel's knowledge, no
consents, approvals, authorizations or orders of, and no
filing with any court or governmental agency or body (other
than such as may be required under the Act and applicable
Blue Sky laws), is required for the valid authorization,
issuance, sale and delivery of the Securities and the
consummation of the transactions and agreements contemplated
by this Agreement, the Underwriter's Warrant, and as
contemplated by the Prospectus, other than all such
authorizations, approvals, consents, orders, registrations,
licenses and permits which have been duly obtained and are
in full force and effect and have been disclosed to the
Underwriter, other than the continuing effectiveness of the
Registration Statement [and the delivery of the Warrant
Exercise Prospectus].
(iii) All issued and outstanding securities of the
Company have been duly authorized and validly issued and are
fully paid and non-assessable; and to such counsel's
knowledge none of such securities were issued in violation
of the preemptive rights of any holders of any security of
the Company or similar contractual rights granted by the
Company. The outstanding options and warrants to purchase
shares of Common Stock constitute the valid and binding
obligations of the Company, enforceable in accordance with
their terms, except (i) such enforceability may be limited
by bankruptcy, insolvency, reorganization, fraudulent
conveyance, marshaling and/or similar laws, now or hereafter
in effect affecting creditors' rights and remedies
(including such as may deny giving effect to waivers of
debtor's rights), (ii) as
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enforceability of any indemnification provision may be
limited under Federal and State laws, and (iii) that the
remedy of specific performance and injunction and other
forms of equitable relief may be subject to the equitable
defenses and to the discretion of the courts before which
any proceeding therefor may be brought (regardless of
whether such enforceability is considered a proceeding in
equity or in law). The authorized and outstanding capital
stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized and, when
issued and paid for, will be validly issued, fully paid and
non-assessable. The Securities are not, and will not, be
subject to the preemptive rights of any holders of any
security of the Company or, to such counsel's knowledge,
similar contractual rights granted by the Company. All
corporate action required to be taken for the authorization,
issuance and sale of the Securities has been duly and
validly taken. When issued, the Underwriter's Warrants will
constitute valid and binding obligations of the Company to
issue and sell, upon exercise thereof and payment therefor,
the number of shares of Common Stock of the Company called
for thereby and such and the Underwriter's Warrants, when
issued, in each case, will be enforceable against the
Company in accordance with their respective terms, except
(i) such enforceability may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance,
marshaling and/or similar laws, now or hereafter in effect
affecting creditors' rights and remedies and (including such
as may deny giving effect to waivers of debtor's rights),
(ii) as enforceability of any indemnification provision may
be limited under Federal and State laws, and (iii) that the
remedy of specific performance and injunction and other
forms of equitable relief may be subject to the equitable
defenses and to the discretion of the courts before which
any proceeding therefor may be brought (regardless of
whether such enforceability is considered a proceeding in
equity or in law). The certificates representing the
Securities are in due and proper form.
(v) To such counsel's knowledge, except as set forth in
the Prospectus, no holders of any securities of the Company
or of any options, warrants or securities of the Company
exercisable for or convertible or exchangeable into
securities of the Company have the right to require the
Company to register any such securities of the Company under
the Act or to include any such securities in a registration
statement to be filed by the Company.
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(vi) To such counsel's knowledge, there is no claim or
action by any person pertaining to, or proceeding, pending
or to such counsel's knowledge threatened, which challenges
the exclusive rights of the Company with respect to any
Intangibles used in the conduct of its business (including,
without limitation, any such licenses or rights described in
the Prospectus as being owned or possessed by the Company);
and to such counsel's knowledge, the Company's current
products, services and processes do not infringe on any
intangibles held by third parties.
(vii) This Agreement and the Underwriter's Warrant have
each been duly and validly authorized and, when executed and
delivered by the Company, will constitute valid and binding
obligations of the Company, enforceable against the Company
in accordance with their respective terms, except (i) such
enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, marshaling and/or
similar laws, now or hereafter in effect affecting
creditors' rights and remedies and (including such as may
deny giving effect to waivers of debtor's rights), (ii) as
enforceability of any indemnification provision may be
limited under Federal and State laws, and (iii) that the
remedy of specific performance and injunction and other
forms of equitable relief may be subject to the equitable
defenses and to the discretion of the courts before which
any proceeding therefor may be brought (regardless of
whether such enforceability is considered a proceeding in
equity or in law).
(viii) The execution, delivery and performance by the
Company of this Agreement, and the Underwriter's Warrant
Agreement, the issuance and sale of the Securities, the
consummation of the transactions contemplated hereby and
thereby and the compliance by the Company with the terms and
provisions hereof and thereof, do not and will not, with or
without the giving of notice or the lapse of time, or both,
(a) to such counsel's knowledge, conflict with, or result in
a breach of, any of the terms or provisions of, or
constitute a default under, or result in the creation or
modification of any lien, security interest, charge or
encumbrance upon any of the properties or assets of any of
the Company pursuant to the terms of, any material mortgage,
deed of trust, note, indenture, loan, contract, commitment
or other material agreement or instrument, to which it is a
party or by which it or any of its properties or assets may
be bound, (b) result in any violation of the provisions of
the Company's Certificate of Incorporation or By-Laws, (c)
to such counsel's
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knowledge, violate any statute or any material
judgment, order or decree, rule or regulation applicable to
the Company of any court, domestic or foreign, or of any
federal, state or other regulatory authority or other
governmental body having jurisdiction over any of the
Company's or its properties or assets, which might result in
any material and adverse change in the condition (financial
or otherwise), business prospects or properties of the
Company, or might materially affect the properties or assets
thereof, or (d) to such counsel's knowledge, have a material
adverse effect on any material permit, certification,
registration, approval, consent, license or franchise of the
Company.
