As filed with the Securities and Exchange Commission on March 13, 1997
Registration No. 333-18667
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-------------------------
COMPU-DAWN, INC.
(Name of Small Business Issuer in its Charter)
Delaware 7373 11-3344575
(State or other jurisdic- (Primary Standard (I.R.S. Employer
tion of incorporation Industrial Classifi- Identification Number)
or organization) cation Code No.)
77 Spruce Street
Cedarhurst, New York 11516
Telephone : (516) 374-6700
Telecopier: (516) 374-9553
(Address and telephone number of principal executive
offices) (Address of principal place of business or intended
principal place of business)
-------------------------
Mark Honigsfeld
Chairman of the Board and
Chief Executive Officer
COMPU-DAWN, INC.
77 Spruce Street
Cedarhurst, New York 11516
Telephone: (516) 374-6700
Telecopier: (516) 374-9553
(Name, address and telephone number of agent for service)
-------------------------
Copies to:
Fred Skolnik, Esq. Edward K. Blodnick, Esq.
Gavin C. Grusd, Esq. Blodnick, Blodnick & Zelin, P.C.
Certilman Balin Adler & Hyman, LLP 2 Expressway Plaza, Suite 200
90 Merrick Avenue Roslyn Heights, New York 11577
East Meadow, NY 11554 Telephone: (516) 621-7500
Telephone: (516) 296-7000 Telecopier: (516) 621-7533
Telecopier: (516) 296-7111
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of the registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o ______________
[Cover continued on next page.]
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o ____
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. o___________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed Maximum Proposed Maximum
Titles of Each Class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered (1) per Share (2) Price (2) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares (3) 1,150,000 $5.00 $5,750,000 $1,796.88
Underwriter's Common Share Purchase 100,000 --- $ 100 ---
Warrants (4)
Common Shares (5) 100,000 $8.25 $ 825,000 $249.99
Common Shares (6) 431,200 $5.00 $2,156,000 $674.82
Common Shares (7) 250,250 $5.00 $1,251,250 $391.02
---------------------
Total Registration Fee: $3,112.71(8)
====================================================================================================================================
</TABLE>
<TABLE>
<C> <C>
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended ("Securities Act"), this
Registration Statement covers such additional indeterminate number of Common Shares
underlying warrants (the "Bridge Warrants") issued to certain bridge lenders (the "Bridge
Lenders") and Underwriter's Common Share Purchase Warrants (the "Underwriter's
Warrants") as may be issued by reason of adjustments in the number of Common Shares
pursuant to anti-dilution provisions contained in the Bridge Warrants and Underwriter's
Warrants, respectively. Because such additional Common Shares will, if issued, be issued
for no additional consideration, no registration fee is required.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes 150,000 Common Shares subject to the Underwriter's overallotment option.
(4) To be issued to the Underwriter.
(5) Issuable upon exercise of the Underwriter's Warrants.
(6) Issuable upon exercise of the Bridge Warrants and registered on behalf of the Bridge
Lenders.
(7) Registered on behalf of Selling Stockholders.
(8) $3,034.60 of the registration fee was paid with the original filing.
</TABLE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 13, 1997
PROSPECTUS
Compu-DAWN, Inc.
1,000,000 Shares of Common Stock, par value $.01 per share
Offering Price Per Share - $5.00
---------------
Compu-DAWN, Inc., a Delaware corporation (the "Company"), hereby offers
1,000,000 shares of Common Stock, par value $.01 per share (the "Common
Shares"). See "Risk Factors" and "Description of Securities". The "Risk Factors"
section begins on page 6 of this Prospectus.
The Company will apply for inclusion of the Common Shares on The Nasdaq
SmallCap Market, although there can be no assurances that an active trading
market will develop even if the securities are accepted for quotation. See "Risk
Factors - Lack of Prior Market for Common Shares; No Assurance of Public Trading
Market" and "Risk Factors - Penny Stock Regulations May Impose Certain
Restrictions on Marketability of Securities".
Prior to this offering (the "Offering"), there has been no public
market for the Common Shares. It is currently anticipated that the initial
public offering price will be $5.00 per Common Share. The price of the Common
Shares has been determined by negotiations between the Company and E.C. Capital,
Ltd., the underwriter of this Offering (the "Underwriter"), and does not
necessarily bear any relationship to the Company's assets, book value, net worth
or results of operations or any other established criteria of value. For
additional information regarding the factors considered in determining the
initial public offering price of the Common Shares, see "Risk Factors -
Arbitrary Offering Price; Possible Volatility of Stock Price," "Risk Factors -
Lack of Prior Market for Common Shares; No Assurance of Public Trading Market,"
"Description of Securities" and "Underwriting".
The registration statement of which this Prospectus forms a part also
covers the resale of an aggregate of 431,200 Common Shares (the "Warrant
Shares") underlying warrants (the "Bridge Warrants") issued to certain bridge
lenders (the "Bridge Lenders") (see "Bridge Financing") and an aggregate of
250,250 Common Shares held by certain stockholders (collectively with the Bridge
Lenders, the "Selling Stockholders"). The Company will not receive any of the
proceeds from the resale of the Common Shares by the Selling Stockholders. The
Common Shares held by the Selling Stockholders may be resold at any time
following the date of this Prospectus, subject to an agreement between the
Bridge Lenders and the Underwriter restricting the transfer of the Warrant
Shares for a period of six months without the Underwriter's consent. The resale
of the Common Shares by the Selling Stockholders is subject to Prospectus
delivery and other requirements of the Securities Act of 1933, as amended (the
"Act"). Sales of such Common Shares or the potential of such sales at any time
may have an adverse effect on the market price of the Common Shares offered
hereby. See "Principal and Selling Stockholders" and "Risk Factors - Shares
Eligible for Future Sale May Adversely Affect the Market".
----------------
[Cover Continued on Next Page]
<PAGE>
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK
VALUE OF THE COMMON SHARES OFFERED HEREBY AND SHOULD BE
CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" AND "DILUTION".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price Underwriting Discounts Proceeds to
to Public and Commissions (1) Company (2)
- --------------------------------------------------------------------------------
Per Share...... $5.00 $0.50 $4.50
- --------------------------------------------------------------------------------
Total (3)......$5,000,000 $500,000 $4,500,000
================================================================================
(1) Does not reflect additional compensation to be received by the Under-
writer in the form of (i) a non-accountable expense allowance of
$150,000 ($172,500 if the Overallotment Option (as hereinafter defined
is exercised in full), $50,000 of which has already been paid, (ii) a
three year financial advisory and investment banking agreement
providing for aggregate fees of $108,000 payable in advance at the
closing of this Offering, and (iii) warrants (to be purchased by the
Underwriter for one mil ($.001) per warrant) to purchase 100,000 Common
Shares (10% of the total number of Common Shares sold pursuant hereto)
(the "Underwriter's Warrants"), exercisable for a period of four years,
commencing one year from the date of this Prospectus. The Company and
the Underwriter have agreed to indemnify each other against certain
liabilities, including liabilities under the Act. The Company has
been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is
therefore unenforceable. See "Underwriting".
(2) Before deducting expenses of the Offering payable by the Company
estimated at $625,000, including the Underwriter's non-accountable
expense allowance and financial advisory fee referred to in footnote
(1) (not assuming exercise of the Overallotment Option), registration
fees, transfer agent fees, NASD fees, Blue Sky filing fees and
expenses, legal fees and expenses, and accounting fees and expenses.
See "Use of Proceeds" and "Underwriting".
(3) Does not include 150,000 additional Common Shares to cover
overallotments which the Underwriter has an option to purchase for 45
days from the date of this Prospectus at the initial public offering
price, less the Underwriter's discount (the "Overallotment Option"). If
the Overallotment Option is exercised in full, the total Price to
Public will be $5,750,000, Underwriting Discounts and Commissions will
be $575,000, and Proceeds to Company will be $5,175,000. See
"Underwriting".
---------------
[Cover Continued on Next Page]
<PAGE>
The Common Shares are offered by the Underwriter on a "firm commitment"
basis, when, as and if delivered to and accepted by the Underwriter, and subject
to prior sale, allotment and withdrawal, modification of the offer with notice,
receipt and acceptance by the Underwriter named herein and subject to its right
to reject orders in whole or in part and to certain other conditions. It is
expected that the delivery of the certificates representing the Common Shares
and payment therefor will be made at the offices of the Underwriter on or about
__________, 1997.
E. C. CAPITAL, LTD.
The date of this Prospectus is _______, 1997.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ SMALLCAP MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
A SIGNIFICANT PORTION OF THE COMMON SHARES TO BE SOLD IN THIS OFFERING
MAY BE SOLD TO CUSTOMERS OF THE UNDERWRITER. SUCH SALES MAY AFFECT THE MARKET
FOR AND LIQUIDITY OF THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL
BROKER-DEALERS DO NOT MAKE A MARKET IN THE COMPANY'S SECURITIES, AS TO WHICH
THERE CAN BE NO ASSURANCE. SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE COMMON SHARES THROUGH AND/OR WITH
THE UNDERWRITER.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME
TO TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE MARKET FOR THE COMMON SHARES. HOWEVER, THERE IS NO
ASSURANCE THAT THE UNDERWRITER WILL OR WILL NOT CONTINUE TO BE A DOMINATING
INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREBY MAY BE
SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE UNDERWRITER'S PARTICIPATION
IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR
FROM TIME TO TIME. SEE "RISK FACTORS - LACK OF PRIOR MARKET FOR COMMON SHARES;
NO ASSURANCE OF PUBLIC TRADING MARKET".
2
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information (including financial
statements and notes thereto) contained in this Prospectus and is qualified in
its entirety by the more detailed information appearing elsewhere herein. In
addition, unless otherwise indicated to the contrary, the information appearing
herein does not give effect to the issuance of (a) 150,000 Common Shares upon
exercise of the Overallotment Option; (b) 100,000 Common Shares upon exercise of
the Underwriter's Warrants; (c) 431,200 Common Shares upon the exercise of the
Bridge Warrants; or (d) 710,400 Common Shares upon the exercise of other
outstanding options and warrants. See "Bridge Financing". However, all
references to Common Shares and prices per share in this Prospectus give
retroactive effect to a 325 for 1 stock split effectuated on October 18, 1996 as
part of the Company's reincorporation in the State of Delaware. See
"Underwriting". Each prospective investor is urged to read this Prospectus in
its entirety.
The Company
Compu-DAWN, Inc. (the "Company") is primarily engaged in the business
of designing, developing, licensing, installing and servicing computer software
products and systems for law enforcement and public safety agencies. The
software systems include computer-aided dispatching, computer interfacing with
state and national crime information databases, advanced mobile on-line radio
computing, automatic vehicle location (employing dynamic map displays), records
management and photo-image database systems. Certain of these applications
utilize telecommunications and space satellite technology, and other
infrastructure, provided by third parties. The Company has developed, licensed
and installed its systems in more than 55 agencies primarily located in the
State of New York.
The Company was incorporated under the name Coastal Computer Systems,
Inc. in New York on March 31, 1983 and was reincorporated in Delaware under its
present name on October 18, 1996.
The Company's executive offices are located at 77 Spruce Street,
Cedarhurst, New York 11516 and its telephone number is (516) 374-6700.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating the Company and its business.
3
<PAGE>
The Offering
Common Shares Being Offered............. 1,000,000 shares
Common Shares Outstanding Prior to
the Offering ........................... 986,700 shares
Common Shares to be Outstanding
After the Offering (1).................. 1,986,700 shares
Use of Proceeds......................... The net proceeds to the Company from
the sale of the 1,000,000 Common Shares
offered hereby are estimated to be
$3,875,000. The net proceeds are
expected to be applied in the following
approximate percentages for the
following purposes: (i) product
enhancement and development (32.3%);
(ii) repayment of indebtedness (25.2%);
(iii) marketing and advertising
(16.8%); (iv) hiring and training of
additional personnel (3.8%); (v)
purchase of equipment (3.8%);
(vi) payment of accrued compensation to
Chairman of the Board and Chief
Executive Officer, and to President
(3.0%); and (vii) working capital
(15.1%). See "Use of Proceeds".
Risk Factors............................ An investment in the securities offered
hereby involves a high degree of risk
and immediate substantial dilution
of the book value of the Common Shares,
and should be considered only by
persons who can afford the loss of
their entire investment. See "Risk
Factors" and "Dilution".
Proposed Nasdaq SmallCap Market
Symbol(2)............................. "CODI"
- -----------------
(1) Does not give effect to the issuance of (i) 150,000 Common Shares upon
exercise of the Overallotment Option; (ii) 100,000 Common Shares upon
exercise of the Underwriter's Warrants; (iii) 431,200 Common Shares upon the
exercise of the Bridge Warrants; (iv) 389,950 Common Shares upon the
exercise of outstanding options which are currently exercisable (the
"Exercisable Options"); (v) 31,200 Common Shares upon the exercise of
other outstanding warrants (the "Other Warrants") ;or (vi) 289,250 Common
Shares upon the exercise of other outstanding options (collectively with the
Exercisable Options and the Other Warrants, the "Other Derivative
Securities"). See "Bridge Financing", "Management - Stock Option Plan",
"Certain Relationships and Related Transactions" and "Underwriting".
(2) Although the Company will apply for inclusion of the Common Shares on
The Nasdaq SmallCap Market, there can be no assurance that the
Company's securities will be included
4
<PAGE>
for quotation, or, if so included, that the Company will be able to
continue to meet the requirements for continued quotation, or that a
public trading market will develop or, if such market develops, that it
will be sustained. See "Risk Factors - Lack of Prior Market for Common
Shares; No Assurance of Public Trading Market".
Summary Financial Information
The following summary financial information has been derived from the
financial statements of the Company included elsewhere in this Prospectus. All
amounts are in dollars except the number of Common Shares. The information
should be read in conjunction with the financial statements and the related
notes thereto. See "Financial Statements".
Statement of Operations Data
Years Ended
December 31,
1996 1995
---- ----
Revenues ....................... $ 477,527 $1,040,181
Operating income (loss) ......... (606,549) 129,981
Net income (loss) ............... (549,170) 78,660
Net income (loss) per share ..... $ (.29) $ .04
Weighted average number of
Common Shares outstanding ... 1,894,933 1,894,933
Balance Sheet Data
December 31, 1996 December 31, 1995
-------------------------------------
Actual As Adjusted(1) Actual
------ -------------- ------
Working capital ................. $ 115,817 $3,360,143 $140,179
Total assets .................... 943,059 4,048,059 385,240
Total liabilities ............... 1,153,459 383,459 220,395
Total stockholders' equity (deficit) (210,400) 3,664,600 164,845
- ---------------
(1) Adjusted to give effect to the receipt and application of the net
proceeds of approximately $3,875,000 from the sale of the Common Shares
offered hereby.
5
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative and
involves a high degree of risk and substantial dilution, and should only be
purchased by investors who can afford to lose their entire investment.
Prospective purchasers, prior to making an investment, should consider carefully
the following risks and speculative factors associated with this Offering, as
well as other information set forth elsewhere in this Prospectus, including the
information contained in the financial statements herein.
1. Dependence on Offering Proceeds; Possible Need for Additional
Financing. The Company's cash requirements have been and will continue to be
significant. The Company is dependent on the proceeds from this Offering in
order to sustain and further expand its operations. The Company believes that
the net proceeds of this Offering, together with anticipated increased revenues
generated from operations, will be sufficient to conduct the Company's
operations for at least 12 months. In the event that the Company's plans change,
or the costs of operations prove greater than anticipated, the Company could be
required to curtail its expansion or seek additional financing sooner than
currently anticipated. The Company has no current arrangements with respect to
additional financing and there can be no assurance that such additional
financing, if available, will be on terms acceptable to the Company. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Liquidity and Capital Resources".
2. Inexperience of Underwriter. This is the first offering under-
written by the Underwriter. There can be no assurance that the Underwriter's
limited experience will not adversely affect the development of a trading market
for, or liquidity of, the Company's securities. Therefore, purchasers of the
Common Shares offered hereby may suffer a lack of liquidity in their investment
or a material diminution of the value of their investment. See "Underwriting".
3. Downward Trend in Revenues; Current Period and Anticipated Future
Losses. For the years ended December 1996 and 1995, the Company's revenues were
$477,527 and $1,040,181, respectively. The decline in revenues was primarily as
a result of a decrease in software sales (i.e. fewer units sold) which occurred
due to the Company's focus on raising capital (commencing in late 1995 and
continuing throughout 1996), strategic planning, and the allocation and devotion
of substantial personnel time to the development of visual computer-aided
dispatching (or V-CAD) and new wireless mobile computing technology. Such
actions diverted the Company's resources away from sales activities. For the
year ended December 31, 1996, the Company experienced a net loss of $549,170.
The Company's operating results for future periods are subject to numerous
uncertainties. The Company anticipates significant expenses for the foreseeable
future, including, without limitation, research and development expenses,
enhancing and refining the Company's current product line, marketing costs,
obligations under new key employee compensation agreements, the lease for the
Company's premises which commenced in September 1996, and
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<PAGE>
general administrative expenses. The Company believes that, for the foreseeable
future, it will be unable to achieve sufficient additional revenues to offset
such anticipated significant operating costs. Accordingly, the Company
anticipates that operating losses will continue for a significant period of
time. If such operating losses do continue, the Company cannot predict the
severity or length of time of such operating losses and the impact of such
operating losses on the financial conditions and results of operations of the
Company. There can be no assurance that the Company's technology and products
will be able to compete successfully in the marketplace and/or generate
significant revenue, or that the Company's business will be able to operate
profitably. See "Risk Factors - Competition", "Business - Competition",
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Results of Operations".
The Company's quarterly operating results have, in the past,
varied and may in the future vary significantly, depending on facts such as the
size, timing and recognition of revenue from significant software sales and
system integration activity, the time of new product releases and market
acceptance of these new releases, and increases in operating expenses. Thus, the
Company's revenues and results of operations have and may continue to vary
significantly from quarter to quarter, period to period, and year to year based
upon frequency and volume of sales and licensing of the Company's software
applications and providing of consulting services during such period. Due to the
relatively fixed nature of certain of the Company's costs throughout each
quarterly period, including personnel and facilities costs, the decline of
revenues in any quarter typically results in lower profitability in that
quarter. There can be no assurance that the Company will become profitable or
avoid losses in any future period.
4. Evolving Market; New Product Development; Technological
Obsolescence. The markets for the Company's products are characterized by
evolving industry requirements, rapid technological change and frequent new
product introductions which may result in product or technology obsolescence.
Certain companies may be developing technologies or products of which the
Company is unaware which may be functionally similar, or superior, to some or
all of those offered by the Company. As a result, the ability of the Company to
compete will depend on its ability to adapt, enhance and improve its existing
products and technology and, if necessary, to develop and introduce new products
and technology to the marketplace in a timely and cost- competitive manner.
There can be no assurance that the Company will be able to compete successfully,
that its competitors or future competitors will not develop technologies or
products that render the Company's products or technology obsolete or less
marketable, or that the Company will be able to successfully enhance its
products or technology or adapt them satisfactorily.
New product development efforts are subject to all of the
risks inherent in the development of new technology and products including
unanticipated delays, expenses, technical problems or difficulties, as well as
the possible insufficiency of funding to complete development. There can be no
assurance as to when, or whether, new products will be successfully developed.
In addition, no assurance can be given that additional technologies can be
developed within a reasonable development schedule, if at all. Further, there
can be no assurance that the Company would have sufficient economic or human
resources to complete such development in a timely
7
<PAGE>
manner, or at all, or that it could enter into economically reasonable
arrangements for the completion of such products by third parties.
Following the development of additional products, the Company
must successfully complete a testing program for the products before they can be
marketed. Although the Company believes that its testing program is adequate,
unforeseen technical problems arising out of such testing could significantly
and adversely affect the Company's ability to produce and market a commercially
acceptable product. In addition, the Company's success will depend upon its
current and proposed technologies and products meeting acceptable cost and
performance criteria in the marketplace. There can be no assurance that the
technologies and products will meet applicable price or performance objectives
or that unanticipated technical or other problems will not occur which would
result in increased costs or material delays. Also, there can be no assurance
that new technologies will be developed in the future by the Company. If
superior technology is developed by the Company's competitors, such products may
render the Company's present products obsolete, and thus would have a materially
negative impact on the Company. See "Business".
5. Failure to Integrate Various Product Introductions and Offerings.
The Company believes that significant market opportunities exist for a provider
of fully integrated software designed for the public safety marketplace. One of
the Company's business strategies is to provide a "total solution" fully
integrated software product line used in public safety. Although the Company has
had limited success in the past integrating its software products with other
systems, there can be no assurance, however, that the Company will be able to
fully integrate these applications, or newly created applications, or that
achieving such integration will enable the Company to improve its competitive
position in the software market. Moreover, the Company's inability to further
integrate its products could have a material adverse effect on the Company's
business and results of operations.
6. Intellectual Property Protection and Infringement. The Company's
technology is not patented or covered by a registered copyright. In the absence
of patent protection, the Company's business and competitive advantage may be
materially and adversely affected by competitors who develop substantially
equivalent technology. The Company instead currently relies on trade secrets and
common law intellectual property rights (including, without limitation, common
law copyright), together with non-disclosure agreements to establish and protect
certain proprietary rights in its products. These measures afford limited
protection, and there can be no assurance that the steps taken by the Company to
protect these proprietary rights will be adequate to prevent misappropriation of
its technology or the independent development by others of similar technology.
In the absence of a registered copyright, the Company will be unable to bring
an action for copyright infringement. If the Company registers a common law
copyright after the infringing action occurs, it may be limited in its ability
to prove its case and its recovery of damages. Registration of a copyright with
the United States copyright office is not a requirement to make a copyright
legally effective; however, registration of a copyright generally provides a
rebuttable presumption of its validity. A copyright may be registered at any
time prior to bringing an infringement action. However, the option to elect
statutory damages in lieu of actual damages and profits, and the
8
<PAGE>
eligibility to receive an award of attorney's fees (at the discretion of the
court) are not available if the infringement occurred prior to registration. The
Company intends to seek registered copyright protection under United States law
with respect to some of its technology, although no assurance can be given that
the Company will obtain such protection. While the Company believes that it
would be impractical and not cost-effective for anyone to attempt to copy
software such as that used in its products, unauthorized parties, nevertheless,
might attempt to copy aspects, or reverse engineer certain, of the Company's
products, or may obtain and use information that the Company regards as
proprietary. The cost of, and time dedicated to, enforcement by the Company of
its rights, if any, could be significant. Regardless of the outcome of such
enforcement proceedings, there can be no assurance that such proceedings will be
effective. In addition, although the Company believes that there are no
infringement claims against the Company and no grounds for the assertion of any
such claims, the cost of responding to any such assertion, should it be made,
could be significant. See "Risk Factors - Competition", "Business - Intellectual
Property Rights and Licenses" and "Business Competition".
7. Competition. The Company's products compete with those of numerous
well-established companies, which design, sell, produce or market software
systems for public safety operations. Many of these companies have substantially
greater financial, technical and other resources than those of the Company, and
they may have established reputations for success in the development, licensing,
sale and service of their products and technology. Certain of those competitors
have the financial resources necessary to enable them to withstand substantial
price competition or downturns in the market for computer software products used
by public safety agencies and organizations. In addition, the Company
anticipates that a material portion of the sale of its products will be made
through the competitive bid process. There can be no assurance that the Company
will be able to compete effectively in such process. See "Business -
Competition" and "Business - Products and Services".
8. Limited Sales and Marketing Experience. The Company has limited
experience in the areas of sales, marketing and distribution. The Company's
sales and marketing staff will require additional personnel in the future. There
can be no assurance that the Company will be able to build an adequate sales and
marketing staff, that establishing such a sales and marketing staff will be
cost-effective, or that the Company's sales and marketing efforts will be
successful. See "Risk Factors Challenges to Growth; Unascertainable Risks
Related to Possible Acquisitions" and "Business Sales and Marketing".
9. Dependence on Significant Customers. Although the composition of the
Company's largest customers has changed from year to year, historically the
Company's revenues have been materially dependent on a limited number of
customers. Generally, the Company does not receive repeat business from its
customers for the design and installation of software systems. Further revenues
from customers to whom the Company has licensed software systems are usually
derived from maintenance and support contracts. Accordingly, the Company does
not believe that the makeup of its current customers is material to an
understanding of the Company's future business prospects. While the Company
expects its customer base to continue to expand, a limited number
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<PAGE>
of large customers may continue to account for a significant portion of the
Company's sales during any given period for the foreseeable future. As such, the
Company's financial condition and results of operations may be adversely
affected by a delay, reduction or cancellation of orders from one or more of its
current or future significant customers or the loss of one or more such
customers. See "Risk Factors - Lengthy Sales Cycle" and "Business - Customers".
10. Product Concentration. Licensing of products and the provision of
maintenance and support services to the law enforcement and public safety market
represented substantially all of the Company's revenues for the fiscal years
ended December 31, 1995 and 1996, and are expected to continue to account for
all of the Company's revenues for the foreseeable future. Any factors adversely
affecting the Company's products, such as the introduction of superior
competitive products or shifts in the needs of the marketplace, would have a
material adverse effect on the Company's financial condition and results of
operations. See "Risk Factors - Competition", "Business - Products and Services"
and "Business-Competition".
11. Lengthy Sales Cycle. Licensing of the Company's software products
typically involves a detailed technical evaluation and a commitment of capital,
technical, marketing and other resources, with the attendant delays frequently
associated with customers' internal procedures to approve large capital
expenditures and to test and accept new technologies that affect the customer's
operations infrastructure. For those and other reasons, the sales cycle
associated with the Company's products is typically lengthy and subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance procedure, that are beyond the Company's control. Because of
the lengthy sales cycle and the generally large size of customer orders, if
revenues forecasted from a specific customer for a particular fiscal quarter are
not realized in that quarter, the Company's operating results for that quarter
could be materially adversely affected. See "Risk Factors - Dependence on
Significant Customers".
12. New Management Team; Dependence on Executive Management; Need to
Retain Key Personnel. The Company's executive management team, Mark Honigsfeld,
Chairman and Chief Executive Officer of the Company, Dong W. Lew, President and
Chief Operating Officer of the Company, and Louis Libin, Chief Technology
Officer of the Company, have worked together for only a brief period. Mr.
Honigsfeld was elected Chairman of the Board of the Company in August 1996 and
was elected Chief Executive Officer of the Company effective as of October 1,
1996. Mr. Libin was elected as a director of the Company and became the
Company's Chief Technology Officer in January 1997 and only began serving as
Chief Technology Officer on a full-time basis in March 1997.
The Company has a three-year employment agreement with each of
Messrs. Honigsfeld, Lew and Libin, each of which includes, among other things, a
non-competition and non- solicitation provision. However, each agreement
provides that the employee can terminate his agreement with the Company at any
time upon 30 days notice for any reason. Additionally, Mr. Honigsfeld's
employment agreement allows him to devote up to 10% of his working time, and Mr.
Libin's employment agreement allows him to devote up to one day a week, to other
endeavors which are not competitive with the Company. The loss of the services
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<PAGE>
of either Mr. Honigsfeld, Mr. Lew or Mr. Libin would have a material adverse
effect on the Company's business.
The Company has obtained a "key-man" life insurance policy on
the life of Mr. Honigsfeld which will provide for a death benefit to the
Company, on his life, of $1,000,000. The Company intends to obtain "key man"
life insurance policy on the life of Mr. Libin which would provide a death
benefit to the Company of $1,000,000. The Company has been unable to secure life
insurance coverage for Mr. Lew in light of Mr. Lew's age and history as a
smoker. With regard to Messrs. Honigsfeld and Libin, there can be no assurance
that the death benefit would be adequate to fund the Company's needs until a
replacement could be found.
The success of the Company is also dependent upon its ability
to hire and retain additional qualified and talented executive, technical and
marketing personnel. There is always intense competition for qualified personnel
in the Company's business and the Company's inability to recruit qualified
personnel could have a material adverse effect on the Company's business and
results of operations. There can be no assurance that the Company will be able
to retain the members of its current management or personnel, or that it will be
able to successfully attract and retain qualified management, engineering and
sales or other personnel in the future. See "Management - Employment
Agreements".
13. Dependence on Licensors. The Company currently relies on operating
system software owned by certain third parties for certain software and platform
operating systems which the Company uses to create its products, and in some
cases to bundle with its own software in its products. The licenses are
perpetual in duration subject to the payment of an annual maintenance and
enhancement fee, which is based on the number of end users of such operating
system software, or a monthly sublicense fee, which is based upon the number of
customers to which the Company's products (which includes such licensed
operating system software) are licensed. Although the Company believes that
there are alternatives to the operating system software that the Company
currently uses, termination of any of these licenses could delay the Company
from producing its products for approximately three to six months as a result of
the need to revise the Company's software to make it compatible with such
alternative operating system software. Such result would have a material adverse
effect on the Company. See "Business- Intellectual Property Rights and
Licenses".
14. Challenges to Growth; Unascertainable Risks Related to Possible
Acquisitions. The Company anticipates a period of rapid growth that is expected
to place a strain on the Company's administrative, financial and operational
resources. The Company's ability to manage any growth effectively will require
it to continue to improve its operational, financial and management controls,
reporting systems and procedures, to install new management information and
control systems, and to train, motivate and manage its employees. There can be
no assurance that the Company will install such management information and
control systems in an efficient and timely manner or that the new systems will
be adequate to support the Company's operations. Because of the complexity of
its products, the Company has in the past experienced, and expects in
11
<PAGE>
the future to experience, a time lag between the date on which technical and
sales personnel are hired and the time at which such persons become fully
productive. In addition, customer satisfaction could be substantially affected
by the quality of the Company's post-sales system implementation process and, in
many cases, its maintenance and service capabilities. If the Company is unable
to hire, train and retain qualified personnel and consultants to implement these
services or is unable to manage the post-sales process effectively, its ability
to attract repeat sales or obtain references for new prospective sales could be
adversely affected, which could limit the Company's growth opportunities.
Additionally, many of the challenges of growth may be unforeseeable and beyond
the control of the Company. If the Company is unable to manage growth
effectively, such that the Company's sales and marketing efforts exceed its
capacity to design, develop, install, maintain and service its products, or if
new employees are unable to achieve adequate performance levels, the Company's
business, operating results and financial condition could be adversely affected.
The Company intends to explore opportunities to add, through
acquisition or licensing, technology or products to enhance or add to its
current product line, or to acquire a customer base or sales organization to
augment the Company's infrastructure. The Company is not actively seeking any
acquisition at this time. In exploring a potential acquisition or license, the
Company will consider, among other criteria, the comparative cost to the Company
in capital, resources and personnel to create the identified technology or
product, or to establish the targeted customer base or sales organization;
restrictions on the Company developing similar technology or products arising
from patent or other intellectual property protection; and the synergy of the
identified technology or products, or customer base or sales organization, with
the Company's products and organization. Although the Company anticipates it
will follow the foregoing general criteria in determining whether or not to
pursue any acquisition or license, management will have sole discretion over
whether or not to engage in any such transaction. There can be no assurance that
the Company will identify any acquisition or licensing candidates or, if it
does, that it will be able to reach any agreements to acquire or license
technology or products, or acquire assets, on terms acceptable to the Company.
Since the Company has not identified any potential acquisition candidates, there
is no basis for the Company to evaluate the possible merits or risks relating to
the technology or assets which may be acquired. To the extent that the Company
effects an acquisition of technology or products in the early stage of
development or growth (including technology or products which have not been
fully tested or marketed), the Company will be subject to numerous risks
inherent in developmental technology and an additional high level of risk
associated with high-technology industries based on innovative technologies or
processes. Furthermore, future acquisition transactions may require the Company
to obtain additional financing from banks or other financial institutions or to
undertake debt or equity financing. No assurance can be given that the Company
would be able to obtain financing upon commercially reasonable terms, or at all.
Furthermore, equity financing will result in a dilution of existing stockholders
of the Company, which may be significant. If debt financing ultimately proves to
be available, any borrowings may subject the Company to various risks
traditionally associated with the incurring of indebtedness, including the risks
of interest rate fluctuations and insufficiency of cash flow to pay principal
and interest. To the extent any such transaction involves the acquisition of a
business, there can be no assurance that the Company will successfully integrate
the operations of the acquired business with
12
<PAGE>
those of the Company, or that all of the benefits expected from such integration
will be realized. Any delays or unexpected costs incurred in connection with
such integration could have an adverse effect on the combined company's
business, operating results or financial condition. Furthermore, there can be no
assurance that the operations, management and personnel of the companies will be
compatible or that the Company will not experience the loss of key personnel.
The amount of net proceeds of this Offering, if any, expended with respect to an
acquisition will be determined by the Board of Directors of the Company. In most
cases each acquisition may be consummated without seeking and obtaining
stockholder approval, in which case, the stockholders will not have an
opportunity to review the financial statements of an acquisition candidate,
except in those cases where stockholder approval is required. Although the
Company will endeavor to evaluate the risks inherent in a particular
acquisition, there can be no assurance that the Company will properly ascertain
or assess such significant risk factors. See "Risk Factors - Limited Sales and
Marketing Experience", "Business - Products and Services" and "Business - Sales
and Marketing".
15. International Expansion. As part of the Company's long range
marketing plan, the Company intends, in the future, to explore opportunities to
expand its operations into international markets which could require significant
management attention and financial resources. Currently, the Company has not
developed any international marketing strategy, has not given any significant
attention to international marketing, and has no timetable in mind to implement
an international marketing plan. For the foreseeable future, the Company does
not expect international marketing activities to be material to the Company nor
does it have any current plans to devote significant capital or resources to
international marketing. There can be no assurance that the Company's efforts to
develop international sales and support channels will be successful.
International sales are subject to a number of risks, including potentially
longer payment cycles, unexpected changes in regulatory requirements, import and
export restrictions and tariffs, difficulties in staffing and managing foreign
operations, the burden of complying with a variety of foreign laws, greater
difficulty in accounts receivable collection, potentially adverse tax
consequences, currency fluctuations and potential political and economic
instability. Additionally, the protection of intellectual property may be more
difficult and costly to enforce outside of the United States. In the event that
the Company is successful in expanding its sales and operations internationally,
the imposition of, or change in, price controls or other restrictions on foreign
currencies could materially affect the Company's business, operating results and
financial condition.
16. Control by Existing Management and Stockholders; Effect of Certain
Anti- Takeover Considerations. Upon completion of the Offering, the Company's
directors, executive officers and certain principal stockholders and their
affiliates will own beneficially approximately 48% of the Common Shares (giving
effect to the sales of Common Shares by the Selling Stockholders and without
giving effect to the exercise of the Overallotment Option). Accordingly, such
holders, if acting together, will have the ability to exert significant
influence over the election of the Company's Board of Directors and other
matters submitted to the Company's stockholders for approval. The voting power
of these holders may discourage or prevent any proposed takeover of the Company
unless the terms thereof are approved by such holders. Pursuant to the Company's
Certificate of Incorporation, Preferred Shares may be issued by the Company in
the future without
13
<PAGE>
stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of Common Shares will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Shares
that may be issued in the future. The issuance of Preferred Shares could have
the effect of discouraging a third party from acquiring a majority of the
outstanding Common Shares of the Company and preventing stockholders from
realizing a premium on their Common Shares. The Certificate of Incorporation
also provides for staggered terms for the members of the Board of Directors. A
staggered Board of Directors, and certain provisions of the Company's by-laws
and of Delaware law applicable to the Company (which law prohibits the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless it is approved in a prescribed manner),
could delay or make more difficult a merger, tender offer or proxy contest
involving the Company. See "Principal and Selling Stockholders" and "Description
of Securities".
17. Broad Discretion in Application of Proceeds; Repayment of
Indebtedness; Payment of Accrued Compensation. While the Company intends to use
the net proceeds of this Offering as described in the "Use of Proceeds" section
of this Prospectus, the Company has broad discretion to adjust the application
and allocation of such net proceeds in order to address changed circumstances
and opportunities. As a result of the foregoing, the success of the Company will
be substantially dependent upon the discretion and judgment of the management of
the Company with respect to the application and allocation of the net proceeds
of this Offering. Pending use of the proceeds, the funds will be invested in
certificates of deposit, high grade commercial paper and government securities
or other low risk investments. See "Use of Proceeds".
The Company intends to utilize an aggregate of $975,000, or
approximately 25% of the net proceeds of this Offering, to repay (i) promissory
notes in the principal amount of $770,000 issued in connection with the
Company's Bridge Financing transaction in October 1996 and (ii) $200,000
borrowed by the Company from its Chairman of the Board and Chief Executive
Officer under a secured credit facility loan agreement (the "Credit Agreement"),
plus interest accrued on such principal amount at the rate of 10% per annum.
Additionally, the Company intends to utilize $115,000, or 3% of the net proceeds
of this Offering, to pay (i) accrued and unpaid compensation of $100,000 to the
Company's Chairman of the Board and Chief Executive Officer, and (ii) an accrued
and unpaid signing bonus of $15,000 payable to the President of the Company,
each in connection with the execution of his employment agreement with the
Company which was effective as of October 1, 1996. As a result of the foregoing,
$1,090,000, or approximately 28% of the net proceeds of this Offering, will not
be available to fund future business activities. See "Use of Proceeds", "Bridge
Financing", "Management" and "Certain Relationships and Related Transactions".
18. Lack of Prior Market for Common Shares; No Assurance of Public
Trading Market. Prior to this Offering, no public trading market existed for the
Common Shares. There can be no assurances that a public trading market for the
Common Shares will develop or that a public trading market, if developed, will
be sustained. Although the Company anticipates that, upon
14
<PAGE>
completion of this Offering, the Common Shares will be eligible for inclusion on
The Nasdaq SmallCap Market, no assurance can be given that the Common Shares
will be listed thereon. Under prevailing rules of The Nasdaq Stock Market, Inc.,
in order to qualify for initial quotation of securities on The Nasdaq SmallCap
Market, a company, among other things, must have at least $4,000,000 in total
assets, $2,000,000 in total capital and surplus, $1,000,000 in market value of
public float and a minimum bid price of $3.00 per share. Although the Company
may, upon the completion of this Offering, qualify for initial quotation of the
Common Shares on The Nasdaq SmallCap Market, in order for the Common Shares to
continue to be listed thereon, the Company, among other things, generally must
have $2,000,000 in total assets, $1,000,000 in total capital and surplus,
$1,000,000 in market value of public float and a minimum bid price of $1.00 per
share.
The Nasdaq Stock Market, Inc. has proposed a rule change
which, if adopted, would impose substantially more stringent criteria for the
initial and continued listing of securities on The Nasdaq SmallCap Market. The
proposed new rules provide that, for initial listing on The Nasdaq SmallCap
Market, a company would need to have, among other things, (i) either net
tangible assets (i.e., net of goodwill and other intangible assets) of
$4,000,000, a market capitalization of $50,000,000 or net income for two of the
last three fiscal years of $750,000, (ii) a minimum market value of public float
of $5,000,000, (iii) a minimum bid price of $4.00 per share, and (iv) either one
year of operating history or a market capitalization of $50,000,000. For
continued listing on The Nasdaq SmallCap Market, a company would need to have,
among other things, (i) either net tangible assets of $2,000,000, a market
capitalization of $35,000,000, or net income for two of the last three fiscal
years of $500,000, and (ii) a minimum market value of public float of
$1,000,000. Additionally, for both initial listing and continued listing on The
Nasdaq SmallCap Market, companies would be required to have at least two
independent directors, and an Audit Committee, a majority of the members of
which would need to be independent directors.
If the Company is unable to satisfy the requirements for
quotation on The Nasdaq SmallCap Market, trading, if any, in the Common Shares
offered hereby would be conducted in the over-the-counter market in what is
commonly referred to as the "pink sheets" or on the NASD OTC Electronic Bulletin
Board. As a result, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, the securities offered hereby.