(ix) The Registration Statement and the Prospectus and
any post-effective amendments or supplements thereto (other
than the financial statements, schedules and data included
therein, as to which no opinion need be rendered) comply as
to form in all material respects with the requirements of
the Act and Regulations. The Securities and all other
securities issued or issuable by the Company conform in all
material respects to the description thereof contained in
the Registration Statement and the Prospectus. The
descriptions in the Registration Statement and the
Prospectus of statutes, regulations, government
classifications, contracts and other documents have been
reviewed by us, and, based upon such review, are accurate in
all material respects and present fairly the information
required to be disclosed with respect thereto. To such
counsel's knowledge, each statute or regulation or legal or
governmental proceeding required to be described in the
Prospectus is not described as required, and all contracts
or documents known to counsel, of a character required to be
described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement are so
described or filed as required.
(x) Counsel has participated in one or more personal or
telephonic conferences with officers and other
representatives of the Company, representatives of the
independent public accountants for the Company and
representatives of the Underwriter at which the contents of
the Registration Statement, the Prospectus and related
matters were discussed and although such counsel is not
passing upon and does not assume any responsibility for the
accuracy completeness or fairness of the statements
contained in the Registration Statement and Prospectus
(except as otherwise set forth in this opinion), to such
counsel's knowledge, no facts have come to the attention of
such counsel which lead them to believe that either the
Registration Statement or any amendment
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or supplement thereto, as of the date of such opinion,
contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (it
being understood that such counsel need express no opinion
with respect to the financial statements and schedules and
other financial and statistical data included in the
Registration Statement or Prospectus), and that on the
Closing Date, the Prospectus and any amendment or supplement
thereto contained any untrue statement or a material fact or
omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under
which they were made, not misleading.
(xi) The Registration Statement has become effective
under the Act, and, to such counsel's knowledge, no stop
order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened
under the Act or applicable state securities laws.
(xii) DELETED
(xiii) Except as described in the Prospectus, to such
counsel's knowledge, no default exists in the due
performance and observance of any material term, covenant or
condition of any material license, contract, indenture,
mortgage, deed of trust, note, loan or credit agreement
known to such counsel, or any other material agreement or
instrument evidencing an obligation for borrowed money known
to such counsel, or any other material agreement or
instrument to which the Company is a party or by which the
Company may be bound or to which any of the properties or
assets of the Company is subject. To such counsel's
knowledge, the Company is not in violation of any term or
provision of its Certificate of Incorporation or By-Laws or
of any material term of any material franchise, license,
permit, applicable law, rule, regulation, judgment or decree
of any governmental agency or court, domestic or foreign,
having jurisdiction over it or any of its properties or
business, except as described in the Prospectus.
(xiv) To such counsel's knowledge, except as described
in the Prospectus, the Company does not own an interest in
any corporation, partnership, joint venture, trust or other
business entity.
(xv) To such counsel's knowledge, except as
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set forth in the Prospectus, there is no action, suit
or proceeding before or by any court of governmental agency
or body, domestic or foreign, now pending, or threatened
against the Company, which might result in any material and
adverse change in the condition (financial or otherwise),
business or prospects of the Company, or might materially
and adversely affect the properties or assets thereof.
(xvi) To such counsel's knowledge, except as described
in the Prospectus, there are no claims, payments, issuances,
arrangements or understandings for services in the nature of
a finder's or origination fee with respect to the sale of
the Securities hereunder or financial consulting
arrangements or any other arrangements, agreements,
understandings, payments or issuances that may affect the
Underwriter's compensation, as determined by the NASD in
connection with the offer and sale of the Securities.
Unless the context clearly indicates otherwise, the term "Company" as used
in this Section 4.2.1 shall include each subsidiary, if any, of the Company. The
opinion of counsel for the Company and any opinion relied upon by such counsel
for the Company shall include a statement to the effect that it may be relied
upon by counsel for the Underwriter.
4.2.2 [Reserved]
4.2.3 Option Closing Date Opinion of Counsel. On any Option
Closing Date, the Underwriter shall have received the opinions of
Certilman, Balin, Adler & Hyman, LLP, counsel to the Company, dated
the Option Closing Date addressed to the Underwriter and in the form
and substance reasonably satisfactory to Blodnick, Blodnick & Zelin,
P.C., counsel to the Underwriter, confirming as of the Option Closing
Date, the statements made by such counsel to the Company in their
opinion delivered on the Closing Date.
4.2.4 Reliance. In rendering such opinion, such counsel may rely
(i) as to matters involving the application of laws other than the
laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such Opinions if at all, upon an opinion or opinions (in
form and substance reasonably satisfactory to Underwriter's counsel)
of other counsel reasonably acceptable to Underwriter's counsel,
familiar with the applicable laws, and (ii) as to matters of fact, to
the extent they deem proper, on
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certificates or other written statements of officers of
departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be
delivered to Underwriter's counsel if requested. The opinion of
counsel for the Company shall include a statement to the effect that
it may be relied upon by counsel for the Underwriter in its opinion
delivered to the Underwriter.