The above-described rules may adversely affect the liquidity of the market for
the Company's securities. If a trading market does in fact develop for the
Common Shares offered hereby, there can be no assurance that it will be
maintained. In any event, because certain restrictions may be placed upon the
sale of securities at prices under $5.00 per share, if the price of the Common
Shares falls below such threshold, unless such Common Shares qualify for an
exemption from the "penny stock" rules, such as a listing on The Nasdaq SmallCap
Market, some brokerage firms will not effect transactions in the Company's
securities and it is unlikely that any bank or financial institution will accept
such securities as collateral. Such factors could have a material adverse affect
in developing or sustaining any market for the Common Shares. See "Risk Factors
- - 'Penny Stock' Regulations May Impose Certain Restrictions on Marketability of
Securities" and "Underwriting".
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<PAGE>
Although it has no legal obligation to do so, the Underwriter
may from time to time act as a market maker and may otherwise effect and
influence transactions in the Company's securities. However, there is no
assurance that the Underwriter will continue to effect and influence
transactions in the Company's securities. The prices and liquidity of the
Company's Common Shares may be significantly affected by the degree, if any, of
the Underwriter's participation in the market. The Underwriter may voluntarily
discontinue such participation at any time. Further, the market for, and
liquidity of, the Company's Common Shares may be materially adversely affected
by the fact that a significant portion of the Common Shares may be sold to
customers of the Underwriter.
19. Arbitrary Offering Price; Possible Volatility of Stock Price. The
initial public offering price of the Common Shares as determined by negotiation
between the Company and the Underwriter may not be indicative of the market
price for such securities in the future, and does not necessarily bear any
relationship to the Company's assets, book value, net worth or results of
operations of the Company or any other established criteria of value. Among the
factors considered in determining the price of the Common Shares were the
history of, and prospects for, the industry in which the Company operates,
estimates of the business potential of the Company, the present state of the
development of the Company's business, the Company's financial condition, an
assessment of the Company's management, the general condition of the securities
markets at the time of this Offering, and the demand for similar securities of
comparable companies. It should be noted that the stock market in recent years
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of many smaller companies. Frequently, such
fluctuations have been unrelated or disproportionate to the operating
performance of such companies. These fluctuations, as well as general economic
and market conditions, may have a material adverse effect on the market price of
the Common Shares. See "Underwriting", "Description of Securities" and
"Financial Statements".
20. "Penny Stock" Regulations May Impose Certain Restrictions on
Marketability of Securities. The Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. If, as anticipated,
the Common Shares offered hereby are authorized for quotation on The Nasdaq
SmallCap Market upon the completion of this Offering, such securities will
initially be exempt from the definition of "penny stock". If the Common Shares
offered hereby are removed from listing on The Nasdaq SmallCap Market at any
time, the Company's Common Shares may become subject to rules that impose
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the Commission relating to the penny stock market. The broker-dealer must also
disclose the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker-dealer must
16
<PAGE>
disclose this fact and the broker-dealer's presumed control over the market.
Finally, monthly statements must be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in
penny stocks. Consequently, the "penny stock" rules may restrict the ability of
broker-dealers to sell the Company's Common Shares and may affect the ability of
purchasers in this Offering to sell the Company's Common Shares in the secondary
market as well as the price at which such purchasers can sell any such Common
Shares.
21. Immediate and Substantial Dilution; Equity Securities Sold
Previously at Below Offering Price. Upon completion of this Offering, assuming
no exercise of the Overallotment Option, and without giving effect to the
exercise of the Underwriter's Warrant, the pro forma net tangible book value per
share of the Company's Common Shares as of December 31, 1996 would have been
$1.84. At the initial public offering price of $5.00 per share, investors in
this Offering will experience an immediate dilution of approximately $3.16, or
63.2% in net tangible book value per share, and existing investors will
experience an increase of approximately $2.19 per share. The present
stockholders of the Company have acquired their respective equity interest at
costs substantially below the public offering price. Accordingly, to the extent
that the Company incurs losses, the public investors will bear a
disproportionate risk of such losses. The exercise of the Bridge Warrants issued
to the Bridge Lenders for the purchase of 431,200 Common Shares, at an exercise
price of $.50 per share, and the exercise of the Other Derivative Securities,
for the purchase of an aggregate of 710,400 Common Shares, generally at exercise
prices substantially below the public offering price, will result in further
substantial dilution to the public investors. See "Dilution", "Bridge
Financing", "Management - Executive Compensation", "Management - Stock Option
Plan" and "Underwriting".
22. No Dividends. The Company has never paid any dividends on its
Common Shares and does not intend to pay dividends on its Common Shares in the
foreseeable future. Any earnings which the Company may realize in the
foreseeable future are anticipated to be retained to finance the growth of the
Company. See "Dividend Policy" and "Description of Securities".
23. Shares Eligible for Future Sale May Adversely Affect the Market.
All of the Company's outstanding Common Shares are "restricted securities" and,
in the future, may be sold upon compliance with Rule 144 or pursuant to
registration under the Act (see discussion below with respect to the
registration of Common Shares held by certain stockholders of the Company and
underlying the Bridge Warrants held by the Bridge Lenders). Rule 144 currently
provides, in essence, that a person holding "restricted securities" for a period
of two years may sell an amount every three months up to the greater of (a) 1%
of the Company's issued and outstanding securities of that class of securities
or (b) the average weekly volume of sales of such securities during the four
calendar weeks preceding the sale if there is adequate current public
information available concerning the Company. Additionally, non-affiliates (who
have not been affiliates of the Company for at least three months) may sell
their "restricted securities" in compliance with Rule 144 without volume
limitations after they have held such securities for a period of three years.
Effective April 29, 1997, the foregoing two or three year holding periods will
be reduced to one or two years, respectively. An aggregate of 406,250 Common
Shares have been owned by Mr. Lew for more than
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<PAGE>
two years. However, such shares are subject to an agreement with the Underwriter
restricting the public sale thereof for a period of one year without the
Underwriter's consent.
The Company is registering for resale 250,250 Common Shares
held by certain stockholders. In addition, the Company is registering for resale
the 431,200 Common Shares underlying the Bridge Warrants. Such Common Shares may
be resold at any time following the date of this Prospectus, subject to an
agreement between each of the Bridge Lenders and the Underwriter restricting the
transferability of such Common Shares for a period of six months without the
Underwriter's consent. Prospective investors should be aware that the
possibility of resales by the Selling Stockholders, as well as other
stockholders of the Company, may have a material depressive effect on the market
price of the Company's Common Shares in any market which may develop. See
"Bridge Financing", "Principal and Selling Stockholders" and "Underwriting".
24. Limitations on Director Liability. The Company's Certificate of
Incorporation provides, pursuant to Delaware law, that a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, with certain exceptions.
These provisions may discourage stockholders from bringing suit against a
director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by stockholders on behalf of the Company against
any director. In addition, the Company's Certificate of Incorporation provides
for mandatory indemnification of directors and officers to the fullest extent
permitted or not prohibited by Delaware law. See "Description of Securities
Limitation on Liability of Directors; Indemnification".
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 Common
Shares offered hereby are estimated to be $3,875,000 (after deducting
underwriting discounts of $500,000 and other expenses of this Offering estimated
to be $625,000, including the Underwriter's non-accountable expense allowance in
the amount of 3% of the gross proceeds of the Offering, and a $108,000 financial
consulting fee payable to the Underwriter at the closing) (but not considering
any exercise of the Overallotment Option or the Underwriter's Warrants). The
Company, based upon all currently available information, intends to utilize such
net proceeds approximately as follows:
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Approximate Approximate
Amount of Percentage
Net Proceeds of Net Proceeds
Product enhancement and development(1) $ 1,250,000 32.3%
Repayment of indebtedness (2) 975,000 25.2%
Marketing and advertising (3) 650,000 16.8%
Hiring and training of additional personnel 150,000 3.8%
Purchase of equipment 150,000 3.8%
Payment of accrued compensation, including
signing bonuses, to Chairman of the Board and
Chief Executive Officer and to President(4) 115,000 3.0%
Working capital (5) 585,000 15.1%
--------- -----
Total $ 3,875,000 100.0%
=========== ======
(1) Includes, without limitation, costs to develop a radio modem to be used in
connection with mobile computing software systems. See "Business-Products".
(2) Represents, in part, the repayment of promissory notes (the "Bridge Notes")
in the aggregate principal amount of $770,000 issued in connection with the
Bridge Financing transaction in October 1996. The Bridge Notes are due and
payable upon the closing of the Offering. If such closing occurs on or
before September 15, 1997, no interest will be payable on the Bridge Notes.
If the Offering closes after such date, interest shall accrue on the
principal of the Bridge Notes, from the date such Bridge Notes were issued,
at the rate of 12% per annum. Also represents the repayment of $200,000,
plus interest accrued thereon at the rate of 10% per annum, to Company's
Chairman of the Board and Chief Executive Officer under the Credit
Agreement. Principal and accrued interest under the Credit Agreement is
payable (i) upon the closing of this Offering, if it occurs prior to June
1997, or (ii) otherwise, in equal quarterly installments commencing in June
1997, and ending in June 1999, subject to acceleration in the event of the
closing of this Offering. See "Risk Factors - Broad Discretion in
Application of Proceeds; Repayment of Indebtedness; Payment of Accrued
Compensation", "Bridge Financing" and "Certain Relationships and Related
Transactions".
(3) See "Business - Sales and Marketing".
(4) Represents the payment of accrued and unpaid compensation of approximately
$100,000 to the Company's Chairman of the Board and Chief Executive Officer,
and the payment of an accrued and unpaid signing bonus of $15,000 payable to
the President of the Company, each in connection with the execution of his
employment agreement with the Company which was effective as of October 1,
1996. See "Risk Factors - Broad Discretion in Application of Proceeds;
Repayment of Indebtedness; Payment of Accrued Compensation" and
"Management - Employment Agreements".
19
<PAGE>
(5) To be used for general operating and overhead expenses. Additionally, the
Company may use a portion of the proceeds of this Offering allocated to
working capital to acquire technology or assets to expand or enhance its
product line and business. At present, the Company has not identified any
acquisition candidates, nor can it predict that it will identify any
appropriate acquisition candidates in the future. The Company is not
actively seeking any acquisition candidates at this time. See "Risk Factors
- Challenges to Growth; Unascertainable Risks Related to Possible
Acquisitions" and "Business - Products and Services".
The amounts set forth above are estimates. Should a reapportionment or
redirection of funds be determined to be in the best interests of the Company,
the actual amount expended to finance any category of expenses may be increased
or decreased by the Company's management, at its discretion.
The Company believes that the proceeds of this Offering will enable the
Company to expand its business, which the Company anticipates, but cannot
assure, will result in an increase in annual revenues. The Company believes that
the net proceeds of this Offering, together with anticipated increased revenues
generated from operations, will be sufficient to conduct the Company's
operations for at least 12 months. See "Risk Factors - Dependence on Offering
Proceeds; Possible Need for Additional Financing".
It is anticipated that, to the extent that the Company's expenditures
are less than projected and/or the proceeds of this Offering increase as a
result of the exercise by the Underwriter of its Overallotment Option, the
resulting balances will be retained and used for general working capital
purposes. Conversely, to the extent that such expenditures require the
utilization of funds in excess of the amounts anticipated, additional financing
may be sought from other sources, such as debt financing from financial
institutions, although there can be no assurance that such additional financing,
if available, will be on terms acceptable to the Company. See "Risk Factors -
Dependence on Offering Proceeds; Possible Need for Additional Financing" and
"Risk Factors - Risks Attendant to Expansion".
Pending use of the proceeds, the funds will be invested in certificates
of deposit, high grade commercial paper and government securities, or other low
risk investments.
DILUTION
All references herein to net tangible book value, net tangible book
value per Common Share and the number of Common Shares outstanding assume no
exercise of the Underwriter's Overallotment Option or the Underwriter's
Warrants. See "Bridge Financing" and "Underwriting".
No Exercise of Bridge Warrants or Exercisable Options
20
<PAGE>
The following discussion assumes no exercise of the Bridge Warrants or
the Exercisable Options. See "Bridge Financing" and "Management - Stock Option
Plan".
As of December 31, 1996, the Company had an aggregate of 986,700 Common
Shares outstanding and a net tangible book value (deficit) of ($349,726), or
($.35) per share. Net tangible book value per share represents the total amount
of the Company's tangible assets, less the total amount of its liabilities,
divided by the total number of Common Shares outstanding.
After giving effect to the sale of 1,000,000 Common Shares by the
Company at the Offering price of $5.00 per Common Share, with net proceeds of
$3,875,000, the net tangible book value of the Company as of December 31, 1996
would have been $3,664,600, or $1.84 per Common Share. This amount represents an
immediate dilution (the difference between the price per Common Share to
purchasers in this Offering and the pro forma net tangible book value per Common
Share as of December 31, 1996, after giving effect to the issuance of the
1,000,000 Common Shares) of approximately $3.16 per Common Share to new
investors and an immediate increase (the difference between the pro forma net
tangible book value per Common Share as of December 31, 1996, after giving
effect to the issuance of the 1,000,000 Common Shares, and the net tangible book
value per Common Share as of December 31, 1996, before giving effect to the
Offering) of approximately $2.19 per Common Share to the Company's current
stockholders. Such increase to the Company's current stockholders is solely
attributable to the cash price paid by purchasers of the Common Shares offered
for sale by the Company.
The following table illustrates the per share dilution as of December 31, 1996:
Public offering price per share(1).......................... $5.00
Net tangible book value per share (deficit) before giving
effect to the Offering(2)................................. ($ .35)
Increase per share attributable to the sale of the
Common Shares offered hereby............................. 2.19
-----
Pro forma net tangible book value per share after the
Offering(2) .......................................... 1.84
----
Dilution per share to purchasers in the Offering (3) ....... $3.16
====
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(2) After deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
21
<PAGE>
(3) Does not give effect to the exercise of the Underwriter's Overallotment
Option, the Underwriter's Warrants, the Bridge Warrants, or the Other
Derivative Securities for the purchase of 710,400 Common Shares of the
Company. See "Bridge Financing", "Management - Stock Option Plan",
"Certain Relationships and Related Transactions", "Description of
Securities - Common Shares" and "Underwriting".
The following table sets forth the relative cost and ownership
percentage of the Common Shares offered hereby as compared to the Common Shares
outstanding immediately prior to the Offering.
<TABLE>
<CAPTION>
Common Shares Average
Acquired Total Consideration Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Current Stockholders........ 986,700(1) 49.7% $ 168,425 3.3% $ .17
Purchasers of Common
Shares in the Offering... 1,000,000(2) 50.3% $5,000,000 96.7% $5.00
--------- ---- --------- -----
Total............... 1,986,700(1)(2) 100.0% $5,168,425 100.0%
========= ===== ========= =====
</TABLE>
(1) Does not give effect to the exercise of the Bridge Warrants or the Other
Derivative Securities. See "Bridge Financing", "Management - Stock Option
Plan", "Certain Relationships and Related Transactions" and "Description
of Securities - Common Shares".
(2) Assumes no exercise of the Underwriter's Overallotment Option. See
"Underwriting".
Exercise of Bridge Warrants and Exercisable Options
As indicated above, the foregoing figures do not give effect
to the exercise of the Bridge Warrants for the purchase of an aggregate of
431,200 Common Shares of the Company or the Exercisable Options for the purchase
of an aggregate of 389,950 Common Shares of the Company. The following
discussion assumes such exercises. See "Bridge Financing" and "Management -
Stock Option Plan".
As of December 31, 1996, the Company had an aggregate of 1,807,850
Common Shares outstanding on a pro forma basis and a pro forma net tangible book
value (deficit) of ($45,169), or ($.02) per Common Share.
After giving effect to the sale of 1,000,000 Common Shares by the
Company at the Offering price of $5.00 per Common Share, with net proceeds of
$3,875,000, the pro forma net tangible book value of the Company as of December
31, 1996 would have been $3,969,157, or $1.41 per Common Share. This amount
represents an immediate dilution (the difference between the price per Common
Share to purchasers in this Offering and the pro forma net tangible book value
per Common Share as of December 31, 1996, after giving effect to the issuance of
the 1,000,000 Common Shares) of
22
<PAGE>
approximately $3.59 per Common Share to new investors and an immediate increase
(the difference between the pro forma net tangible book value per Common Share
as of December 31, 1996, after giving effect to the issuance of the 1,000,000
Common Shares, and the pro forma net tangible book value per Common Share as of
December 31, 1996, before giving effect to the Offering) of approximately $1.43
per Common Share to the Company's current stockholders. Such increase to the
Company's current stockholders is solely attributable to the cash price paid by
purchasers of the Common Shares offered for sale by the Company.
The following table illustrates the per share dilution as of December 31, 1996:
Public offering price per share(1)........................ $5.00
Pro forma net tangible book value (deficit) per share
before giving effect to the Offering(2).................. ($ .02)
Increase per share attributable to the sale of the
Common Shares offered hereby........................... 1.43
-----
Pro forma net tangible book value per share after the
Offering(2) (3)........................................ 1.41
----
Dilution per share to purchasers in the Offering (4) ..... $3.59
====
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(2) Gives retroactive effect to the exercise of the Bridge Warrants and the
Exercisable Options.
(3) After deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(4) Does not give effect to the exercise of the Underwriter's Overallotment
Option or the Underwriter's Warrants. See "Underwriting".
The following table sets forth the relative cost and ownership
percentage of the Common Shares offered hereby as compared to the Common Shares
outstanding immediately prior to the Offering.
<TABLE>
<CAPTION>
Common Shares Average
Acquired Total Consideration Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Current Stockholders........ 1,807,850(1) 64.4% $ 501,010 9.1% $ .28
Purchasers of Common
Shares in the Offering... 1,000,000(2) 35.6% $5,000,000 90.9% $ 5.00
--------- ------ --------- -----
Total............... 2,807,850(1)(2) 100.0% $5,501,010 100.0%
========= ===== ========== =====
</TABLE>
23
<PAGE>
(1) Gives effect to the exercise of the Bridge Warrants and the Exercisable
Options. See "Bridge Financing", "Management - Stock Option Plan" and
"Description of Securities - Common Shares".
(2) Assumes no exercise of the Underwriter's Overallotment Option. See
"Underwriting".
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 and as adjusted to give effect to the issuance and sale of the
1,000,000 Common Shares offered by the Company at $5.00 per Common Share, and
the application of net proceeds of approximately $3,875,000 therefrom. This
table should be read in conjunction with the financial statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
December 31, 1996
Actual As Adjusted(1)
------ --------------
Long-Term Debt................................. $ 822,656 $ 52,656
------- ------
Stockholders' Equity:
Preferred Shares, $.01 par value, 1,000,000
shares authorized, none issued................ - -
Common Shares, $.01 par value, 20,000,000
shares authorized, 986,700 shares issued
and outstanding (actual), and 1,986,700
shares issued and outstanding
(as adjusted) (1)............................ 9,867 19,867
Additional paid-in capital..................... 158,558 4,023,558
Retained earnings (Deficit).................... (378,825) (378,825)
-------- ---------
Total Stockholders' Equity (Deficit)........... (210,400) 3,664,600
Total Capitalization........................... $612,256 $3,717,256
======= =========
(1) Reflects the issuance of the 1,000,000 Common Shares of the Company
offered hereby, and the anticipated application of the net proceeds of
$3,875,000 therefrom, after deducting underwriting discounts and
commissions and estimated expenses of the Offering.
24
<PAGE>
DIVIDEND POLICY
Holders of the Company's Common Shares are entitled to dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor. The Company has not declared or paid any dividends in the past and
does not currently anticipate declaring or paying any dividends in the
foreseeable future. The Company intends to retain earnings, if any, to finance
the development and expansion of its business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent upon
future earnings, if any, the Company's financial condition, capital
requirements, general business conditions, and other factors. Therefore, there
can be no assurance that any dividends of any kind will ever be paid.
BRIDGE FINANCING
In October 1996, the Company borrowed an aggregate of $770,000 from 22
lenders (the "Bridge Lenders") in a financing in which the Underwriter acted as
the placement agent. In consideration for making the loans to the Company, each
Bridge Lender received, for each $10,000 loaned, (i) a promissory note in the
principal amount of $10,000 (each a "Bridge Note") and (ii) five year warrants
for the purchase of 5,600 Common Shares of the Company at an exercise price of
$.50 per share (the "Bridge Warrants"). Among the Bridge Lenders were Dong W.
Lew ($70,000), President of the Company, Mark Honigsfeld ($60,000), Chairman of
the Board and Chief Executive Officer of the Company, Murray Gross ($50,000), a
principal stockholder of the Company (Mr. Gross subsequently transferred all his
Common Shares in the Company to his affiliate, About Face, Ltd.), and John P.
Hefferon ($10,000), Executive Vice President - Sales and Marketing of the
Company. See "Management", "Principal and Selling Stockholders" and "Certain
Relationships and Related Transactions".
Each of the Bridge Notes is due and payable upon the closing of the
Offering of the Company's securities described in this Prospectus, or over a 120
month period commencing on September 15, 1999 if the Offering does not close by
then. In the event such closing occurs on or before September 15, 1997, no
interest will be payable on the Bridge Notes. If the Offering closes after
September 15, 1997 but before September 15, 1999, interest shall accrue on the
principal of the Bridge Notes, from the date such Bridge Notes were issued at
the rate of 8% per annum. If the Offering closes after September 15, 1999,
interest shall accrue on the principal of such Bridge Notes, from the date such
Bridge Notes were issued, at the rate of 12% per annum until such date, and the
Bridge Notes shall be payable in 120 equal monthly installments with interest
accruing at the rate of 8% per annum. The Company intends to use a portion of
the proceeds of this Offering to repay the Bridge Lenders in full. See "Risk
Factors - Broad Discretion in Application of Proceeds; Repayment of
Indebtedness; Payment of Accrued Compensation" and "Use of Proceeds".
The Company entered into the Bridge Financing transaction because it
required additional financing to fund costs and expenses relating to this
Offering, for the Common Share Repurchases, to recruit additional personnel and
training costs, to fund product development costs, to relocate and expand its
facilities, and for working capital, and no other sources of financing were
available to the Company at that time. As part of the Bridge Financing
transaction, the Company agreed to register,
25
<PAGE>
and has included in the Registration Statement of which this Prospectus forms a
part, the 431,200 Common Shares underlying the Bridge Warrants issued to the
Bridge Lenders for resale under the Act. See "Principal and Selling
Stockholders" and "Underwriting".
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The Company was incorporated in the State of New York on March 31, 1983
under the name of Coastal Computer Systems, Inc. The Company was reincorporated
in the State of Delaware under its present name Compu-DAWN, Inc., on October 18,
1996. The Company is engaged in the business of designing, developing,
licensing, installing and servicing computer software products and systems for
the law enforcement and public safety industry.
The Company generates revenues from the granting of non-exclusive,
non-transferable and non-assignable licenses to use software it has developed,
through fixed price contracts. Revenues from such fixed price contracts are
recognized using the percentage of completion method of accounting. The Company
retains title to the software and warrants that it will provide technical
support and repair any defects in the software at no charge. The warranty period
for each contract is negotiated individually, with the periods ranging from 90
days to three years. To date, repair costs have been minimal and, therefore, the
Company has not had to establish a reserve for warranty costs.
The Company also provides post-contract, customer support to licensees
of its software. Revenues from such services are recognized ratably over the
period of performance. Fees billed and/or received prior to performance of
services are reflected as deferred revenues.
The Company's revenues, expenses and operating results have varied
considerably in the past and are likely to vary in the future. Fluctuations in
revenues depend on a number of factors, some of which are beyond the Company's
control. These factors include, among other things, the timing of contracts,
delays in customer acceptance of the Company's software products, and
competition.
See "Risk Factors - Lengthy Sales Cycle".
Currently, the Company's products are marketed primarily in the State
of New York.
Results of Operations
Year Ended December 31, 1996 versus 1995
26
<PAGE>
Revenues
Total revenues for the year ended December 31, 1996 were $477,527 as
compared to $1,040,181 for the prior year, a decrease of $562,654 or 54.1%. This
decrease was primarily a result of the decrease in software sales (due to fewer
units sold). Such decrease occurred due to the Company's focus on raising
capital (since late 1995 and throughout the year ended December 31, 1996) and
developing new wireless mobile computing technology, which diverted the
Company's resources away from sales activities. Management does not believe that
acceptance of the Company's products or timing of contracts significantly
contributed to the decline in revenues during 1996. As a result of the new
systems licensed during 1995, maintenance income for the year ended December 31,
1996 increased by approximately $52,000, from $222,910 to $275,016, when
compared to the year ended December 31, 1995.
The Company expects that it will be successful in obtaining maintenance
contracts for any new systems sold in the future and, therefore, deferred
maintenance revenues may vary accordingly.
There is no assurance that the Company will be able to generate
significant revenues in future periods. In fact, for the foreseeable future,
inherent with the typical length in the sales cycle for the licensing of the
Company's software products, and with the in-process development of new products
which have not been brought to the market, the Company believes that it will
experience difficulties in maintaining historical levels of revenues. However,
management of the Company believes that through the use of the proceeds of this
Offering for, among other things, product enhancement, marketing, and the
introduction of new products to the market, the Company will be able to increase
revenues over the long-term.
Costs and Expenses
Total costs increased from $910,200 to $1,084,076 when comparing the
years ended December 31, 1995 to 1996.
Programming costs decreased from $404,165 for the year ended December
31, 1995 to $268,915 for the year ended December 31, 1996. These costs decreased
as a direct result of the decrease in software sales and primarily encompassed
salaries and wages and license fees for the Company's main computer operating
system. General and administrative expenses increased from $365,760 for 1995 to
$657,062 for 1996. This increase was primarily a result of increased payroll due
to new hires for management and marketing. Research and development costs
increased from $140,275 to $158,099 when comparing 1995 to 1996. This increase
of 12.7% was due to increased payroll and related costs.
Income (Loss)
For the year ended December 31, 1996, the Company had a net loss of
$549,170, or $.29 per share. For the year ended December 31, 1995, the Company
had net income of $78,660, or $.04 per share. The principal reason for this
decrease in earnings is the 54.1% decrease in revenues as discussed above.
27
<PAGE>
Liquidity and Capital Resources
At December 31, 1996, the Company had cash of $286,497, accounts
receivable of $100,010, a current ratio of 1.4:1 and a negative net worth of
$210,400. At December 31, 1995, the Company had cash of $105,962, accounts
receivable of $218,466, a current ratio of 1.8:1 and net worth of $164,845.
Management of the Company attributes the decline in its financial position to
the net loss during the year ended December 31, 1996, as described previously.
In August 1996, the Company sold 480,300 of its Common Shares for
aggregate proceeds of $144,090. Payment for these shares was held in escrow
until the consummation of the Bridge Financing transaction which was completed
in October 1996 (as discussed below).
In October 1996, in a Bridge Financing transaction, the Company
successfully completed the sale of 77 units, each unit consisting of a $10,000
Bridge Note and a Bridge Warrant to acquire 5,600 Common Shares of the Company.
The Bridge Warrants are exercisable only upon the successful completion of an
initial public offering ("IPO") of the Company's Common Shares as discussed
below. Each of the Bridge Notes is due and payable upon the closing of the
contemplated IPO, i.e. this Offering. In the event such closing occurs on or
before September 15, 1997, no interest will be payable on the Bridge Notes. See
"Bridge Financing".
In January 1997, the Company entered into a secured credit facility
loan agreement (the "Credit Agreement") with Mark Honigsfeld, the Chairman of
the Board and Chief Executive Officer of the Company, which provides for the
Company to borrow up to $200,000. The Credit Agreement further provides that all
amounts borrowed shall be repaid in full, together with accrued interest, (i)
upon the closing of this Offering, if the Offering closes prior to June 1997, or
(ii) otherwise, in equal quarterly installments commencing in June 1997 and
ending in June 1999, subject to acceleration in the event of the closing of the
Offering. Interest accrues on the unpaid principal amount at the rate of 10% per
annum. The Company has the option to prepay any outstanding principal and
accrued interest at any time, without penalty, in amounts no less than, and in
multiples of, $5,000. The Credit Agreement is secured by a first priority
security interest in all the assets owned by the Company. At the date of this
Prospectus, the Company has borrowed all $200,000 available under the Credit
Agreement, all of which is outstanding.
A portion of the net proceeds of approximately $3,875,000 from this
Offering will be used for product enhancement and development, to repay the
Bridge Notes, to repay the borrowings under the Credit Agreement, for marketing
and advertising, for hiring and training of additional personnel and for the
purchase of equipment. See "Use of Proceeds".
Even though revenues have been declining and the trend of declining
revenues is expected to continue, in September 1996, the Company moved its
facilities to new and more costly space (see "Business - Facilities" and
"Financial Statements, Note 10a") and has signed new compensation agreements
with certain key employees (see "Management - Employment Agreements" and
"Financial Statements, Note 10d"). Both the new space and the continued
employment of these key
28
<PAGE>
individuals are needed in order for the Company to develop new, and enhance
existing, products and to grow in the future. There can be no assurance,
however, that either of these commitments will result in increased revenues and
earnings. Until such time that the Company significantly increases revenues, the
new lease and compensation agreements are likely to result in continuing
operating losses.
The Company currently has no planned capital commitments.
Cash Flows - Year Ended December 31, 1996 versus 1995
For the year ended December 31, 1996, cash utilized by operating
activities was $289,383 as compared to $50,654 of cash provided by operating
activities for the prior year. This is primarily a result of higher software
sales generated in 1995 as compared to 1996 thereby generating more receipts
from customers.
For the year ended December 31, 1995, $32,712 was utilized for
investing purposes, primarily for the purchase of fixed assets. For the year
ended December 31, 1996, $176,609 was utilized for investing activities
primarily for purchases of fixed assets and for a loan to an officer.
For the year ended December 31, 1996, cash provided by financing
activities aggregated $646,527, primarily due to the completion of the Bridge
Financing in October 1996 in the amount of $770,000. The Company utilized cash
of $98,063 for the year ended December 31, 1995 primarily due to payments of
debt and the repurchase of Common Shares from former shareholders.
Other
The Company believes that the cash it generates from operations, and
the expected net proceeds from this Offering will be sufficient for at least the
ensuing 12 month period.
Inflationary Impact
Since the inception of operations, inflation has not significantly
affected the operating results of the Company. However, inflation and changing
interest rates have had a significant effect on the economy in general and,
therefore, could affect the operating results of the Company in the future.
Forward Looking Statements
Except for historical information contained herein, the matters set
forth above contain forward looking statements that involve certain risks and
uncertainties that could cause actual results to differ from those in the
forward looking statements. Potential risks and uncertainties include such
factors as the level of spending by law enforcement and public safety agencies
for computer application software and hardware, the competitive environment
within the industry, the ability of the Company to expand its operations, the
competency required, and experience, of management to
29
<PAGE>
effectuate the Company's business plan, the level of costs incurred in
connection with the Company's planned expansion efforts, economic conditions in
the industry and the financial strength of the Company's customers and
suppliers.
BUSINESS
Introduction
The Company is primarily engaged in the business of designing,
developing, licensing, installing and servicing computer application software
systems for law enforcement and public safety agencies. The Company's software
systems include computer-aided dispatching ("CAD"), computer interfacing with
local, state and national crime information databases, advanced wireless mobile
on-line communications computing ("AMO") (utilizing radio frequency), automatic
vehicle location ("AVL") (employing dynamic map displays), records management,
and photo-imaging database systems. These modules may be integrated and licensed
as a package, or may be licensed individually.
Certain of these applications utilize telecommunications and space
satellite technology, other infrastructure, and hardware provided by third
parties. The third party providers of such technology and infrastructure with
respect to a particular customer's system, vary depending on the location of the
customer and whether or not the customer has a business relationship with a
third party provider. Accordingly, the Company is not dependent on any
particular third party's technology or infrastructure for its software systems
to function. These third parties are typically major CDPDs (cellular digital
packet data providers) such as AT&T, Bell Atlantic, NYNEX, and GTE, or dedicated
radio frequency data network providers such as RAM Mobile Data and Motorola. The
Company's AMO system requires computer hardware and services from third party
providers, and interfaces with dedicated radio frequencies owned by the
Company's customers which require special radio equipment provided by companies
such as Motorola, Inc. and Dataradio Corp. The Company's customers may purchase
such technology, infrastructure, services and hardware directly from these
providers, and with respect to radio equipment, through authorized dealers as
well.
The Company's software is compatible with virtually all operating
systems. The Company has installed its systems in more than 55 agencies,
primarily law enforcement agencies located in the state of New York. The Company
provides a full range of product support and maintenance services, both on-site
and by remote connection.
30
<PAGE>
Industry Background
The goal of law enforcement and public safety agencies is to maximize
the safety and improve the quality of life of people and communities. The
effectiveness of a law enforcement or public safety agency is dependent on its
personnel and resources. Such effectiveness is enhanced by maximizing the patrol
time of agency personnel, and the availability of timely, accurate and reliable
information. This allows services to be provided in an efficient, cost-effective
manner. Computer technology is an important tool for providing information to
law enforcement and public safety personnel, reducing administrative time and
streamlining procedures, to support an agency's strategic and operational goals.
Generally, a law enforcement or public safety agency's strategy is not
geared to one overall plan for an entire community, but is based on several
individual plans addressing the unique needs of the neighborhoods that comprise
that community. Agencies need the ability to maximize their resources, customize
information, analyze crime information by sector, district and area, and analyze
repeat call areas that tax agencies' resources. Additionally, agencies have a
need to respond to incidents and 911 calls as rapidly, efficiently and cost
effectively as possible.
Computer technology has been developed for the public safety market to
address these needs. CAD systems, integrated with enhanced 911 ("E911") systems,
allow a dispatcher to retrieve information about the 911 caller, and the
location and the individuals involved in the incident being reported. Mobile
wireless communication systems in vehicles provide agency personnel in the field
with the ability to receive information regarding an incident and the people
involved, such as location, "mug shots" and photographs, and arrest and booking
data. Such systems also enable such personnel to go "on-line" with the agency's
database, and with other vehicles, in real time. Wireless communication systems
also provide personnel with the capability to file reports from their vehicles
instead of having to return to the station. This increases personnel time and
visibility in the community. AVL system technology provides a dispatcher with
the capability of immediately identifying the location of the most appropriate
vehicle to investigate an incident, significantly shortening response time.
Without an AVL system, a dispatcher has to alert the vehicles in the field of an
incident and then wait, as they report their location and/or availability,
before determining which vehicle would be the most appropriate to respond to an
incident. Information sharing technology allows agencies to link their databases
to local, state and national crime databases to access information for more
in-depth and efficient investigation of incidents. Records management and
photograph imaging systems for law enforcement agencies make arrest and booking
procedures and incident investigations more efficient, while similar systems for
fire and EMS departments contribute to the efficient deployment of firefighting
and emergency equipment and investigation of incidents. Without a computerized
records management system, records and reports would need to be handwritten or
typed, and physically stored in various filing cabinets, file rooms, or on
microfilm or microfiche. In such form, such reports are comparatively error
prone, and may be misplaced or unavailable, which makes retrieval difficult and
time consuming. Computerized records systems allow for easy entry and retrieval,
and increased productivity, enabling agency personnel to spend more time "on the
beat" in the community.
In essence, the foregoing computer technology enables law enforcement
and public safety agencies to allocate and utilize resources and manpower hours
to maximize their goal of public safety.
The Company believes that the market for application software and
technology products utilized in the law enforcement and public safety market is
growing due to (i) an increased public
31
<PAGE>
and governmental priority for law enforcement and public safety, (ii) an
awareness that specific computer technology for the law enforcement and public
safety market now exists, (iii) the availability of federal funding assistance
to obtain computer equipment and technology, (iv) breakthroughs in development
of new mobile wireless computer communications technology and (v) acknowledgment
by certain agencies that computer-aided law enforcement has contributed to a
recent drop in crime rates, and the ability to effectively handle increasing
incidents of crime without increasing personnel. For example, The New York Times
recently reported that New York City's mayor and top police officials attribute
that city's drop in crime rate, in part, to a series of new police strategies
which includes, among other things, the use of computer technology that has
allowed the police department to identify crime patterns much more quickly and
flood problem streets with undercover and beat officers. Also, the City of
Chicago has installed an E911 dispatch system which has contributed to a recent
decline in crime. In addition, the City of Glens Falls, New York, a customer of
the Company, recently advised the Company that, although incidents of crime had
increased, its computer system enabled the police department to effectively
respond to, and handle, these incidents without increasing personnel.
Development of Technology
The Company's current technology has been developed and enhanced over
approximately an eight year period by Dong H. Lew, the Company's President, Alan
Daniels (the Company's founder and former president) and technicians employed by
the Company. Mr. Daniels no longer has any daily involvement with the operations
or research and development activities of the Company; however, he is available
as needed by the Company, from time to time, pursuant to an informal arrangement
to provide consulting services on technical issues and software programming on
an hourly basis. The Company's technology is not patented or covered by any
registered copyrights; however, its software programs are copyrighted under
common law. The Company does not license any technology from third parties other
than technology for certain operating software. The Company continually
undertakes research and development, under the supervision of Mr. Lew, and Louis
Libin, the Company's Chief Technology Officer, to develop new, and enhance
existing, technology and products. The Company cannot, however, give any
assurance that it will develop any new products or technology, or enhancements
for existing products and technology, or that the Company will have the services
of Mr. Lew or Mr. Libin indefinitely. If it does develop or enhance any products
or technology, the Company cannot predict the pace or time period of such new
developments or enhancements, the costs relating to such research and
development (which could be significant or prohibitive), or the availability of
qualified technical personnel. See "Risk Factors Evolving Market; New Product
Development; Technological Obsolescence", "Risk Factors Intellectual Property
Protection and Infringement", "Risk Factors - New Management Team; Dependence on
Executive Management; Need to Retain Key Personnel" , "Risk Factors Dependence
on Licensors" and "Business - Intellectual Property Rights and Licenses".
Products and Services
Products
The Company's software products consist of CAD systems, computer inter-
face systems which connect the customer's computer system to local, state and
national crime information databases, AMO communication systems utilizing radio
frequency, AVL systems employing dynamic map displays, records management
systems, and photo-imaging database systems. Certain
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of the Company's software systems also interface with and utilize space
satellite technology, telecommunications technology, computer hardware and other
infrastructure provided by third parties. The Company's software is compatible
with virtually all operating systems, utilizing a variety of software, including
Windows(R) and Unix(R). The Company's software also allows linkage of its
products to mainframe systems and is adaptable to both small and large hardware
systems.
The Company markets its products to law enforcement agencies under the
ALECS 2000(TM) (Advanced Law Enforcement Computer System) product line and to
fire and EMS departments under its AFFECT(TM) (Advanced Firefighter Computer
Technology) product line.
The Company licenses its software to customers in modules pursuant to a
perpetual license. Customers may acquire all the modules as an integrated "total
solution" package, or any of the modules individually, on a stand alone basis or
as an addition to, or as a replacement for, an existing system. The software
modules licensed from the Company can be integrated with the customer's other
software systems. The Company's "total solution" package of integrated modules
maximizes efficiency since data entered into one module will be available in all
modules in real time. A hybrid network comprised of certain of the Company's
modules and other software systems may require data to be entered into the
Company modules and other software systems separately.
The price to the customer of the Company's products, whether a "total
solution" package or individual modules, varies depending on several factors,
including the need for, and existence of, communication infrastructure in the
customer's jurisdiction (such as radio towers necessary for AMO radio frequency
modules), volume of use of telecommunications systems (such as telephone lines
and radio cells), and the customer's computer hardware requirements to implement
the software system.
The Company's ALECS 2000(TM) product line for law enforcement and its
AFFECT(TM) product line for fire and EMS are similar in many respects. Both
address the reporting of incidents, the dispatch of resources and the deployment
of personnel.
The Company's modules are described below. See "Business - Customers".
Computer-Aided Dispatching - CAD and AVL
The Company's CAD system, under both the ALECS 2000(TM) and AFFECT (TM)
product lines, integrates several software and communications technologies, such
as E911 dispatch systems, mapping software integrated with global positioning
systems for vehicle tracking, and geo-based mapping systems, which include
street addresses and intersections, longitude/latitude, and other information to
identify the locations and addresses of incidents. The integration of these
systems with the Company's CAD software provides to police and other public
safety agencies the capability to respond rapidly and efficiently to incidents,
and streamlines record management, enhancing productivity and accuracy of record
keeping. The Company is currently developing visual CAD software (known as
V-CAD, or Visual Computer-Aided Dispatching), which provides the dispatcher with
touch screen graphical interfacing, allowing for a more user-friendly
environment.