4.2.5 Secondary Market Trading Survey. On the Effective Date the
Underwriter shall have received the Secondary Market Trading Survey.
4.3 Cold Comfort Letter. At the time this Agreement is executed and at
each of the Closing Date and the Option Closing Date, if any, you shall
have received a letter, addressed to the Underwriter and in form and
substance satisfactory in all respects (including the non-material nature
of the changes or decreases, if any, referred to in clause (iii) below) to
you and to Blodnick, Blodnick & Zelin, P.C., counsel for the Underwriter,
from Lazar, Levine & Company, LLP, dated as of the date of this Agreement
and as of the Closing Date and the Option Closing Date.
4.4 Officers' Certificates.
4.4.1 Officers' Certificate. At each of the Closing Date and the
Option Closing Date, if any, the Underwriter shall have received a
certificate of the Company signed by the Chairman of the Board or the
President, Principal Accounting Officer and the Secretary of the
Company, dated the Closing Date or the Option Closing Date, as the
case may be, respectively, to the effect that the Company has
performed or complied with all conditions by the Company prior to and
as of the Closing Date, or the Option Closing Date, as the case may
be, and that the conditions set forth in Section 4.5 hereof have been
satisfied as of such date and that, as of the Closing Date and the
Option Closing Date, as the case may be, the representations and
warranties of the Company set forth in Section 2 hereof are true and
correct in all material respects. In addition, the Underwriter will
have received a certificate signed by the Chairman of the Board of the
Company showing compliance in connection with information supplied to
state securities commissions.
4.4.2 Secretary's Certificate. At each of the Closing Date and
the Option Closing Date, if any, the Underwriter
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shall have received a certificate of the Company signed by the
Secretary of the Company, dated the Closing Date or the Option Closing
Date, as the case may be, respectively, certifying (i) that the
By-Laws and Certificate of Incorporation of the Company are true and
complete, have not been modified and are in full force and effect,
(ii) that the resolutions relating to the public offering contemplated
by this Agreement are in full force and effect and have not been
modified, (iii) all correspondence between the Company or its counsel
and the Commission, (iv) all correspondence between the Company or its
counsel and the NASD concerning inclusion on Nasdaq and (v) as to the
incumbency of the officers of the Company. The documents referred to
in such certificate shall be attached to such certificate.
4.5 No Material Changes. Prior to and on each of the Closing Date and
the Option Closing Date, if any, (i) there shall have been no Material
Adverse Change since the Effective Date, (ii) the Company shall not be in
default under any provision of any instrument relating to any outstanding
indebtedness which default would have a material adverse effect on the
Company, (iii) no material amount of the assets of the Company shall have
been pledged or mortgaged, except as set forth in the Registration
Statement and Prospectus, (iv) no action suit or proceeding, at law or in
equity, shall have been pending or threatened against the Company, or
affecting any of its property or business before or by any court or federal
or state commission, board or other administrative agency wherein an
unfavorable decision, ruling or finding may materially adversely affect the
business, operations, prospects or financial condition or income of the
Company, except as set forth in the Registration Statement and Prospectus,
(v) no stop order shall have been issued under the Act and no proceedings
therefor shall have been initiated or threatened by the Commission, and
(vi) the Registration Statement and the Prospectus and any amendments or
supplements thereto contain all material statements which are required to
be stated therein in accordance with the Act and the Regulations and
conform in all material respects to the requirements of the Act and the
Regulations, and neither the Registration Statement nor the Prospectus nor
any amendment or supplement thereto contains any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.6 Delivery of Agreements. The Company has delivered to the
Underwriter executed copies of the Underwriter's Purchase Option.
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4.7 Opinion of Counsel for Underwriter. All proceedings taken in
connection with the authorization, issuance or sale of the Securities as
herein contemplated shall be reasonably satisfactory in form and substance
to you and to Blodnick, Blodnick & Zelin, P.C., counsel to the Underwriter,
and you shall have received from such counsel a favorable opinion, dated
the Closing Date and the Option Closing Date, if any, with respect to such
of these proceedings as you may reasonably require. On or prior to the
Effective Date, the Closing Date and the Option Closing Date, as the case
may be, counsel for the Underwriter shall have been furnished such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
this Section 4.7, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions herein
contained.
5. Conditions of Obligations of the Company. The Registration Statement
shall have become effective not later than 5:00 P.M., New York time, on the next
day following the date of this Agreement, or such other time and date, not later
than 5:00 p.m. New York City time, on the seventh (7th) day thereafter, as may
be approved by the Company, and such Registration Statement shall be effective
at each of the Closing Date and the Option Closing Date, and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or shall
be pending or contemplated by the Commission at the Closing Date and any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of Certilman, Balin, Adler & Hyman,
LLP, counsel to the Company.
6. Underwriter's Representations and Warranties. The Underwriter Represents
and Warrants to the Company that:
6.1 Organization; Good Standing. The Underwriter has been duly
organized and is validly existing as a corporation and is in good standing
under the laws of its state of incorporation.
6.2 Corporate Power; Licenses; Consents. The Underwriter is registered
as a broker-dealer with the Securities and Exchange Commission and in each
state where such registration is required where the Underwriter acts as a
broker-dealer.
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6.3 Litigation. Except as set forth in the Prospectus, there is no
action, suit, or proceeding against the Underwriter which will prevent the
Underwriter from completing all that is necessary to complete the
underwriting of the securities of the Company.
6.4 Binding Obligation; Enforceability. This Agreement and the
transactions contemplated hereby have been duly authorized by, and executed
on behalf of the Underwriter and constitute the valid and binding
obligations of the Underwriter, enforceable in accordance with its terms.
7. Indemnification.
7.1 Indemnification of Underwriter.
7.1.1 General. Subject to the conditions set forth below, the
Company agrees to indemnify and hold harmless the Underwriter, its
directors, officers, agents and employees and each person, if any, who
controls the Underwriter ("controlling person") within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against
any and all loss, liability, claim, damage and expense whatsoever
(including but not limited to any and all legal or other expenses
reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever) to
which they or any of them may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise or
under the laws of foreign countries, arising out of or based upon any
untrue statement or alleged untrue statement of a material fact
contained in (i) any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time each may be amended
and supplemented); (ii) in any post-effective amendment or amendments
or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the
Underwriter's Warrants; or (iii) any application or other document or
written communication (in this Section 6 collectively called
"application") executed by the Company or based upon written
information furnished by the Company in any jurisdiction in order to
qualify the Securities under the securities laws thereof or filed with
the Commission, any state securities commission or agency, Nasdaq or
any securities exchange; or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make
the statements therein in the light of
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the circumstances under which they were made, not misleading, and
with respect to the Registration Statement and any amendment thereto,
as of the effective date thereof, unless such statement or omission
was made in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to the Underwriter
by or on behalf of the Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or Prospectus, or
any amendment or supplement thereof, or in any application, as the
case may be; provided, however, that the foregoing indemnity agreement
with respect to any preliminary prospectus shall not inure to the
benefit of the Underwriter from whom the person asserting such losses,
claims, damages or liabilities purchased Public Securities, or any
person controlling such Underwriter, if a copy of the Prospectus (as
then amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on
behalf of such Underwriter to such person, if required by law so to
have been delivered, at or prior to the written confirmation of the
sale of the Public Securities to such person, and if the Prospectus
(as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage or liability. The Company agrees
promptly to notify the Underwriter of the commencement of any
litigation or proceedings against the Company or any of its officers,
directors or controlling persons in connection with the issue and sale
of the Securities or in connection with the Registration Statement or
Prospectus.
7.1.2 Procedure. If any action is brought against the Underwriter
or controlling person in respect of which indemnity may be sought
against the Company pursuant to Section 5.1.1, the Underwriter shall
promptly notify the Company in writing of the institution of such
action and the Company shall assume the defense of such action,
including the employment and fees of counsel (subject to the approval
of the Underwriter) and payment of actual expenses. The Underwriter or
controlling person shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of the Underwriter or such controlling person
unless (i) the employment of such counsel shall have been authorized
in writing by the Company in connection with the defense of such
action, or (ii) the Company shall not have employed counsel to have
charge of the defense of such action, or (iii) such indemnified party
or parties shall have reasonably concluded that there may be defenses
available to it or them which are different from or additional to
those available to the Company (in which case the Company shall not
have the right to
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direct the defense of such action on behalf of the indemnified
party or parties), in any of which events the fees and expenses of not
more than one additional firm of attorneys selected by the Underwriter
and controlling person, as a single group, shall be borne by the
Company. Notwithstanding anything to the contrary contained herein, if
the Underwriter or controlling person shall assume the defense of such
action as provided above, the Company shall have the right to approve
the terms of any settlement of such action which approval shall not be
unreasonably withheld.
7.2 Indemnification of the Company. The Underwriter agrees to
indemnify and hold harmless the Company, its directors, officers, agents,
employees and controlling persons against any and all loss, liability,
claim, damage and expense described in the foregoing indemnity from the
Company to the Underwriter, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions directly
relating to the transactions effected by the Underwriter in connection with
this offering, made in any Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment or supplement thereto, or in any
application, in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to the Underwriter by or
on behalf of the Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment or
supplement thereto or in any such application. In case any action shall be
brought against the Company or any other person so indemnified based on any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or an application, and in respect of which
indemnity may be sought against the Underwriter, the Underwriter shall have
the rights and duties given to the Company, and the Company and each other
person so indemnified shall have the rights and duties given to the
Underwriter by the provisions of Section 6.1.2.