The CAD system allows the dispatcher receiving the E911 call to
immediately identify the caller's telephone number, the related address, and the
name of the telephone number owner (unless the call is made from a cellular
phone). The CAD system enables the dispatcher to access any
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records maintained in the agency's database relative to that person or the
location of the incident (e.g. gun permit issued, prior domestic violence or
prank calls).
Once a decision is made to dispatch a vehicle to an incident, a record
is created and the location of the incident appears on a computer-generated map
of the area. Using AVL software, which links the customer's system and a
receiver in each of the customer's vehicles to GPSs (global positioning
satellites), the map also shows the position of vehicles "in the field" which
are available to respond to the incident. The dispatcher can then select the
closest available vehicle to respond to the incident and can observe the
movement of that vehicle as it responds to the call.
Wireless Mobile Data Communications System - AMO
The Company has recently developed and begun to market a wireless AMO
data communications system which permits "on-line" real time access between
vehicles in the field and the central database, between the central database and
local, state or national databases, crime information centers and other
centralized computer records, and between vehicles. The Company's AMO system
employs radio frequency networks (i.e. private radio networks, public radio
networks, and cellular and short range spread spectrum technology) to provide
complete communication and access from the vehicle to the central databases as
well as vehicle to vehicle. The Company's AMO system allows the agency's
personnel to log onto the customer's central database directly from their
vehicles and have access to all information in such central database.
Additionally, the AMO technology provides capability for the agency's personnel
to input information into the agency's database directly from their vehicles,
and transfer or access information from vehicle to vehicle. In comparison, other
currently existing competitive mobile data access systems do not provide for
on-line and real time access to information between vehicles and the central
databases, but only allow for the transmittal of batch data from the central
databases to vehicles and vice versa. AMO employs unique "text to voice"
technology which converts data received by the vehicles' systems from text into
voice data, and, by voice recognition, converts voice commands into text to be
sent to the dispatcher. This enhances the safety of vehicle operators since they
can receive and give information without having to divert their attention to
read a computer screen or input information by keyboard. Furthermore, the main
police, fire and EMS radio channels are not employed and remain available.
AMO, through the use of photo imaging technology, allows "mug shots" to
be rapidly made available at a crime or incident scene, or the personnel at the
scene can create a permanent computer photograph record of the accident or crime
scene and transmit it directly into the agency's central database or to other
vehicles.
The Company intends to use a portion of the net proceeds from this
Offering to develop a radio modem to be used in connection with the Company's
AMO system and other mobile computing software systems. However, the Company
cannot assure that it will be successful in developing such a radio modem. See
"Use of Proceeds".
The Company has sold AMO systems to, and installed such AMO systems in,
Onondaga County (New York) for its E911 department which covers multiple
agencies such as police, fire and EMS departments, the Putnam County (New York)
Sheriff's Department, the Johnson City Police Department (in Broome County, New
York), the Glens Falls Police Department (in Warren County, New York) and the
Long Beach and Garden City Police Departments (in Nassau County, New York). See
"Business - Customers".
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As a recently developed product, AMO is subject to the risks inherent
in the development of new technology, including unanticipated delays in
implementing the system, expenses, technical problems or difficulties and the
possible insufficiency of funding to complete development. See "Risk Factors -
Evolving Market; New Product Development; Technological Obsolescence".
Records Management
The Company's records management systems for law enforcement and other
public safety agencies offers a wide range of options and flexibility to fit an
agency's needs and budget. The ALECS 2000(TM) records management system
processes data from the incident report through prosecution, and is made up of
component sub-modular units, including a records management system, a
photograph/"mug shot" imaging system, a parking violation system, and a false
alarm billing system. The AFFECT(TM) records management system processes data
from the incident report through closing the investigation, and also provides
information such as the location of resources, including, without limitation,
hydrants and secondary sources of water (such as ponds, lakes, rivers, and
seawater access), foam and other chemical fire extinguishing material, hoses and
jaws-of-life.
As discussed above, the Company's records management systems obviate
the need for handwritten or typed reports and physical filing systems which are
cumbersome, error prone, and make for difficult and time consuming information
retrieval.
Local Court Records Management and Sheriff's Records Management
The Company's products also include records management systems which
are specifically designed for local courts and sheriff departments. The local
court records management system records summonses, tracks fines payable and
enters the appropriate dates on court calendars. The sheriff's records
management system provides several functions through the following sub-modules:
civil warrants/attachment records management, pistol permit records management,
photo imaging/booking for county jails, property records management, jewelry
recovery and pawn shop records management, and police academy records
management. One of the goals of this technology is to streamline procedures and
allow for more efficient allocation of resources and manpower hours.
Services
Installation
System installation is an integral part of the Company's services. The
Company's installation procedure commences with an in-depth consultation with
the customer to determine the appropriate modules needed to meet the customer's
particular requirements within budgetary parameters. Once the customer's needs
have been identified, the Company provides customized system design and file
creation. The Company then implements the system, undertakes system start-up and
provides training for the customer's personnel in the operation of the Company's
software products. Customer training is conducted either at the customer's site
or at a remote location, and can range up to several days, depending on the
customer's particular system.
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Support and Maintenance
The Company provides post-installation system software maintenance and
training support for all of its software products. The Company's systems support
teams, which include communications and software technicians and program
developers, are available to assist customers via telephone access, 24 hours a
day, seven days a week, 52 weeks a year, and provide on-site support, pursuant
to a software maintenance agreement. Software updates and enhancements to the
modules are included under maintenance contracts. Customers pay the Company a
set monthly service fee (currently ranging between 1% and 2% of the installation
contract value) which is dependent on the extent and complexity of the
customer's system. Currently, the Company has maintenance agreements with all of
its customers. During the fiscal years ended December 31, 1995 and 1996, support
and maintenance income represented approximately 21% and 58%, respectively, of
the Company's revenues. See "Business-Customers".
Possible Future Acquisitions
In addition to the foregoing products and services, the Company intends
to explore opportunities to add, through acquisition or licensing, technology or
products to enhance or add to its current product line, or to acquire a customer
base or sales organization to augment the Company's infrastructure. The Company
is not actively seeking any acquisition at this time. In exploring a potential
acquisition or license, the Company will consider, among other criteria, the
comparative cost to the Company in capital, resources and personnel to create
the identified technology or product, or establish the targeted customer base or
sales organization, restrictions on the Company developing similar technology or
products arising from patent or other intellectual property protection, and the
synergy of the identified technology or products with the Company's products and
organization. At present, the Company has not identified any acquisition or
license candidates and it does not have any current plans, proposals or
arrangements with respect to any acquisitions; however, it is actively seeking
such candidates. There can be no assurance that the Company will identify any
acquisition or licensing candidates or, if it does, that it will be able to
reach any agreements to acquire or license technology or products, or acquire
assets, on terms acceptable to the Company. With respect to possible
acquisitions or licensing agreements, the Company may, from time to time, enter
into agreements with related parties (of which none are presently contemplated).
In such case, the Company anticipates that the terms of such agreements will be
commercially reasonable and no less favorable to the Company than the Company
could obtain from unrelated third parties. Additionally, the Company intends
that such agreements will be approved by a majority of disinterested directors.
See "Risk Factors - Challenges to Growth; Unascertainable Risks Related to
Possible Acquisitions" and "Use of Proceeds".
Intellectual Property Rights and Licenses
The Company's products are based on approximately 3,000 interdependent
software application programs and system utility modules, including software
developed for creating applications of the modules. The Company's technology is
not patented; however, its software programs are copyrighted under common law.
The Company has not registered any of its common law copyrights with the United
States Copyright Office. The Company believes that it takes at least two to
three months of training for a programmer to grasp the complete structure of the
Company's software. The Company requires every employee to sign an agreement of
nondisclosure and assignment of development rights. While large software vendors
have instituted lawsuits to protect intellectual property rights to software
against infringers, the Company believes that, in its case, the complexity and
total system integration of the Company's products best protects its trade
secrets.
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There can be no assurance that the intellectual property and contractual rights
on which the Company relies to protect its intellectual property and
confidential and proprietary information will provide it with meaningful
protections. See "Risk Factors - Intellectual Property Protection and
Infringement".
The Company utilizes certain operating system software (written in the
"M" computer programming language and owned by Intersystems, Inc.
("Intersystems")), in the development of its software systems. The Company uses
such operating system software pursuant to a perpetual license which allows the
Company to use such software to create its software modules, and, in some cases,
to "bundle" such operating system software with its own software as part of its
software products. The Company pays Intersystems a monthly fee to sublicense
such operating software (based on the number of product units in which
Intersystem's operating system software is included), and an annual fee to use
such operating software to create software (based on the number of product units
for which the third party's operating system software is used to create). The
termination of this license could have a material adverse effect on the
Company's ability to produce and deliver its software products on a timely
basis. If such license is terminated, the Company would be required to license
alternative operating system software. The Company believes alternative
operating system software written in different versions of the "M" computer
programming language is owned by, and currently available from, other sources.
However, the Company would have to revise its software to make it compatible
with such alternative operating system software, which the Company believes
would result in production and delivery delays of approximately three to six
months. See "Risk Factors - Dependence on Licensors".
Sales and Marketing
According to the National Directory of Fire Chiefs and Emergency
Department (1993) and the National Directory of Law Enforcement Administration
(1996), the national law enforcement and public safety market is estimated to
have more than 18,000 law enforcement agencies and more than 35,000 fire
departments. Based on management's exposure to the marketplace, the Company
believes that the majority of such agencies currently have limited or no
computerization of their law enforcement and public safety activities. The
Company believes that mobile wireless computer communications, computer-aided
dispatching, integrated mapping and photo-imaging technology have not been
marketed extensively to a majority of these agencies.
The Company intends to implement the following marketing strategy with a
portion of the proceeds of this Offering, although no assurances can be given
that, if such marketing strategy is implemented, it will be successful. See
"Risk Factors - Limited Sales and Marketing Experience" and "Use of Proceeds".
Direct Marketing
The Company currently participates to a limited extent in public safety
conferences and trade shows, holds regional seminars, presents and conducts
demonstrations, and conducts targeted mailings and phone campaigns. The Company
intends to expand such direct marketing significantly following the consummation
of this Offering.
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Current Customers
Generally, once a system is designed and installed for a customer, there
is little repeat business other than maintenance and support, and the provision
of software enhancements or updates. Accordingly, the Company intends to
intensify sales efforts to current customers for add-on products and to obtain
references for other prospective customers, a strategy which has been somewhat
successful with current sales resources. See "Business-Customers".
Subcontracting and Business Partnership Opportunities
The Company is pursuing a strategy whereby it would create business
co-ventures and subcontractor relationships with large system integrators and
public network service providers such as IBM, AT&T, Bell Atlantic, Motorola, RAM
and GTE, in order to have the resources needed to establish a presence in the
"large size" market segment (i.e. departments or agencies with more than 200
sworn officers or personnel). See "Business - Customers". No assurances can be
given that the Company will develop such relationships or derive future revenues
from any such affiliations. The Company monitors governmental announcements of
officially published requests for proposals ("RFPs") to find business co-venture
or subcontracting opportunities. The selection of the appropriate large system
integrator by the Company as a potential business co-venturer or prime
contractor often depends on the specifications in the RFP. The Company intends
to contact large system integrators to demonstrate its product capabilities and,
more importantly, to establish a credible presence for participating in "large
size" market segment projects. Although, in the past, the Company has had some
success in partnering with large system integrators, no assurance can be given
that the Company will be viewed by these entities as an acceptable business
co-venturer or subcontractor in the future. If the Company is unable to
establish such a business relationship, its plans to expand into the "large
size" market segment may be delayed or hindered due to a limitation of resources
needed to respond competitively to RFPs or to meet "large size" market segment
agency requirements. See "Risk Factors - Limited Sales and Marketing Experience"
and "Business - Competition".
Increase in Sales Staff
Until recently, the Company had no sales staff and sales efforts were
conducted by one of the Company's principals and its project manager. Since the
closing of its Bridge Financing, the Company has retained two full-time sales
associates. The Company intends to use a portion of the proceeds of this
Offering to increase sales staff in order to penetrate geographic markets beyond
New York. In addition, the Company intends to engage a marketing support person,
a technical training specialist, a technical writer and other individuals to
coordinate installations, handle subcontract relations with large system
integrators, and provide technical sales support. See "Risk Factors Challenges
of Growth; Unascertainable Risks Related to Possible Acquisitions", "Risk
Factors Limited Sales and Marketing Experience" and "Use of Proceeds".
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Customers
The Company has installed software systems for, and provides maintenance
and support services to, 57 customers, 53 of which are law enforcement agencies
and four of which include fire and EMS departments. The following customers
accounted for the following percentage of software sales revenues for the fiscal
year ended December 31, 1995: Onondaga County (New York), 42.8% and the Queens
County (New York) District Attorney, 21.4%. No other customer accounted for 10%
or more of the Company's software sales during such period. The following
customers accounted for the following percentages of software sales for the year
ended December 31, 1996: Madison County (New York), 28.2% and Westchester County
(New York), 18.6%. No other customer accounted for 10% or more of the Company's
software sales during such period. The project undertaken by the Company for
Onondaga County is described below. The Company provided consulting services to
the Queens County District Attorney's Office with respect to the conversion of
an early dialect of the "M" Computer programming language running on that
agency's old hardware system to a current standard version of "M" running on a
high-speed multi-processor Unix(R) computer. The Company sold to, and installed
in, Madison County a records management system, a CAD system, and a specialized
version of a network wireless radio system between fixed points, for that
County's fire department. The Company sold to, and installed in, Westchester
County a records management system, a CAD system, a photo imaging system and
special modules such as civil warrant processing, jury duty processing, pawn
shop records and police academy records. The Company does not rely on past
customers for future revenues from sales and installations of software systems.
Accordingly, the Company will not suffer any material adverse effect if the
Company does not sell software systems to such customers in the future.
Based on the experience of management in the marketplace, management's
discussions with a senior New York State Division of Criminal Justice Services
official and an E911 consultant to a major telecommunications company, a recent
referendum in Bergen County, New Jersey supporting the regionalized sharing of
services by towns and municipalities, and the specifications of RFPs received by
the Company soliciting bids for law enforcement and public safety software
systems, the Company believes that there is a trend away from town and
municipality dispatching and toward county-wide dispatching. As a result of this
trend, the Company believes that there will be a need in the future for
comprehensive public safety systems which will address and integrate the needs
of police, fire and EMS departments. As a "total solution" software system
provider, the Company believes that, with the proceeds of this Offering and the
successful implementation of its marketing plan, it will be in a position to
meet such needs. See "Risk Factors - Dependence on Significant Customers", "Use
of Proceeds" and "Business - Sales and Marketing".
Typically, a customer will procure a software system from the Company
under a perpetual license, pursuant to which the Company will be paid a
percentage of the license fee at the time the contract is entered into, and then
will receive further installments as certain performance milestones are met,
until completion of the contract. After the contract is completed, any further
revenues from that customer are usually derived from a maintenance and support
contract. From time to time, however, the Company may receive additional
contracts from an existing customer for add-on modules, an aspect of business
which the Company intends to market more aggressively in the future. See
"Business-Sales and Marketing".
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The length of time that it takes to complete a systems installation
contract varies (generally from three to twelve months), depending on the nature
and complexity of the system and the customer's internal procurement procedures.
During the period of time that installments are being paid, the customer, or a
small number of customers with contracts in progress, may account for a
significant percentage of the Company's revenues. However, once those contracts
are completed, such customers will no longer represent a material portion of the
Company's future revenues. Accordingly, the Company does not rely on such
customers for a continuing revenue stream and the Company does not believe that
the make-up of its current significant customers is material to an understanding
of the Company's future business prospects. However, the Company anticipates
that at any particular time a limited number of large customers will continue to
represent a significant portion of its revenues for the foreseeable future. See
"Risk Factors - Lengthy Sales Cycle", "Risk Factors - Evolving Market; New
Product Development; Technological Obsolescence", "Risk Factors - Significant
Customers" and "Business - Sales and Marketing".
The following two examples are illustrative of the diverse application of
the Company's products and services:
(i) The Onondaga County Police Department utilizes an AMO
application, designed, developed and installed by the Company, which links over
700 police, fire and EMS vehicles. For this project, the Company was retained by
International Business Machines Corp. ("IBM") as a subcontractor to design,
develop, install and service all the required AMO software. The project included
integration by the Company of IBM and Digital Equipment Corp. hardware which
already contained application software provided by other subcontractors for both
records management and computer-aided dispatch; and
(ii) The Company, as prime contractor, designed, developed and
installed a "total solution" system for the Putnam County Sheriff's Office, a
comparatively small agency of seven vehicles. The system consisted of a records
management system, a CAD system and an AMO system.
Competition
The Company faces competition in the "small size" market segment (which
the Company views as departments or agencies with 20 or fewer sworn officers or
personnel) and the "medium size" market segment (which the Company views as
departments or agencies with 21 to 200 sworn officers or personnel) from
companies such as NewWorld Systems, Pamet Systems, Inc. and Software Corporation
of America. Although such competitors have significantly greater financial,
technical and other resources than those of the Company, the Company feels that
it has been able to compete successfully in such market due to its "total
solution" system integration technology and local presence, the Company having
installed systems in over 50 "small size" and "medium size" law enforcement
agencies in the state of New York. The Company believes further that, as it
expands its presence to other geographical areas and market segments, sales to
such agencies are likely to develop outside of its current primary market of New
York.
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The Company believes that more intense competition exists in the "large
size" market segment in which the system price ranges widely (between $1 million
and $100 million) depending on the size of the customer and the complexity of
the system (as compared to the Company's typical sale in the "small size" and
"medium size" market segments, which historically has ranged between $25,000 and
$350,000). The "large size" market is dominated by software vendors, such as PRC
Public Safety, Inc. and Systemhouse, Ltd., and large system integrators such as
IBM, Andersen Consulting, Electronic Data Systems and Harris Corporation. In
order to penetrate the "large size" market segment, the Company intends to
pursue business co-ventures or subcontracting relationships with large systems
integrators having greater financial resources and name recognition than the
Company. The Company believes that, in the future, through an extensive
marketing plan, it can build brand name awareness for its products and services.
The Company cannot, however, assure that it will be successful in this strategy.
See "Risk Factors - Competition" and "Business - Sales and Marketing".
The Company believes that the mobile wireless computer communication
technology sub- market is in its infancy. With the development of the Company's
AMO system utilizing radio frequency networks as discussed above, the Company
believes that, with sufficient resources, it will be capable of increasing its
sale price range to between $75,000 and $1 million per installation, depending
on the customer size and the extent and complexity of the system.
The Company further believes that large software companies, communication
equipment companies and computer hardware companies are currently not
concentrating their resources on the law enforcement and public safety market
because of that market's special requirements for secure radio operations and
the particular applications and expertise needed to meet those special
requirements. Additionally, most "large size" agencies have a general need for
highly specific customized systems and systems integration. Generally, such
companies that do have an interest in pursuing the law enforcement and public
safety markets look for a business partner, like the Company, that has the
necessary expertise to design and install law enforcement and public safety
systems. The Company also believes that, as a "total solution" provider in the
field of law enforcement and public safety computer technology, it is, subject
to obtaining the appropriate resources, positioned to develop generic
communications software protocols for secure on-line radio frequency mobile data
transmission basic to almost all mobile computers for police, fire and EMS
departments. See "Business - Products and Services" and "Business - Sales and
Marketing".
Employees
The Company currently has 16 full-time employees and one part-time
employee, including six software developers/programmers, one technical writer,
one marketing employee, three sales persons, and six executive and
administrative personnel. The Company also has two part-time industry
consultants. Management believes that its relations with its employees are
satisfactory.
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The Company's Product Development Group performs research and development
activities and its Customer Service Support Group handles installations,
maintenance and service. The Company's new customers are trained by consultants
who generally are retired and active-duty police officers from police
departments that have systems installed by the Company. The Company's daily
operations are managed by a software development manager, a manager of
operations, and a director of technology.
Facilities
The Company's executive offices are located at 77 Spruce Street,
Cedarhurst, New York where it leases approximately 5,000 square feet of space.
The premises are held pursuant to a five year double net lease expiring in
September 2001 that provides for a base annual rental of approximately $85,000.
The Company believes that its premises are adequate for its needs for the
foreseeable future.
MANAGEMENT
Executive Officers and Directors
The names and ages of, and the positions held by, the executive officers
and directors of the Company are set forth below.
Class of
Name Age Positions Held Directorship(1)
---- --- -------------- ---------------
Dong W. Lew 67 President, Chief Operating I
Officer, Treasurer and Director
Mark Honigsfeld 42 Chairman of the Board, Chief II
Executive Officer, Secretary
and Director
Louis Libin 38 Chief Technology Officer and III
Director
John P. Hefferon 51 Executive Vice President - Sales -
and Marketing
William D. Rizzardi 54 Director I
Robert Edward (Teddy)
Turner, IV 33 Director II
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(1) The Company's Certificate of Incorporation provides for three classes of
directors. The term of each class is three years except that the initial term of
office of the Class I directors will expire at the Company's annual meeting of
stockholders in 1997 and the initial term of office of the Class II directors
will expire at the Company's annual meeting in 1998.
Dong W. Lew
Mr. Lew joined the Company in 1988. He was elected a director
and the President in August 1992 and was elected Treasurer in August
1996. He graduated from the Massachusetts Institute of Technology
("M.I.T.") with a Bachelor of Arts Degree in Business and Engineering
Administration, and has over 25 years of experience in the computer
industry. From 1981 to 1988, Mr. Lew was an independent computer
consultant providing turnkey computer systems with custom software to the
manufacturing and publishing industries. Prior to 1981, he was employed
in computer systems design and managerial capacities by such firms as
Mergenthaler, Inc., Harris-Intertype, Inc., and Codesco International,
Inc.
Mark Honigsfeld
Mr. Honigsfeld joined the Company as Chairman of the Board,
Secretary and a director in August 1996 and, effective October 1, 1996,
he was elected Chief Executive Officer of the Company. In 1978, he
founded Facelifters Home Systems, Inc. ("FACE"), a cabinet manufacturing
and installation company for which he served as Chief Executive Officer
and Chairman of the Board until April 25, 1996. On such date, FACE, a
publicly-traded company, was acquired by a New York Stock Exchange
company in a transaction valued at approximately $70 million to FACE's
stockholders. Prior to the merger, FACE's revenues on an annualized basis
approached $50 million. As the founder, Chief Executive Officer and
Chairman of the Board, Mr. Honigsfeld was directly involved in the
planning and development of almost all areas of FACE's business,
including corporate finance, public offerings, investor relations,
mergers and acquisitions, licensing, product design and engineering,
sales and marketing, manufacturing, field installation, customer service,
management information services and management training. Prior to the
sale transaction, FACE had approximately 600 employees and associates
representing its products and services at 28 locations in 14 states,
approximately 135 telemarketing personnel, 180 direct sellers, 120
manufacturing employees and 165 supervisory, management and
administrative personnel. In addition, FACE had working arrangements with
approximately 175 independent contracting companies nationwide. Mr.
Honigsfeld holds a Bachelor of Science Degree in Industrial Arts, magna
cum laude, and a Master of Science Degree in Industrial Arts, with
honors, from City College of the City University of New York.
43
<PAGE>
Louis Libin
Mr. Libin joined the Company in January 1997 on a per diem basis
as Chief Technology Officer and a director. Effective March 10, 1997, he
began to serve as the Company's Chief Technology Officer on a full-time
basis. Since 1989, Mr. Libin has represented the United States on
satellite and transmission issues at the International Telecommunications
Union (the "ITU") in Geneva, Switzerland. Mr. Libin has also been
Chairman of the Expert Group On Broadcast Interactive Services of the ITU
since 1991. Since 1987, Mr. Libin has served as the Director of
Technology specializing in broadcast transmission systems for the General
Electric Corporation ("GE"). Since 1995, Mr. Libin has also served as
Assistant Secretary of all GE's wholly-owned subsidiaries that are
involved in broadcast media, with the responsibility for technical
developments and all Federal Communications Commission (the "FCC") issues
and licenses. From 1983 to 1986, Mr. Libin was a project manager for
Radio Corporation of America ("RCA") until RCA's acquisition by GE. From
1981 to 1982, Mr. Libin was employed by the Loral Corporation as an
electronic design engineer where he designed radio frequency systems for
the United States military. From 1980 to 1981, Mr. Libin was a design
engineer for the Chryon Corporation, a computer graphics company. From
1979 to 1980 he worked for Burroughs Computer Systems, Inc. (now part of
Unisys) as a field engineer. Additionally, since 1988, Mr. Libin has
acted as a consultant and advisor to the FCC in connection with the
planning of communications systems and logistics for major events in the
United States and abroad, including political conventions, presidential
inaugurations, and the Olympics. Mr. Libin is an active member of the
National Society of Professional Engineers and the Association of Federal
Communications Consulting Engineers. He also sits on the Engineering
Advisory Board of the National Association of Broadcasters. Mr. Libin
received a B.S.E.E. Degree in Electrical Engineering from the Pratt
Institute and a Master of Science Degree in Optical Electronics from
M.I.T. in 1991.
John P. Hefferon
Mr. Hefferon joined the Company in October 1996 as Executive
Vice President - Sales and Marketing. From January 1973 to January 1987,
he served in various positions with Wang Laboratories, Inc. ("Wang
Laboratories"), including sales representative, branch manager, district
manager, Atlantic area director and Eastern Regional Vice President -
Sales and Marketing of Wang Financial Information Services Corporation, a
subsidiary of Wang Laboratories (a position he held for eleven years).
From January 1987 to November 1988, Mr. Hefferon worked for Computer
Leasing, Inc. where he was involved in arranging lease financing for
multi-million dollar IBM mainframes in the Fortune 500 marketplace. From
late 1988 through March 1990, Mr. Hefferon was Eastern Regional Director
for Imnet, Inc., a start-up imaging software company. From March 1990 to
August 1995, Mr. Hefferon served in several executive sales and marketing
positions with Allerion, Inc., a network systems integrator. From August
1995 to October 1996, Mr. Hefferon served as Vice President - Sales of
Ultradata Inc., an application software company.
44
<PAGE>
William D. Rizzardi
Mr. Rizzardi joined the Company in January 1997 as a director.
Since December 1996, Mr. Rizzardi has been the President of Environmental
Solutions Corporation, a bio- remediation company. From 1995 to 1996, Mr.
Rizzardi was an independent management consultant to the Long Island
Research Institute, a not-for-profit technology development laboratory.
From 1979 to 1994, Mr. Rizzardi held various positions with Northrop
Grumman Corporation and its affiliates, including a Vice President of
Grumman Data Systems Division, where he was responsible for the
development, operations and support of all information systems for the
Grumman Corporation, Corporate Vice President of Information Management
and Chief Information Officer of Grumman Data Systems Division, and a
Vice President of Northrop Grumman Corporation - Data Systems and
Services Division following the acquisition of Grumman Corporation by
Northrop Corporation. Mr. Rizzardi received a Bachelor of Science Degree
in Nuclear Physics from City College of the City University of New York
and a B.S.E.E. Degree in Management from the Sloan School of M.I.T.
Robert Edward (Teddy) Turner, IV
Mr. Turner joined the Company as a director in February 1997.
Since June 1993, Mr. Turner has been the Southeast Regional Sales
Manager, and then the Promotions Manager, of Turner Home Entertainment, a
domestic home video company. From June 1990 to June 1993, Mr. Turner was
the President of Challenge America, Ltd., where he founded the United
States' First Campaign for Entry in the Whitbread Round The World Race (a
32,000 mile, nine month professional sailing race), and created that
company's promotional materials and managed its public relations. From
March 1989 to June 1990, Mr. Turner was the Vice President, Sales and
Marketing of Country Music Television, during which time that cable
network's advertising revenues grew from less than $2,000,000 to over
$6,000,000, and its cable system distribution grew from less than
6,000,000 subscribers to over 14,000,000 subscribers. From September 1987
to February 1989, Mr. Turner was Special Projects Manager for Turner
Broadcasting System, Inc. ("TBS"), a cable television network, where he
developed, produced and packaged special programs and was involved with
all of TBS's Soviet relations, the Goodwill Games and various other
national and international corporate projects. Mr. Turner holds a
Bachelor of Science Degree in Business Administration from The Citadel.
Mr. Turner sits on the Board of several foundations and trusts, including
The Turner Foundation, Inc., Jane Smith Turner Foundation, Southeast Land
Preservation Trust and TEAM - The Exceptional Athlete Matters.
Each director will hold office until the next annual meeting of
stockholders during the year in which the term of his class of directorship
expires and until his successor is elected and qualified. Executive officers
serve at the pleasure of the Board of Directors. See "Risk Factors - Control of
the Company" and "Certain Relationships and Related Transactions".
There is no family relationship among any of the Company's executive
officers and directors.
45
<PAGE>
Executive Compensation
The following table provides summary information concerning cash and
certain other compensation paid or accrued by the Company to, or on behalf of,
Mr. Lew, the Company's President, and Mr. Honigsfeld, the Company's Chairman of
the Board and Chief Executive Officer, during the last three fiscal years. Mr.
Honigsfeld was elected Chairman of the Board and Chief Executive Officer in
August 1996 and October 1996, respectively. No other executive officer of the
Company had a combined salary and bonus in excess of $100,000 for the year ended
December 31, 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
----------------------------------- ----------------------
Awards Payouts
---------------------- -------
Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principal Positions Year Salary Bonus Compensation Award(s) Options Payout Compensation
- ------------------- ---- ------ ----- ------------ -------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark Honigsfeld (1) 1996 $62,500(2) - - - 233,000 - -
Chairman of the Board, 1995 - - - - - - -
Chief Executive Officer 1994 - - - - - - -
and Secretary
Dong W. Lew (3) 1996 $87,500(4) $15,000(5) - - 156,950 - -
President and 1995 $70,980 - - - - - -
Treasurer 1994 $70,980 - - - - - -
- --------------
</TABLE>
(1) Mr. Honigsfeld was elected Chief Executive Officer of the Company and was
entitled to compensation effective as of October 1, 1996.
(2) Represents accrued and unpaid salary relating to 1996 (based on a salary
of $250,000 per annum) which is payable on the earlier of the closing
date of this Offering or on December 15, 1997. In the event this Offering
is not closed by December 15, 1997, the amount payable to Mr. Honigsfeld
will be deferred over a 120 month period (subject to acceleration in the
event of a subsequent consummation of the Offering). See "Management -
Employment Agreements".
(3) Mr. Lew acted as the Company's Chief Executive Officer during 1994, 1995 and
the period January 1, 1996 to September 30, 1996.
(4) Based upon a salary of $75,000 per annum from January 1, 1996 to September
30, 1996 and $125,000 per annum from October 1, 1996 to December 31, 1996.
46
<PAGE>
(5) Represents an accrued and unpaid signing bonus relating to the execution
of Mr. Lew's employment agreement in October 1996 which is payable on the
closing date of this Offering. See "Management - Employment Agreements".
Each non-employee director of the Company is entitled to receive a
director's fee of $500 per meeting (other than telephonic meetings) and options
to purchase 5,000 Common Shares of the Company each year, which options will be
exercisable for a period of ten years from the date of grant, at an exercise
price equal to the market price of the Company's Common Shares on the date of
the grant. Additionally, each non-employee director will be reimbursed for
reasonable out-of-pocket expenses incurred in attending meetings of the Board of
Directors of the Company. The members of the Board of Directors intend to meet
regularly, as needed.
The following table sets forth certain information concerning individual
grants of stock options during the fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996
Number of Percentage of Total
Securities Underlying Options Granted To
Name Options Granted Employees in Fiscal Year Exercise Price Expiration Date
- ---- --------------- ------------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Mark Honigsfeld 233,000 46.9% $.30 July 31, 2001
Dong W. Lew 156,950 31.6% $.30 July 31, 2001
</TABLE>
No options were exercised during the fiscal year ended December 31, 1996.
Employment Agreements
The Company is a party to Employment Agreements with Mark Honigsfeld and
Dong W. Lew, each for a term of three years commencing as of October 1, 1996,
subject to continuing, automatic one-year extensions, unless either the Company
or the individual notifies the other, at least 90 days prior to any annual
anniversary date, of its desire not to extend the term thereof. Each Employment
Agreement provides for earlier termination as discussed below.
Pursuant to their respective Employment Agreements, Mr. Honigsfeld serves
as Chairman of the Board and Chief Executive Officer of the Company and Mr. Lew
serves as President and Chief Operating Officer of the Company.
The Employment Agreements provide for base annual compensation of
$250,000 and $125,000 for Messrs. Honigsfeld and Lew, respectively. No amounts
due Mr. Honigsfeld under his Employment Agreement have been paid to date; all
such amounts will be due and payable to him on the earlier of December 15, 1997
or the closing date of this Offering. In the event the Offering is not
consummated by December 15, 1997, the payment obligation will be deferred over a
120 month period (subject to acceleration in the event of a subsequent
consummation of the Offering).
47
<PAGE>
The Employment Agreement for Mr. Lew provides for a signing bonus in the amount
of $15,000 which will be paid to him on the closing date of this Offering.
See "Use of Proceeds".
In addition to base compensation, each of Messrs. Honigsfeld and Lew is
entitled to receive (i) an annual bonus amount equal to a percentage of base
salary (ranging from 7 1/2% to 20%) based upon the Company achieving certain
sales levels (ranging from $3,750,000 to $6,000,000 in the initial year with
$1,000,000 increased thresholds per year if the bonus is earned in a particular
year) and (ii) an annual bonus based on the Company's earnings, if any, before
income taxes (excluding, among other items, any one time non-recurring charges)
("EBITANC"). Such latter bonus for each ranges from 5% to 10% of EBITANC based
on EBITANC thresholds ranging from $250,000 to $1,500,000.
The Employment Agreements for Messrs. Honigsfeld and Lew provide that
each is entitled to receive, for each year thereof, options for the purchase of
5,000 Common Shares of the Company for each $100,000 of EBITANC. Such options
would be exercisable for a five year period at an exercise price of no less than
110% of the market value of the Common Shares on the date of the grant. Messrs.
Honigsfeld and Lew are also entitled to receive an expense allowance of up to
$500 per month and an automobile allowance in the amount of $1,000 per month.
Each Employment Agreement provides that, notwithstanding the rolling
three year term thereof, it may be terminated prior to such expiration date
under the following circumstances: (i) death; (ii) total disability (as provided
for in the Employment Agreements); (iii) termination by the Company for "cause"
(as defined in the Employment Agreements); (iv) termination by the Company at
any time upon written notice to the employee; (v) termination by the employee
upon 30 days written notice to the Company; (vi) termination by the employee at
any time for "good reason" (as defined in the Employment Agreements); or (vii)
termination by the Company at any time within 12 months after a "change in
control" (as defined in the Employment Agreements). Additionally, Mr.
Honigsfeld's Employment Agreement allows him to devote up to 10% of his working
time to other endeavors which are not in competition with the Company.
The Employment Agreements provide for compensation under certain
circumstances upon termination of employment (in addition to accrued but unpaid
compensation) as follows: (i) in the event of the employee's death, the
employee's estate or spouse shall be entitled to receive an amount equal to the
employee's monthly salary as of the date of death multiplied by the number of
full years that he was an employee of the Company or a subsidiary or a
predecessor in interest thereof; (ii) in the event of termination of an
Employment Agreement due to disability, the employee shall be entitled to
receive an amount equal to his monthly salary as of the date of termination of
such Employment Agreement, multiplied by the number of full years that he was an
employee of the Company or a subsidiary or a predecessor in interest thereof
(but, in no event, would the disabled employee be entitled to an amount equal to
less than six months of salary); and (iii) in the event of termination of
employment by the Company following a "change of control" or for any reason
other than death, disability or "cause", or in the event of termination of an
Employment Agreement by the employee for "good reason", the employee shall be
entitled to receive his full salary for the
48
<PAGE>
unexpired term of such agreement, without mitigation of damages based upon
employment obtained elsewhere.
The Employment Agreements provide for a restriction on the solicitation
of customers of the Company for a period of two years following termination
thereof, and a covenant not to compete with the Company for a period of six
months following termination of employment for cause. See "Risk Factors - New
Management Team; Dependence on Executive Management; Need to Retain Key
Personnel".
Effective January 6, 1997, the Company and Louis Libin entered into a
three-year employment agreement, providing for Mr. Libin to serve as the
Company's Chief Technology Officer on a non- full-time per diem basis until
March 10, 1997, and on a full-time basis commencing on such date. Such
employment agreement provides for a salary of $200,000, $225,000 and $250,000
per annum in the first, second and third years, respectively. Additionally, Mr.
Libin's Employment Agreement allows him to devote up to one day a week to other
endeavors which are not in competition to the Company. Other terms of Mr.
Libin's employment agreement conform in structure to the material provisions of
Messrs. Honigsfeld's and Lew's Employment Agreements such as bonuses, benefits,
restrictive covenants and termination.
Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") provides for the
grant of options intended to qualify as "incentive stock options" ("ISOs") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
options that are not intended to so qualify ("Nonstatutory Stock Options"). The
total number of Common Shares reserved for issuance under the 1996 Plan is
2,000,000 (subject to adjustment in the event of a stock split, stock dividend,
recapitalization or similar capital change) plus an indeterminate number of
Common Shares issuable upon the exercise of "reload options".
The 1996 Plan is presently administered by the Board of Directors of the
Company, which selects the eligible persons to whom options shall be granted,
determines the number of Common Shares subject to each option, the exercise
price therefor and the periods during which options are exercisable, interprets
the provisions of the 1996 Plan and, subject to certain limitations, may amend
the 1996 Plan. Each option granted under the 1996 Plan is evidenced by a written
agreement between the Company and the optionee.
Options may be granted to all full-time employees (including officers)
and directors of, and certain consultants and advisors to, the Company or any
subsidiary of the Company.
The exercise price for ISOs granted under the 1996 Plan may not be less
than the fair market value of the Common Shares on the date the option is
granted, except for ISOs granted to 10% stockholders which must have an exercise
price of not less than 110% of the fair market value of the Common Shares on the
date the option is granted. The exercise price for Nonstatutory Stock
49
<PAGE>
Options is determined by the Board of Directors. ISOs granted under the 1996
Plan have a maximum term of ten years, except for 10% stockholders who are
subject to a maximum term of five years. The term of Nonstatutory Stock Options
is determined by the Board of Directors. Options granted under the 1996 Plan are
not transferable, except by will and the laws of descent and distribution. The
total amount of ISOs that may be granted to any individual person in any
calendar year is limited; however, there is no limit as to Nonstatutory Stock
Options. The Company and the Underwriter have agreed that, for a period of one
year after the date of this Prospectus, there shall not be outstanding more than
1,100,000 options and warrants (excluding the Bridge Warrants and Underwriter's
Warrants).
As of the date of this Offering, there are outstanding under the 1996
Plan (i) currently exercisable options for the purchase of an aggregate of
389,950 Common Shares with exercise prices at $.30 per share (comprised of five
year options held by Messrs. Honigsfeld and Lew for the purchase of 233,000 and
156,950 Common Shares, respectively, as described in the "Option Grants In
Fiscal Year Ended December 31, 1996" table above); (ii) ten year options held by
Messrs. Honigsfeld and Hefferon for the purchase of 100,000 and 5,000 Common
Shares, respectively, at an exercise price of $3.00 per share, which vest in
January 1998; (iii) ten year options held by Messrs. Libin and Rizzardi for the
purchase of 50,000 and 5,000 Common Shares, respectively, at an exercise price
of $3.00 per share, which vest in one-third increments in January 1998, 1999,
and 2000; (iv) ten year options held by Mr. Turner for the purchase of 5,000
Common Shares, at an exercise price of $3.00 per share, which vest in one-third
increments in February 1998, 1999 and 2000; and (v) various options granted to
certain non-executive employees of the Company to purchase an aggregate of
124,250 Common Shares. All grants were at exercise prices at least equal to the
fair market value of the Company's Common Shares on the date of grant, as
determined by the Board of Directors.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of the date of this
Prospectus with respect to the beneficial ownership of the outstanding Common
Shares of the Company by (i) any holder of more than 5% of the outstanding
Common Shares; (ii) the Company's directors; (iii) the directors and executive
officers of the Company as a group; and (iv) the Selling Stockholders. The
number of Common Shares under the column below entitled "Number of Common Shares
Beneficially Owned Before the Offering" includes Common Shares underlying the
Bridge Warrants (which become exercisable upon the consummation of the Offering)
held by certain persons as indicated in the footnotes following the table.
50
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Common Number of Common
of Beneficial Owner; Shares Beneficially Number of Shares Beneficially Percentage of Class(1)
Name of Selling Owned Before the Common Shares Owned After the Before After
Stockholder Offering Offered Hereby Offering Offering Offering
<S> <C> <C> <C> <C> <C>
Dong W. Lew(2) 1,502,650(3)(4)(5) 39,200 563,200(3) 100.0% 26.3%
Mark Honigsfeld(2) 596,800(3)(6) 33,600 563,200 47.6% 25.4%
About Face, Ltd. (7 ) 103,075(3)(5)(8) 103,075 0 10.2% -
Robert H. Solomon(9) 100,275(3)(10) 100,275 0 9.9% -
Robert LoRusso(11) 100,100(3) 100,100 0 10.1% -
Harvey Bibicoff(12) 70,000(13) 70,000 0 6.9% -
Apollo Equities(14) 56,000(13) 56,000 0 5.4% -
James Favia 42,000(13) 42,000 0 4.1% -
Sydney Gluck 22,400(13) 22,400 0 2.2% -
Steven Wallitt 16,800(13) 16,800 0 1.7% -
John Eckhoff 14,000(13) 14,000 0 1.4% -
Kenneth Moschetto 14,000(13) 14,000 0 1.4% -
Lawrence Levine 11,200(13) 11,200 0 1.1% -
Maretza Jimenez
Campos 11,200(13) 11,200 0 1.1% -
Lori Siegal 11,200(13) 11,200 0 1.1% -
Horizon Acquisitions 8,400(13) 8,400 0 * -
Stuart Copperman 5,600(13) 5,600 0 * -
Teddy Selinger 5,600(13) 5,600 0 * -
John P. Hefferon 5,600(13) 5,600 0 * -
Scott Cohen 2,800(13) 2,800 0 * -
Peter Guardino 2,800(13) 2,800 0 * -
James Portnof 2,800(13) 2,800 0 * -
Windsor L. P. 2,800(13) 2,800 0 * -
Louis Libin (2) 0 0 0 - -
William D. Rizzardi (2) 0 0 0 - -
Robert Edward Turner, IV(16) 0 0 0 - -
Directors and executive
officers as a group
(6 persons) 1,508,250(3)(4)(5)(6) 78,400 1,126,400 100.0% 47.8%
(15)
</TABLE>
* Less than 1%.
(1) Does not give effect to the exercise of the Underwriter's Overallotment
Option or the Underwriter's Warrants. See "Underwriting".
(2) The address for Messrs. Lew, Honigsfeld, Libin and Rizzardi is 77 Spruce
Street, Cedarhurst, New York.
(3) The number of Shares reflected as being owned by Mr. Lew before the
Offering includes all shares beneficially owned by Messrs. Honigsfeld,
LoRusso, Solomon and About Face, Ltd., as such shares are subject to a
limited irrevocable proxy which will expire upon consummation of this
Offering. See "Certain Relationships and Related Transactions".
(4) Includes 156,950 shares issuable upon the exercise of options granted
under the 1996 Plan and 39,200 shares issuable upon exercise of the
Bridge Warrants.
(5) In October 1996, the Company made a $70,000 loan to Mr. Lew, the proceeds
of which were utilized by him to participate in the Bridge Financing.
In March 1997, Mr. Honigsfield 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. Honisgfeld. Mr. Lew retains voting
rights to such shares unless and until there is a default under the terms
of the loan. See "Certain Relationships and Related Transactions".
51
<PAGE>
(6) Includes 233,000 shares issuable upon the exercise of options granted
under the 1996 Plan and 33,600 shares issuable upon the exercise of
Bridge Warrants. Also includes 330,200 shares held by the Mark Honigsfeld
Living Trust dated March 27, 1996 whose sole beneficiary is Mr.
Honigsfeld's wife. Mr. Honigsfeld, the settlor and trustee of the trust,
has the right to terminate the trust and receive the shares.
(7) About Face, Ltd.'s address is 6539 Waggoner Drive, Dallas, Texas. About
Face, Inc., a Texas corporation, is the general partner of About Face,
Ltd., a Texas limited partnership. Murray Gross is the principal
stockholder of About Face, Inc. Mr. Gross is also a limited partner of
About Face, Ltd.
(8) Includes 28,000 shares issuable upon the exercise of the Bridge Warrants.
(9) Mr. Solomon's address is 68 West Park Avenue, Long Beach, New York.
(10) Includes 25,200 shares issuable upon the exercise of the Bridge Warrants.
(11) Mr. LoRusso's address is 410 Jericho Turnpike, Jericho, New York.
(12) Mr. Bibicoff's address is 55 Maple Run Drive, Jericho, New York.
(13) Represents shares issuable upon the exercise of the Bridge Warrants.
(14) Apollo Equities' address is 30 Broad Street, New York, New York.
(15) Includes 5,600 shares issuable to Mr. Hefferon upon the exercise of the
Bridge Warrants.
(16) The address for Mr. Turner is 2030 Dering Circle, Atlanta, Georgia.
The Company will not receive any of the proceeds from the resale of the
Common Shares by the Selling Stockholders. The Common Shares held by the Selling
Stockholders may be resold at any time following the date of this Prospectus,
subject to an agreement between each of the Bridge Lenders and the Underwriter
restricting the transfer of the Common Shares for a period of six months without
the Underwriter's consent. The sale of such Common Shares or the potential of
such sales at any time may have an adverse effect on the market prices of the
Common Shares offered hereby. The Underwriter has advised the Company that it
will not waive the transfer restrictions for at least 30 days following the date
of this Prospectus, and, in any event, it does not have any plans to waive any
transfer restrictions prior to their respective expiration dates. See "Risk
Factors Shares Eligible For Future Sale May Adversely Affect the Market" and
"Underwriting".
The Common Shares offered may be sold from time to time directly by the
Selling Stockholders. Alternatively, the Selling Stockholders may from time to
time offer such Common Shares through underwriters, dealers, or agents. The
distribution of Common Shares by the Selling
52
<PAGE>
Stockholders may be effected in one or more transactions that may take place on
the over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more broker-dealers
for resale of such shares as principals, at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Stockholders in connection with such
sales of Common Shares. The Common Shares offered by the Selling Stockholders
may be sold by one or more of the following methods, without limitation: (i) a
block trade in which a broker or dealer so engaged will attempt to sell the
Common Shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (ii) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus; (iii) ordinary brokerage transactions in which the broker solicits
purchasers; and (iv) face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or dealers engaged by the
Selling Stockholders may arrange for other brokers or dealers to participate.
The Selling Stockholders and intermediaries through whom such Common Shares are
sold may be deemed "underwriters" within the meaning of the Act with respect to
the Common Shares offered, and any profits realized or commissions received may
be deemed underwriting compensation.
At the time a particular offer of Common Shares is made by or on behalf
of a Selling Stockholder, to the extent required, a Prospectus Supplement will
be distributed which will set forth the number of Common Shares being offered
and the terms of the offering, including the name or names of any underwriters,
dealers or agents, the purchase price paid by any underwriter for Common Shares
purchased from the Selling Stockholder and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective August 1996, the Company issued 330,200 Common Shares to the
Mark Honigsfeld Living Trust dated March 27, 1996 (the "Honigsfeld Trust") in
consideration for $.30 per share or an aggregate price of $99,060. Mr.
Honigsfeld, the settlor and trustee of the Honigsfeld Trust, has the right to
terminate it and receive the Common Shares. Mr. Honigsfeld's wife is the sole
beneficiary of the Honigsfeld Trust. Upon Mr. Honigsfeld accepting the position
as Chairman of the Board, he was issued a five year option, which expires in
August 2001, to acquire up to 233,000 Common Shares of the Company pursuant to
the 1996 Plan at an exercise price of $.30 per share. See "Management - Stock
Option Plan".
In September 1996, the Company entered into a certain consulting
agreement with Alan Daniels and Geraldine Lum Daniels, the Company's founders
and two of the Minority Stockholders (as defined below), providing for Alan
Daniels and Geraldine Lum Daniels to assist the Company with technical and
marketing issues until the Bridge Financing closed (which occurred in October
1996) in consideration for a one-time payment of $25,290 at such closing.
53
<PAGE>
In October 1996, the Company repurchased 65,000 Common Shares and
canceled warrants for the purchase of 50,700 Common Shares (the "Repurchase
Agreements") from 13 individuals (the "Minority Stockholders"), such repurchases
occurring upon the consummation of the Bridge Financing. Pursuant to the
Repurchase Agreements, the Minority Stockholders were paid $.30 per share and
received new warrants exercisable for a five year period to purchase an
aggregate of 31,200 Common Shares at an exercise price of $5.00 per share.
In October 1996, the Company loaned $70,000 to Dong W. Lew, President and
Chief Operating Officer of the Company, for purposes of his participation in the
Bridge Financing. Such loan is evidenced by a promissory note, providing for the
payment of principal and interest at the rate of 8% per annum in 120 equal
monthly installments, subject to acceleration on the closing date of this
Offering if the Offering closes by October 1999 and such Offering yields gross
proceeds of $4,500,000 or more. Payment of the promissory note is secured by a
pledge of 28,000 Common Shares of the Company. All voting rights to such shares
remain with Mr. Lew except in the event of a default on the payment of the
promissory note. In March 1997, Mr. Honigsfeld purchased from the Company the
promissory note in consideration for the payment in cash of the outstanding
amount of such note. Mr. Honigsfeld concurrently received an assignment of the
Company's rights as pledgee of Mr. Lew's Common Shares.
In January 1997, the Company entered into the secured Credit Agreement
with Mark Honigsfeld, Chairman of the Board and Chief Executive Officer of the
Company, which permits the Company to borrow up to $200,000. The Credit
Agreement further provides that all amounts borrowed shall be repaid in full,
together with accrued interest, (i) upon the closing of the Offering, if the
Offering closes before June 1997, or (ii) otherwise, in equal quarterly
installments commencing in June 1997 and ending in June 1999 subject to
acceleration in the event of the closing of the Offering. Interest accrues on
the unpaid principal amount at the rate of 10% per annum. The Company has the
option to prepay any outstanding principal and accrued interest at any time
without penalty in amounts no less than, and in multiples of, $5,000. The Credit
Agreement is secured by a first priority security interest in all the assets
owned by the Company. At the date of this Prospectus, the Company has borrowed
all $200,000 available under the Credit Agreement, all of which is outstanding.
The Company entered into the Credit Agreement because it required additional
financing to fund the Company's working capital needs and no other sources of
financing were available at that time. The Company believes that the terms of
the Agreement are commercially reasonable and are at least as favorable to the
Company as the Company could have obtained from an unrelated third party. The
Credit Agreement was approved by, among others, all the disinterested directors
of the Company. See "Risk Factors - Broad Discretion in Application of Proceeds;
Repayment of Indebtedness; Payment of Accrued Compensation".
To the extent that the Company may enter into any agreements with related
parties in the future (of which none are presently contemplated), the Company
anticipates that the terms of such agreements will be commercially reasonable
and no less favorable to the Company than the Company could obtain from
unrelated third parties. Additionally, the Company intends that such agreements
would be approved by a majority of disinterested directors. See "Risk Factors
Challenges to Growth; Unascertainable Risks Related to Possible Acquisitions".
54
<PAGE>
DESCRIPTION OF SECURITIES
Common Shares
The Company is authorized to issue up to 20,000,000 Common Shares, par
value $.01 per share, of which 986,700 shares are issued and outstanding as of
the date of this Prospectus and owned by five stockholders of record. All of the
issued and outstanding Common Shares are validly issued, fully paid and
non-assessable. An additional 1,141,600 Common Shares are reserved for issuance
upon the exercise of outstanding options and warrants, including the Bridge
Warrants.
Holders of the Common Shares of the Company are entitled to share equally
on a per share basis in such dividends as may be declared by the Board of
Directors out of funds legally available therefor. There are presently no plans
to pay dividends with respect to the Common Shares. See "Dividend Policy". Upon
liquidation, dissolution or winding up of the Company, after payment of
creditors and the holders of any senior securities of the Company, including
Preferred Shares, if any, the assets of the Company will be divided pro rata on
a per share basis among the holders of the Common Shares. The Common Shares are
not subject to any liability for further assessments. There are no conversion or
redemption privileges, nor any sinking fund provisions, with respect to the
Common Shares, and the Common Shares are not subject to call. The holders of the
Common Shares do not have any preemptive or other subscription rights.
Holders of the Common Shares are entitled to cast one vote for each share
held at all stockholders' meetings including the annual meeting for the election
of directors. The Common Shares do not have cumulative voting rights.
Preferred Shares
The Company's Certificate of Incorporation authorizes 1,000,000 "blank
check" Preferred Shares, par value $.01 per share, whereby the Board of
Directors of the Company shall have the authority, without further action by the
holders of the outstanding Common Shares, to issue Preferred Shares from time to
time in one or more series, to fix the number of shares constituting any series
and the stated value thereof, if different from the par value, and to fix the
terms of any such series, including dividend rights, dividend rates, conversion
or exchange rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price and the liquidation preference of
such series. As of the date of this Prospectus, there are no Preferred Shares
issued and outstanding, and the Company has no plans to issue any Preferred
Shares.
Delaware Anti-Takeover Law; Staggered Board of Directors
The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law enacted in 1988. In general,
the law prohibits a Delaware public corporation from engaging in a "business
combination" with an "interested stockholder" for a period
55
<PAGE>
of three years after the date of the transaction in which the person became an
interested stockholder, unless it is approved in a prescribed manner.
The Company's Certificate of Incorporation provides for staggered terms
for the Board of Directors in three classes. The term of each class is three
years (except that the initial term of office of the Class I directors will
expire at the Company's annual meeting of stockholders in 1997 and the initial
term of office of the Class II directors will expire at the Company's annual
meeting of stockholders in 1998). Each director holds office until the next
annual meeting of stockholders during the year in which the term of his class of
directorship expires and until his successor is elected and qualified. The
Company currently has five directors (two in Classes I and II and one in Class
III). Accordingly, based on the current size of the Board and the makeup of the
classes of directors, the term of no more than two directors will expire in any
given year.
As a result of Section 203 of the General Corporation Law of Delaware and
the Company's staggered Board of Directors, potential acquirors of the Company
may be discouraged from attempting to effect acquisition transactions with the
Company, thereby possibly depriving holders of the Company's securities of
certain opportunities to sell or otherwise dispose of such securities at
above-market prices pursuant to such transactions.
Limitation on Liability of Directors; Indemnification
Article X of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by Section 102 of the Delaware General Corporation Law, provided that
this provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) arising under Section 174 of the
Delaware General Corporation Law (with respect to unlawful dividend payments and
unlawful stock purchases or redemptions); or (iv) for any transaction from which
the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of
Incorporation and its by-laws provisions to indemnify its directors, officers,
employees and agents and to purchase insurance with respect to liability arising
out of the performance of their duties as directors, officers, employees and
agents as permitted by Section 145 of the Delaware General Corporation Law. The
Delaware General Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors, officers, employees and agents may be entitled under the
Company's by-laws, any agreement, vote of stockholders or otherwise.
Furthermore, the Company has entered into an indemnification agreement to
indemnify its directors and officers, under certain circumstances, to the extent
provided in the Certificate of Incorporation and Bylaws of the Company, subject
to Delaware General Corporation Law, against
56
<PAGE>
any claim or action against, or involving, any of them in their respective
capacities as a director or an officer of the Company or its affiliates.
The effect of the foregoing is to require the Company, to the extent
permitted by law, to indemnify the officers, directors, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to indemnify
the Company, its directors, officers, and each person who controls the Company
within the meaning of Section 15 of the Act with respect to any statement in or
omission from the Registration Statement or the Prospectus or any amendment or
supplement thereto if such statement or omission was made in reliance upon
information furnished in writing to the Company by the Underwriter specifically
for or in connection with the preparation of the Registration Statement, the
Prospectus, or any such amendment or supplement thereto.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
The Company intends to obtain directors and officers insurance in the
approximate amount of $1,000,000.
Transfer Agent
The transfer agent for the Company's Common Shares is American Stock
Transfer Company.
UNDERWRITING
General
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriter has agreed to purchase the 1,000,000
Common Shares offered hereby from the Company on a "firm commitment" basis, if
any are purchased. The Underwriter has advised the Company that it proposes to
offer the Common Shares to the public at a price of $5.00 per Common Share, as
set forth on the cover page of this Prospectus, and that it may allow to certain
dealers who are NASD members concessions not to exceed $___ per Common Share, of
which an amount not in excess of $___ per Common Share may be reallowed to other
dealers who are members of the NASD. After the Offering, the public offering
price, concession and reallowance may be changed by the Underwriter.
57
<PAGE>
The Company has granted an Overallotment Option to the Underwriter,
exercisable during the 45 day period from the date of this Prospectus, to
purchase up to a maximum of 150,000 additional Common Shares at the Offering
price, less the underwriting discount, to cover overallotments, if any.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with the Registration Statement, including liabilities arising under
the Act. Insofar as indemnification for liabilities arising under the Act may be
provided to officers, directors or persons controlling the Company, the Company
has been informed that, in the opinion of the Commission, such indemnification
is against public policy and is therefore unenforceable.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance of 3% of the aggregate Offering price of the Common Shares
offered hereby, including any Common Shares purchased pursuant to the
Overallotment Option, $50,000 of which has already been paid.
The Company has agreed to sell to the Underwriter, or its designees,
warrants to purchase an aggregate of 10% of the Common Shares sold pursuant to
this Offering, exclusive of the exercise of the Underwriter's Overallotment
Option, for a purchase price of one mil ($.001) per warrant (the "Underwriter's
Warrants"). The Underwriter's Warrants shall be exercisable during a four year
period commencing one year from the closing date of this Offering. Any profits
realized upon the sale of the Common Shares issuable upon exercise of the
Underwriter's Warrants may be deemed to be additional underwriting compensation.
The exercise price of the Common Shares issuable upon exercise of the
Underwriter's Warrant shall be $8.25 per share (165% of the initial public
offering price of the Common Shares). The exercise price of the Underwriter's
Warrants and the number of Common Shares covered thereby are subject to
adjustment in certain events to prevent dilution. For the life of the
Underwriter's Warrants, the holders thereof are given, at a nominal cost, the
opportunity to profit from a rise in the market price of the Company's Common
Shares with a resulting dilution in the interest of other stockholders. The
Company may find it more difficult to raise capital for its business if the need
should arise while the Underwriter's Warrants are outstanding. At any time when
the holders of the Underwriter's Warrants might be expected to exercise them,
the Company would probably be able to obtain additional capital on more
favorable terms. The Company has granted the Underwriter certain "demand" and
"piggyback" registration rights with respect to the Underwriter's Warrants and
the underlying Common Shares.
At the closing of the sale of the Common Shares offered hereby, the
Company will enter into a three year financial advisory and investment banking
agreement with the Underwriter, pursuant to which the Company will be obligated
to pay the Underwriter $108,000 in advance for financial and investment advisory
services to the Company.
At the closing of this Offering, the Company and the Underwriter will
enter into a non-exclusive merger and acquisition agreement pursuant to which
the Underwriter would be compensated at the rate of between 2% - 5% of the value
of any consummated transaction with respect to which the Company was introduced
to the other party by the Underwriter.
58
<PAGE>
Additionally, for a period of three years following the date of this
Prospectus, the Underwriter has been granted the right to sell, for the account
of any officer, director or holder of 5% or more of the Company's Common Shares
(collectively, the "Insiders"), any of the Company's securities which the
Insiders propose to sell pursuant to Rule 144 promulgated under the Act, on
terms at least as favorable as the Insiders can secure elsewhere.
The Company has also agreed to have a designee of the Underwriter serve
as a director of the Company, or as an observer of the Board of Directors, for a
period of three years following the date of this Prospectus.
The Company's current stockholders, have agreed that, except with respect
to the Common Shares underlying the Bridge Warrants owned by them, they will not
transfer any of their Common Shares publicly for a period of one year following
the date of this Prospectus without the prior consent of the Underwriter.
Additionally, the Selling Stockholders (including current stockholders with
respect to the Common Shares underlying Bridge Warrants owned by them) have
agreed that they will not transfer any of their Common Shares publicly for a
period of six months following the date of this Prospectus without the consent
of the Underwriter. Notwithstanding the foregoing, Robert LoRusso, About Face,
Ltd. and Robert H. Solomon, principal stockholders of the Company, are exempt
from such consent requirement with respect to the 100,100, 75,075 and 75,075
Common Shares, respectively, owned by them. The Underwriter has advised the
Company that it will not waive the transfer restrictions with respect to the
Selling Stockholders for at least thirty days following the date of this
Prospectus and that, in any event, it has no plans to waive such transfer
restrictions prior to its expiration. However, the Underwriter has informed the
Company that it may contemplate the waiver of such transfer restriction in the
future if the sale of the Selling Stockholders' Common Shares would not have an
adverse effect on the market price of the Company's Common Shares and the market
could sustain such sale. The Underwriter has further advised the Company that it
has no current plans, proposals, arrangements or understandings with, and it
knows of no plans, proposals, arrangements or understandings with respect to, or
related to, the offering of 250,250 Common Shares by certain of the Selling
Stockholders who are not subject to any transfer restriction agreement. See
"Principal and Selling Stockholders".
The Company has agreed not to issue any equity securities, or securities
convertible into, or exchangeable or exercisable for, equity securities, for a
period of twelve months from the date of this Prospectus, except that the
Company may issue (i) Common Shares upon the exercise of the Bridge Warrants and
the Underwriter's Warrants; (ii) Common Shares upon the exercise of the Other
Derivative Securities, that are currently outstanding, as well as upon the
exercise of options hereafter granted, of up to 1,100,000 Common Shares in the
aggregate; and (iii) Common Shares and Preferred Shares in connection with a
merger or acquisition transaction.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and Underwriter's Warrants which have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
59
<PAGE>
The Underwriter, a registered broker-dealer, purchases and sells
securities on behalf of its customers. The Underwriter also engages in
investment banking activities and provides companies with financial advisory
services. The Underwriter has been in business for approximately two years. This
is the first offering underwritten by the Underwriter. There is no affiliation
or material relationship between any promoter of the Company and the
Underwriter. See "Risk Factors Inexperience of Underwriter".
Determination of Public Offering Price
Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price for the Common Shares has been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in the negotiations were an analysis of the areas of activity
in which the Company is engaged, the present state of the Company's business,
the Company's financial condition, the Company's prospects, an assessment of
management, the general condition of the securities market at the time of this
Offering and the demand for similar securities of comparable companies. The
public offering price of the Common Shares does not necessarily bear any
relationship to assets, earnings, book value or other criteria of value
applicable to the Company.
The Company anticipates that the Common Shares will be listed for
quotation on The Nasdaq SmallCap Market under the symbol "CODI", but there can
be no assurance that an active trading market will develop, even if the
securities are accepted for quotation. The Underwriter intends to make a market
in the Common Shares of the Company.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon
for the Company by Certilman Balin Adler & Hyman, LLP, 90 Merrick Avenue, East
Meadow, New York 11554. Certain legal matters will be passed upon for the
Underwriter by Blodnick, Blodnick & Zelin, P.C., 2 Expressway Plaza, Suite 200,
Roslyn Heights, New York 11577.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1995
and for the years then ended included in this Prospectus have been audited by
Lazar, Levine & Company LLP, independent certified public accountants, as set
forth in their report thereon appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the Act
with the Commission in Washington, D.C. with respect to the Common Shares
offered hereby. This
60
<PAGE>
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Common
Shares offered hereby, reference is hereby made to the Registration Statement
and such exhibits, which may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Reports and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at the following
addresses: New York Regional Office, Seven World Trade Center, New York, New
York 10048; and Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661-2511. Copies of such material can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Furthermore, the Commission
maintains a Web site that will contain reports, proxy and information statements
and other information regarding the Company. The address of such Web site is
http://www.sec.gov.
61
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
INDEX TO FINANCIAL STATEMENTS
Page(s)
<S> <C>
Independent Auditors' Report F - 2
Financial Statements:
Balance Sheets as of December 31, 1996 and 1995 F - 3
Statements of Operations for the Years Ended December 31, 1996 and 1995 F - 4
Statement of Shareholders' Equity for the Two Years in the Period Ended December 31, 1996 F - 5
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 F - 6
Notes to Financial Statements F - 8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Compu-DAWN, Inc.
Cedarhurst, New York
We have audited the accompanying balance sheets of Compu-DAWN, Inc. as of
December 31, 1996 and 1995 and the statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Compu-DAWN, Inc. as of December
31, 1996 and 1995 and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
LAZAR, LEVINE & COMPANY LLP
New York, New York
February 13, 1997 except as to Note 12(c)
which is dated March 11, 1997
F-2
<PAGE>
Compu-DAWN, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
- ASSETS (Note 12) -
December 31, December 31,
1996 1995
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash (Note 2b) $ 286,497 $105,962
Accounts receivable, net of allowances for doubtful accounts of
$30,000 and $18,000 for 1996 and 1995, respectively (Note 2b) 100,010 218,466
Prepaid expenses 19,281 2,567
Loan receivable from officer - current portion (Note 3) 4,828 -
Income tax refund receivable (Notes 2f and 9) 36,004 -
------------- ---------
TOTAL CURRENT ASSETS 446,620 326,995
FIXED ASSETS (Notes 2c, 4 and 5) 138,814 45,265
------------ ----------
OTHER ASSETS:
Deferred offering costs (Note 10) 139,326 -
Deferred income taxes (Notes 2f and 9) - 6,200
Loan receivable from officer (Note 3) 64,419 -
Financing costs (Note 6) 132,355 -
Security deposits 21,525 6,780
------------- ----------
357,625 12,980
------------ ----------
$ 943,059 $385,240
============ ==========
- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 260,134 $ 38,442
Deferred revenue (Note 2d) 28,100 30,030
Due to former shareholders (Note 7) 34,710 -
Current portion of long-term debt (Note 5a) - 22,351
Capitalized lease payable - current (Note 5b) 7,859 2,442
Income taxes payable (Note 2f and 9) - 93,551
------------ ----------
TOTAL CURRENT LIABILITIES 330,803 186,816
NON-CURRENT LIABILITIES:
Equipment loans payable (Note 5a) - 2,958
Capitalized lease payable (Note 5b) 29,541 4,191
Deferred rent liability (Note 10a) 23,115 26,430
Promissory notes payable (Note 6) 770,000 -
------------ ----------
822,656 33,579
------------ ----------
COMMITMENTS AND CONTINGENCIES (Notes 10, 11 and 12)
SHAREHOLDERS' EQUITY (DEFICIT) (Note 7):
Preferred stock, $.01 par value; 1,000,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 20,000,000 shares authorized, 986,700
and 1,157,000 shares issued for 1996 and 1995, respectively 9,867 11,570
Additional paid-in capital 158,558 54,430
Retained earnings (deficit) (378,825) 170,345
------------ ---------
(210,400) 236,345
Less: treasury stock, 685,750 shares at cost for 1995 - (71,500)
------------ ---------
(210,400) 164,845
------------ ---------
$ 943,059 $385,240
============ ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
1996 1995
--------------- ---------
<S> <C> <C>
REVENUES (Notes 2d and 8):
Software sales $ 202,511 $ 817,271
Maintenance income 275,016 222,910
------------ ------------
477,527 1,040,181
------------ -----------
COSTS AND EXPENSES:
Programming costs and expenses 268,915 404,165
General and administrative expenses 657,062 365,760
Research and development (Note 2e) 158,099 140,275
------------ ------------
1,084,076 910,200
----------- ------------
INCOME (LOSS) FROM OPERATIONS (606,549) 129,981
OTHER INCOME (EXPENSES):
Interest and other income 4,845 1,367
Interest expense (17,619) (993)
Loss on abandonment of leasehold improvements (Note 10a) (5,378) -
-------------- -----------
(18,152) 374
------------- -----------
INCOME (LOSS) BEFORE PROVISION (CREDIT)
FOR INCOME TAXES (624,701) 130,355
Provision (credit) for income taxes (Notes 2f and 9) (75,531) 51,695
------------- ------------
NET INCOME (LOSS) $ (549,170) $ 78,660
=========== ============
EARNINGS (LOSS) PER COMMON SHARE (Note 2g) $(.29) $.04
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING (Note 2g) 1,894,933 1,894,933
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
STATEMENT OF SHAREHOLDERS' EQUITY
Additional Retained Total
Preferred Common Stock Paid-in Earnings Treasury Shareholders'
Stock Shares Amount Capital (Deficit) Stock Equity (Deficit)
----- ------ ------ ------- --------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (Note 7) - 1,157,000 $11,570 $ 54,430 $ 91,685 $(38,500) $119,185
Purchases of treasury stock, 107,250
shares at cost (Note 7) - - - - - (33,000) (33,000)
Net income - - - - 78,660 - 78,660
------- --------- ------- -------- --------- -------- --------
Balance at December 31, 1995 - 1,157,000 11,570 54,430 170,345 (71,500) 164,845
Cancellation of shares held
in treasury - (685,750) (6,858) (64,642) - 71,500 -
Issuances of common stock (Note 7) - 580,450 5,805 168,330 - - 174,135
Warrants issued pursuant to debt
offering (Note 6) - - - 34,500 - - 34,500
Purchase of outstanding options
(Note 7) - - - (15,210) - - (15,210)
Purchases and cancellation of
outstanding shares (Note 7 ) - (65,000) (650) (18,850) - - (19,500)
Net loss - - - - (549,170) - (549,170)
--------- --------- ------- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1996 - 986,700 $ 9,867 $158,558 $(378,825) $ - $(210,400)
========= ========= ======= ======== ========= ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 1 of 2
For the Year Ended
December 31,
1996 1995
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $582,053 $1,027,473
Cash paid to suppliers and employees (825,948) (977,193)
Interest paid (1,995) (993)
Interest and other income received 3,791 1,367
Income taxes paid (47,284) -
-------- ---------
Net cash (utilized) provided by
operating activities (289,383) 50,654
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to officer (70,000) -
Principal repayments of officer's loan 753 -
Purchase of fixed assets (95,117) (29,232)
Proceeds from sale of fixed assets 2,500 -
Payment of security deposits (14,745) (3,480)
-------- ---------
Net cash (utilized) by investing activities (176,609) (32,712)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt offering 770,000 -
Expenses associated with debt offering (100,100) -
Payments for common stock and options acquired (21,583) (29,167)
Principal payments of other long-term debt (3,726) (67,235)
Payments of capital lease obligations (2,828) (1,661)
Expenses associated with initial public offering (139,326) -
Proceeds from sale of shares 144,090 -
-------- ---------
Net cash provided (utilized) by financing
activities 646,527 (98,063)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 180,535 (80,121)
Cash and cash equivalents, at beginning of year 105,962 186,083
-------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $286,497 $105,962
======== =========
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 2 of 2
------------------------
For the Year Ended
December 31,
1996 1995
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
(UTILIZED) PROVIDED BY OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $(549,170) $ 78,660
Adjustments to reconcile net income (loss) to net cash (utilized) provided
by operating activities:
Allowance for doubtful accounts 12,000 13,000
Depreciation and amortization 27,291 12,370
Deferred tax expense (benefit) 6,200 (4,450)
Deferred rent liability (3,315) 26,430
Compensatory stock 30,045 -
Loss on disposal of fixed assets 7,617 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 106,456 (28,139)
(Increase) decrease in prepaid expenses (16,714) 501
(Increase) in tax refund receivable (36,004) -
Increase (decrease) in accounts payable and accrued expenses 221,692 (119,715)
(Increase) decrease in deferred revenue (1,930) 15,430
(Decrease) increase in income taxes payable (93,551) 56,567
-------- -------
NET CASH (UTILIZED) PROVIDED BY OPERATING ACTIVITIES $(289,383) $ 50,654
======== =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
(a)During 1996 and 1995, the Company incurred capital lease obligations of
$33,595 and $7,271, respectively in connection with the purchase of office
equipment.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - DESCRIPTION OF COMPANY:
Compu-DAWN, Inc., the Company, was incorporated under the name
of Coastal Computer Systems, Inc., in New York on March 31,
1983, and was reincorporated in Delaware under its present name
on October 18, 1996. The Company is engaged in the business of
designing, developing, licensing, installing and servicing
computer software products and systems predominantly for public
safety and law enforcement agencies. The Company's customers, to
date, are primarily located in New York State.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with
generally accepted accounting principles. Outlined below are
those policies which are considered particularly significant.
(a) Use of Estimates:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain
estimates and assumptions, where applicable, that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period. While actual results could
differ from those estimates, management does not expect such
variances, if any, to have a material effect on the financial
statements.
(b) Concentration of Credit Risk /Fair Value:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash
investments and accounts receivable.
The Company maintains, at times, deposits in federally insured
financial institutions in excess of federally insured limits.
Management monitors the soundness of these financial
institutions and feels the Company's risk is negligible.
Management believes that concentrations of credit risk with
respect to accounts receivable are limited due to the Company's
methods of progress billings and collections.
As of December 31, 1996 and 1995, the fair value of cash and
cash equivalents, receivables, obligations under accounts
payable and debt instruments approximate the carrying value.
F-8
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(c) Fixed Assets:
Fixed assets are recorded at cost. Depreciation of fixed assets
is provided on a straight-line basis as follows:
Computer equipment 3 years
Furniture and fixtures 5 years
Motor vehicles 5 years
Maintenance and repairs are expensed as incurred. Leasehold
improvements are amortized over the useful life of the asset or
the lease, whichever is shorter. Capital leases are amortized
over the term of the respective leases or the useful lives of
the related assets, whichever is shorter.
Depreciation and amortization expense for the years ended
December 31, 1996 and 1995 aggregated $25,046 and $12,370,
respectively.
(d) Revenue Recognition:
The Company generates revenues from the granting of
nonexclusive, non-transferable and non- assignable licenses to
use software it has developed, through fixed price contracts.
Revenues from such fixed price contracts are recognized using
the percentage of completion method of accounting. The Company
retains title to the software and warranties that it will
provide technical support and repair any defects in the software
at no charge. The warranty period for each contract is
negotiated individually, for periods ranging from 90 days to
three years. To date, repair costs have been minimal and
therefore the Company has not established a reserve for such
warranty costs.
In addition, the Company provides post-contract customer support
to licensees of its software. Revenues from such services are
recognized ratably over the period of performance. Fees billed
and/or received prior to performance of services are reflected
as deferred revenue.
(e) Software Development Costs:
The Company reflects costs incurred in establishing the
technological feasibility of a computer software product to be
leased or sold, as research and development costs, and expenses
such costs in the period incurred. Research and development
costs for the years ended December 31, 1996 and 1995 aggregated
$158,099 and $140,275, respectively.
After technological feasibility has been established, all costs
incurred on the software product are to be capitalized and
amortized on a product by product basis. Capitalization of
computer software costs is discontinued when the product is
available to be sold or leased.
To date, the Company has only sold or leased software which has
been developed for specific customers. As such, all costs
incurred have been expensed as research and development costs.
Costs associated with post-contract customer support
(maintenance) are charged to expense when related revenue is
recognized or when those costs are incurred, whichever occurs
first.
F-9
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(f) Income Taxes:
The Company has adopted Financial Accounting Standards Board
Statement No. 109 "Accounting for Income Taxes" ("SFAS 109").
Under SFAS 109, deferred tax assets and liabilities are
determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured by
applying enacted tax rates and laws to taxable years in which
such differences are expected to reverse.
(g) Earnings Per Share:
Earnings per share has been computed on the basis of the
weighted average number of common shares and common equivalent
shares outstanding during each period presented. In accordance
with the rules of the Securities and Exchange Commission, all
shares issued and "cheap" options and warrants are being treated
as outstanding for all periods presented.
(h) Statements of Cash Flows:
For purposes of the statements of cash flows, the Company
considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
NOTE 3 - LOAN RECEIVABLE - OFFICER:
In October 1996, the Company made a loan of $70,000 to an
officer for the purpose of such officer's participation in a
debt offering (see Note 6). Such loan is evidenced by a
promissory note requiring 120 equal monthly payments, at an
annual interest rate of 8% and is secured by 28,000 shares of
common stock owned by the individual. This note which may be
prepaid at any time is also due and payable upon the closing of
a public offering of the Company's common stock should such
occur within three years of the date of the note and yield gross
proceeds of at least $4,500,000. See Note 11.
NOTE 4 - FIXED ASSETS:
Fixed assets consist of the following:
December 31,
1996 1995
Computer equipment $139,916 $100,254
Furniture and fixtures 16,499 6,389
Motor vehicles 12,597 24,445
Leasehold improvements 45,345 10,756
Assets under capitalized leases 41,484 7,889
------- --------
255,841 149,733
Less: accumulated depreciation and
amortization 117,027 104,468
------- --------
$138,814 $ 45,265
======= ========
F-10
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 5 - LONG-TERM DEBT:
(a) Notes Payable:
Term notes payable consisted of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Installment notes payable re: purchases of treasury
stock, non-interest bearing $ - $21,583
Equipment notes payable in monthly installments of
$258, with interest at an annual rate of 6% - 3,726
------- -------
- 25,309
Less: current maturities - 22,351
------- -------
$ - $ 2,958
======= =======
</TABLE>
(b) Capitalized Lease Obligations:
The Company has entered into various capital leases for
furniture, fixtures and equipment which expire in years through
2001. The assets and liability under these capital leases are
recorded at the lower of the present value of the minimum lease
payments or the fair market value of the assets. The assets are
depreciated over their estimated useful lives. Depreciation of
assets under capital leases for the years ended December 31,
1996 and 1995 aggregated $5,989 and $1,315, respectively.
Minimum future lease payments under capital leases as of
December 31, 1996 are as follows:
1997 $11,711
1998 10,049
1999 8,388
2000 8,388
2001 7,689
------
Total minimum lease payments 46,225
Less: amount representing interest 8,825
------
$37,400
======
F-11
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 6 - DEBT OFFERING:
In October 1996, the Company successfully completed the sale of
77 units in a private offering, each unit consisting of a
$10,000 principal amount 12% promissory note ("bridge note") and
a redeemable stock purchase warrant to acquire 5,600 shares of
the Company's common stock for aggregate gross proceeds of
$770,000. The warrants are exercisable at a price of $.50 per
share only upon the successful completion of an Initial Public
Offering ("IPO"), (see Note 11), of the Company's common stock.
Each of the bridge notes is due and payable upon the closing of
the IPO. In the event such closing occurs on or before September
15, 1997, no interest will be payable on these notes. In the
event that the Company closes an IPO after September 15, 1997
but before September 15, 1999, the notes shall bear interest at
a rate of 8% per annum and be payable upon the closing of the
IPO. In the event the Company does not close an IPO by September
15, 1999, interest shall accrue at a rate of 12% per annum
through such date and the notes shall be payable in 120 equal
monthly installments with interest at a rate of 8% per annum
beginning September 16, 1999.
In accordance with APB No. 14, the proceeds of debt issued with
stock purchase warrants should be allocated based on the fair
values of the debt without the warrants and of the warrants
themselves when issued. Utilizing the provisions of SFAS No.
123, the fair value of the above-mentioned warrants has been
calculated to be an aggregate of $34,500. Accordingly, this
amount is reflected as additional paid-in capital and as
financing costs.
Financing costs, which represent costs incurred in connection
with this private offering, are being charged to operations as
additional interest expense over the term of the bridge notes.
In September 1996, prior to the closing of this private
offering, the Company entered into a consulting agreement with
one of its founding shareholders which provided for a one-time
payment at closing of $25,290.