7.3 Contribution.
7.3.1 Contribution Rights. In order to provide for just and
equitable contribution under the Act in any case in which (i) any
person entitled to indemnification under this Section 6 makes claim
for indemnification pursuant hereto but it is judicially determined
(by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in
such case notwithstanding
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the fact that this Section 6 provides for indemnification in such
case, or (ii) contribution under the Act, the Exchange Act or
otherwise may be required on the part of any such person in
circumstances for which indemnification is provided under this Section
6, then, and in each such case, the Company and the Underwriter shall
contribute to the aggregate losses, liabilities, claims, damages and
expenses of the nature contemplated by said indemnity agreement
incurred by the Company and the Underwriter, and their respective
directors, officers, agents, employees and controlling persons as
incurred, in such proportions that the Underwriter is responsible for
that portion represented by the percentage that the underwriting
discount appearing on the cover page of the Prospectus bears to the
initial offering price appearing thereon and the Company is
responsible for the balance; provided, that, no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Notwithstanding the
provisions of this Section 6.3, the Underwriter shall not be required
to contribute any amount in excess of the amount by which the total
price at which the Public Securities underwritten by it and
distributed to the public were offered to the public exceeds the
amount of any damages which the Underwriter has otherwise been
required to pay in respect of such losses, liabilities, claims,
damages and expenses. For purposes of this Section, each director,
officer and employee of the Underwriter, and each person, if any, who
controls the Underwriter within the meaning of Section 15 of the Act
shall have the same rights to contribution as the Underwriter.
7.3.2 Contribution Procedure. Within fifteen days after receipt
by any party to this Agreement (or its representative) of notice of
the commencement of any action, suit or proceeding, such party will,
if a claim for contribution in respect thereof is to be made against
another party ("contributing party"), notify the contributing party of
the commencement thereof, but the omission to so notify the
contributing party will not relieve it from any liability which it may
have to any other party other than for contribution hereunder. In case
any such action, suit or proceeding is brought against any party, and
such party notifies a contributing party or its representative of the
commencement thereof within the aforesaid fifteen days, the
contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified.
Any such contributing party shall not be liable to any
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party seeking contribution on account of any settlement of any
claim, action or proceeding which was effected by such party without
the written consent of such contributing party. The contribution
provisions contained in this Section are intended to supersede, to the
extent permitted by law, any right to contribution under the Act, the
Exchange Act or otherwise available.
8. Additional Covenants.
8.1 Board Designee. For a period of three years from the Effective
Date, the Underwriter shall have the right to send a representative (who
need not be the same individual from meeting to meeting) to observe each
meeting of the Board of Directors. The Company agrees to give the
Underwriter written notice of each such meeting at the same time and in the
same manner as Directors of the Company are informed and to provide the
Underwriter with an agenda and minutes of the meeting no later than it
gives such notice and provides such items to the other directors. Such
observer will have the right to attend all meetings of the Board of
Directors, but shall have no voting rights. Such observer shall be entitled
to receive reimbursement for all reasonable out-of-pocket expenses incurred
in attending such meetings, including but not limited to food, lodging and
transportation.
8.2 [Reserved]
8.3 [Reserved]
8.4 Press Releases. The Company will not issue a press release or
engage in any other publicity until 25 days after the Effective Date
without the Underwriter's prior written consent.
8.5 Form S-8 or any Similar Form. The Company shall not file a
Registration Statement on Form S-8 (or any similar or successor form) for
the registration of shares of Common Stock underlying stock options for a
period of ________ year(s) from the Effective Date without the Underwriters
written consent.
8.6 [Reserved]
8.7 Compensation and Other Arrangements. The Company hereby agrees
that for a period of three years from the Effective
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Date, all the compensation and other arrangements between the Company
and its officers, directors and affiliates shall be determined by a
compensation committee of the Company's Board of Directors, a majority of
whom are not employed by the Company.
9. Covenants of the Underwriter. The Underwriter, covenants and agrees with
the Company as follows:
9.1 Compliance with NASD Rules of Fair Practice. The Underwriter
hereby agrees to comply with the National Association of Securities Dealers
Regulation, Inc.'s Rules of Fair Practice.
9.2 Waiver of "Lock-Up". The Underwriter shall not consummate any
transactions with the Company's bridge lender described in the Prospectus,
or waive the "lock-up" applicable to such bridge lender's securities until
the Company has complied with its undertaking to the Registration Statement
to file "sticker" supplements to the Prospectus pursuant to rule 424(c) of
the Act, or to file a post-effective amendment to the Registration
Statement.
10. Representations and Agreements to Survive Delivery. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Date or the Option Closing Date and such
representations, warranties and agreements of the Underwriter and Company,
including the indemnity agreements contained in Section 6 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Underwriter, the Company or any controlling person, and
shall survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriter until the earlier of the expiration of any
applicable statute of limitations and the seventh anniversary of the later of
the Closing Date or the Option Closing Date, if any, at which time the
representations, warranties and agreements shall terminate and be of no further
force and effect.
11. Effective Date of This Agreement and Termination Thereof
11.1 Effective Date. This Agreement shall become effective on the
Effective Date at the time that the Registration Statement is declared
effective. The time of the initial public offering of the Public
Securities, for the purpose of this Section 10 shall mean the time, after
the Registration Statement becomes
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effective, of the release by you for publication of the first
newspaper advertisement which is subsequently published relating to the
Public Securities or the time, after the Registration Statement becomes
effective, when the Public Securities are first released by you for
offering to the pubic by the Underwriter or dealers by letter or telegram,
whichever shall first occur. You may prevent this Agreement from becoming
effective without liability to any other party, except as noted below, by
giving the notice indicated below in this Section 9 before the time this
Agreement becomes effective. The Underwriter agrees to give the Company
notice of the commencement of the offering described herein.