NOTE 7 - CAPITAL STOCK AND EQUIVALENTS:
In October 1996, simultaneously with its reincorporation in the
State of Delaware, (see Note 1) the Company increased its
authorized capital to 20,000,000 shares of common stock, $.01
par value, and 1,000,000 shares of preferred stock, $.01 par
value. The Company also effected a stock split of its issued and
outstanding common stock on a 325 for 1 basis, resulting in
1,157,000 shares. This stock split has been reflected
retroactively in the accompanying financial statements and
accordingly, all references to the number of common shares
issued and outstanding have been restated. No preferred shares
are issued and outstanding.
During 1994 the Company repurchased 578,500 shares of its common
stock from certain shareholders at an aggregate cost of $38,500.
These shares are reflected as shares held in treasury for 1995
and as being canceled in 1996.
F-12
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 7 - CAPITAL STOCK AND EQUIVALENTS (Continued):
During 1995 the Company repurchased an additional 107,250 shares
of its common stock from certain shareholders at an aggregate
cost of $33,000. These shares are also reflected as treasury
stock for 1995 and as being canceled in 1996.
In August 1996, the Company sold 480,300 shares of its common
stock at a price of $.30 per share, for cash proceeds of
$144,090 and issued 100,150 shares of its common stock in lieu
of payment of legal and consulting fees of $30,045, for an
aggregate amount of $174,135.
The Company had also granted, to certain former shareholders,
options to purchase an aggregate of 50,700 shares of common
stock (post-split) at an aggregate exercise price of $156.
In October 1996, following the successful completion of a debt
offering (see Note 6), the Company entered into agreements with
the former shareholders, canceling these unexercised options in
consideration of payment of $.30 for each underlying share and
the issuance of warrants to purchase an aggregate of 31,200
shares of stock at an exercise price of $5.00 per share. The
payment for these options aggregating $15,210 has been charged
against additional paid-in capital.
The Company also purchased, in October 1996, 65,000 shares held
by these former shareholders at a per share price of $.30. These
shares were canceled upon the repurchase, and accordingly,
common stock and additional paid-in capital have been reduced by
$650 and $18,850, respectively.
In addition, in October 1996, the Company established a Stock
Option Plan under which options (including non-statutory
options) to purchase up to 2,000,000 shares may be granted to
eligible persons. The Company has since granted options to
purchase an aggregate of 679,200 shares of common stock
(including options to purchase an aggregate of 181,250 shares
which were granted subsequent to the balance sheet date) at
prices ranging from $.30 to $4.00 per share, aggregating
$783,235. To date, none of these options have been exercised.
(See also Note 2g regarding earnings per share).
NOTE 8 - ECONOMIC DEPENDENCY:
To date, the Company's revenues have been materially dependent
on a limited number of customers. The nature of the Company's
business (see Note 1) is such that during any individual
accounting period it will license its software products to a
limited number of significant customers. In addition, revenues
from the Company's products are primarily from the public safety
and law enforcement markets.
Also, the Company currently relies on a limited number of (two
or three) software licensors of its main computer operating
system. The Company cannot assure that if any of these licenses
are terminated, it will be able to replace those licenses on a
timely basis.
F-13
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 9 - INCOME TAXES:
The income tax expense (benefit) is comprised of the following:
For the Year Ended
December 31,
1996 1995
CURRENT:
Federal $(50,709) $39,050
State (18,622) 17,095
DEFERRED:
Federal (4,165) (3,000)
State (2,035) (1,450)
---------- --------
$(75,531) $51,695
The component of the Company's deferred tax asset, pursuant to
SFAS 109, is as follows:
December 31, December 31,
1996 1995
Allowance for doubtful accounts $ - $6,200
======= ======
The Company has net operating losses carryforwards of
approximately $400,000, which may be applied against future
taxable income, and which expire in various years beginning
after 2011. Since there is no assurance that the Company will
generate future taxable income to utilize the deferred tax asset
resulting from its net operating loss carryforwards, the Company
has not recognized this asset as of December 31, 1996.
The following is a reconciliation of the maximum statutory
federal tax rate to the Company's effective tax rate:
For the Year Ended
December 31,
1996 1995
---------- ---------
Federal statutory rate (34.0%) 34.0%
State income taxes (7.0) 7.9
Other 28.9 (2.0)
(12.1%) 39.7%
====== ====
F-14
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 10 - COMMITMENTS:
(a) In October 1996, the Company entered into a lease, for its current
executive offices, which provides for base annual rental of $85,000. This
lease, which is for an initial term of five years, has scheduled annual
increases, and can be renewed for an additional five year period.
The total amount of the base rent payments is being charged to expenses
using the straight-line method over the term of the lease. The Company
has recorded a deferred credit to refect the excess of rent expense over
cash payments since the inception of this lease. Previously, the
Company was occupying space pursuant to a lease which expires in March
1997. The Company has elected to write-off the remaining balance of
unamortized leasehold improvements on this old space of $5,378 during the
current year.
The Company also sublets to an unaffiliated third party, space
which was previously utilized as its executive offices under a
lease which expires in February 1998. As of December 31, 1996,
the Company had a remaining accrued liability of $12,198 which
represents the net cost to the Company in excess of rental
income.
Total net rent expense for operating leases, consisted of the
following:
For the Year Ended
December 31,
1996 1995
Minimum rentals $48,677 $39,544
Sublease rentals (18,000) (1,500)
------ ------
Total net rent expense $30,677 $38,044
====== ======
At December 31, 1996, future minimum rentals (based upon the new
space) and sublease income are as follows:
Total Sublease
Rent Income Net
1997 $ 95,428 $18,000 $77,428
1998 87,616 3,000 84,616
1999 87,975 - 87,975
2000 93,075 - 93,075
2001 72,675 - 72,675
------ ------ -------
Total $436,769 $21,000 $415,769
======= ====== =======
(b) The Company also leases certain types of equipment under
operating leases which expire at various dates through 1999.
Lease payments, which are charged to operations, aggregate
approximately $1,100 per month.
F-15
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 10 - COMMITMENTS (Continued):
(c) The Company is also committed to provide post-contract customer
support, to two of its customers through a third-party provider.
The agreement with the third party provides for monthly payments
of $483 and expires in July 1997.
(d) Effective October 1, 1996, the Company entered into an
employment agreement with the Chairman of its Board of
Directors, whereby he will also serve as chief executive officer
of the Company, which becomes effective upon the closing date of
the contemplated IPO (see Note 11), to continue until September
30, 1999. This agreement provides for annual compensation of
$250,000 and a signing bonus based on a fixed formula.
Effective October 1, 1996, the Company entered into a three-year
employment agreement with its President and Chief Operating
Officer. This agreement provides for annual compensation of
$125,000 and a signing bonus of $15,000.
The agreements with both of these officers provide for
continuing automatic one year extensions, increases as
determined by the Board of Directors, annual bonuses based on
sales and pretax income and include provisions for termination
and covenants not to compete. In addition, the agreements
provide for common stock option grants based upon levels of
Company earnings.
NOTE 11 - PROPOSED INITIAL PUBLIC OFFERING:
The Company is preparing to undertake an initial public offering
("IPO") of 1,000,000 shares of its common stock at a price of
$5.00 per share, or an aggregate of approximately $3,875,000 of
net proceeds. The net proceeds from this offering will be used
to repay the promissory notes from the private offering (see
Note 6), build a staff of regional sales managers to cover the
United States and for marketing, product development, etc.
The proposed offering also covers the resale of an aggregate of
431,200 shares of common stock underlying the warrants issued in
connection with the debt offering and an aggregate of 250,250
shares currently held by certain shareholders. The Company will
not receive any of the proceeds from the resale of these shares.
NOTE 12 - SUBSEQUENT EVENTS:
(a) In January 1997, the Company entered into a secured credit
agreement with its chairman of the board which provides for up
to $200,000 of borrowings. These borrowings are secured by all
the assets of the Company, bear interest at a rate of 10% per
annum and mature upon the closing of an IPO (see Note 11). If an
IPO does not close prior to June 1997, the borrowings are
payable in eight equal quarterly installments, beginning in June
1997. To date, the Company has borrowed $200,000.
F-16
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 12 - SUBSEQUENT EVENTS (Continued):
(b) In January 1997, the Company entered into a three year
employment agreement with an employee to serve as the Company's
chief technology officer. Such agreement provides for annual
base salaries of $200,000, $225,000 and $250,000 in the first,
second and third years, respectively. Other terms of this
employment agreement conform in structure to the material
provisions of the employment agreements described in Note 10(d)
above.
(c) In March 1997, the chairman of the board of the Company
purchased from the Company the $70,000 promissory note (see Note
3) in consideration for the payment in cash of the outstanding
amount of such note. The chairman of the board concurrently
received an assignment of the Company's collateral security for
the note.
F-17
<PAGE>
<TABLE>
<S> <C>
No dealer, salesman or other person has been
authorized to give any information or to make
any representations not contained in this
Prospectus and, if given or made, such
information or representations must not be relied 1,000,000 Shares of Common Stock
upon as having been authorized by the Company
or the Underwriter. Neither the delivery of this
Prospectus nor any sale made hereunder shall
under any circumstances create any implication
that there has been no change in the affairs
of the Company since the date hereof. This Prospectus
does not constitute an offer of any securities other
than the securities to which it relates or an offer
to any person in any jurisdiction in which such an COMPU-DAWN, INC.
offer would be unlawful.
-----------
TABLE OF CONTENTS
Page
Prospectus Summary...................................
Risk Factors.........................................
Use of Proceeds......................................
Dilution.............................................
Capitalization.......................................
Dividend Policy......................................
Bridge Financing.....................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................
Business.............................................
Management........................................... PROSPECTUS
Principal and Selling Stockholders...................
Certain Relationships and Related Transactions.......
Description of Securities............................
Underwriting.........................................
Legal Matters........................................
Experts..............................................
Additional Information...............................
Financial Statements.................................
------------- E. C. Capital, Ltd.
Until , 1997 (25 days after the date of this
Prospectus), all dealers effecting transactions in
the registered securities, whether or not participating
in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation
of dealers to deliver a Prospectus when acting
as underwriters and with respect to their
unsold allotments or subscriptions.
, 1997
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Article X of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by Section 102 of the Delaware General Corporation Law, provided that
this provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) arising under Section 174 of the
Delaware General Corporation Law (with respect to unlawful dividend payments and
unlawful stock purchases or redemptions), or (iv) for any transaction from which
the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of Incorporation
and its by-laws provisions to indemnify its directors, officers, employees and
agents and to purchase insurance with respect to liability arising out of the
performance of their duties as directors, officers, employees and agents as
permitted by Section 145 of the Delaware General Corporation law. The Delaware
General Corporation law provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors, officers, employees and agents may be entitled under the Company's
by-laws, any agreement, vote of stockholders or otherwise.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers, directors, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to indemnify
the Company, its directors, and each person who controls it within the meaning
of Section 15 of the Act with respect to any statement in or omission from the
registration statement or the Prospectus or any amendment or supplement thereto
if such statement or omission was made in reliance upon information furnished in
writing to the Company by the Underwriter specifically for or in connection with
the preparation of the registration statement, the Prospectus, or any such
amendment or supplement thereto.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses to be incurred by the Company in connection with the
issuance and distribution of the securities being registered, other than
underwriting discounts and commissions, are estimated as follows:
SEC Registration Fee $ 3,112.71
NASD Filing Fee 2,000.00
Blue Sky Fees and Expenses 25,000.00
Registrant's Counsel Fees and Expenses 125,000.00
Accountant's Fees and Expenses 75,000.00
Underwriter's Non-Accountable Expense Allowance 150,000.00
Underwriter's Consulting Fee 108,000.00
Printing and Engraving Expenses 50,000.00
NASDAQ Listing Fees 10,000.00
Blue Sky Counsel Fees 25,000.00
Transfer Agent and Registrar's Fees and Expenses 15,000.00
Miscellaneous Expenses 36,887.29
----------
Estimated Total $625,000.00
Item 26. Recent Sales of Unregistered Securities.
The Company sold the following Common Shares during the past three
years. The number of Common Shares referred to herein gives effect to a 325 for
1 stock split effectuated on October 18, 1996 in connection with the Company's
reincorporation in the State of Delaware.
In October 1996, the Company borrowed $770,000 from the following
bridge lenders (the "Bridge Lenders") in a Bridge Financing transaction. In
consideration for making the loans, the Company issued Bridge Warrants to the
Bridge Lenders for the purchase of an aggregate of 431,200 Common Shares at a
price of $0.50 per share.
II-2
<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
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
======= ==========
II-3
<PAGE>
Additionally, in August 1996, the Company issued 25,075 Common Shares
to Mr. Gross in payment of consulting fees of $7,522.50 in connection with the
Company's marketing activities and 75,075 Common Shares to Robert H. Solomon in
payment of legal and consulting fees of $22,522.50.
All the foregoing transactions were private transactions not involving
a public offering and were exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof. The Bridge Financing Securities
were sold only to accredited investors. The Company determined that the
stockholders to whom the Company issued Common Shares in the August 1996
transactions discussed above were sophisticated investors. Except as otherwise
indicated below, sales of the securities were without the use of an underwriter,
and the certificates evidencing the securities relating to the foregoing
transactions bear restrictive legends permitting the transfer thereof only upon
registration of such securities or an exemption under the Securities Act.
The Underwriter of this Offering acted as placement agent for the
Company in connection with the Bridge Financing transaction on a "best efforts,
all or none" basis. The Underwriter received a placement fee of 10% of the gross
proceeds of the Bridge Financing transaction, or $77,000, and a non-accountable
expense allowance of 3% of the gross proceeds of the Bridge Financing
transaction or $23,100. The Company also paid the fees and disbursements of the
Underwriter's counsel in connection with representing the Underwriter in its
capacity of placement agent in the Bridge Financing transaction.
Item 27. Exhibits.
Exhibit
Number Title of Exhibit
1.1 Form of Underwriting Agreement by and between the Company and the
Underwriter.
1.2 Form of Financial Consulting Agreement between the Underwriter and the
Company.
2.1 Agreement of Merger between the Company and Coastal Computer Systems,
Inc., a New York corporation.*
3.1 Articles of Incorporation of the Company.*
3.2 By-Laws of the Company.*
4.1 Specimen Common Share Certificate.
4.2 Form of Underwriter's Common Share Purchase Warrant.
5.1 Opinion of Certilman Balin Adler & Hyman, LLP, counsel for the
Company.**
II-4
<PAGE>
10.1 Restated and Amended Employment Agreement dated as of October 1, 1996
between the Company and Dong W. Lew.
10.2 Restated and Amended Employment Agreement dated as of October 1, 1996
between the Company and Mark Honigsfeld.
10.3 $70,000 Promissory Note dated October 30, 1996 from Dong W. Lew to the
Company.*
10.4 Form of Warrant between the Company and each of the Bridge Lenders.
10.5 1996 Stock Option Plan.
10.6 Lease dated October 1, 1996 between Summit Equities Corp. and the
Company.*
10.7 Pledge and Hypothecation Agreement dated October 30, 1996 between the
Company and Dong W. Lew.
10.8 Credit Agreement dated January 20, 1997 between the Company and Mark
Honigsfeld.
10.9 $100,000 Promissory Note dated January 20, 1997 from the Company to Mark
Honigsfeld.
10.10 $50,000 Promissory Note dated February 19, 1997 between the Company and
Mark Honigsfeld.
10.11 $50,000 Promissory Note dated March 5, 1997 between the Company and Mark
Honigsfeld.
10.12 Form of Indemnification Agreement between the Company and the Company's
directors and officers.
10.13 Consulting Agreement dated September 27, 1996 between the Company and
Alan Daniels and Geraldine Lum Daniels.
10.14 Employment Agreement dated January 6, 1997 between the Company and Louis
Libin.
23.1 Consent of Lazar, Levine & Company LLP, independent auditors.
23.2 Consent of Certilman Balin Adler & Hyman, LLP (included in its opinion
filed as Exhibit 5.1 hereto).
27.1 Financial Data Schedule.
*Previously filed.
**To be filed by amendment.
II-5
<PAGE>
Item 28. Undertakings.
(a) Rule 415 Offering.
The undersigned Company will:
(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information
set forth in the registration statement; and
(iii) include any additional or changed material information on the
plan of distribution.
(2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Equity Offerings of Nonreporting Small Business Issuers.
The undersigned Company will provide to the Underwriter, at the closing
specified in the underwriting agreement, Common Share certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
(c) Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions referred to in Item 24 of this Registration
Statement, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling persons of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will,
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 March __, 1997.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
Mark Honigsfeld,
Chairman of the Board and 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, March 13, 1997
Mark Honigsfeld Chief Executive Officer,
Secretary and Director
(Principal Financial Officer
and Principal Accounting Officer)
* President, Chief Operating March 13, 1997
Dong W. Lew Officer, Treasurer and
Director
/s/ Louis Libin Director March 13, 1997
Louis Libin
/s/ William D. Rizzardi Director March 13, 1997
William D. Rizzardi
/s/ Robert Edward Turner, IV Director March 13, 1997
Robert Edward Turner, IV
*By: /s/ Mark Honigsfeld
Mark Honigsfeld
Attorney-in Fact
II-8
<PAGE>
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Mark Honigsfeld and Dong W. Lew, and each
of them, with full power to act as his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, and each of his substitutes, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, and each of his substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Date
/s/ Louis Libin March 13, 1997
Louis Libin
/s/ William D. Rizzardi March 13, 1997
William D. Rizzardi
/s/ Robert Edward Truner, IV March 13, 1997
Robert Edward Turner, IV
II-9
<PAGE>
COMPU-DAWN, INC.
1,000,000 Shares of Common Stock
UNDERWRITING AGREEMENT
Roslyn Heights, New York
_______, 1997
European Community 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 European Community 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, 1,000,000
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.
1
<PAGE>
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 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 copies ____
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 150,000 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 telecopy with 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
2
<PAGE>
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 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 at 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 Purchase Option. 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 100,000 Warrants
("Underwriter's Warrants"), each Underwriters 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 Purchase Options in the names and denominations designated
by the Underwriter shall be made on the Closing Date.
3
<PAGE>
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 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
4
<PAGE>
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 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
5
<PAGE>
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
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 (iii) 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,
6
<PAGE>
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 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 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,
(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.
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<PAGE>
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 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, (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).
2.9 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 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
8
<PAGE>
laws, (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). Representation is made that stock ownership will be in accordance
with Exhibit B annexed hereto.
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;
(iii) violate any existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or 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
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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, prospectus
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 prospectus 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, 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
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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.
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.
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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 Underwriters, 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.
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
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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 Small Cap 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 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.
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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 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
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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, which shares
are being registered for resale in the Registration Statement, with respect to
which such persons agree not to sell such shares of Common Stock for six (6)
months, following the Effective Date of the Registration Statement, (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, which shares are being registered for resale in the
Registration Statement, with respect to which such persons agree not to sell
such shares of Common Stock for six (6) months, following the Effective Date of
the Registration Statement, except with the consent of the Underwriter and, if
applicable, the Pennsylvania Securities Commission, and (iii) certain 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
owned by them or their family members and affiliates (either pursuant to Rule
144 of the Regulations or otherwise) underlying the Bridge Warrants for a period
of six (6) months following the Effective Date except with the consent of the
Underwriter and, if applicable, the Pennsylvania Securities Commission.
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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.
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, (iii) the issuance of common or preferred
securities in connection with a merger or acquisition by the Company, (iv)
issuance of shares, (v) 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 (vi)
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, only with the consent of
the underwriter which consent will not be unreasonably 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 (i) a Prospectus is
required to be delivered under the Act, the Company will use all reasonable
efforts to comply with all requirements
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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 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.
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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 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 thereof, 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
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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.
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
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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 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
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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 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
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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 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.
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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.
3.21 Transfer Agent. The Company shall retain American Stock
Transfer Company as its transfer agent for the Common Stock and the Warrants.
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
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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.
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
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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
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
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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; 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. The offers and sales of the
outstanding Common Stock and options and warrants to purchase shares of Common
Stock were at all relevant times either registered under the Act and the
applicable state securities or Blue Sky Laws or exempt from such registration
requirements. 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
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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, (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.
(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,
(iii) that the remedy of specific performance and injunction and other forms
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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
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
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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 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
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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, 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
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
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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, file 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 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.
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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 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 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 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
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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.
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
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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. Underwriter's Representations and Warranties. The Underwriter
Represents and Warrants to the Company that:
5.1 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.
5.2 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.
5.3 [Reserved]
5.4 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.
6. Indemnification.
6.1 Indemnification of Underwriter.
6.1.1 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
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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 5 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 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
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Securities or in connection with the Registration Statement or Prospectus.
6.1.2 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 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.
6.2 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
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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 5.1.2.
6.3 Contribution.
6.3.1 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 5 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 the fact
that this Section 5 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 5, 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 5.3, the
Underwriter shall not be required to contribute any amount in excess of the
amount by which the total
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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.
6.3.2 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 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.
7. Additional Covenants.
7.1 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
38
<PAGE>
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.
7.2 [Reserved]
7.3 [Reserved]
7.4 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.
7.5 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.
7.6 [Reserved]
7.7 Compensation and Other Arrangements. The Company hereby
agrees that for a period of three years from the Effective 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.
8. Covenants of the Underwriter. The Underwriter, covenants
and agrees with the Company as follows:
8.1 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.
8.2 Waiver of "Lock-Up". The Underwriter shall not consummate
any transactions with the Company's bridge lender described in the Prospectus,
or waiver 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"
39
<PAGE>
supplements to the Prospectus pursuant to rule 424(c) of the Act, or to file a
post-effective amendment to the Registration Statement.
9. 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 Dates or the Option Closing Date and such
representations, warranties and agreements of the Underwriter and Company,
including the indemnity agreements contained in Section 5 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.
10. Effective Date of This Agreement and Termination Thereof
10.1 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 9 shall mean the time, after the Registration
Statement becomes 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.
10.2 Termination.
10.2.1 By the Underwriter. The Underwriter shall have
40
<PAGE>
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 for
the sale of the Securities.
10.2.2 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
41
<PAGE>
days notice to the Underwriter to terminate this Agreement without any liability
to the Underwriter of any kind.
10.3 Notice. If you elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this Section 9,
the Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
10.4 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.
10.5 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.
11. Miscellaneous.
11.1 Notices. All communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be mailed,
delivered or telecopied and confirmed:
If to the Underwriter:
European Community Capital, Ltd.
One Expressway Plaza
Roslyn Heights, New York 11577
Attention: Mr. Greg Small
Fax: (516) 625-9223
42
<PAGE>
Copy to:
Blodnick, Blodnick & Zelin, P.C.
Expressway Plaza Two, Suite 200
Roslyn Heights, New York 11577
Attn: Edward K. Blodnick, Esq.
Fax (516) 621-7533
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
11.2 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.
11.3 Amendment. This Agreement may only be amended by a
written instrument executed by each of the parties hereto.
11.4 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,
43
<PAGE>
with respect to the subject matter hereof.
11.5 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 5 hereof, and
their respective successors, legal representatives 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.
11.6 Governing Law; Jurisdiction. This Agreement shall be
governed by and construed and enforced in accordance with the law of the 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.
11.7 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.
11.8 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
44
<PAGE>
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.
45
<PAGE>
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:_______________________
Accepted as of the date first above written.
Roslyn Heights, New York
EUROPEAN COMMUNITY CAPITAL, LTD
- ----------------------------------
Name: Greg Small
Title: President
46
<PAGE>
04575\02SYPL01.000
CONSULTING AGREEMENT
CONSULTING AGREEMENT, made and executed as of March _____,
1997, between Compu-Dawn, Inc. (the "Company"), with its principal place of
business at 77 Spruce Street, Cedarhurst, New York and European Community
Capital ("Consultant") with its principal place of business at 300 Old Country
Road, Mineola, New York.
W I T N E S S E T H :
WHEREAS, Consultant is a stock brokerage and underwriter with
knowledge of the financial community and stock markets;
WHEREAS, because of the importance of Consultant's opinion,
counsel, and advice to the Company, the Company desires that Consultant remain
available to consult, guide and the Company, and Consultant desires to make
himself available for such purposes;
WHEREAS, the Company desires to retain the financial
consulting services of Consultant and Consultant desires to render such
financial consulting services to the Company upon the terms and conditions
herein set forth.
NOW, THEREFORE, in consideration of the covenants and
agreements herein contained, it is hereby agreed as follows:
1
<PAGE>
1. FINANCIAL CONSULTING SERVICES:
Commencing on the "Commencement Date" (as such term is
hereinafter defined), Consultant agrees from time to time as the Company may
request, to be available by telephone and/or in person as Consultant deems
appropriate to render business, management and other consulting services to the
Company, and to advise and assist the Company and its affiliates in conducting
their business and affairs. Consultant shall not be obligated to spend any
specific amount of time in rendering consulting services and the compensation
provided for in Paragraph 3 hereof shall be payable to Consultant even if the
Company makes no requests for advice or services. Subject to the provisions
of Paragraph 4 hereof, Consultant may accept such other consulting arrangements
and/or employment as Consultant may desire; provided, however, that Consultant
shall be reasonably available to the Company as aforesaid.
2. FINANCIAL CONSULTING TERM:
The term of this Agreement with respect to consulting
services shall be for a period of approximately three (3) years, commencing on
the date of the Closing of the Public Offering (the "Commencement Date") and
terminating on the third anniversary of the Commencement Date.
3. FINANCIAL CONSULTING FEES:
Consultant's total compensation for the financial
consulting services to be rendered to the Company shall be $108,000, payable in
full at the Closing of the Public Offering.
4. Nothing herein shall restrict Consultant from
underwriting, making a market in, or trading in the stock of a competing
company.
2
<PAGE>
5. In order to induce consultant to execute this Agreement,
perform the financial consulting services required to be performed by the
Consultant hereunder, notwithstanding the inability of Consultant to perform his
services hereunder due to any disability or incapacity, the Company shall
continue to pay to Consultant the full compensation and payments provide for
herein.
6. In the event of the insolvency, liquidation, sale or
dissolution of the Consultant prior to the termination of this Agreement, and in
order to induce Consultant to execute this Agreement, perform the financial
consulting services required to be performed by it hereunder, the Company shall
continue to pay the full compensation provided for herein, such payments to be
made to the persons or entities from time to time, designated in writing by
Consultant and if no such persons are designated to the proper representative of
Consultant.
7. Beginning on the date hereof and at any time thereafter,
Consultant shall treat as confidential and proprietary, all information relating
to the business or interests of the Company, including trade secrets and
business plans of the Company.
Consultant acknowledges that the restrictions contained in
this Paragraph 7 are reasonable in view of the nature of the business in which
the Company is engaged and its knowledge of the business of the Company. The
parties hereto acknowledge that any breach of this paragraph will cause the
Company irreparable harm for which the Company will have no adequate remedy at
law. As a result, the Company will be entitled to the issuance by a court of
competent jurisdiction of an injunction, restraining order or other equitable
relief in favor of itself, restraining Consultant from committing or continuing
any such violation. Any right to obtain an injunction, restraining order or
other equitable relief hereunder will not be deemed a waiver of any right to
assert any other remedy the Company may have under this Agreement or otherwise
at law or in equity.
3
<PAGE>
8. NOTICES:
All notices, requests, demands or other communications
hereunder must be in writing and shall be deemed to have been duly given if
delivered by hand against receipt, or if mailed by first class registered mail,
return receipt requested, postage and registry fees prepaid, and addressed to
the parties at their addresses set forth above or to such other address as
either party hereto may specify by written notice given hereunder to the other
party.
a. If to Consultant, with a copy to:
Blodnick Blodnick & Zelin, P.C.
Expressway Plaza Two, Suite 200
Roslyn Heights, New York 11577-2031
Attention: Edward K. Blodnick, Esq.
b. If to the Company, with a copy to:
Certilman, Balin, Adler & Hyman LLP
90 Merrick Avenue
East Meadow, New York 11554
Attention: Fred Skolnik, Esq.
9. Miscellaneous.
a. No amendment of any provision of this Agreement shall in
any event be effective unless the amendment shall be in writing and signed by
the Consultant and the Company and no waiver nor consent to any departure by any
party therefrom shall in any event be effective unless such waiver or consent
shall be in writing and signed by the party waiving or consenting to such
provision, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose which is given.
4
<PAGE>
b. No failure on the part of Consultant or the Company to
exercise, and no delay in exercising, any right under this Agreement shall
operate as a waiver thereof; nor shall any single or partial exercise thereof or
the exercise of any other right. The remedies herein provided are cumulative and
not exclusive of any remedies provided by law.
c. The agreements, representations, warranties, covenants
and provisions contained in this Agreement shall survive the Closing.
d. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or thereof or affecting the validity or
enforceability of such provision in any jurisdiction.
e. This Agreement between the Company and Consultant being
entered into herewith sets forth the entire understanding of the parties hereto
with respect to all matters contemplated hereby and thereby supersedes any
previous agreements and understandings among them concerning such matters. No
statements or agreements oral or written, made prior to or at the signing hereof
shall vary, waive or modify the written terms hereof.
f. This Agreement shall be binding upon and inure to the
benefit of the Company and the Consultant and the respective successors and
assigns, except that neither the Corporation nor the Consultant may assign this
Agreement, or the rights or obligations hereunder, without the prior written
consent of the other party. This Agreement shall be governed by, and construed
in accordance with the laws of the State of New York applicable to agreements
and instruments executed and performed in the State of New York.
5
<PAGE>
g. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute but one and the same
agreement.
10. Each party shall be responsible for their own professional
fees and their own costs and expenses in regard to the negotiation and execution
of this Agreement.
11. Both parties to this agreement agree except as required by
law, they will not directly or indirectly make statements or encourage others to
make statements or release information that is designed to or could reasonably
be expected to criticize the other party.
12. Each of the parties agree that any dispute hereunder shall
be resolved by Arbitration pursuant to the rules of the NASD with said
Arbitration to take place in Manhattan or Long Island. Nothing herein shall
restrict any party to this Agreement to seek equitable relief in the New York
State Supreme Courts located in New York County and Nassau County or the Eastern
District of New York Federal Court.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
COMPU-DAWN, INC. European Community Capital, Ltd.
By:_______________________ By:____________________________
Mark Honigsfeld David Stetson
6
<PAGE>
<TABLE>
<S> <C> <C> <C>
NUMBER SHARES
NP Compu-DAWN, INC.
INCORPORATED UNDER THE LAWS OF DELAWARE CUSIP 20476A 10 0
See reverse side for
certain definitions
COMMON STOCK
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $.01 EACH OF THE COMMON STOCK OF
Compu-DAWN, Inc.
transferable on the books of the Corporation in person or by duly authorized
attorney, upon surrender of this certificate properly endorsed. This certificate
is not valid until countersigned by the Transfer Agent and registered by the
Registrar.
Witness the seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
Compu-DAWN, Inc.
CORPORATE
SEAL
1996
DELAWARE
--------------------------------- -----------------------------------------------------
CHAIRMAN, CHIEF EXECUTIVE OFFICER PRESIDENT AND TREASURER
AND SECRETARY
COUNTERSIGNED AND REGISTERED: AMERICAN STOCK
TRANSFER & TRUST COMPANY TRANSFER AGENT AND REGISTRAR
-----------------------------------------------------
Authorized Officer
</TABLE>
<PAGE>
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT -............Custodian..................
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act...........................................
tenants in common
Additional abbreviations may also be used though not in
the above list.
Compu-DAWN, Inc.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof of the
Corporation and the qualifications, limitations, or restrictions of such
preferences and/or rights. This certificate and the shares represented thereby
are issued and shall be held subject to all the provisions of the Certificate of
Incorporation and all amendments thereto and resolutions of the Board of
Directors providing for the issue of shares of Preferred Stock (copies of which
may be obtained from the secretary of the Corporation), to all of which the
holder of this certificate by acceptance hereof assents.
For value received, ___________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
shares of the capital stock represented by the within certificate, and do hereby irrevocably constitute and appoint
_________________________________________________________________________________ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated______________________________
-------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- ------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
</TABLE>
\04575\002\warrant.002
100,000 SHARES
COMPU-DAWN, INC.
WARRANT TO PURCHASE COMMON SHARES
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION"
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH
TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND
EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.
The Transferability of this Warrant is
Restricted as Provided in Paragraph 4
THIS IS TO CERTIFY THAT, for value received, E.C. Capital,
Ltd. (together with any registered assignee hereof the "Holder") is entitled to
purchase from Compu-Dawn, Inc. (the "Company"), a corporation organized under
the laws of Delaware, at any time or from time to time during the period (the
"Exercise Period") commencing on the first anniversary of the date hereof (the
"Commencement Date") until 5:00 p.m., New York Time, on _________ (the
"Expiration Date"), up to 100,000 fully paid and non-assessable common shares,
$.01 par value, of the Company (the "Common Shares"), as now constituted,
all per share in accordance with the terms and provisions hereof. The number of
Common Shares to be received upon the exercise of this Warrant and the price to
be paid for each Common Share shall be adjusted from time to time as hereinafter
set forth. The Common Shares or other securities or property deliverable upon
such exercise, as adjusted from time to time, are hereinafter sometimes
referred to as "Warrant Shares" and the exercise price of a Common Share in
effect at any time and as adjusted from time to time is hereinafter sometimes
referred to as the "Exercise Price". Unless the context otherwise requires, the
term "Warrant" or "Warrants" as used herein includes this Warrant and any other
Warrant or Warrants which may be issued pursuant to the provisions of this
Warrant, whether upon transfer, assignment, partial exercise, divisions,
combinations, exchange, or otherwise, and the term "Holder" includes any
transferee or transferees or assignee or assignees of the Holder named above,
all of whom shall be subject to the provisions of the Warrant, and, when used
with reference to Warrant Shares, means the holder or holders of such Warrant
Shares.
Subject to Paragraph 5 hereof, this Warrant is exercisable at a
purchase price of $8.25 per share (the "Exercise Price").
1
<PAGE>
The Common Shares issuable upon exercise of this Warrant have
been registered under a registration statement on Form SB-2, (File No.
333-18667) declared effective by the Securities and Exchange Commission on
March __, 1997 (the "Registration Statement"). This Warrant was originally
issued pursuant to an Underwriting Agreement between the Company and E.C.
Capital, Ltd., dated March , 1997, in connection with a public offering of
1,000,000 Common Shares of the Company (the "Offering").
1. EXERCISE OF WARRANTS
The purchase rights represented by this Warrant are
exercisable from time to time at the option of the Holder hereof, in whole or
in part (but not as to fractional Common Shares), during the Exercise Period,
until 5:00 p.m. New York time on the Expiration Date, by presentation and
surrender to Company at its principal office, with the warrant exercise form
attached hereto, duly executed and accompanied by payment (either in cash or by
certified or official bank check, payable to the order of the Company) of the
Exercise Price for the number of the Warrant Shares specified in such form. In
case of the purchase of fewer than all of the Common Shares purchasable under
this Warrant, the Company shall cancel this Warrant upon the surrender thereof
and shall execute and deliver a new Warrant of like tenor, dated the date
hereof, for the balance of the Common Shares purchasable hereunder. Each person
in whose name any certificate for Common Shares is issued shall, for all
purposes, be deemed to have become the Holder of record of such shares on the
date of exercise of this Warrant, irrespective of the date of delivery of such
certificate, except that if the stock transfer books of the Company are closed
on such exercise date, such person shall be deemed to havebecome the Holder of
record of such shares at the close of business on the next succeeding date on
which the stock transfer books are open. The Company shall take all actions
necessary to ensure that all Common Shares issued upon the exercise of this
Warrant are, when they are issued as provided herein, duly and validly
authorized and issued, fully paid and non-assessable.
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2. ISSUANCE OF STOCK CERTIFICATES
The issuance of certificates for
Common Shares upon the exercise of this Warrant shall be made without charge to
the Holder hereof and such certificates shall be issued in the name of, or in
such names as may be directed by, the Holder hereof; provided, however, that the
Company shall not be required to pay any transfer tax that may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificate in a name other than that of the Holder, and the Company shall not
be required to issue or deliver such certificates unless or until the person or
person requesting the issuance thereof shall have paid to the Company the amount
of such transfer tax of shall have established to the satisfaction of the
Company that such transfer tax has been paid or that no such tax is due.
3. RIGHTS OF HOLDER
3.1 Rights of Holder. Nothing in this Warrant shall be
construed as conferring upon the Holder hereof any rights as a shareholder of
the Company. No provision of this Warrant, in the absence of affirmative action
by the Holder to purchase the Commons Shares, and no mere enumeration herein of
the rights or privileges of the Holder, shall give rise to any liability of the
holder for the Exercise Price or as a shareholder of the Company, whether such
liability is asserted by the Company or by creditors thereof.
4. RESTRICTIONS ON TRANSFERABILITY: REDEMPTION
4.1 Restrictions on Transfer of Warrant. This Warrant shall
not be transferred, sold, assigned or hypothecated, except by will or pursuant
to the laws of descent and distribution and except that (i) it may be
transferred in whole or in part to any person who is an officer, director or
stockholder of E.C. Capital, Ltd. and (ii) beginning one year after the
Commencement Date it may be transferred to a party other than those described in
clause (i) provided that the Warrant is exercised immediately upon such
transfer. If this Warrant is not exercised immediately upon a transfer pursuant
to the foregoing clause (ii), it shall lapse. Any such assignment shall be
effected by the Holder (i) executing the form of assignment at the end hereof
and (ii) surrendering this Warrant for cancellation at the office or agency of
the Company, accompanied by a certificate (signed by the holder, or an officer
of the Holder if the Holder is a corporation), stating that each transferee is a
permitted transferee under this paragraph 4; whereupon the Company shall issue,
in the name or names specified by the Holder (including the Holder) a new
Warrant or Warrants of like tenor and representing in the aggregate rights to
purchase the same number of Common Shares as are purchasable hereunder.
5. ADJUSTMENT OF EXERCISE PRICE AND WARRANT
SHARES PURCHASABLE
A. The Exercise Price at which Common Shares shall be
purchasable, as set forth in Section 1 hereof, shall be $8.25 per share, subject
to adjustment from time to time as follows:
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(1) If the Company shall declare a dividend payable in
Common Shares, subdivide or combine the outstanding Common Shares, the Exercise
Price shall be adjusted (to the nearest whole cent) to that price determined by
multiplying the Exercise Price in effect immediately prior to such event by a
fraction (i) the numerator of which shall be the number of Common Shares
outstanding immediately prior to such event and (ii) the denominator of which
shall be the number of Common Shares outstanding immediately after such event.
Appropriate readjustment of the Exercise Price shall be made if any dividend
referred to above shall be abandoned.
B. In the event of an adjustment of the Exercise Price, the
number of Common Shares (or reclassified stock) issuable upon exercise of this
Warrant after such adjustment shall be equal to the number determined by
dividing:
(1) an amount equal to the product of (i) the number of Common
Shares issuable upon exercise of this Warrant immediately
prior to such adjustment, and (ii) the Exercise Price
immediately prior to such adjustment; by (2) the Exercise
Price immediately after such adjustment.
C. In the event of any reorganization or reclassification of
the outstanding Common Shares (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination) or in the event of any consolidation of the Company
with, or merger of the Company with, another entity after which no securities of
the Company will be publicly held, or in the event of any sale, lease or
conveyance of all, or substantially all, of the property, assets, business and
goodwill of the Company as an entity, the Holder of this Warrant shall thereupon
or thereafter, at any time after the first anniversary of the Commencement Date
and prior to the Expiration Date, have the right, but not the obligation, to
exercise this Warrant. Upon such exercise, the Holder shall have the right to
purchase and/or receive the kind and amount of stock and other securities, cash
or other property receivable upon such reorganization, reclassification,
consolidation, merger or sale by a holder of the number of Common Shares which
the Holder of this Warrant would have received had he exercised this Warrant
immediately prior to such reorganization, reclassification, consolidation,
merger or sale, at a price equal to the aggregate Exercise Price then in effect
pertaining to this Warrant (the kind, amount and price of such stock and other
securities to be subject to adjustment as herein provided). After any such
reorganization, reclassification, consolidation, merger or sale which shall
result in any cash distribution in excess of the Exercise Price provided for by
this Warrant, the Holder of this Warrant may at his option exercise the same
without making payment of the Exercise Price and in such case the Company shall
upon the distribution to said Holder, consider that said Exercise Price has been
paid in full to it and in making settlement to said Holder, shall deduct from
the amount payable to such Holder an amount equal to such Exercise Price.