11.2 Termination.
11.2.1 By the Underwriter. The Underwriter shall have the right
to terminate this Agreement at any time prior to any Closing Date, (i)
if any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future
materially disrupt, general securities markets in the United States;
or (ii) if trading on the New York Stock Exchange, the American Stock
Exchange or in the over-the-counter market shall have been suspended,
or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices for securities shall have been fixed, or maximum
ranges for prices for securities shall have been required on the
over-the-counter market by the NASD or by order of the Commission or
any other government authority having jurisdiction, or (iii) if the
United States shall have become involved in a war or material
hostilities, or (iv) if a banking moratorium has been declared by a
New York State or federal authority, or (v) if a moratorium on foreign
exchange trading has been declared which materially adversely impacts
the United States securities market, or (vi) if the Company shall have
sustained a material loss by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which,
whether or not such loss shall have been injured, will, in your
opinion, make it inadvisable to proceed with the delivery of the
Securities, or (vii) if either Lew or Honigsfeld shall no longer serve
the Company in his present capacity, or (viii) if the Company has
materially breached any of its representations, warranties or
obligations hereunder, or (ix) if the Underwriter shall have become
aware after the date hereof of a Material Adverse Change, or such
adverse material change in general market conditions as in the
Underwriter's reasonable judgment would make it impracticable to
proceed with the offering, sale and/or delivery of the Securities or
to enforce contracts made by the Underwriter
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for the sale of the Securities.
11.2.2 By the Company. The Company shall have the right to
terminate this Agreement as set forth in Section ___ (Conditions of
the Obligation of the Company) and (ii) in the event any action or
proceeding of the nature referred to in section [6].3 shall be
instituted against the Underwriter at any time prior to the Closing
Date hereunder, or in the event there shall be filed by or against the
Underwriter in any court pursuant to any federal, state, local or
municipal statute, a petition in bankruptcy or insolvency, or for
reorganization or for the appointment of a receiver or trustee of its
assets or if the Underwriter shall make an assignment for the benefit
of creditors, the Company shall have the right on three days notice to
the Underwriter to terminate this Agreement without any liability to
the Underwriter of any kind.
11.3 Notice. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 11 the
Company shall be notified on the same day as such election is made by you
by telephone or telecopy, confirmed by letter.
11.4 Expenses. In the event that this Agreement shall not be carried
out for any reason, within the time specified herein or any extensions
thereof pursuant to the terms herein, the obligations of the Company to pay
the expenses related to the transactions contemplated herein shall be
governed by Section 3.15 hereof.
11.5 Indemnification. Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this
Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Section 5 shall not be in any way effected by such election
or termination or failure to carry out the terms of this Agreement or any
part hereof.
12. Miscellaneous.
12.1 Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered
or telecopied and confirmed:
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If to the Underwriter:
European Community Capital, Ltd.
300 Old Country Road
Mineola, New York 11501
Attention: Mr. Greg Small
Fax: (516) 625-9223
Copy to:
Blodnick, Blodnick & Zelin, P.C.
Expressway Plaza Two, Suite 200
Roslyn Heights, New York 11577
Attn: Edward K. Blodnick, Esq.
Fax (516) 294-5677
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If to the Company:
Compu-Dawn, Inc.
77 Spruce Street
Cedarhurst, New York 11516
Attn: Mark Honigsfeld
Fax (516) 374-9553
Copy to:
Robert H. Solomon, Esq.
68 West Park Avenue
Long Beach, New York 11561
Fax (516) 431-0312
-and-
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York 11554
Attention: Fred Skolnik, Esq.
Fax No. (516) 296-7111
12.2 Headings. The headings contained herein are for the sole purpose
of convenience of reference and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this
Agreement.
12.3 Amendment. This Agreement may only be amended by a written
instrument executed by each of the parties hereto.
12.4 Entire Agreement. This Agreement (together with the other
agreements and documents being delivered pursuant to or in connection with
this Agreement) constitutes the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersede all prior agreements
and understandings of the parties, oral and written, with respect to the
subject matter hereof.
12.5 Binding Effect. This Agreement shall inure solely to the benefit
of and shall be binding upon, the Underwriter, the Company and the
controlling persons, directors and officers referred to in Section 6
hereof, and their respective successors, legal epresentatives and assigns,
and no other person shall have or be construed to have nay legal or
equitable right, remedy or claim under or in respect of or by virtue of
this Agreement or any provisions herein contained.
12.6 Governing Law; Jurisdiction. This Agreement shall be governed by
and construed and enforced in accordance with the law of the
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State of New York, without giving effect to conflicts of law,
principles of such state. The Company hereby agrees that any action,
proceeding or claim against it arising out of, relating in any way to this
Agreement shall be brought and enforced in the courts of the State of New
York, New York County or the Federal District Court of the United States of
America for the Southern District of New York, and irrevocably submits to
such jurisdictions, which jurisdictions shall be exclusive. The Company
hereby waives any objection to such exclusive jurisdiction and that such
courts represent an inconvenient forum. Any such process or summons to be
served upon the Company or the Underwriter may be served by transmitting a
copy thereof by registered or certified mail, return receipt requested,
postage prepaid, addressed to it at the address set forth in Section 10
hereof. Such mailing shall be deemed personal service and shall be legal
and binding upon the Company or the Underwriter, as the case may be, in any
action, proceeding or claim. The Company and the Underwriter agree that the
prevailing party(ies) in any such action shall be entitled to recover from
the other party(ies) all of its reasonable attorneys' fees and expenses
relating to such action or proceeding and/or incurred in connection with
the preparation therefor.
12.7 Execution in Counterparts; Facsimile Signatures. This Agreement
may be executed in one or more counterparts, and by the different parties
hereto in separate counterparts, each of which shall be deemed to be an
original, but all of which taken together shall constitute one and the same
agreement, and shall become effective when one or more counterparts has
been signed by each of the parties hereto and delivered to each of the
other parties hereto. Facsimile signatures hereon shall be deemed to be
original signatures.
12.8 Waiver. Etc. The failure of any of the parties hereto to at any
time enforce any of the provisions of this Agreement shall not be deemed or
construed to be a waiver of any such provision, nor to in any way effect
the validity of this Agreement or any provision hereof or the right of any
of the parties hereto to thereafter enforce each and every provision of
this Agreement. No wavier of any breach, non-compliance or non-fulfillment
of any of the provisions of this Agreement shall be effective unless set
forth in a written instrument executed by the party or parties against whom
or which enforcement of such waiver is sought and no waiver of any such
breach, non-compliance or non-fulfillment shall be construed or deemed to
be a waiver of any other or subsequent breach, non-compliance or
non-fulfillment.
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If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
COMPU-DAWN, INC.
By: Mark Honigsfeld
Chief Executive Officer
Accepted as of the date first above written.
Mineola, New York
E.C. CAPITAL, LTD
Name: Greg Small
Title: President
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May 19, 1997
Compu-DAWN, Inc.
77 Spruce Street
Cedarhurst, NY 11516
Re: Registration Statement on Form SB-2 (Registration No. 333-18667)
Gentlemen:
In our capacity as counsel to Compu-DAWN, Inc., a Delaware
corporation (the "Company"), we have been asked to render this opinion in
connection with the Company's Registration Statement on Form SB-2 (Registration
No. 333-18667) (the "Registration Statement"), being filed contemporaneously by
the Company with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, covering the issuance of 1,500,000 Common Shares, $.01 par
value, of the Company (the "Issuable Shares") (including 1,200,000 Issuable
Shares being offered for sale to the public (the "Public Offering"), 180,000
Issuable Shares covering an overallotment of the Public Offering, and 120,000
Issuable Shares underlying the Underwriter's Common Share Purchase Warrant), and
the resale of 639,450 Common Shares (including 389,200 Common Shares (the
"Warrant Shares") underlying warrants held by certain selling stockholders and
250,250 Common Shares (the "Other Resale Shares") held by certain selling
stockholders). The Issuable Shares, the Warrant Shares and the Other Resale
Shares are collectively referred to as the "Shares".
In connection with our opinion, we have examined the
Certificate of Incorporation and By-Laws of the Company, the Registration
Statement, as amended, and certain agreements entered into, and instruments and
warrants issued, by the Company in connection with the issuance of the Shares.
We are also familiar with proceedings of the Board of Directors of the Company,
or otherwise have relied upon representations made by officers of the Company,
relating to the authorization of the issuance of the Shares. We have also
examined such other instruments and documents as we deemed relevant under the
circumstances.
For purposes of the opinions, we have assumed (i) the
authenticity of all documents submitted to us as originals, (ii) the conformity
to the originals of all documents submitted as certified, photostatic or
facsimile copies and the authenticity of the originals, (iii) the legal capacity
of natural persons, (iv) the due authorization, execution and delivery of all
documents by all parties and the validity and binding effect thereof and (v) the
conformity to the proceedings of the Board of Directors of all minutes of such
proceedings and all representations, oral and written, made by officers of the
Company with respect thereto. We have also assumed that the corporate records
furnished to us by the Company include all corporate proceedings taken by the
Company to date.
<PAGE>
Compu-DAWN, Inc.
May 19, 1997
Page 2
Based solely upon and subject to the foregoing, including the
assumptions made, we are of the opinion that (i) the Issuable Shares and the
Warrant Shares have been duly and validly authorized, and when issued and fully
paid for, shall be duly and validly authorized and issued, and fully paid and
nonassessable Common Shares, $.01 par value, of the Company; and (ii) the Other
Resale Shares are duly and validly authorized and issued, fully paid and
nonassessable Common Shares, $.01 par value, of the Company.
We hereby consent to the use of our opinion as herein set
forth as an exhibit to the Registration Statement and to the use of our name
under the caption "Legal Matters" in the Prospectus forming a part of the
Registration Statement.
This opinion is as of the date hereof, and we do not
undertake, and hereby disclaim, any obligation to advise you of any changes in
any of the matters set forth herein.
We are rendering this opinion only as to the matters expressly
set forth herein, and no opinion should be inferred as to any other matters.
This opinion is for your exclusive use only and is to be
utilized and relied upon only in connection with the matters expressly set forth
herein.
Very truly yours,
CERTILMAN BALIN ADLER & HYMAN, LLP
<PAGE>
AMENDED AND RESTATED LOAN AGREEMENT
(Revolving)
Amended and Restated Loan Agreement, dated as of April 30, 1997,
between Mark Honigsfeld, residing at 969 East End, Woodmere, New York 11598 (the
"Lender"), and Compu-Dawn, Inc., a Delaware Corporation, with offices located at
77 Spruce Street, Cedarhurst, New York 11516 (the "Borrower").
1. Amendment and Restatement. This Agreement amends and restates the Loan
Agreement dated January 21, 1997 between the Lender and Borrower in its
entirety.