D. In the event the Company shall, at any time after the first
anniversary of the Commencement Date and prior to the Expiration Date and prior
to the exercise thereof dissolve, liquidate or wind up its affairs, the Holder
of this Warrant shall thereupon or thereafter at any time be entitled, but not
obligated, to exercise this Warrant, and upon the exercise thereof, to receive,
in
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lieu of the Common Shares of the Company which he would have been entitled to
receive, the same kind and amount of assets as would have been issued,
distributed or paid to him upon any such dissolution, liquidation or winding up
with respect to such Common Shares of the Company, had he been the holder of
record of such Common Shares receivable upon the exercise of this Warrant on the
record date for the determination of those entitled to receive any such
liquidating distribution. After any such dissolution, liquidation or winding up
which shall result in any cash distribution in excess of the Exercise Price
provided for by this Warrant, the Holder of this Warrant may at his option
exercise the same without making payment of the Exercise Price, and in such case
the Company shall upon the distribution to said Holder consider that said
Exercise Price has been paid in full to it and in making settlement to said
Holder shall deduct from the amount payable to such Holder an amount equal to
such Exercise Price.
E. Irrespective of any adjustments in the Exercise Price or
the number or kind of shares purchasable upon exercise of this Warrant, this
Warrant may continue to express the same price and number and kind of shares as
when originally issued.
F. The Company may retain a firm of independent public
accountants of recognized standing (who may be any such firm regularly employed
by the Company) to make any computation required under this Section, and a
Certificate signed by such firm shall be conclusive evidence of the correctness
of any computation made under this Paragraph.
G. Notwithstanding anything contained herein to the contrary,
no adjustment of the Exercise Price or the number of shares issuable upon
exercise of this Warrant shall be made for any action taken by the Company
pursuant to written agreements in existence on the original issue date of this
Warrant.
6. OFFICER'S CERTIFICATE
Whenever the Exercise Price shall
be adjusted as required by the provisions of Paragraph 5, the Company shall
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office and, in the event it shall have informed the Holder that an
agent has been designated as an agent for the exercise or transfer of this
Warrant, with such warrant transfer agent, an officer's certificate showing the
adjusted Exercise Price determined as therein provided, setting forth in
reasonable detail the facts requiring such adjustment, including a statement of
the number of additional Common Shares, if any, the consideration for such
shares, determined as provided in Paragraph 5, and such other facts as shall be
necessary to show the officer's certificate shall be made available at all
reasonable times for inspection by the Holder of this Warrant and the Company
shall, forthwith after each such adjustment, mail copy of such certificate to
such Holder by certified mail, return receipt requested.
7. NOTICES TO WARRANT HOLDER
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7.1 Notices. So long as this Warrant shall be outstanding, (i)
if the Company shall pay any dividend or make any distribution upon the Common
Shares otherwise than in cash and out of earned surplus, or (ii) if the Company
shall offer to the holders of Common Shares for subscription or purchase by them
any shares of any class or any other rights, or (iii) if there shall be any
_____ capital stock of the Company, consolidation or merger of the Company with
or into another corporation, sale, lease or transfer of all or substantially all
of the property and assets of the Company, or voluntary or involuntary
dissolution, liquidation or winding up of the Company shall be affected, then in
any such event, the Company shall cause to be mailed by certified mail to the
Holder, at least thirty days prior to the date specified in (x) or (y) below, as
the case may be, a notice containing a brief description of the proposed action
and stating the date or expected date on which (x) a record is to be taken for
the purpose of such dividend distribution or rights, or (y) such
reclassification, reorganization, consolidation, merger, conveyance, lease or
transfer, dissolution, liquidation or winding up is to take place and the date,
if any, is to be fixed, or expected date as of which the holders of Common
Shares of record shall be entitled to exchange their Common Shares for
securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, lease or transfer,
dissolution, liquidation or winding up.
8. REGISTRATION
8.1 Definitions. For purposes of this paragraph 8:
(a) The term "Act" means the Securities Act of 1933, as
amended;
(b) The terms "register", "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Act and the declaration or ordering of
effectiveness of such registration statement;
(c) The term "Registrable Securities" means this Warrant, the
Warrant Shares and any capital stock of the Company issued as a dividend or
other distribution with respect to, or in exchange or in replacement of, this
Warrant and/or the Warrant Shares; and
(d) The term "Holder" means any holder of this Warrant and/or
Warrant Shares.
(e) The term "Warrant" shall mean this Warrant with all other
purchase warrants of like tenor, (differing, however, as to date, identity of
holders and number of shares purchasable) originally issued simultaneously with
the original predecessor of this Warrant.
8.2 Request. The Company will on a single occasion, during the
four-year period commencing on the Commencement Date of this Warrant, at its
expense, upon the request of the holders of a majority of the Warrants (or in
case of their prior exercise, upon the request of the holders of a majority of
the Warrant Shares) promptly file with the Securities and Exchange Commission
and use best efforts to process to effectiveness the requisite post-effective
amendments to the Registration Statement (or a new registration statement if
required) necessary to revise the
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prospectus contained therein (the "Prospectus") in order to reflect the terms of
offering and to permit the public offering of all or any part of the Registrable
Securities and to keep the related prospectus current for a period of nine
months, or if the resale of the Warrant Shares is underwritten, for a period
ending when the disribution of the Warrant Shares is completed, and will furnish
such selling parties with a reasonable number of copies of the related
prospectus; the selling holders of the Registrable Securities shall be covered
by the indemnity agreements of the Company contained in Section 6.1 of the
Underwriting Agreement between the Company and E.C. Capital, Ltd., of even date,
which Section is incorporated herein by reference, with respect to such
post-effective amendments (or new registration statement) to the same extent as
the Underwriter is covered by such indemnity agreements with respect to the
Registration Statement and Prospectus, provided that such selling parties shall
reciprocally furnish the Company with indemnity agreements with respect to such
post-effective amendments (or new registration statement) similar to those
covering the Company under Section 6.2 of such Underwriting Agreement. Expenses
to be borne by the Company in connection with such post-effective amendments (or
new registration statement) shall not include any underwriting discounts or
commissions, stock transfer taxes with respect to the securities so offered or
fees or expenses of counsel for the holders of the Registrable Securities.
8.2.1. Notwithstanding the foregoing, the Company may
delay filing a registration statement, and may withhold efforts to cause the
registration statement to become effective for a period of up to one hundred and
eighty (180)days, if the Company determines in good faith that such registration
might (i) interfere with or affect the negotitation or completion of any
transaction that is being contemplated by the Company (whether or not a final
decision has been made to undertake such transaction) at the time the right to
delay is exercised, or (ii) involve initial or continuing disclosure obligations
that might not be in the best interest of the Company's stockholders. If, after
a registration statement becomes effective, the Company advises the holders
of registered shares that the Company considers it appropriate for the
registration statement to be amended, the holders of such shares shall suspend
any further sales of their registered shares until the Company advises them
that the registration statement has been amended.
8.3 Piggy-back. During the four-year period commencing on the
Commencement Date of this Warrant and ending on the Expiration Date of this
Warrant, the Company shall advise each holder of Warrants or Warrant Shares, at
least thirty (30) days prior to any date on which the Company proposes to
register any of its equity securities under the Act on a registration form
usable for resales (other than on Form S-8 or other form similar thereto
relating to employee benefit plans or Form S-4 or similar forms used in
connection with business combinations). Upon the written request of any Holder
given within twenty (20) days after receipt of any such notice by the Company,
the Company shall use its best efforts to cause to be registered under the Act
all of the Registrable Securities that each such Holder has requested be
registered.
Notwithstanding the foregoing, if the underwriter of such
offering determines that the total amount of securities which it and any other
persons or entities intend to include in such offering would adversely affect
the success of such offering, then the amount or kind of securities to be
offered by the holders of Warrant Shares and the holders of any other securities
(the "Other
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Securities") seeking to have such securities included in such registration
statement pursuant to the incidental registration rights of such other holders
shall be determined as follows: (i) there shall first be included all
Registrable Securities sought to be registered by holders thereof before any
Other Securities are included in such registration statement and there shall
then be included the Other Securities, and (ii) in the event that all
Registrable Securities cannot be so included, there shall be included
Registrable Securities pro rata to the extent necessary to reduce the total
amount recommended by such underwriters or excluded in their entirety, as the
case may be . In addition, if such registration statement relates to an
underwritten public offering and the number of shares to be offered is reduced
by the underwriter(s) subsequent to the initial filing thereof with the
Securities and Exchange Commission, the number of Registrable Securities to be
registered under such registration statement will be reduced pro rata.
Further, the Company shall have the right at any time it shall
have given written notice pursuant to this Paragraph 8.3 (irrespective of
whether a written request for inclusion of Registrable Securities shall have
been made) to elect not to file any such proposed registration statement, or to
withdraw the same after the filing thereof.
8.4 Covenants with Respect to Registration. In connection with
any registration under Paragraph 8.2 or 8.3, the Company covenants and agrees as
follows:
(a) The Company shall use its best efforts to have any
registration statement declared effective remain effective for a period adequate
for all Holders to dispose of their Registrable Securities; provided, however,
that in connection with any proposed registration (i) intended to permit an
offering of any securities from time to time (i.e., a so-called "shelf
registration"), the Company shall in no event be obligated to cause any such
registration to remain effective for more than two hundred seventy (270) days,
or (ii)covering the resales of the Warrant Shares which are underwritten, the
Company shall in no event be obligated to cause any such registration to remain
effective for longer than the expiration of the distribution period of the
Warrant Shares.
(b) The Company shall, to the extent provided for in
this agreement, prepare and file with the Securities and Exchange Commission
("SEC") such amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement.
(c) The Company shall furnish to the Holders such
numbers of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Act, and such other documents as they
may reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) The Company shall use its best efforts to register
and qualify the securities covered by such registration statement under such
other securities or Blue Sky laws of
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such jurisdictions as shall be reasonably appropriate for the distribution of
the securities covered by the registration statement, provided that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions, and further provided that (anything in this
Agreement to the contrary notwithstanding with respect to the bearing of
expenses) if any jurisdiction in which the securities shall be qualified shall
require that expenses incurred in connection with the qualification of the
securities in that jurisdiction be borne by selling shareholders, then such
expenses shall be payable by selling shareholders pro rata, to the extent
required by such jurisdiction.
8.5 Information Regarding Holder. It shall be a condition
precedent to the obligations of the Company to take any action pursuant to this
Paragraph that the Holders shall furnish to the Company such information
regarding them, the Registrable Securities held by them, and the intended method
of disposition of such securities as the Company shall reasonably request and as
shall be required in connection with the action to be taken by the Company.
8.6 Expenses. The company shall pay all expenses incurred in
connection with a registration pursuant to the paragraph, including without
limitation all registration and qualification fees, printers' and accounting
fees, fees and disbursements of counsel for the Company, except for (i) the fees
and disbursements of counsel for the Holders, if any (ii) state transfer taxes;
(iii) underwriting discounts and commissions and (iv) brokerage commissions.
9. COVENANTS OF THE COMPANY
The Company covenants and agrees that all Common Shares which
may be issued upon the exercise of this Warrant will, upon full payment
therefor, be duly authorized, validly issued, fully paid and non-assessable
(free from all taxes, liens, and charges with respect to the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously
with each issue)). Without limiting the generality of the foregoing, the
Company will from time to time take all such action as may be required to
assure that the par value, if any, per share of the Common Shares is at all
times not in excess of the applicable Exercise Price. The Company further
covenants and agrees that during the period within which this Warrant may be
exercised, the Company will at all times reserve for issue and delivery upon
exercise of this Warrant such number of Common Shares as shall be required for
issue and delivery upon exercise in full of this Warrant
10. EXCHANGE AND REPLACEMENT OF WARRANT
This Warrant is exchangeable without expense to
Holder, upon the surrender hereof by Holder at the principal executive office of
the Company, for a new Warrant or Warrants of like tenor and date representing
in the aggregate the right to purchase the same number of shares as are
purchasable hereunder in such denominations as shall be designated by the
registered holder hereof at the time of such surrender.
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Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and (in the cases of loss, theft or destruction) of reasonably
satisfactory indemnity, or security reasonably satisfactory to it, and
reimbursement to the Company of all reasonable expense incidental thereto, and
upon surrender and cancellation of this Warrant of like tenor and date, in lieu
of this Warrant and any such lost, stolen or destroyed Warrant shall thereupon
become void.
11. NONISSUANCE OF FRACTIONAL INTERESTS
No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon exercise hereof, the Company
shall pay to the Holder an amount in cash equal to such fraction multiplied by
the current market value of such fractional share, determined as follows:
(a) If the Warrant Shares are listed on a national
securities exchange oradmitted to unlisted trading privileges on such exchange,
the current value shall be the last reported sale price of the Warrant Shares on
such exchange on the last business day prior to the date of exercise of this
Warrant or if no such sale is made on such day, or the Warrant Shares are
listed on The Nasdaq National Market or SmallCap Market (collectively "NASDAQ"),
the average closing bid and asked prices of the Warrant Shares for such day
on such exchange or NASDAQ, as the case may be; or
(b) If the Common Shares are not so listed or
admitted to unlisted trading privileges, the current value shall be the mean of
the last reported high bid and low asked prices of the Common Shares reported
by the National Quotation Bureau, Inc. or a comparable firm selected by the
Board of Directors of the Company, on the last business day prior to the date of
the exercise of this Warrant; or
(c) If the Common Shares are not so listed or
admitted to unlisted trading privileges and bid and asked prices are not so
reported, the current value shall be an amount, not less than book value per
share of Common Shares, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
12. NOTICES
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to the Holder of this Warrant, at the address of
such Holder appearing in the records of the Company; or
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(b) If to the Company, at 77 Spruce Street, Cedarhurst, New
York 11516 or such other address of which the Company gives written notice to
the registered Holder of this Warrant.
13. SUCCESSORS
13.1 All the covenants, agreements, representations and warranties
contained in this Warrant shall bind the parties hereto and their respective
heirs, executors, administrators, distributees, successors and assigns,
provided, however, that except as otherwise provided herein this Warrant may not
be sold, transferred, assigned, pledged, hypothecated or otherwise disposed of
without the prior written consent of the Company.
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14. HEADINGS
14.1 The Article and paragraph headings in this Warrant are inserted
for purposes of convenience only and have no substantive effect.
15. LAW GOVERNING
15.1 This Warrant shall be construed and enforced in accordance with,
and governed by, the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officers as of the day and year first above
written.
COMPU-DAWN, INC.
By: _________________________
Mark Honigsfeld
ATTEST:
- ------------------
[SEAL]
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PURCHASE FORM
The undersigned hereby irrevocably elects to exercise the
within Warrant to the extent of purchasing ____ Common Shares and hereby makes
payment of $________ in payment of the actual exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name __________________________________________________
(Please typewrite or print in block letters)
Address _______________________________________________
Signature: __________________________
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RESTATED AND AMENDED
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") by and between COMPU-DAWN,
INC., a Delaware corporation ("Company"), and DONG LEW ("Executive") is made and
entered into a New York, New York on this the 28th day of October, 1996,
effective as of the 1st day of October, 1996 ("Effective Date").
TERMS OF EMPLOYMENT
1.1 Employment. The Company hereby employs the Executive as the
President and Chief Operating Officer of the Company for and during the term
hereof. The Executive hereby accepts employment under the terms and conditions
set forth in this Agreement.
1.2 Duties of Executive. The Executive shall perform in the capacity
described in Section 1.1 hereof and shall have such duties, responsibilities,
and authorities as are designated for such offices pursuant to the Bylaws, as
amended, of the Company, and as may be reasonably assigned to him from time to
time by the Board of Directors of the Company; provided, however, the Executive
shall, during the term hereof, continuously have and retain such duties,
responsibilities, and authorities at least as significant in scope and substance
as the duties, responsibilities, and authorities required of the Executive's
offices and position with the Company as of the effective date. The Executive
agrees to devote his full time during normal business hours, best efforts,
abilities, knowledge and experience to the faithful performance of the duties,
responsibilities, and authorities which may be reasonably assigned to him and
which are consistent with his executive offices under Section 1.1 of this
Agreement. Notwithstanding the preceding, the Executive may, without being in
violation of his obligations hereunder, (i) serve on corporate, civic or
charitable boards or committees which are not engaged in business in the
computer software industry; provided, however, the Executive may serve as an
officer or director of a trade or business association related to the computer
software industry; (ii) invest the Executive's personal assets in such form or
manner as will not require any material services by the Executive in the
operation of the entities in which such investments are made, provided the
Executive shall use his best efforts to pursue such activities in such a manner
so that such activities shall not prevent the Executive from fulfilling his
obligations to the Company hereunder, and provided further, the Executive shall
resolve any conflict between his obligations to the Company and his obligations
to any other entity in which the Executive has a financial interest in favor of
the Company.
1.3 Term. This Agreement shall become effective as of the Effective
Date and shall continue in force and effect until September 30, 1999, unless
sooner terminated as provided in Section 1.6 hereof or renewed or extended
either (i) by written agreement between the Company and the Executive pursuant
to terms and conditions mutually acceptable to each, or (ii) in accordance with
the following sentence of this Section. Notwithstanding the preceding, as of
September 30 each year, the term of this Agreement shall be automatically
extended one (1) additional year so that the unexpired term of this Agreement as
of October 1 each year shall always be three (3) years unless
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on or before July 1 of any year either party notifies the other in writing that
such party does not desire to so extend the term of this Agreement in which
event this Agreement shall continue in force and effect until the expiration of
the unexpired term of this Agreement, unless sooner terminated as provided in
Section 1.6 hereof or renewed or extended by written agreement between the
Company and the Executive pursuant to terms and conditions mutually acceptable
to each.
1.4 Compensation. The Company shall pay the Executive, as full
compensation for services rendered by the Executive under the Agreement, as
follows:
(a) Base Salary. The Company shall pay the Executive a base salary of
ONE HUNDRED AND TWENTY FIVE THOUSAND AND NO/100 DOLLARS ($125,000.00)
per year, or such higher salary as may be determined from time to time
during the term hereof either in accordance with the provisions of
Section 1.4(b) hereof or by the Board of Directors in its sole
discretion, prorated for any partial period of employment ("Salary").
Such Salary shall be paid by the Company to the Executive in twenty-six
(26) equal bi-weekly installments in accordance with the regular
payroll payment dates of the Company or in such installments and on
such days during the month as the Company and the Executive shall
mutually determine. The Company's compensation of the Executive by
payments of the Salary pursuant to Section 1.4(a) shall not be deemed
exclusive and shall not prevent the Executive from participating in any
other compensation or benefit plan of the Company, nor shall such
compensation in any way limit or reduce any other obligation of the
Company hereunder; and, except to the extent specifically set forth
herein, no other compensation, benefit or payment hereunder shall in
any way limit or reduce the obligation of the Company to pay the Salary
to the Executive during the term of this Agreement.
(b) Annual Bonus Based on Pre-Tax Taxable Income. In addition to the
Salary set forth in Section 1.4(a) hereof, the Executive shall receive
a bonus each year during the term of this Agreement in an amount equal
to a varying percentages of the pre-tax consolidated taxable income of
the Company and its subsidiaries for the preceding taxable year ended
December 31 (or such other fiscal year as the Company may adopt in the
future), commencing with the taxable year ending December 1, 1997 as
determined by the Company's independent accountant in accordance with
generally accepted accounting principles (except as hereinafter set
forth) prorated for any partial period of employment ("Earnings Annual
Bonus"). Notwithstanding the preceding, for purposes of this Agreement
the pre-tax consolidated taxable income of the Company and its
subsidiaries for any given year shall be determined without taking into
consideration; (i) the Earnings Annual Bonus to be paid to the
Executive or other executive officers of the Company for that year or;
(ii) any losses incurred by the Company and its subsidiaries on start
up ventures during the first twelve months of such venture; or (iii)
one-time non-recurring charges as the result of, including but not
limited to, divestitures, acquisitions, consolidations, restructuring,
and changes in accounting ("EBITANC"). The Earnings Annual Bonus
payable to the Executive shall be the amount determined by multiplying
the EBITANC of the Company as determined above by the applicable
percentage based upon the EBITANC of the Company as set forth in the
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table below, prorated for any partial period of employment:
EBITANC Earninqs Annual Bonus
Less than $250,000 None
$250,000 or more but 5% of EBITANC of the
less than $500,000 Company
$500,000 or more but 6% of the EBITANC of the
less than $1,000,000 Company
$1,000,000 or more but 7.5% of the EBITANC of the
less than $1,500,000 Company
$1,500,000 or more 10% of the EBITANC of the
Company
For example, if the Executive worked a full twelve months during the
employment year and the EBITANC of the Company for the preceding year ended
December 31 was either: $100,000, $300,000, $800,000 or $1,200,000, then the
Earnings Annual Bonus due the Executive would be $0, $15,000 ($300,000 x 5%),
$48,000 ($800,000 x 6%), $90,000 ($1,200,000 x 7.5%) and $150,000 ($1,500,000 x
10%), respectively. Such Earnings Annual Bonus, or the balance thereof in the
event the Executive elects to receive a portion of such bonus quarterly as
hereinafter set forth, shall be paid to the Executive within ninety (90) days
after the end of the taxable year of the Company for which the Executive is
entitled to receive the Earnings Annual Bonus.
Notwithstanding the preceding, the Earnings Annual Bonus shall be
estimated and determined quarterly by the Company within forty-five (45) days
after the end of each fiscal quarter of the Company ("Estimated Quarterly
Earnings Bonus"). The Company shall notify the Executive ("Bonus Notice") of the
Estimated Quarterly Earnings Bonus due the Executive. The Executive shall have
the option exercisable for a period of thirty (30) days after receiving the
Bonus Notice to demand and receive up to fifty percent (50%) of such Estimated
Quarterly Earnings Bonus ("Advance Earnings Bonus Payment"). If the Executive
elects to receive the Advance Earnings Bonus Payment, such amount shall be paid
concurrently with the next regularly scheduled payroll. In the event that the
sum of the Advance Earnings Bonus Payments paid to the Executive exceeds the
Annual Earnings Bonus due the Executive for the Company's fiscal year, the
Executive shall repay such excess to the Company within ninety (90) days after
the Company's audited financial results are made available by the Company's
auditors.
(c) Annual Bonus Based On Net Sales. In addition to the Minimum Annual
Earnings Bonus set forth in Section 1.4(c) hereof, the Executive shall
receive a bonus each year during the term of this Agreement in an
amount equal to varying percentages of the "net sales" of the
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Company and its subsidiaries for the preceding taxable year ended
December 31 (or such other fiscal year as the Company may adopt in the
future), commencing with the taxable year ending December 31, 1997 as
determined by the Company's independent accountant in accordance with
generally accepted accounting principles (except as hereinafter set
forth) prorated for any partial period of employment ("Net Sales Annual
Bonus"). The Net Sales Annual Bonus payable to the Executive shall be
the amount determined by multiplying the Executive's base salary of the
Company and its subsidiaries as determined above by the applicable
percentage based upon the "net sales" of the Company and its
subsidiaries as set forth in the table below, prorated for any partial
period of employment, provided however that the threshold bonus levels
below shall increase by $1,000,000 in the year next succeeding a year
when a Net Sales Annual Bonus is earned.
Net Sales Net Sales Annual Bonus
Less than $3,750,000 None
$3,750,000 or more but 7 1/2% of base salary
less than $4,500,000
$4,500,000 or more but 10% of base salary
less than $5,250,000
$5,250,000 or more but 15% of base salary
less than $6,000,000
$6,000,000 or more 20% of base salary
For example, if the Executive worked a full twelve months during the
employment year and the "net sales" of the Company and its subsidiaries for the
preceding year ended December 31 was either: $3,000,000, $4,000,000, $5,000,000,
$5,500,000 & $6,00,000, then the Net Sales Annual Bonus due the Executive would
be $0, $9,375 ($125,000 x 7.5%), $12,500 ($125,000 x 10%), $18,750 ($125,000 x
15%) and $25,000 ($125,000 x 20%), respectively. Such Net Sales Annual Bonus,
shall be paid to the Executive within thirty (30) days after the Company's
audited financial statements are made available by the Company's auditors.
For purposes of this Agreement, the term "Net sales" shall mean the
gross sales of the Company and its subsidiaries for the fiscal year ended
December 31 less the sum of any returns and allowances for such taxable year and
any sales taxes included in the gross sales of the Company and its subsidiaries
for such taxable year.
(d) Discretionary Bonus Compensation. In addition to the Earnings
Annual Bonus set forth in Section 1.4(b) hereof, and Net Sales Annual
Bonus set forth in Section 1.4(c) hereof, the Company may also pay the
Executive discretionary annual bonus compensation
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("Discretionary Bonus Compensation") in an amount determined by the
Board of Directors of the Company in its sole discretion to be proper
and appropriate based upon such factors as the Board of Directors deems
appropriate including (i) the Executive's contributions to the success
of the business operations and the pre-tax profits of the Company and
its subsidiaries, as determined in accordance with generally accepted
accounting principles, (ii) the consolidated revenues of the Company
and its subsidiaries for the taxable year, and (iii) the general
overall performance of the Company and its subsidiaries for the taxable
year. Such Discretionary Bonus Compensation shall be paid by the
Company to the Executive in the manner set forth in the resolution of
the Board of Directors of the Company authorizing and declaring the
payment of such Discretionary Bonus Compensation. Notwithstanding
anything herein to the contrary, the Executive shall not be entitled to
any Discretionary Bonus Compensation (i) for a period of one (1) year
following the closing of the contemplated initial public offering of
the Company's securities and (ii) for any Employment Year during the
term of this Agreement unless and until such Discretionary Bonus
Compensation is determined and declared by the Board of Directors of
the Company.
(e) Signing Bonus. In addition to all other bonuses payable hereunder
the Executive shall be paid a signing bonus in the amount of Fifteen
Thousand ($15,000.00) Dollars.
1.5 Employment Benefits. In addition to the Salary, the Earnings Annual
Bonus, Net Sales Annual Bonus or other bonus payable to the Executive hereunder,
the Executive shall be entitled to the following benefits upon satisfaction by
the Executive of the eligibility requirements therefor, subject to the following
limitations:
(a) Sick Leave Benefits and Disability Insurance. Unless this Agreement
is terminated pursuant to the provisions of Section 1.6(b) hereof, the
Executive shall be paid sick leave benefits for a period of up to six
(6) months at his then prevailing Salary rate during his absence due to
illness or other incapacity, reduced by the amount, if any, of worker's
compensation, social security entitlement, or disability benefits, if
any, under the Company's group disability insurance plan, if any.
(b) Life Insurance; "Key Man" Life Insurance. The Company, at its own
expense, shall provide the Executive, subject to the Executive passing
any physical examination required by the Company's insurance company,
life insurance benefits under and consistent with any group term life
insurance plan which the Company, at its election, may adopt. Any such
life insurance coverage shall be upon terms and conditions comparable
to the coverage, if any, provided other executive officers of the
Company and provided further however, that the Company shall not be
obligated to incur a premium of more than $5,000 per year for any such
coverage. In addition, the Company may obtain "Key Man" life insurance
upon the life of the Executive in an amount determined by the Company
in its sole discretion. The Executive shall fully cooperate in
obtaining said life insurance, including submitting to any physical
examination.
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(c) Hospitalization, Accident, Major Medical and Dental Insurance. The
Company, at its own expense, shall provide the Executive (and all
dependents of the Executive at the request of the Executive) with group
hospitalization, group accident, major medical, and dental insurance in
amounts of coverage comparable to the coverage, if any, provided other
executive officers of the Company.
(d) Vacations. The Executive shall be entitled to a reasonable paid
vacation of not less that fifteen (15) business days each year during
the term of this Agreement, exclusive of national and religious
holidays and weekends, which vacation shall be taken by the Executive
in accordance with the business requirements of the Company at the time
and its personnel policies then in effect relative to this subject. The
Executive shall also be entitled to all paid holidays given by the
Company to its executive employees.
(e) Working Facilities. During the term of this Agreement, the Company
shall provide at its expense, adequate office space, furniture,
equipment, supplies, and personnel (including professional, clerical,
support and other personnel) as shall be suitable in the opinion of the
Board of Directors of the Company to the Executive's position and
adequate for the Executive's use in performing his duties and
responsibilities under this Agreement.
(f) Automobile Allowance. During the term of this Agreement, the
Company shall provide the Executive with a monthly automobile allowance
of ONE THOUSAND AND NO/100 DOLLARS ($1,000.00). In addition during the
term of this Agreement, the Company shall reimburse the Executive for
the cost of automobile insurance, gasoline and maintenance expenses
incurred by the Executive in connection with such automobile on a
monthly basis within ten (10) business days after receiving an itemized
invoice. Any allowance due the Executive pursuant to the preceding
provisions of this paragraph shall be paid by the Company concurrently
with payroll in twenty-six payments of $461.54 per month.
(g) Minimum Incentive Stock Options. With respect to each of the
Company's fiscal years ending during the term of this Agreement, the
Company shall grant the Executive incentive stock options effective as
of December 31 of that year, to the extent permissible under incentive
stock option plans maintained by the Company, to purchase 5,000 shares
of common stock of the Company for each full $100,000 of EBITANC of the
Company and its subsidiaries for such fiscal year as determined by the
Company's independent accountant in accordance with generally accepted
accounting principles. The number of shares of common stock covered by
the incentive stock options to be granted to the Executive pursuant to
this paragraph, and the exercise price per share thereof, shall be
proportionately adjusted for any increase or decrease in the number of
issued shares of common stock of the Company resulting from a
subdivision or consolidation of shares or the payment of a stock
dividend (but only on the common stock) or any other increase or
decrease in the number of shares affected without receipt of
consideration by the Company. Notwithstanding the preceding, nothing
contained herein shall preclude the Board of Directors of the Company
from terminating one or more incentive stock option plans currently or
hereafter maintained by
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the Company or issuing additional incentive stock options to the
Executive in its discretion.
(h) Other Employment Benefits. As an employee of the Company, the
Executive shall participate in and receive such other fringe benefits
as may be in effect from time to time for employees of the Company,
whether or not specifically enumerated herein and whether or not
through any written plan or arrangement, upon satisfaction by the
Executive of the eligibility requirements therefor. Any such benefits
shall be upon terms and conditions comparable to the benefits, if any,
provided other executive officers of the Company.
1.6 Termination. This Agreement and the Executive's employment
hereunder may be terminated without any breach of this Agreement at any time
during the term hereof only by reason of and in accordance with the following
provisions:
(a) Death. If the Executive dies during the term of this Agreement and
while in the employ of the Company, this Agreement shall automatically
terminate as of the date of the Executive's death, and the Company
shall have no further liability hereunder to the Executive or his
estate except to the extent set forth in Section 1.7(a) hereof.
(b) Disability. If, during the term of this Agreement, the Executive
shall be prevented from performing his duties hereunder by reason of
becoming disabled as hereinafter defined for twelve (12) months out of
a twenty-four (24) month period, then the Company may terminate this
Agreement immediately upon written notice to the Executive without any
further liability hereunder to the Executive except as set forth in
Section 1.7(b) hereof. For purposes of this Agreement, the Executive
shall be deemed to have become disabled when (i) he either receives
"disability benefits" under (a) Social Security, or (b) the Company's
disability plan, if any (whether funded with insurance or self-funded
by the Company), or (ii) the Board of Directors of the Company, upon
the written report of a qualified physician (after complete examination
of the Executive) designated by the Board of Directors of the Company
or its insurers, shall have determined that the Executive has become
physically and/or mentally incapable of performing his duties under
this Agreement.
(c) Termination by the Company for Cause. Prior to the expiration of
the term of this Agreement, the Company may discharge the Executive for
cause and terminate this Agreement immediately upon written notice to
the Executive without any further liability hereunder to the Executive
or his estate, except to the extent set forth in Section 1.7(c) hereof.
For purposes of this Agreement, a "discharge for cause" shall mean
termination of the Executive upon written notice to the Executive
limited, however, to one or more of the following reasons:
(1) Misappropriation or embezzlement by the Executive in
connection with the Company as determined by the affirmative
unanimous vote of the Board of Directors of the Company other
than the Executive;
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(2) Gross mismanagement or gross neglect of the Executive's
duties as determined by the affirmative unanimous vote of the
Board of Directors of the Company other than the Executive
after notice to the Executive of the particular details
thereof and a period of thirty (30) days thereafter within
which to cure such act or acts of gross mismanagement or gross
neglect, and the failure of the Executive to cure such act or
acts within such thirty (30) day period;
(3) Indictment for a felony; or
(4) Willful and unauthorized disclosure of Trade Secrets (as
defined in Section 1.8 hereof) of the Company as determined by
the affirmative unanimous vote of the Board of Directors of
the Company other than the Executive.
(d) Termination by the Company with Notice. The Company may terminate
this Agreement, for a reason other than as set forth in subparagraphs
(a), (b), (c) or (g) of this Section 1.6 at any time immediately upon
written notice to the Executive without any further liability hereunder
to the Executive except to the extent set forth in Section 1.7(d)
hereof.
(e) Termination by the Executive with Notice. The Executive may
terminate this Agreement without liability to the Company arising
solely from the resignation of the Executive at any time upon thirty
(30) days written notice to the Company in which event the Company
shall have no further liability hereunder to the Executive except to
the extent set forth in Section 1.7(e) hereof.
(f) Termination by the Executive for Good Reason. The Executive may
terminate this Agreement at any time for Good Reason (as hereinafter
defined) in which event the Company shall have no further liability
hereunder to the Executive except to the extent set forth in Section
1.7(f) hereof. For purposes of this Agreement, the term "Good Reason"
shall mean, without the Executive's express written consent, the
occurrence of any the following circumstances (which changes shall
constitute a "Change"):
(1) The assignment to the Executive of any duties inconsistent
in any material respect (unless in the nature of a promotion)
with the Executive's position in the Company immediately prior
to such Change (including, but not limited to, the Executive's
status, offices and titles), or a significant adverse
alteration or diminution in the nature or status of the
Executive's authority, duties or responsibilities from those
in effect immediately prior to such change, other than an
isolated, insubstantial and inadvertent action that is fully
corrected within five (5) days after receipt of written notice
from the Executive;
(2) Any failure by the Company to comply with any of the
provisions of Section 1.4 or 1.5 of this Agreement, other than
an isolated, insubstantial and inadvertent action that is
fully corrected within five (5) days after receipt of written
notice from the
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Executive;
(3) The Company's requiring the Executive to be based anywhere
other than at the Company's executive office, except for
travel reasonably required of the Executive in the performance
of the Executive's duties on behalf of the Company to an
extent substantially consistent with the Executive's present
business travel obligations;
(4) The failure of the Company to obtain an agreement,
satisfactory to the Executive, from any and all successors to
assume and agree to perform this Agreement, as contemplated in
Section 1.9 hereof; or
(5) Any failure by the Company to comply with any material
provision of this Agreement that has not been cured within ten
(10) days after notice of such noncompliance has been given by
the Executive to the Company.
During a period of three (3) months immediately following any such
termination of this Agreement by the Executive, the Executive agrees to
provide such consulting services to the Company as it may reasonably
request, at such time or times within such period as may be mutually
agreed upon between the Company and the Executive. The Executive shall
be compensated for any such consulting services at a daily rate equal
to one thirtieth (1/30) of the monthly Salary paid to the Executive at
the time of the Executive's resignation from the Company, plus
reimbursement for any reasonable out-of-pocket expenses incurred by the
Executive in rendering such consulting services.
(g) Termination upon Change in Control. The Company may terminate this
Agreement at any time within twelve (12) months after a Change in
Control (as hereinafter defined) immediately upon written notice to the
Executive without any further liability hereunder to the Executive
except to the extent set forth in Section 1.7(g) hereof. In the event
this Agreement is terminated by the Company within twelve (12) months
after the occurrence of a Change of Control, the provisions of this
Section shall supersede the provisions of Sections 1.6(d) hereof, the
provisions of Section 1.6(d) shall not be available to the Company and
the payments due the Executive hereunder shall be determined in
accordance with the provisions of Section 1.7(g) hereof and the
provisions of Section 1.7(d) shall not be available. For purposes of
this Agreement, the terms "Change of Control" shall mean:
(1) The transfer, through one transaction or a series of
related transactions, either directly or indirectly, or
through one or more intermediaries, of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934) of 25% or more of either the
then outstanding shares of common stock or the combined voting
power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors, or
the last of any series of transfers that results in the
transfer of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Securities Exchange Act of 1934)
of 25% or more
9
<PAGE>
of either the then outstanding shares of common stock or the
combined voting power of the Company's then outstanding voting
securities entitled to vote generally in the election of
directors;
(2) Approval by the shareholders of the Company of a merger or
consolidation, with respect to which persons who were the
shareholders of the Company immediately prior to such merger
or consolidation do not, immediately thereafter, own more than
50% of the combined voting power entitled to vote generally in
the election of directors of the merged or consolidated
company's then outstanding voting securities, or a liquidation
or dissolution of the Company or the sale of all or
substantially all of the assets of the Company;
(3) The transfer, through one transaction or a series of
related transactions, of more than 50% of the assets of the
Company, or the last of any series of transfers that results
in the transfer of more than 50% of the assets of the Company.
For purposes of this paragraph, the determination of what
constitutes more than 50% of the assets of the Company shall
be determined based on the most recent financial statement
prepared by the Company's independent accountants; or
(4) During any calendar year, individuals who at the beginning
of such year constituted the Board of the Company and any new
director or directors whose election by the Board was approved
by a vote of a majority of the directors then still in office
who either were directors at the beginning of the year or
whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority
thereof provided, however, that this provision will not be
triggered in the event the Executive votes or causes other
stockholders to vote their shares to cause said change to the
directorship of the Company.
1.7 Compensation upon Termination.
(a) Death. In the event the Executive's employment hereunder is
terminated pursuant to the provisions of Section 1.6(a) hereof due to
the death of the Executive, the Company shall have no further
obligation to the Executive or his estate, except to pay to the
Executive's spouse, or if he leaves no spouse, to the estate of the
Executive (provided, however, that the Executive, with the written
consent of the Executive's spouse, if any, may affirmatively designate
a beneficiary other than his spouse or estate): (i) any accrued, but
unpaid, Salary, any authorized but unreimbursed business expenses, and
any vacation or sick leave benefits, which have accrued as of the date
of death, but were then unpaid or unused, (ii) any accrued, but unpaid,
Earnings Annual Bonus, Net Sales Annual Bonus or other bonuses payable
to the Executive, and (iii) an amount equal to the difference between
(a) the full monthly Salary payable hereunder as of the date of death
of the Executive for a period consisting of that number of months equal
to one (1) month multiplied by the number of full years that the
Executive was an employee of the Company or a subsidiary or a
predecessor in interest
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thereof, and (b) the monthly payment, if any, payable to the Executive
under the Company's salary continuation plan, if any, for the
corresponding month during the period set forth in clause (iii)(a)
above. Any amount due the Executive under clause (i) of this paragraph
shall be paid in a lump sum in cash within thirty (30) days after the
death of the Executive, any amount due the Executive under clause (ii)
of this paragraph shall be paid in accordance with the Discretionary
Bonus Resolution; provided, however, that any unpaid Annual Bonus shall
be paid to the Executive within thirty (30) days after the Company's
audited financial statements for the fiscal year is made available by
the Company's auditors for which such Annual Bonus is due, and any
amount due the Executive under clause (iii) of this paragraph shall be
paid in accordance with the Company's regular payroll periods during
the period set forth in said clause (iii). For purposes of the
provision "Salary" shall include any amounts due under Section 1.5(f)
hereof.