2. Loan.
(a) The Lender shall lend to the Borrower during the term of this
agreement sums of money not to exceed the aggregate amount of Five Hundred
Thousand ($500,000.00) Dollars.
(b) The Borrower may borrow sums from the Lender up to the loan
commitment at any time from the date of this Agreement to July 1, 1999.
3. Procedure for borrowing. The Borrower may borrow in amounts of not less
than $25,000, and in additional multiples of not less than $25,000, by giving
written notice to the Lender at least ten days before the date the amount is to
be borrowed, which date is hereinafter referred to as the Closing Date, and by
delivering to the Lender on the Closing Date a note in the form of Exhibit A
attached hereto and by complying with the conditions for borrowing stated in
this agreement.
4. Note Provisions. Each note delivered for an amount borrowed shall bear
interest at the rate of 10% per annum and the interest shall be paid quarterly
upon the unpaid principal amount, commencing six (6) months from the date of
issuance or on such date set forth in the note (the "Initial Payment Date"). The
principal sum of each note shall be due and payable in eight (8) equal quarterly
installments commencing on the Initial Payment Date and the entire amount shall
be payable thirty (30) months from the date of issuance.
5. Prepayment. The Borrower may prepay any note in whole or in part,
provided any partial prepayment shall be applied on unpaid installments on the
note in the inverse order of maturity and may not be made in amounts of less
than $5,000 or multiples thereof.
6. Default. The Borrower shall be in default if:
(a) It fails to pay any installment of principal or interest on any
note when due or within ten days thereafter;
(b) It becomes insolvent or admits in writing its inability to pay its
debts as they mature; or applies for, consents to, or acquiesces in the
appointment of a trustee or receiver for any of its property; or in the
absence of an application, consent, or acquiescence a trustee or receiver
is appointed for it or a substantial part of its property and is not
discharged within 30 days; or it otherwise commits an act of bankruptcy; or
any bankruptcy, reorganization, debt arrangement, or
<PAGE>
other proceeding under any bankruptcy or insolvency law, or any
dissolution or liquidation proceeding, is instituted by or against it and
if instituted is consented to or acquiesced in by it or remains for 30 days
undismissed;
(c) It defaults in the performance of the terms and conditions of this
agreement and such default continues for 30 days after notice thereof from
the Lender or from the holder of a note;
7. Acceleration. If any of the events listed in paragraph 6(a) occur, the
unpaid installments of the note shall immediately become due and payable.
8. Acceleration at Option of lender. If any of the events listed in
paragraph 6(b) or 6(c) occur and shall continue, the Lender may declare the
notes immediately due and payable, at which time all unpaid installments shall
immediately become due and payable. The Lender shall promptly advise the
Borrower in writing of any acceleration under this paragraph, but the failure to
do so shall not impair the effect of a subsequent declaration.
9. Security. The Security Agreement dated January 21, 1997 between the
Lender and the Borrower shall apply to this Agreement.
10. Benefit. This agreement shall be binding on the respective successors
and assigns of the Lender and the Borrower and shall inure to the benefit of the
successors and assigns of the Lender.
11. Delay. No delay on the part of the Lender or the holder of any note in
the exercise of any right shall operate as a waiver, nor shall any single or
partial exercise of any right preclude other or additional exercise of any
right.
12. Notices. All notices shall be in writing and shall be addressed to the
respective parties at their principal office, by first class, certified mail,
return receipt requested, postage prepaid.
IN WITNESS WHEREOF, the parties have caused this agreement to be executed
by their proper officers and by having their seals affixed on the day and year
first above written.
Lender:
---------------------
MARK HONIGSFELD
Borrower:
COMPU-DAWN, INC.
By:
Dong W. Lew, President
<PAGE>
Promissory Note
$100,000 Date: May 8, 1997
- --------
The undersigned, for value received, promises to pay to the order of
Mark Honigsfeld at 969 East End, Woodmere, New York, the sum of $100,000 payable
in eight (8) quarterly installments of $12,500.00, the first installment due
August 1, 1997, with interest at the rate of 10% per annum from the date hereof,
payable quarterly commencing on August 1, 1997, on the principal remaining
unpaid.
This note evidences and indebtedness incurred under an Amended and
Restated Loan Agreement (Revolving) dated April 30, 1997 between the
undersigned, therein called the Borrower, and the payee, therein called the
Lender, the terms and conditions (including, without limitation, terms relating
to prepayment, default and acceleration) of which are incorporated into this
note to the extent that such terms do not conflict with the terms of this note.
Presentation and demand for payment, notice of dishonor, protest, and
notice of protest and hereby waived.
Compu-DAWN, Inc.
By:/s/ Dong W. Lew, President
Dong W. Lew, President
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Amendment No. 3 to the Registration
Statement on Form SB-2 of our report dated February 13, 1997 relating to the
financial statements of Compu-DAWN, Inc. and to the reference to our Firm under
the caption "Experts" in the Prospectus.
/s/ Lazar, Levine & Company LLP
LAZAR, LEVINE & COMPANY LLP
New York, New York
May 19, 1997
<PAGE>
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