(b) Disability. In the event the Executive's employment hereunder is
terminated pursuant to the provisions of Section 1.6(b) hereof due to
the Disability of the Executive, the Company shall be relieved of all
of its obligations under this Agreement, except to pay the Executive
(i) any accrued, but unpaid Salary, any authorized but unreimbursed
business expenses, and any vacation or sick leave benefits which have
accrued as of the date on which such permanent disability is
determined, but then remain unpaid, (ii) any accrued, but unpaid,
Earnings Annual Bonus and Net Sales Annual Bonus and any declared, but
unpaid, Discretionary Bonus Compensation but without accelerating the
bonus payment date, and (iii) an amount equal to the difference between
(a) the full monthly Salary payable hereunder as of the date of
termination of the Executive's employment hereunder for a period
consisting of that number of months equal to one (1) month multiplied
by the number of full years that the Executive was an employee of the
Company or a subsidiary or predecessor in interest thereof, subject to
a minimum of six (6) months, and (b) the monthly payment, if any,
payable to the Executive under the Company's salary continuation plan
and/or disability plan, if any, for the corresponding month during the
period set forth in clause (iii)(a) above. The provisions of the
preceding sentence shall not affect the Executive's rights to receive
payments under the Company's disability insurance plan, if any. Any
amount due the Executive under clause (i) of this paragraph shall be
paid in a lump sum in cash within thirty (30) days after the
termination of the Executive's employment hereunder, any amount due the
Executive under clause (ii) of this paragraph shall be paid in
accordance with the Discretionary Bonus Resolution; provided, however,
that bonus and Net Sales Annual Bonus shall be paid to the Executive
within thirty (30) days after the issuance of the Company's fiscal year
audited financial results for which such Earnings Annual Bonus is due,
and any amount due the Executive under clause (iii) of this paragraph
shall be paid in accordance with the Company's regular payroll periods
during the period set forth in clause (iii). For purposes of this
provision "salary" shall include any amounts due under Section 1.5(f)
hereof.
(c) Cause. In the event the Executive's employment hereunder is
terminated by the Company for Cause pursuant to the provisions of
Section 1.6(c) hereof, the Company shall
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have no further obligation to the Executive under this Agreement:
except to pay the Executive (i) any accrued, but unpaid, Salary, any
authorized but unreimbursed business expenses, and any vacation or sick
leave benefits, which have accrued as of the date of termination of
this Agreement, but were then unpaid or unused, and (ii) any accrued,
but unpaid, Earnings Annual Bonus, Net Sales Annual Bonus and other
bonus. Any amount due the Executive under clause (i) of this paragraph
shall be paid in a lump sum in cash within thirty (30) days after the
termination of the Executive's employment hereunder, and any amount due
the Executive under clause (ii) of this Paragraph shall be paid in
accordance with the Discretionary Bonus Resolution; provided, however,
that any unpaid Earnings Annual Bonus or Net Sales Annual Bonus and
other bonus shall be paid to the Executive within thirty (30) days
after the end of the Company's taxable year for which such Earnings or
Net Sales Annual Bonus is due.
(d) Termination by the Company with Notice. In the event the
Executive's employment hereunder is terminated by the Company pursuant
to the provisions of Section 1.6(d) hereof, the Executive shall be
entitled to receive (i) any accrued, but unpaid, Salary, any authorized
but unreimbursed business expenses, and any vacation or sick leave
benefits which have accrued as of the date of termination of the
Agreement, but were then unpaid or unused, (ii) any accrued, but
unpaid, Earnings Annual Bonus or Net Sales Annual Bonus and any
declared, but unpaid, and (iii) the full monthly Salary payable
hereunder for the unexpired term of the Agreement whelher or not the
Executive has sought or obtained employment elsewhere after the
termination of the Executive's employment pursuant to the provisions of
section 1.6(d) hereof. Any amount due the Executive under clauses (i),
(ii) and (iii) of this paragraph (other than for any Earnings Annual
Bonus and Net Sales Annual Bonus) shall be paid in a lump sum in cash
within thirty (30) days after the termination of the Executive's
employment thereunder; provided, however, that any unpaid Earnings
Annual Bonus and Net Sales Annual Bonus shall be paid to the Executive
within ninety (90) days after the end of the Company's taxable year for
which such Earnings or Net Sales Annual Bonus is due. In addition, in
the event this Agreement is terminated by the Company pursuant to the
provisions of Section 1.6(d) hereof, the Company at its expense shall
continue to provide the Executive with the benefits set forth in
Sections 1.5(b), 1.5(c), 1.5(f) and 1.5(h) above for the unexpired term
of this Agreement whether or not the Executive has sought or obtained
employment elsewhere after the termination of the Executive's
employment pursuant to the provisions of Section 1.6(d) hereof;
provided, however, if the Executive obtains employment elsewhere during
the aforesaid period, then the Company shall continue to provide the
benefits set forth in Sections 1.5(b), 1.5(c), 1.5(f) and 1.5(h) hereof
only to the extent the Executive does not receive such benefits in
their entirety from the Executive's then current employer.
(e) Termination by the Executive with Notice. In the event the
Executive's employment hereunder is terminated by the Executive
pursuant to the provisions of Section 1.6(e) hereof, the Executive
shall be entitled to receive (1) any accrued, but unpaid, Salary, any
authorized but unreimbursed bus:ness expenses, and any vacation or sick
leave benefits which have
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accrued as of the date of termination of this Agreement, but were then
unpaid or unused, and (ii) any accrued, but unpaid, Earnings Annual
Bonus, Net Sales Annual Bonus and any declared, but unpaid,
Discretionary Bonus Compensation. Any amount due the Executive under
clause (i) of this paragraph shall be paid in a lump sum in cash within
thirty (30) days after the termination of the Executive's employment
hereunder, and any amount due the Executive under clause (ii) of this
paragraph shall be paid in accordance with the Discretionary Bonus
Resolution; provided, however, that any unpaid Earnings Annual Bonus
and Net Sales Annual Bonus shall be paid to the Executive within ninety
(90) days after the end of the Company's taxable year for which such
Earnings or Net Sales Annual Bonus is due.
(f) Termination by the Executive for Good Reason.
(1) Prior to Change of Control. In the event this Agreement is
terminated by the Executive pursuant to the provisions of
Section 1.6(f) hereof prior to the occurrence of a Change of
Control, the Executive shall be entitled to receive (i) any
accrued, but unpaid, Salary, any authorized but unreimbursed
business expenses, and any vacation or sick leave benefits
which have accrued as of the date of termination of the
Agreement, but were then unpaid or unused, (ii) any accrued,
but unpaid, Earnings Annual Bonus, and Net Sales Annual Bonus
and any declared, but unpaid, Discretionary Bonus
Compensation, and (iii) the full monthly Salary payable
hereunder for the unexpired term of the Agreement whether or
not the Executive has sought or obtained employment elsewhere
after the termination of the Executive's employment pursuant
of the provisions of Section 1.6(f) hereof. Any amount due the
Executive under clauses (i), (ii) and (iii) of this paragraph
(other than for any Earnings Annual Bonus and Net Sales Annual
Bonus) shall be paid in a lump sum in cash within thirty (30)
days after the termination of the Executive's employment
hereunder; provided, however, that any unpaid Earnings or Net
Sales Annual Bonus shall be paid to the Executive within
ninety (90) days after the end of the Company's taxable year
for which such Minimum Annual Bonus is due. In addition, in
the event this Agreement is terminated by the Executive
pursuant to the provisions of Section 1.6(f) hereof prior to
the occurrence of a Change of Control, the Company at its
expense shall continue to provide the Executive with the
benefits set forth in Section 1.5(b), 1.5(c) 1.5(f) and 1.5(h)
above for the unexpired term of this Agreement whether or not
the Executive has sought or obtained employment elsewhere
after the termination of the Executive's employment pursuant
to the provisions of Section 1.6(f) hereof; provided, however,
if the Executive obtains employment elsewhere during the
aforesaid period, then the Company shall continue to provide
the benefits set forth in Sections 1.5(b), 1.5(c) and 1.5(h)
hereof only to the extent the Executive does not receive such
benefits in their entirety from the Executive's then current
employer.
In addition, in the event this Agreement is terminated by the
Executive pursuant to
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the provisions of Section 1.6(f), the Company at its expense
shall purchase the automobile provided to the Executive
pursuant to Section 1.5(f) by paying the total lease payments
due pursuant to Section 1.5(f) and the residual value then due
in order to acquire title and transfer title on said
automobile to Executive within ninety (90) days after the
termination of the Executive's employment thereunder.
(2) After Change of Control. In the event this Agreement is
terminated by the Executive pursuant to the provisions of
Section 1.6(f) hereof after the occurrence of a Change of
control, the executive shall be entitled to receive (i) any
accrued, but unpaid, Salary, any authorized but unreimbursed
business expenses, and any vacation or sick leave benefits
which have accrued as of the date of termination of the
Agreement, but were then unpaid or unused, (ii) any accrued,
but unpaid, Earnings Annual Bonus, Net Sales Annual Bonus and
any declared, but unpaid, Discretionary Bonus Compensation,
and (iii) an amount equal to the full monthly Salary payable
hereunder for the unexpired term of the Agreement whether or
not the Executive has sought or obtained employment elsewhere
after the termination of the Executive's employment pursuant
to the provisions of Section 1.6(f) hereof. Any amount due the
Executive under clauses (i), (ii) and (iii) of this paragraph
(other than for any Earnings or Net Sales Annual Bonus) shall
be paid in a lump sum in cash within thirty (30) days after
the termination of the Executive's employment hereunder;
provided, however, than any unpaid Earnings Annual Bonus and
Net Sales Annual Bonus shall be paid to the Executive within
ninety (90) days after the end of the Company's taxable year
for which such Earnings or Net Sales Annual Bonus is due. In
addition, in the event this Agreement is terminated by the
Executive pursuant to the provisions of Section 1.6(f) hereof
after the occurrence of a Change of Control, the Company at
its expense shall continue to provide the Executive with the
benefits set forth in Section 1.5(b), 1.5(c) 1.5(f) and 1.5(h)
above for the unexpired term of this Agreement whether or not
the Executive has sought or obtained employment elsewhere
after the termination of the Executive's employment pursuant
to the provisions of Section 1.6(f) hereof; provided, however,
if the Executive obtains employment elsewhere during the
aforesaid period, then the Company shall continue to provide
the benefits set forth in Sections 1.5(b), 1.5(c) 1.5(f) and
1.5(h) hereof only to the extent the Executive does not
receive such benefits in their entirety from the Executive's
current employer. In addition, in the event this Agreement is
terminated by the Executive pursuant to the provisions of
Section 1.6(f), the Company at its expense shall purchase the
automobile provided to the Executive pursuant to Section
1.5(f) by paying the total lease payments due Section 1.5(f)
and residual value than due in order to acquire title and
transfer title on said automobile to Executive within ninety
(90) days after the termination of the Executive's employment
thereunder.
(g) Termination by the Company After Change of Control. In the event
this Agreement is terminated by the Company pursuant to the provisions
of Section 1.6(g) hereof after the
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occurrence of a Change of Control, the Executive shall be entitled to
receive (i) any accrued, but unpaid, Salary, any authorized but
unreimbursed business expenses, and any vacation or sick leave benefits
which have accrued as of the date of termination of the Agreement, but
were then unpaid or unused, (ii) any accrued, but unpaid, Earnings
Annual Bonus, Net Sales Annual Bonus and any declared, but unpaid,
Discretionary Bonus Compensation, and (iii) an amount equal to the full
monthly Salary payable hereunder for the unexpired term of the
Agreement whether or not the Executive has sought or obtained
employment elsewhere after the termination of the Executive's
employment pursuant to the provisions of Section 1.6(g) hereof. Any
amount due the Executive under clauses (i) and (ii) of this paragraph
shall be paid in a lump sum in cash within thirty (30) days after the
termination of the Executive's employment hereunder, and any amount due
the Executive under clause (iii) of this paragraph shall be paid in a
lump sum in cash within ninety (90) days after the termination of the
Executive's employment hereunder. In addition, in the event this
Agreement is terminated by the Company pursuant to the provisions of
Section 1.6(g) hereof after the occurrence of a Change of Control, the
Company at its expense shall continue to provide the Executive with the
benefits set forth in Sections 1.5(b), 1.5(c) 1.5(f) and 1.5(h) above
for the unexpired term of this Agreement whether or not the Executive
has sought or obtained employment elsewhere after the termination of
the Executive's employment pursuant to the provisions of Section 1.6(g)
hereof; provided, however, if the Executive obtains employment
elsewhere during the aforesaid period, then the Company shall continue
to provide the benefits set forth in Sections 1.5(b), 1.5(c) 1.5 (f)
and 1.5(h) hereof only to the extent the Executive does not receive
such benefits in their entirety from the Executive's then current
employer.
(h) Termination of Obligations of the Company Upon Payment of
Compensation. Upon payment of the amount, if any, due the Executive
pursuant to the preceding provisions of this Section, the Company shall
have no further obligation to the Executive under this Agreement.
1.8 Protective Covenants. The Executive recognizes that his employment
by the Company is one of the highest trust and confidence because (i) the
Executive will become fully familiar with all aspects of the Company's business
and that of its subsidiaries during the period of his employment with the
Company, (ii) certain information of which the Executive will gain knowledge
during his employment is proprietary and confidential information which is of
special and peculiar value to the Company or its subsidiaries, and (iii) if any
such proprietary and confidential information were imparted to or became known
by any person, including the Executive, engaging in a business in competition
with that of the Company or its subsidiaries, hardship, loss and irreparable
injury and damage could result to the Company or its subsidiaries, the
measurement of which would be difficult if not impossible to ascertain. The
Executive acknowledges that any and all inventions, improvements, discoveries,
formulae, processes, products or designs developed by the Executive alone or in
conjunction with others in connection with the Company's business during the
term of the Executive's employment with the Company ("Proprietary Information")
shall be the sole and absolute property of the Company in perpetuity, that the
Executive shall promptly disclose
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<PAGE>
such Proprietary Information to the Company, and the Executive shall have no
right, title or interest therein or to receive additional monies therefor,
regardless of whether development occurred during working hours or any other
time during the term of the Executive's employment with the Company. The
Executive shall assist the Company in obtaining patents on all such Proprietary
Information deemed patentable by the Company and shall execute all documents
necessary to obtain such patents and to vest the Company with full and extensive
title to the patents and to protect the patents against infringement by others.
For purposes of this Agreement, an invention shall be deemed to have been made
during the period of the Executive's employment if, during such period, the
invention was conceived or first actually reduced to practice, and the Executive
agrees that any patent application filed by the Executive within one (1) year
after a termination of the Executive's employment with the Company shall be
presumed to relate to an invention made during the term of the Executive's
employment with the Company unless the Executive can establish the contrary. The
Executive further acknowledges that the Company or its subsidiaries has
developed unique skills, concepts, sales presentations, marketing programs,
marketing strategy, business practices, methods of operation, trademarks,
licenses, technical information, Proprietary Information, computer software
programs, tapes and discs concerning its operations systems, customer lists,
customer leads, documents identifying past, present and future customers, hiring
and training methods, investment policies, financial and other confidential and
proprietary information concerning its operations and expansion plans ("Trade
Secrets"). Therefore, the Executive agrees that it is necessary for the Company
to protect its business and that of its subsidiaries from such damage, and the
Executive further agrees that the following covenants constitute a reasonable
and appropriate means, consistent with the best interest of both the Executive
and the Company, to protect the Company or its subsidiaries against such damage
and shall apply to and be binding upon the Executive as provided herein:
(a) Trade Secrets. The Executive recognizes that his position with the
Company is one of the highest trust and confidence by reason of the Executive's
access to and contact with certain Trade Secrets of the Company and its
subsidiaries. The Executive agrees and covenants to use his best efforts and
exercise utmost diligence to protect and safeguard the Trade Secrets of the
Company and its subsidiaries. The Executive further agrees and covenants that,
except as may be required by the Company in connection with this Agreement, or
with the prior written consent of the Company, the Executive shall not, either
during the term of this Agreement or thereafter, directly or indirectly, use for
the Executive's own benefit or for the benefit of another, or disclose,
disseminate, or distribute to another, any Trade Secret (whether or not
acquired, learned, obtained, or developed by the Executive alone or in
conjunction with others) of the Company or its subsidiaries or of others with
whom the Company or its subsidiaries has a business relation ship. All
memoranda, notes, records, drawings, documents, or other writings whatsoever
made, compiled, acquired, or received by the Executive during the term of this
Agreement, arising out of, in connection with, or related to any activity or
business of the Company or its subsidiaries, including, but not limited to, the
customers, suppliers, or others with whom the Company or its subsidiaries has a
business relationship, the arrangements of the Company or its subsidiaries with
such parties, and the pricing and expansion policies and strategy of the Company
or its subsidiaries, are, and shall continue to be, the sole and exclusive
property of the Company or its
16
<PAGE>
subsidiaries, are, and shall continue to be, the sole and exclusive property of
the Company or its subsidiaries, as applicable, and shall, together with all
copies thereof and all advertising literature, to be returned and delivered to
the Company by the Executive immediately, without demand, upon the termination
of this Agreement, or at any time upon the Company's demand.
(b) Restriction on Soliciting Customers of the Company and its
Subsidiaries. The Executive covenants that for a period of twenty-four (24)
months following the termination of this Agreement, he will not, either directly
or indirectly, (i) disclose or otherwise make known to any person or entity the
names and addresses of any of the customers of the Company, or (ii) call on,
solicit, or take away, or attempt to call on solicit or take away any of the
customers of the Company or its subsidiaries with whom he became acquainted
during his employment with the Company, either for himself or for any other
person, firm, corporation or other entity.
(c) Covenant Not to Compete. In the event this Agreement is terminated
pursuant to the provisions of Section 1.6(c) hereof, the Executive hereby
covenants and agrees that for a period of twelve (12) months following the
termination of his employment hereunder, he will not directly or indirectly,
either as an employee, employer, consultant, agent, principal, partner,
shareholder (other than through ownership of public traded capital stock of a
corporation which represent less than five percent (5%) of the outstanding
capital stock of such corporation), corporate officer director, investor,
financier or in any other individual or representative capacity, engage or
participate in any business located in a county in which the Company or any of
its subsidiaries is doing business as of the date of termination of the
Executive's employment hereunder which is competitive with the business of the
Company or any of its subsidiaries as of such date.
(d) Survival of Covenants. Each covenants of the Executive set forth in
this Section 1.8 shall survive the termination of this Agreement and shall be
construed as an agreement independent of any other provision of this Agreement,
and the existence of any claim or cause of action of the Executive against the
Company whether predicated on this Agreement or otherwise shall not constitute a
defense to the enforcement by the Company of said covenant.
(e) Remedies. In the event of breach or threatened breach by the
Executive of any provision of this Section 1.8, the Company shall be entitled to
relief by temporary restraining order, temporary injunction, or permanent
injunction or otherwise, in addition to other legal and equitable relief to
which it may be entitled, including any and all monetary damages which the
Company may incur as a result of said breach, violation or threatened breach or
violation. The Company may pursue any remedy available to it concurrently or
consecutively in any order as to any breach, violation, or threatened breach or
violation, and the pursuit of one of such remedies at any time will not be
deemed an election of remedies or waiver of the right to pursue any other of
such remedies as to such breach, violation, or threatened breach or violation,
or as to any other breach, violation, or threatened breach or violation.
The Executive hereby acknowledges that the Executive's agreement to be
bound by the protective covenants set forth in this Section 1.8 was a material
inducement for the Company
17
<PAGE>
entering into this Agreement and agreeing to pay the Executive the compensation
and benefits set forth herein.
1.9 Merger or Acquisition. In the event the Company should consolidate,
or merge into another corporation, or transfer all or substantially all of its
assets to another entity, or divide its assets among a number of entities, this
Agreement shall continue in full force and effect. The Company will require any
and all successors (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, to expressly assume and agree pursuant to an appropriate
written assumption agreement to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such successor shall be a breach of this
Agreement and shall entitle the Executive to terminate his employment and this
Agreement for Good Reason. As used in this Agreement, the term "Company" shall
mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which executes and delivers the assumption agreement
provided for in this Section 1.9 or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
1.10 Reimbursement of Employee Expenses. The Executive is authorized to
incur ordinary, necessary and reasonable expenses in connection with the
performance of his duties and responsibilities under this Agreement and for the
promotion of the business and activities of the Company during the term hereof,
including, without limitation, expenses for necessary travel and necessary
travel and entertainment and other items of expenses required in the normal and
routine course of the Executive's employment hereunder. The Company will
reimburse the Executive from time to time for all such business expenses
incurred pursuant to and in conformity with the provisions of this Section
provided that the Executive presents to the Company:
(a) An account book in which the Executive recorded at or near
the time each expenditure was made; (i) the amount of the expenditures, (ii) the
time, place and designation of the type of entertainment and travel or other
expenses, or the date and description of the gift (gifts made to one individual
are not to exceed a total of Twenty-Five and No/100 Dollars ($25.00) in any
taxable year); (iii) the business reason for the expenditure and the nature of
the business benefit derived or expected to be derived as the result of the
expenditure; and (iv) the names, occupations, addresses and other information
concerning each person who was entertained or given a gift sufficient to
establish the business relationship to the Company; and
(b) Documentary evidence (such as receipts or paid bills)
which state sufficient information to establish the amount, date, place and
essential character of the expenditure, for such expenditure (i) of Twenty-Five
and No/100 Dollars ($25.00) or more except for transportation charges if not
readily available) and (ii) for lodging or traveling away from home.
GENERAL PROVISIONS
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2.1 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date deposited in a
receptacle maintained by the United States Postal Service for such purpose,
postage prepaid, by certified mail, return receipt requested, addressed to the
respective parties as follows:
If to the Executive: Dong. W. Lew
10 Monroe Blvd., apt. 6H
Long Beach, New York 11561
If to the Company: Compu-Dawn, Inc.
77 Spruce Street
Cedarhurst, New York 11516
Either party hereto may designate a different address by providing written
notice of such new address to the other party hereto.
2.2 Severability. If any provision contained in this Agreement is
determined to be void, illegal or unenforceable, in whole or in part, then the
other provisions contained herein shall remain in full force and effect as if
the provision which was determined to be void, illegal, or unenforceable had not
been contained herein.
2.3 Waiver, Modification, and Integration. The waiver by any party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by any party. This instrument
contains the entire agreement of the parties concerning employment and
supersedes all prior and contemporaneous representations, understandings and
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Executive by the Company and all such prior or
contemporaneous representations, understandings and agreements, both oral and
written, are hereby terminated. The terms of this Agreement may not be modified,
altered or amended except by written agreement of the Executive and the Company,
subject to the prior approval of the Board of Directors of the Company.
2.4 Binding Effect. This Agreement shall be binding and effective upon
the Company and its successors and permitted assigns, and upon the Executive,
his heirs and representatives; provided, however, that the Company shall not
assign this Agreement without the written consent of the Executive.
2.5 Choice of Law and Venue. The parties agree that this Agreement is
made and entered into in Nassau County, New York and shall be governed by and
construed in accordance with the laws of the State of New York, and that any
litigation, special proceeding or other proceeding as between the parties that
may be brought, or arise out of, in connection with or by reason of this
Agreement shall be brought in the applicable state court in and for Nassau
County, New York which Courts shall be the exclusive courts or jurisdiction and
venue.
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2.6 Representation of Executive. The Executive hereby represents and
warrants to the Company that he has not previously assumed any obligations
inconsistent with those contained in this Agreement. The Executive further
represents and warrants to the Company that the Executive has entered into this
Agreement pursuant to his own initiative and that the Company did not induce the
Executive to execute this Agreement in contravention of any existing
commitments. The Executive acknowledges that the Company has entered into this
Agreement in reliance upon the foregoing representations of the Executive.
2.7 Independent Counsel. The Company has been presented by ROBERT H.
SOLOMON,ESQ. The Executive has been represented by . Each
has made his or its own determination with respect to counsel without coercion
from the other. Each has thoroughly reviewed the provisions of this Agreement
and all matters concerning the consulting with the benefit of independent
counsel.
2.8 Arbitration Any controversy or claim arising out of or relating to
this Agreement shall be settled by binding arbitration in Nassau County, New
York under the rules of the American Arbitration Association. Judgment upon the
award may be entered in any court having jurisdiction and the arbitrator(s) are
specifically authorized to award the prevailing party in such arbitration all
reasonable attorney's fees, expenses and costs of arbitration.
2.9 Counterpart Execution. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written effective as of the Effective Date.
COMPU-DAWN, INC.
BY:/s/ Mark Honisgfeld
MARK HONIGSFELD, Secretary
and Chairman of the Board
EXECUTIVE:
/s/ Dong Lew
DONG LEW
Attest
/s/ Doris Abruzzo
Assistant Secretary
AGEMPCOAST
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RESTATED AND AMENDED
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") by and between COMPU-DAWN,
INC., a Delaware corporation ("Company"), and MARK HONIGSFELD ("Executive") is
made and entered into in Long Beach, New York on March 4, 1997 and effective as
of this the 1st day of October, 1996 ("Effective Date").
RECITALS
WHEREAS, on August 1, 1996, Executive became Chairman of the Board of
Directors of the Company;
WHEREAS, commencing October 1, 1996, Executive agreed to devote his
time to the affairs of the Company as a consultant;
WHEREAS, it was the intent of the parties that the Company enter into a
three (3) year Consulting Agreement with the Executive commencing as of the
effective date of a contemplated initial public offering of the Company's
securities (the "IPO") which would provide, inter alia, that Executive would be
paid a signing bonus in an amount equal to the economic value of all
compensation (based upon an annualized amount of $250,000), bonuses and benefits
that would have been due to the Executive if he were employed as of October 1,
1996 (the "Consulting Agreement");
WHEREAS, the Company recognizes the outstanding contributions of the
Executive to date and wishes to enter into an Employment Agreement with the
Executive effective as of October 1, 1996 in lieu of the Consulting Agreement on
terms substantially identical to the Consulting Agreement;
WHEREAS, the parties have agreed to defer compensation to the Executive
hereunder until the earlier of: (i) the closing date of the IPO, or (ii)
December 15, 1997 (the "Deferred Compensation");
WHEREAS the Deferred Compensation shall be due and payable to the
Executive on the closing date of the IPO;
WHEREAS in the event that the IPO does not occur on or before December
15, 1997 then (i) the Deferred Compensation shall be paid by a promissory note
with interest at the rate of 10% per annum over ten (10) years in lieu of a cash
payment; and (ii) the Company may at its option, cancel the Executive's
unexercised stock options; and (iii) terminate this Employment Agreement without
further recourse to the Executive provided that the Company repurchase all
shares of Common Stock owned by the Executive at his cost, payable over ten
(10)) years with interest at the rate of ten (10%) percent per annum.
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NOW, THEREFORE it is agreed by and between the parties:
1.1 Retention. The Company hereby retains the Executive as the Chairman
of the Board, and Chief Executive Officer of the Company for and during the term
hereof. The Executive hereby accepts employment under the terms and conditions
set forth in this Agreement.
1.2 Duties of Executive. The Executive shall perform in the capacity
described in Section 1.1 hereof and shall have such duties, responsibilities,
and authorities as are designated for such offices pursuant to the Bylaws, as
amended, of the Company, and as may be reasonably assigned to him from time to
time by the Board of Directors of the Company; provided, however, the Executive
shall, during the term hereof, continuously have and retain such duties,
responsibilities, and authorities at least as significant in scope and substance
as the duties, responsibilities, and authorities required of the Executive's
offices and position with the Company as of the effective date. The Executive
agrees to devote his full time during normal business hours, best efforts,
abilities, knowledge and experience to the faithful performance of the duties,
responsibilities, and authorities which may be reasonably assigned to him and
which are consistent with his executive offices under Section 1.1 of this
Agreement. Notwithstanding the preceding, the Executive may, without being in
violation of his obligations hereunder, (i) serve on corporate, civic or
charitable boards or committees which are not engaged in business in the
computer software industry; provided, however, the Executive may serve as an
officer or director of a trade or business association related to the computer
software industry; (ii) invest the Executive's personal assets in such form or
manner as will not require any material services by the Executive in the
operation of the entities in which such investments are made, and (iii) devote
up to ten (10) percent of his business time and attention to business activities
not competitive with the Company provided the Executive shall use his best
efforts to pursue such activities in such a manner so that such activities shall
not prevent the Executive from fulfilling his obligations to the Company
hereunder, and provided further, the Executive shall resolve any conflict
between his obligations to the Company and his obligations to any other entity
in which the Executive has a financial interest in favor of the Company.
1.3 Term. This Agreement shall become effective as of the Effective
Date and shall continue in force and effect until September 30, 1999, unless
sooner terminated as provided in Section 1.6 hereof or renewed or extended
either (i) by written agreement between the Company and the Executive pursuant
to terms and conditions mutually acceptable to each, or (ii) in accordance with
the following sentence of this Section. Notwithstanding the preceding, as of
September 30 each year, the term of this Agreement shall be automatically
extended one (1) additional year so that the unexpired term of this Agreement as
of October 1 each year shall always be three (3) years unless on or before July
1 of any year either party notifies the other in writing that such party does
not desire to so extend the term of this Agreement in which event this Agreement
shall continue in force and effect until the expiration of the unexpired term of
this Agreement, unless sooner terminated as provided in Section 1.6 hereof or
renewed or extended by written agreement between the Company and the Executive
pursuant to terms and conditions mutually acceptable to each.
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1.4 Compensation. The Company shall pay the Executive, as full
compensation for services rendered by the Executive under the Agreement, as
follows:
(a) Base Salary. The Company shall pay the Executive a base salary of
TWO HUNDRED AND FIFTY THOUSAND AND NO/100 DOLLARS ($250,000.00) per
year, or such higher salary as may be determined from time to time
during the term hereof either in accordance with the provisions of
Section 1.4(b) hereof or by the Board of Directors in its sole
discretion, prorated for any partial period of employment ("Salary").
Such Salary shall be paid by the Company to the Executive in twenty-six
(26) equal bi-weekly installments in accordance with the regular
payroll payment dates of the Company or in such installments and on
such days during the month as the Company and the Executive shall
mutually determine. The Company's compensation of the Executive by
payments of the Salary pursuant to Section 1.4(a) shall not be deemed
exclusive and shall not prevent the Executive from participating in any
other compensation or benefit plan of the Company, nor shall such
compensation in any way limit or reduce any other obligation of the
Company hereunder; and, except to the extent specifically set forth
herein, no other compensation, benefit or payment hereunder shall in
any way limit or reduce the obligation of the Company to pay the Salary
to the Executive during the term of this Agreement.
(b) Annual Bonus Based on Pre-Tax Taxable Income. In addition to the
Salary set forth in Section 1.4(a) hereof, the Executive shall receive
a bonus each year during the term of this Agreement in an amount equal
to a varied percentage of the pre-tax consolidated taxable income of
the Company and its subsidiaries for the preceding taxable year ended
December 31 (or such other fiscal year as the Company may adopt in the
future), commencing with the taxable year ending December 1, 1997 as
determined by the Company's independent accountant in accordance with
generally accepted accounting principles (except as hereinafter set
forth) prorated for any partial period of employment ("Earnings Annual
Bonus"). Notwithstanding the preceding, for purposes of this Agreement
the pre-tax consolidated taxable income of the Company and its
subsidiaries for any given year shall be determined without taking into
consideration (i) the Earnings Annual Bonus to be paid to the Executive
or other executive officers of the Company for that year or; (ii) any
losses incurred by the Company and its subsidiaries on start up
ventures during the first twelve months of such venture; or (iii)
one-time non-recurring charges as the result of including, but not
limited to divestitures, acquisitions, consolidations, restructuring
and changes in accounting ("EBITANC"). The Earnings Annual Bonus
payable to the Executive shall be the amount determined by multiplying
the EBITANC of the Company as determined above by the applicable
percentage based upon EBITANC of the Company as set forth in the table
below, prorated for any partial period of employment:
EBITANC Earnings Annual Bonus
Less than $250,000 None
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$250,000 or more but 5% of EBITANC of the
less than $500,000 Company
$500,000 or more but 6% of the EBITANC of the
less than $1,000,000 Company
$1,000,000 or more but 7.5% of the EBITANC of the
less than $1,500,000 Company
$1,500,000 or more 10% of the EBITANC of the
Company
For example, if the Executive worked a full twelve months during the employment
year and the EBITANC of the Company for the preceding year ended December 31 was
either: $100,000, $300,000, $800,000 or $1,200,000, then the Earnings Annual
Bonus due the Executive would be $0, $15,000 ($300,000 x 5%), $43,000 ($800,000
x 6%), $90,000 ($1,200,000 x 7.5%) and $1,0,000 ($1,500,000 x 10%),
respectively. Such Earnings Annual Bonus, or the balance thereof in the event
the Executive elects to receive a portion of such bonus quarterly as hereinafter
set forth, shall be paid to the Executive within ninety (90) days after the end
of the taxable year of the Company for which the Executive is entitled to
receive the Earnings Annual Bonus.
Notwithstanding the preceding, the Earnings Annual Bonus shall be
estimated and determined quarterly by the Company within forty-five (45) days
after the end of each fiscal quarter of the Company ("Estimated Quarterly
Earnings Bonus"). The Company shall notify the Executive ("Bonus Notice") of the
Estimated Quarterly Earnings Bonus due the Executive. The Executive shall have
the option exercisable for a period of thirty (30) days after receiving the
Bonus Notice to demand and receive up to fifty percent (50%) of such Estimated
Quarterly Earnings Bonus ("Advance Earnings Bonus Payment"). If the Executive
elects to receive the Advance Earnings Bonus Payment, such amount shall be paid
concurrently with the next regularly scheduled payroll. In the event that the
sum of the Advance Earnings Bonus Payments paid to the Executive exceeds the
Annual Earnings Bonus due the Executive as for the Company's fiscal year, the
Executive shall repay such excess to the Company within ninety (90) days after
the Company's audited financial results are made available by the Company's
auditors.
(c) Annual Bonus Based On Net Sales. In addition to the Minimum Annual
Earnings Bonus set forth in Section 1.4(c) hereof, the Executive shall
receive a bonus each year during the term of this Agreement in an
amount equal to varying percentages of the "net sales" of the Company
and its subsidiaries for the preceding taxable year ended December 31
(or such other fiscal year as the Company may adopt in the future),
commencing with the taxable year ending December 31, 1997 as determined
by the Company's independent accountant in accordance with generally
accepted accounting principles (except as hereinafter set forth)
prorated for any partial period of employment ("Net Sales Annual
Bonus"). The Net Sales Annual Bonus payable to the Executive shall be
the amount determined by multiplying the
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Executive's base salary of the Company and its subsidiaries as
determined above by the applicable percentage based upon the "net
sales" of the Company and its subsidiaries as set forth in the table
below, prorated for any partial period of employment, provided however
that the threshold bonus levels below shall increase by $1,000,000 in
the year next succeeding a year when a Net Sales Annual Bonus is
earned:
Net Sales Net Sales Annual Bonus
Less than $3,750,000 None
$3,750,000 or more but 7 1/2% of base salary
less than $4,500,000
$4,500,000 or more but 10% of base salary
less than $5,250,000
$5,250,000 or more but 15% of base salary
less than $6,000,000
$6,000,000 or more 20% of base salary
For example, if the Executive worked a full twelve months during the
employment year and the "net sales" of the Company and its subsidiaries for the
preceding year ended December 31 was either: $3,000,000, $4,000,000, $5,000,000
$5,500,000 & $6,000,000, then the Net Sales Annual Bonus due the Executive would
be $0, $9,375($125,000 x 7.5%), $12,500($125,000 x 10%), $18,750 ($125,000 x
15%) and $25,000 ($125,000 x 20%), respectively. Such Net Sales Annual Bonus
shall be paid to the Executive within thirty (30) days after the Company's
audited financial statements are made available by the Company's auditors.
For purposes of this Agreement, the term "Net Sales" shall mean the gross sales
of the Company and its subsidiaries for the fiscal year ended December 31 less
the sum of any returns and allowances for such taxable year and any sales taxes
included in the gross sales of the Company and its subsidiaries for such taxable
year.
(d) Discretionary Bonus Compensation. In addition to the Earnings
Annual Bonus set forth in Section 1.4(b) hereof, and Net Sales Annual
Bonus set forth in Section 1.4(c) hereof, the Company may also pay the
Executive discretionary annual bonus compensation ("Discretionary Bonus
Compensation") in an amount determined by the Board of Directors of the
Company in its sole discretion to be proper and appropriate based upon
such factors as the Board of Directors deems appropriate including (i)
the Executive's contributions to the success of the business operations
and the pre-tax profits of the Company and its subsidiaries, as
determined in accordance with generally accepted accounting principles,
(ii) the consolidated revenues of the Company and its subsidiaries for
the taxable year, and (iii)
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the general overall performance of the Company and its subsidiaries for
the taxable year. Such Discretionary Bonus Compensation shall be paid
by the Company to the Executive in the manner set forth in the
resolution of the Board of Directors of the Company authorizing and
declaring the payment of such Discretionary Bonus Compensation to the
Executive ("Discretionary Bonus Resolution"). Notwithstanding anything
herein to the contrary, the Executive shall not be entitled to any
Discretionary Bonus Compensation for any Employment Year during the
term of this Agreement unless and until such Discretionary Bonus
Compensation is determined and declared by the Board of Directors of
the Company.
1.5 Employment Benefits. In addition to the Salary, the Earnings Annual
Bonus, Net Sales Annual Bonus and any Discretionary Bonus Compensation payable
to the Executive hereunder, the Executive shall be entitled to the following
benefits upon satisfaction by the Executive of the eligibility requirements
therefor, subject to the following limitations:
(a) Sick Leave Benefits and Disability Insurance. Unless this Agreement
is terminated pursuant to the provisions of Section 1.6(b) hereof, the
Executive shall be paid sick leave benefits for a period of up to six
(6) months at his then prevailing Salary rate during his absence due to
illness or other incapacity, reduced by the amount, if any, of worker's
compensation, social security entitlement, or disability benefits, if
any, under the Company's group disability insurance plan, if any.
(b) Life Insurance"Key Man" Life Insurance. The Company, at its own
expense, shall provide the Executive, subject to the Executive passing
any physical examination required by the Company's insurance company,
life insurance benefits under and consistent with any group term life
insurance plan which the Company, at its election, may adopt. Any such
life insurance coverage shall be upon terms and conditions comparable
to the coverage, if any, provided other executive officers of the
Company, and provided further, however, that the Company shall not be
obligated to incur a premium of more than $5,000 per year for any such
change. In addition, the Company may obtain "key man" life insurance
upon the life of the Executive in an amount determined by the Company
in its sole discretion. The Executive shall fully cooperate in
obtaining said life insurance, including submitting to any physical
examination.
(c) Hospitalization, Accident, Major Medical and Dental Insurance. The
Company, at its own expense, shall provide the Executive (and all
dependents of the Executive at the request of the Executive) with group
hospitalization, group accident, major medical, and dental insurance in
amounts of coverage comparable to the coverage, if any, provided other
executive officers of the Company.
(d) Vacations. The Executive shall be entitled to a reasonable paid
vacation of not less that fifteen (15) business days each year during
the term of this Agreement, exclusive of national and religious
holidays and weekends, which vacation shall be taken by the Executive
in accordance with the business requirements of the Company at the time
and its personnel
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policies then in effect relative to this subject. The Executive shall
also be entitled to all paid holidays given by the Company to its
executive employees.
(e) Working Facilities. During the term of this Agreement, the Company
shall provide at its expense, adequate office space, furniture,
equipment, supplies, and personnel (including professional, clerical,
support and other personnel) as shall be suitable in the opinion of the
Board of Directors of the Company to the Executive's position and
adequate for the Executive's use in performing his duties and
responsibilities under this Agreement.
(f) Automobile Allowance. During the term of this Agreement, the
Company in its discretion shall provide the Executive with a monthly
automobile allowance of ONE THOUSAND AND NO/lOO DOLLARS ($1,000.00) In
addition, during the term of this Agreement, the Company shall
reimburse the Executive for the cost of automobile insurance, gasoline
and maintenance expenses incurred by the Executive in connection with
such automobile on a monthly basis within ten (10) business days after
receiving an itemized invoice for such expenses along with such
supporting documentation as is required by the Company in accordance
with its policy and procedure for reimbursement of expenses. Any
allowance due the Executive pursuant to the preceding provisions of
this paragraph shall be paid by the Company concurrently with payroll
in twenty-six payments of $461.54 per month.
(g) Minimum Incentive Stock Options. With respect to each of the
Company's fiscal years ending during the term of this Agreement, the
Company shall grant the Executive incentive stock options effective as
of December 31 of that year, to the extent permissible under incentive
stock option plans maintained by the Company, to purchase 5,000 shares
of common stock of the Company for each full $100,000 of the EBITANC of
the Company and its subsidiaries for such fiscal year as determined by
the Company's independent accountant in accordance with generally
accepted accounting principles. The number of shares of common stock
covered by the incentive stock options to be granted to the Executive
pursuant to this paragraph, and the exercise price per share thereof,
shall be proportionately adjusted for any increase or decrease in the
number of issued shares of common stock of the Company resulting from a
subdivision or consolidation of shares or the payment of a stock
dividend (but only on the common stock) or any other increase or
decrease in the number of shares affected without receipt of
consideration by the Company. Notwithstanding the preceding, nothing
contained herein shall preclude the Board of Directors of the Company
from terminating one or more incentive stock option plans currently or
hereafter maintained by the Company or issuing additional incentive
stock options to the Executive in its discretion.
(h) Other Employment Benefits. As an employee of the Company, the
Executive shall participate in and receive such other fringe benefits
as may be in effect from time to time for employees of the Company,
whether or not specifically enumerated herein and whether or not
through any written plan or arrangement, upon satisfaction by the
Executive of the eligibility requirements therefor. Any such benefits
shall be upon terms and conditions
7
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comparable to the benefits, if any, provided other executive officers
of the Company.
1.6 Termination. This Agreement and the Executive's employment
hereunder may be terminated without any breach of this Agreement at any time
during the term hereof only by reason of and in accordance with the following
provisions:
(a) Death. If the Executive dies during the term of this Agreement and
while in the employ of the Company, this Agreement shall automatically
terminate as of the date of the Executive's death, and the Company
shall have no further liability hereunder to the Executive or his
estate except to the extent set forth in Section 1.7(a) hereof.
(b) Disability. If, during the term of this Agreement, the Executive
shall be prevented from performing his duties hereunder by reason of
becoming totally disabled as hereinafter defined for twelve (12) months
out of a twenty-four (24) month period, then the Company may terminate
this Agreement immediately upon written notice to the Executive without
any further liability hereunder to the Executive except as set forth in
Section 1.7(b) hereof. For purposes of this Agreement, the Executive
shall be deemed to have become disabled when (i) he either receives
"disability benefits" under (a) Social Security, or (b) the Company's
disability plan, if any (whether funded with insurance or self-funded
by the Company), or (ii) the Board of Directors of the Company, upon
the written report of a qualified physician (after complete examination
of the Executive) designated by the Board of Directors of the Company
or its insurers, shall have determined that the Executive has become
physically and/or mentally incapable of performing his duties under
this Agreement.
(c) Termination by the Company for Cause. Prior to the expiration of
the term of this Agreement, the Company may discharge the Executive for
cause and terminate this Agreement immediately upon written notice to
the Executive without any further liability hereunder to the Executive
or his estate, except to the extent set forth in Section 1.7(c) hereof.
For purposes of this Agreement, a "discharge for cause" shall mean
termination of the Executive upon written notice to the Executive
limited, however, to one or more of the following reasons:
(1) Misappropriation or embezzlement by the Executive in
connection with the Company as detemined by the affirmative
unanimous vote of the Board of Directors of the Company other
than the Executive;
(2) Gross mismanagement or gross neglect of the Executive's
duties as determined by the affirmative unanimous vote of the
Board of Directors of the Company other than the Executive
after notice to the Executive of the particular details
thereof and a period of thirty (30) days thereafter within
which to cure such act or acts of gross mismanagement or gross
neglect, and the failure of the Executive to cure such act or
acts within such thirty (30) day period;
8
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(3) Indictment for a felony; or
(4) Willful and unauthorized disclosure of Trade Secrets (as
defined in Section 1.8 hereof) of the Company as determined by
the affirmative unanimous vote of the Board of Directors of
the Company other than the Executive.
(d) Termination by the Company with Notice. The Company may terminate
this Agreement, for a reason other than as set forth in subparagraphs
(a), (b), (c) or (g) of this Section 1.6 at any time immediately upon
written notice to the Executive without any further liability hereunder
to the Executive except to the extent set forth in Section 1.7(d)
hereof.
(e) Termination by the Executive with Notice. The Executive may
terminate this Agreement without liability to the Company arising
solely from the resignation of the Executive at any time upon thirty
(30) days written notice to the Company in which event the Company
shall have no further liability hereunder to the Executive except to
the extent set forth in Section 1.7(e) hereof.
(f) Termination by the Executive for Good Reason. The Executive may
terminate this Agreement at any time for Good Reason (as hereinafter
defined) in which event the Company shall have no further liability
hereunder to the Executive except to the extent set forth in Section
1.7(f) hereof. For purposes of this Agreement, the term "Good Reason"
shall mean, without the Executive's express written consent, the
occurrence of any the following circumstances (which changes shall
constitute a "Change"):
(1) The assignment to the Executive of any duties inconsistent
in any material respect (unless in the nature of a promotion)
with the Executive's position in the Company immediately prior
to such Change (including, but not limited to, the Executive's
status, offices and titles), or a significant adverse
alteration or diminution in the nature or status of the
Executive's authority, duties or responsibilities from those
in effect immediately prior to such Change, other than an
isolated, insubstantial and inadvertent action that is fully
corrected within five (5) days after receipt of written notice
from the Executive;
(2) Any failure by the Company to comply with any of the
provisions of Section 1.4 or 1.5 of this Agreement, other than
an isolated, insubstantial and inadvertent action that is
fully corrected within five (5) days after receipt of written
notice from the Executive;
(3) The Company's requiring the Executive to be based anywhere
other than at the Company's executive office, except for
travel reasonably required of the Executive in the performance
of the Executive's duties on behalf of the Company to an
extent substantially consistent with the Executive's present
business travel obligations;
9
<PAGE>
(4) The failure of the Company to obtain an agreement,
satisfactory to the Executive, from any and all successors to
assume and agree to perform this Agreement, as contemplated in
Section 1.9 hereof; or
(5) Any failure by the Company to comply with any material
provision of this Agreement that has not been cured within ten
(10) days after notice of such noncompliance has been given by
the Executive to the Company.
During a period of three (3) months immediately following any such termination
of this Agreement by the Executive, the Executive agrees to provide such
consulting services to the Company as it may reasonably request, at such time or
times within such period as may be mutually agreed upon between the Company and
the Executive. The Executive shall be compensated for any such consulting
services at a daily rate equal to one thirtieth (1/30) of the monthly Salary
paid to the Executive at the time of the Executive's resignation from the
Company, plus reimbursement for any reasonable out-of-pocket expenses incurred
by the Executive in rendering such consulting services .
(g) Termination upon Change in Control. The Company may terminate this
Agreement at any time within twelve (12) months after a Change in
Control (as hereinafter defined) immediately upon written notice to the
Executive without any further liability hereunder to the Executive
except to the extent set forth in Section 1.7(g) hereof. In the event
this Agreement is terminated by the Company within twelve (12) months
after the occurrence of a Change of Control, the provisions of this
Section shall supersede the provisions of Sections 1.6(d) hereof, the
provisions of Section 1.6(d) shall not be available to the Company and
the payments due the Executive hereunder shall be determined in
accordance with the provisions of Section 1.7(g) hereof and the
provisions of Section 1.7(d) shall not be available. For purposes of
this Agreement, the terms "Change of Control" shall mean:
(1) The transfer, through one transaction or a series of
related transactions, either directly or indirectly, or
through one or more intermediaries, of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934) of 25% or more of either the
then outstanding shares of common stock or the combined voting
power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors, or
the last of any series of transfers that results in the
transfer of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Securities Exchange Act of 1934)
of 25% or more of either the then outstanding shares of common
stock or the combined voting power of the Company's then
outstanding voting securities entitled to vote generally in
the election of directors;
(2) Approval by the shareholders of the Company of a merger
or consolidation, with respect to which persons who were the
shareholders of the Company
10
<PAGE>
immediately prior to such merger or consolidation do not,
immediately thereafter, own more than 50% of the combined
voting power entitled to vote generally in the election of
directors of the merged or consolidated company's then
outstanding voting securities, or a liquidation or dissolution
of the Company or the sale of all or substantially all of the
assets of the Company;
(3) The transfer, through one transaction or a series of
related transactions, of more than 50% of the assets of the
Company, or the last of any series of transfers that results
in the transfer of more than 50~ of the assets of the Company.
For purposes of this paragraph, the determination of what
constitutes more than 50% of the assets of the Company shall
be determined based on the most recent financial statement
prepared by the Company's independent accountants; or
(4) During any calendar year, individuals who at the beginning
of such year constituted the Board of the Company and any new
director or directors whose election by the Board was approved
by a vote of a majority of the directors then still in office
who either were directors at the beginning of the year or
whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority
thereof provided, however, that this provision will not be
triggered in the event the Executive votes or causes other
stockholders to vote their shares to cause said change to the
directorship of the Company.
(h) Termination By the Executive without Notice. The Executive may
terminate this Agreement without liability to the Company (except to
the extent set forth in Section 1.7(b) hereof arising solely from the
resignation of the Executive at any time without notice to the Company
in which event the Company shall have no further liability hereunder to
the Executive except to the extent set forth in Section 1.7(h) hereof.
1.7 Compensation upon Termination.
(a) Death. In the event the Executive's employment hereunder is
terminated pursuant to the provisions of Section l.6(a) hereof due to the death
of the Executive, the Company shall have no further obligation to the Executive
or his estate, except to pay to the Executive's spouse, or if he leaves no
spouse, to the estate of the Executive (provided, however, that the Executive,
with the written consent of the Executive's spouse, if any, may affirmatively
designate a beneficiary other than his spouse or estate): (i) any accrued, but
unpaid, Salary, any authorized but unreimbursed business expenses, and any
vacation or sick leave benefits, which have accrued as of the date of death, but
were then unpaid or unused, (ii) any accrued, but unpaid, Earnings Annual Bonus
and Net Sales Annual Bonus any declared, but unpaid, Discretionary Bonus
Compensation, but without accelerating the bonus payment date, (ii) accrued
stock options pursuant to paragraph 1.5(g) and (iv) an amount equal to the
difference between (a) the full monthly Salary payable hereunder as of the date
of death of the Executive for a period consisting of that number of months equal
to one (1) month multiplied by the number of full years that the Executive was
an employee of the
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Company or a subsidiary or a predecessor in interest thereof, and (b) the
monthly payment, if any, payable to the Executive under the Company's salary
continuation plan, if any, for the corresponding month during the period set
forth in clause (iii)(a) above. Any amount due the Executive under clause (i) of
this paragraph shall be paid in a lump sum in cash within thirty (30) days after
the death of the Executive, and any amount due the Executive under clause (ii)
of this paragraph shall be paid in accordance with the Discretionary Bonus
Resolution; provided, however, that any unpaid Annual Bonus shall be paid to the
Executive within thirty (30) days after the audited financial statements for the
fiscal year is made available by the Company's auditors for which such Annual
Bonus is due, and any amount due the Executive under clause (iii) of this
paragraph shall be paid in accordance with the Company's regular payroll periods
during the period set forth in said clause (iii). For purposes of this provision
"Salary" shall include any amounts due under Section 1.5(f) hereof.
(b) Disability. In the event the Executive's employment hereunder is
terminated pursuant to the provisions of Section 1.6(b) hereof due to the
Disability of the Executive, the Company shall be relieved of all of its
obligations under this Agreement, except to pay the Executive (i) any accrued,
but unpaid Salary, any authorized but unreimbursed business expenses, and any
vacation or sick leave benefits which have accrued as of the date on which such
permanent disability is determined, but then remain unpaid, (ii) any accrued,
but un~aid, Earnings Annual Bonus, Net Sales Annual Bonus and any declared, but
unpaid, Discretionary Bonus Compensation but without accelerating the bonus
payment date, and (iii) an amount equal to the difference between (a) the full
monthly Salary payable hereunder as of the date of termination of the
Executive's employment hereunder for a period consisting of that number of
months equal to one (1) month multiplied by the number of full years that the
Executive was an employee of the Company or a subsidiary or predecessor in
interest thereof, and subject to a minimum of six (6) months (b) the monthly
payment, if any, payable to the Executive under the Company's salary
continuation plan and/or disability plan, if any, for the corresponding month
during the period set forth in clause (iii)(a) above. The provisions of the
preceding sentence shall not affect the Executive's rights to receive payments
under the Company's disability insurance plan, if any. Any amount due the
Executive under clause (i) of this paragraph shall be paid in a lump sum in cash
within thirty (30) days after the termination of the Executive's employment
hereunder, any amount due the Executive under clause (ii) of this paragraph
shall be paid in accordance with the Discretionary Bonus Resolution; provided,
however, that any unpaid Earnings Annual Bonus or Net Sales Annual Bonus shall
be paid to the Executive within thirty (30) days after the issuance of the
Company's fiscal year audited financial results for which such Earnings Annual
Bonus is due, and any amount due the Executive under clause (iii) of this
paragraph shall be paid in accordance with the Company's regular payroll periods
during the period set forth in clause (iii) For purposes of this provision
"salary" shall include any amounts due under Section l.,(f) hereof.
(c) Cause. In the event the Executive's employment hereunder is
terminated by the Company for cause pursuant to the provisions of Section 1.6(c)
hereof, the Company shall have no further obligation to the Executive under this
Agreement except to pay the Executive (i) any accrued, but unpaid, Salary, any
authorized but unreimbursed business expenses, and any vacation
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<PAGE>
or sick leave benefits, which have accrued as of the date of termination of this
Agreement, but were then unpaid or unused, and (ii) any accrued, but unpaid,
Earnings Annual Bonus, Net Sales Annual Bonus and any declared, but unpaid,
Discretionary Bonus Compensation, but without accelerating the bonus payment
date. Any amount due the Executive under clause (i) of this paragraph shall be
paid in a lump sum in cash within thirty (30) days after the termination of the
Executive's employment hereunder, and any amount due the Executive under clause
(ii) of this Paragraph shall be paid in accordance with the Discretionary Bonus
Resolution; provided, however, that any unpaid Earnings Annual Bonus or Net
Sales Annual Bonus shall be paid to the Executive within thirty (30) days after
the end of the Company's taxable year for which such Earnings or Net Sales
Annual Bonus is due.
(d) Termination by the Company with Notice. In the event the
Executive's employment hereunder is terminated by the Company pursuant to the
provisions of Section 1.6(d) hereof, the Executive shall be entitled to receive
(i) any accrued, but unpaid, Salary, any authorized but unreimbursed business
expenses, and any vacation or sick leave benefits which have accrued as of the
date of termination of the Agreement, but were then unpaid or unused, (ii) any
accrued, but unpaid, Earnings Annual Bonus or Net Sales Annual Bonus and any
declared, but unpaid, Discretionary Bonus Compensation, and (iii) the full
monthly Salary payable hereunder for the unexpired term of the Agreement whether
or not the Executive has sought or obtained employment elsewhere after the
termination of the Executive's employment pursuant to the provisions of section
1.6(d) hereof. Any amount due the Executive under clauses (i), (ii) and (iii) of
this paragraph (other than for any Earnings Annual Bonus and Net Sales Annual
Bonus) shall be paid in a lump sum in cash within thirty (30) days after the
termination of the Executive's employment thereunder; provided, however, that
any unpaid Earnings Annual Bonus and Net Sales Annual Bonus shall be paid to the
Executive within ninety (90) days after the end of the Company's taxable year
for which such Earnings Annual Bonus or Net Sales Annual Bonus is due. In
addition, in the event this Agreement is terminated by the Company pursuant to
the provisions of Section 1.6(d) hereof, the Company at its expense shall
continue to provide the Executive with the benefits set forth in Sections
1.5(b), 1.5(c), 1.5(f) and 1.5(h) above for the unexpired term of this Agreement
whether or not the Executive has sought or obtained employment elsewhere after
the termination of the Executive's employment pursuant to the provisions of
Section 1.6(d) hereof; provided, however, if the Executive obtains employment
elsewhere during the aforesaid period, then the Company shall continue to
provide the benefits set forth in Sections 1.5(b), 1.5(c), 1.5(f) and 1.5(h)
hereof only to the extent the Executive does not receive such benefits in their
entirety from the Executive's then current employer.
(e) Termination by the Executive with Notice. In the event the
Executive's employment hereunder is terminated by the Executive pursuant to the
provisions of Section 1.6(e) hereof, the Executive shall be entitled to receive
(1) any accrued, but unpaid, Salary, any authorized but unreimbursed business
expenses, and any vacation or sick leave benefits which have accrued as of the
date of termination of this Agreement, but were then unpaid or unused, and (ii)
any accrued, but unpaid, Earnings Annual Bonus, Net Sales Annual Bonus and any
declared, but unpaid, Discretionary Bonus Compensation. Any amount due the
Executive under clause (i) of this
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<PAGE>
paragraph shall be paid in a lump sum in cash within thirty (30) days after the
termination of the Executive's employment hereunder, and any amount due the
Executive under clause (ii) of this paragraph shall be paid in accordance with
the Discretionary Bonus Resolution; provided, however, that any unpaid Earnings
Annual Bonus and Net Sales Annual Bonus shall be paid to the Executive within
ninety (90) days after the end of the Company's taxable year for which such
Earnings and Net Sales Annual Bonus is due. In addition, the Company may, at its
option, cancel the Executive's unexercised stock options and terminate
Executive's unexercised stock options; (ii) repurchase all shares of common
stock owned by Executive, at his cost, payable over ten (10) years; (iii)
require the repayment in cash within thirty (30) days after termination of
Executive's employment, any "signing bonus" paid to Executive.
(f) Termination by the Executive for Good Reason.
(1) Prior to Change of Control. In the event this Agreement is
terminated by the Executive pursuant to the provisions of
Section 1.6(f) hereof prior to the occurrence of a Change of
Control, the Executive shall be entitled to receive (i) any
accrued, but unpaid, Salary, any authorized but unreimbursed
business expenses, and any vacation or sick leave benefits
which have accrued as of the date of termination of the
Agreement, but were then unpaid or unused, (ii) any accrued,
but unpaid, Earnings Annual Bonus, and Net Sales Annual Bonus
and any declared, but unpaid, Discretionary Bonus
Compensation, and (iii) the full monthly Salary payable
hereunder for the unexpired term of the Agreement whether or
not the Executive has sought or obtained employment elsewhere
after the termination of the Executive's employment pursuant
of the provisions of Section 1.6(f) hereof. Any amount due the
Executive under clauses (i), (ii) and (iii) of this paragraph
(other than for any Earnings Annual Bonus and Net Sales Annual
Bonus) shall be paid in a lump sum in cash within thirty (30)
days after the termination of the Executive's employment
hereunder; provided, however, that any unpaid Earnings Annual
Bonus or Net Sales Annual Bonus shall be paid to the Executive
within ninety (90) days after the end of the Company's taxable
year for which such Minimum Annual Bonus is due. In addition,
in the event this Agreement is terminated by the Executive
pursuant to the provisions of Section 1.6(f) hereof prior to
the occurrence of a Change of Control, the Company at its
expense shall continue to provide the Executive with the
benefits set forth in Section 1.5(b), 1.5(c) and 1.5(h) above
for the unexpired term of this Agreement whether or not the
Executive has sought or obtained employment elsewhere after
the termination of the Executive's employment pursuant to the
provisions of Section 1.6(f) hereof; provided, however, if the
Executive obtains employment elsewhere during the aforesaid
period, then the Company shall continue to provide the
benefits set forth in Sections 1.5(b), 1.5(c), 1.5(f) and
1.5(h) hereof only to the extent the Executive does not
receive such benefits in their entirety from the Executives
then current employer. In addition, in the event this
Agreement is terminated by the Executive pursuant to the
provisions of Section 1.6(f), the Company at its expense shall
purchase the
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automobile provided to the Executive pursuant to Section
1.5(f) by paying the total lease payments and the residual
value then due in order to acquire title and transfer title on
said automobile to Executive within ninety (90) days after the
termination of the Executive's employment thereunder.
(2) After Change of Control. In the event this Agreement is
terminated by the Executive pursuant to the provisions of
Section 1.6(f) hereof after the occurrence of a Change of
Control, the executive shall be entitled to receive (i) any
accrued, but unpaid, Salary, any authorized but unreimbursed
business expenses, and any vacation or sick leave benefits
which have accrued as of the date of termination of the
Agreement, but were then unpaid or unused, (ii) any accrued,
but unpaid, Earnings Annual Bonus, Net Sales Annual Bonus and
any declared, but unpaid, Discretionary Bonus Compensation,
and (iii) an amount equal to the full monthly Salary payable
hereunder for the unexpired term of the Agreement whether or
not the Executive has sought or obtained employment elsewhere
after the termination of the Executive's employment pursuant
to the provisions of Section 1.6(f) hereof. Any amount due the
Executive under clauses (i), (ii) and (iii) of this paragraph
(other than for any Earnings or Net Sales Annual Bonus) shall
be paid in a lump sum in cash within thirty (30) days after
the termination of the Executive's employment hereunder;
provided, however, than any unpaid Earnings Annual Bonus and
Net Sales Annual Bonus shall be paid to the Executive within
ninety (90) days after the end of the Company's taxable year
for which such Earnings or Net Sales Annual Bonus is due. In
addition, in the event this Agreement is terminated by the
Executive pursuant to the provisions of Section 1.6(f) hereof
after the occurrence of a Change of Control, the Company at
its expense shall continue to provide the Executive with the
benefits set forth in Section 1.5(b), 1.5(c), 1.5 (f) and
1.5(h) above for the unexpired term of this Agreement whether
or not the Executive has sought or obtained employment
elsewhere after the termination of the Executive's employment
pursuant to the provisions of Section 1.6(f) hereof; provided,
however, if the Executive obtains employment elsewhere during
the aforesaid period, then the Company shall continue to
provide the benefits set forth in Sections 1.5(b), 1.5(c),
1.5(f) and 1.5(h) hereof only to the extent the Executive does
not receive such benefits in their entirety from the
Executive's current employer. In addition, in the event this
Agreement is terminated by the Executive pursuant to the
provisions of Section 1.6(f), the Company at its expense shall
purchase the automobile provided to the Executive pursuant to
Section 1.5(f) by paying the total lease payments and residual
value than due in order to acquire title and transfer title on
said automobile to Executive within ninety (90) days after the
termination of the Executive's employment thereunder.
(g) Termination by the Company After Change of Control. In the event
this Agreement is terminated by the Company pursuant to the provisions
of Section 1.6(g) hereof after the occurrence of a Change of Control,
the Executive shall be entitled to receive (i) any accrued, but unpaid,
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Salary, any authorized but unreimbursed business expenses, and any vacation or
sick leave benefits which have accrued as of the date of termination of the
Agreement, but were then unpaid or unused, (ii) any accrued, but unpaid,
Earnings Annual Bonus, Net Sales Annual Bonus and any declared, but unpaid,
Discretionary Bonus Compensation, and (iii) an amount equal to the full monthly
Salary payable hereunder for the unexpired term of the Agreement whether or not
the Executive has sought or obtained employment elsewhere after the termination
of the Executive's employment pursuant to the provisions of Section l.6(g)
hereof. Any amount due the Executive under clauses (i) and (ii) of this
paragraph shall be paid in a lump sum in cash within thirty (30) days after the
termination of the Executive's employment hereunder, and any amount due the
Executive under clause (iii) of this paragraph shall be paid in a lump sum in
cash within ninety (90) days after the termination of the Executive's employment
hereunder. In addition, in the event this Agreement is terminated by the Company
pursuant to the provisions of Section 1.6(g) hereof after the occurrence of a
Change of Control, the Company at its expense shall continue to provide the
Executive with the benefits set forth in Sections 1.5(b), 1.5(c), 1.5(f) and
l5.5(h) above for the unexpired term of this Agreement whether or not the
Executive has sought or obtained employment elsewhere after the termination of
the Executive's employment pursuant to the provisions of Section 1.6(g) hereof;
provided, however, if the Executive obtains employment elsewhere during the
aforesaid period, then the Company shall continue to provide the benefits set
forth in Sections 1.5(b), 1.5(c), 1.5(f) and l.5(h) hereof only to the extent
the Executive does not receive such benefits in their entirety from the
Executive's then current employer.
(h) Termination by the Executive without Notice. In the event the
Executive's employment hereunder is terminated by the Executive pursuant to the
provisions of Section 1.6(h) hereof, the Executive shall be entitled to receive
(1) any accrued, but unpaid, Salary, any authorized but unreimbursed business
expenses, and any vacation or sick leave benefits which have accrued as of the
date of termination of this Agreement, but were then unpaid or unused, and (ii)
any accrued, but unpaid, Earnings Annual Bonus, Net Sales Annual Bonus and any
declared, but unpaid, Discretionary Bonus Compensation. Any amount due the
Executive under clause (i) of this paragraph shall be paid in a lump sum in cash
within thirty (30) days after the termination of the Executive's employment
hereunder, and any amount due the Executive under clause (ii) of this paragraph
shall be paid in accordance with the Discretionary Bonus Resolution; provided,
however, that any unpaid Earnings Annual Bonus and Net Sales Annual Bonus shall
be paid to the Executive within ninety (90) days after the end of the Company's
taxable year for which such Earnings Annual Bonus and Net Sales Annual Bonus is
due. In addition, the Company may, at its option, cancel the Executive's
unexercised stock op ions and terminate Executive's unexercised stock options;
(ii) repurchase all shares of common stock owned by Executive, at his cost,
payable over ten (10) years; (iii) require the repayment in cash within thirty
(30) days after termination of Executive's employment, any "signing bonus" paid
to Executive.
(i) Termination of Obligations of the Company Upon Payment of
Compensation. Upon payment of the amount, if any, due the Executive pursuant to
the preceding provisions of this Section, the Company shall have no further
obligation to the Executive under this Agreement.
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1.8 Protective Covenants. The Executive recognizes that his employment
by the Company is one of the highest trust and confidence because (i) the
Executive will become fully familiar with all aspects of the Company's business
and that of its subsidiaries during the period of his employment with the
Company, (ii) certain information of which the Executive will gain knowledge
during his employment is proprietary and confidential information which is of
special and peculiar value to the Company or its subsidiaries, and (iii) if any
such proprietary and confidential information were imparted to or became known
by any person, including the Executive, engaging in a business in competition
with that of the Company or its subsidiaries, hardship, loss and irreparable
injury and damage could result to the Company or its subsidiaries, the
measurement of which would be difficult if not impossible to ascertain. The
Executive acknowledges that any and all inventions, improvements, discoveries,
formulae, processes, products or designs developed by the Executive alone or in
conjunction with others in connection with the Company's business during the
term of the Executive's employment with the Company ("Proprietary Information")
shall be the sole and absolute property of the Company in perpetuity, that the
Executive shall promptly disclose such Proprietary Information to the Company,
and the Executive shall have no right, title or interest therein or to receive
additional monies therefor, regardless of whether development occurred during
working hours or any other time during the term of the Executive's employment
with the Company. The Executive shall assist the Company in obtaining patents on
all such Proprietary Information deemed patentable by the Company and shall
execute all documents necessary to obtain such patents and to vest the Company
with full and extensive title to the patents and to protect the patents against
infringement by others. For purposes of this Agreement, an invention shall be
deemed to have been made during the period of the Executive's employment if,
during such period, the invention was conceived or first actually reduced to
practice, and the Executive agrees that any patent application filed by the
Executive within one (1) year after a termination of the Executive's employment
with the Company shall be presumed to relate to an invention made during the
term of the Executive's employment with the Company unless the Executive can
establish the contrary. The Executive further acknowledges that the Company or
its subsidiaries has developed unique skills, concepts, sales presentations,
marketing programs, marketing strategy, business practices, methods of
operation, trademarks, licenses, technical information, Proprietary Information,
computer software programs, tapes and discs concerning its operations systems,
customer lists, customer leads, documents identifying past, present and future
customers, hiring and training methods, investment policies, financial and other
confidential and proprietary information concerning its operations and expansion
plans ("Trade Secrets"). Therefore, the Executive agrees that it is necessary
for the Company to protect its business and that of its subsidiaries from such
damage, and the Executive further agrees that the following covenants constitute
a reasonable and appropriate means, consistent with the best interest of both
the Executive and the Company, to protect the Company or its subsidiaries
against such damage and shall apply to and be binding upon the Executive as
provided herein:
(a) Trade Secrets. The Executive recognizes that his position with the
Company is one of the highest trust and confidence by reason of the Executive's
access to and contact with certain Trade Secrets of the Company and its
subsidiaries. The Executive agrees and covenants to use his best efforts and
exercise utmost diligence to protect and safeguard the Trade Secrets of the
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Company and its subsidiaries. The Executive further agrees and covenants that,
except as may be required by the Company in connection with this Agreement, or
with the prior written consent of the Company, the Executive shall not, either
during the term of this Agreement or thereafter, directly or indirectly, use for
the Executive's own benefit or for the benefit of another, or disclose,
disseminate, or distribute to another, any Trade Secret (whether or not
acquired, learned, obtained, or developed by the Executive alone or in
conjunction with others) of the Company or its subsidiaries or of others with
whom the Company or its subsidiaries has a business relationship. All memoranda,
notes, records, drawings, documents, or other writings whatsoever made,
compiled, acquired, or received by the Executive during the term of this
Agreement, arising out of, in connection with, or related to any activity or
business of the Company or its subsidiaries, including, but not limited to, the
customers, suppliers, or others with whom the Company or its subsidiaries has a
business relationship, the arrangements of the Company or its subsidiaries with
such parties, and the pricing and expansion policies and strategy of the Company
or its subsidiaries, are, and shall continue to be, the sole and exclusive
property of the Company or its subsidiaries, as applicable, and shall, together
with all copies thereof and all advertising literature, to be returned and
delivered to the Company by the Executive immediately, without demand, upon the
termination of this Agreement, or at any time upon the Company's demand.
(b) Restriction on Soliciting Customers of the Company and its
Subsidiaries. The Executive covenants that for a period of twenty-four (24)
months following the termination of this Agreement, he will not, either directly
or indirectly, (i) disclose or otherwise make known to any person or entity the
names and addresses of any of the customers of the Company, or (ii) call on,
solicit, or take away, or attempt to call on solicit or take away any of the
customers of the Company or its subsidiaries with whom he became acquainted
during his employment with the Company, either for himself or for any other
person, firm, corporation or other entity.
(c) Covenant Not to Compete. In the event this Agreement is terminated
pursuant to the provisions of Section 1.6(c) hereof, the Executive hereby
covenants and agrees that for a period of twelve (12) months following the
termination of his employment hereunder, he will not directly or indirectly,
either as an employee, employer, consultant, agent, principal, partner,
shareholder (other than through ownership of public traded capital stock of a
corporation which represent less than five percent (5%) of the outstanding
capital stock of such corporation), corporate officer, director, investor,
financier or in any other individual or representative capacity, engage or
participate in any business located in a county in which the Company or any of
its subsidiaries is doing business as of the date of termination of the
Executive's employment hereunder which is competitive with the business of the
Company or any of its subsidiaries as of such date.
(d) Survival of Covenants. Each covenants of the Executive set forth in
this Section 1.8 shall survive the termination of this Agreement and shall be
construed as an agreement independent of any other provision of this Agreement,
and the existence of any claim or cause of action of the Executive against the
Company whether predicated on this Agreement or otherwise shall not constitute a
defense to the enforcement by the Company of said covenant.
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<PAGE>
(e) Remedies. In the event of breach or threatened breach by the
Executive of any provision of this Section 1.8, the Company shall be entitled to
relief by temporary restraining order, temporary injunction, or permanent
injunction or otherwise, in addition to other legal and equitable relief to
which it may be entitled, including any and all monetary damages which the
Company may incur as a result of said breach, violation or threatened breach or
violation. The Company may pursue any remedy available to it concurrently or
consecutively in any order as to any breach, violation, or threatened breach or
violation, and the pursuit of one of such remedies at any time will not be
deemed an election of remedies or waiver of the right to pursue any other of
such remedies as to such breach, violation, or threatened breach or violation,
or as to any other breach, violation, or threatened breach or violation.
The Executive hereby acknowledges that the Executive's agreement to be
bound by the protective covenants set forth in this Section 1.8 was a material
inducement for the Company entering into this Agreement and agreeing to pay the
Executive the compensation and benefits set forth herein.
1.9 Merger or Acquisition. In the event the Company should consolidate,
or merge into another corporation, or transfer all or substantially all of its
assets to another entity, or divide its assets among a number of entities, this
Agreement shall continue in full force and effect. The Company will require any
and all successors (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, to expressly assume and agree pursuant to an appropriate
written assumption agreement to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such successor shall be a breach of this
Agreement and shall entitle the Executive to terminate his employment and this
Agreement for Good Reason. As used in this Agreement, the term "Company" shall
mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which executes and delivers the assumption agreement
provided for in this Section 1.9 or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
1.10 Reimbursement of Employee Expenses. The Executive is authorized to
incur ordinary, necessary and reasonable expenses in connection with the
performance of his duties and responsibilities under this Agreement and for the
promotion of the business and activities of the Company during the term hereof,
including, without limitation, expenses for necessary travel and necessary
travel and entertainment and other items of expenses required in the normal and
routine course of the Executive's employment hereunder. The Company will
reimburse the Executive from time to time for all such business expenses
incurred pursuant to and in conformity with the
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provisions of this Section provided that the Executive presents to the Company:
(a) An account book in which the Executive recorded at or near
the time each expenditure was made; (i) the amount of the expenditures, (ii) the
time, place and designation of the type of entertainment and travel or other
expenses, or the date and description of the gift (gifts made to one individual
are not to exceed a total of Twenty-Five and No/100 Dollars ($25.00) in any
taxable year); (iii) the business reason for the expenditure and the nature of
the business benefit derived or expected to be derived as the result of the
expenditure; and (iv) the names, occupations, addresses and other information
concerning each person who was entertained or given a gift sufficient to
establish the business relationship to the Company; and
(b) Documentary evidence (such as receipts or paid bills)
which state sufficient information to establish the amount, date, place and
essential character of the expenditure, for such expenditure (i) of Twenty-Five
and No/100 Dollars ($25.00) or more except for transportation charges if not
readily available) and (ii) for lodging or traveling away from home.
GENERAL PROVISIONS
2.1 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date deposited in a
receptacle maintained by the United States Postal Service for such purpose,
postage prepaid, by certified mail, return receipt requested, addressed to the
respective parties as follows:
If to the Executive: Mr. Mark Honigsfeld
969 East End
Woodmere, New York 11598
If to the Company: Compu-Dawn, Inc.
77 Spruce Street
Cedarhurst, New York 11516
Either party hereto may designate a different address by providing written
notice of such new address to the other party hereto.
2.2 Severability. If any provision contained in this Agreement is
determined to be void, illegal or unenforceable, in whole or in part, then the
other provisions contained herein shall remain in full force and effect as if
the provision which was determined to be void, illegal, or unenforceable had not
been contained herein.
2.3 Waiver, Modification. and Integration. The waiver by any party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by any party. This instrument
contains the entire agreement of the parties concerning
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employment and supersedes all prior and contemporaneous representations,
understandings and agreements, either oral or in writing, between the parties
hereto with respect to the employment of the Executive by the Company and all
such prior or contemporaneous representations, understandings and agreements,
both oral and written, are hereby terminated. The terms of this Agreement may
not be modified, altered or amended except by written agreement of the Executive
and the Company, subject to the prior approval of the Board of Directors of the
Company.
2.4 Binding Effect. This Agreement shall be binding and effective upon
the Company and its successors and permitted assigns, and upon the Executive,
his heirs and representatives; provided, however, that the Company shall not
assign this Agreement without the written consent of the Executive.
2.5 Choice of Law and Venue. The parties agree that this Agreement is
made and entered into in Nassau County, New York and shall be governed by and
construed in accordance with the laws of the State of New York, and that any
litigation, special proceeding or other proceeding as between the parties that
may be brought, or arise out of, in connection with or by reason of this
Agreement shall be brought in the applicable state court in and for Nassau
County, New York which Courts shall be the exclusive courts or jurisdiction and
venue.
2.6 Representation of Executive. The Executive hereby represents and
warrants to the Company that he has not previously assumed any obligations
inconsistent with those contained in this Agreement. The Executive further
represents an~ warrants to the Company that the Executive has entered into this
Agreement pursuant to his own initiative and that the Company did not induce the
Executive to execute this Agreement in contravention of any existing
commitments. The Executive acknowledges that the Company has entered into this
Agreement in reliance upon the foregoing representations of the Executive.
2.7 Independent Counsel. The Company has been presented by ROBERT H.
SOLOMON, ESQ. The Executive has been represented by Ira Sturm, Esq.
Each has made his or its own determination with respect to counsel without
coercion from the other. Each has thoroughly reviewed the provisions of this
Agreement and all matters concerning the consulting with the benefit of
independent counsel.
2.8 Arbitration Any controversy or claim arising out of or relating to
this Agreement shall be settled by binding arbitration in Nassau County, New
York under the rules of the American Arbitration Association. Judgment upon the
award may be entered in any court having jurisdiction and the arbitrator(s) are
specifically authorized to award the prevailing party in such arbitration all
reasonable attorney's fees, expenses and costs of arbitration.
2.9 Counterpart Execution. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written effective as of the Effective Date.
COMPU-DAWN, INC.
BY:/s/ Dong Lew
-------------------------
DONG LEW, PRESIDENT
EXECUTIVE:
/s/ Mark Honisgfeld
---------------------------
MARK HONIGSFELD
Attest
/s/ Louis Libin
- -------------------
Assistant Secretary
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VOID AFTER 5:00 P.M., LONG ISLAND, NEW YORK LOCAL TIME ON
THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISEHEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF1933, AS AMENDED (the "ACT"), OR ANY
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE EXERCISED, SOLD OR TRANSFERRED
IN THE ARSENCE OF SUCH REGISTRATION OR AN EXEMPTION HEREFROM. THIS LEGEND SHALL
BE ENDORSED UPON ANY WARRANT ISSUED IN EXCHANGE FOR THIS WARRANT
REDEEMARLE STOCK PURCHASE WARRANT
Warrant No.
This STOCK PURCHASE WARRANT ("Warrant") is issued this day of _____
1996, by Compu-Dawn, Inc., Delaware corporation the (the "Company") to or its
permitted assigns ("Holder").
This Warrant has been issued by the Company to the Holder in a private
offering pursuant to a Private Placement Memorandum dated October 18, 1996 and a
subscription and Registration Rights Agreement between the Holder (executed on
October ___, 1996) and the Company (executed on October ______, 1996 (the
"Subscription and Registration Rights Agreement").
1. Issuance of Warrant. For value received, the Company hereby grants
to Holder, subject to the provisions set forth herein, the right to purchase an
aggregate of ____ shares ( )common stock, $.01 par value per share, ("Shares"),
subject to adjustment as set forth herein at an exercise price per share of $.50
subject to adjustments as set forth herein.
EXHIBIT C
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Upon receipt by the Company of evidence reasonably salisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and (in the case
of loss, theft or destruction) of satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Company shall
executed and deliver a new Warrant of like tenor and date.
The Holder agrees with the Company that this Warrant is issued, and all
the rights hereunder shall be held subject to, all of the conditions,
limitations and provisions set forth herein.
2. Exercise of Warrant. This Warrant may be exercised by Holder as to
all or any part of the Shares covered hereby at any time commencing on the date
of the closing of the Company's initial public offering of securities (the
"Initial Exercise Date") and expiring on the fifth anniversary date thereof or
if such a day is a day on or, which banking institutions in the the City of New
York are authorized by law to close, then on the next succeeding day that shall
not be such a day (subject to (i) redemption by the Company pursuant to the
conditions set forth in Section 10 hereof; and (ii) earlier termination upon the
occurrence of the conditions set forth in Section 6 hereof, upon delivery of the
completed and executed Exercise Form attached hereto, for the numbers of shares
purchased, addressed to the Company c/o Robert H. Solomon, 68 West Park Avenue,
Long Beach, New York or at such other address as the Company shall designate in
writing to Holder, together with this Warrant and a certified or cashier's check
payable to the order of the Company for the aggregate purchase price of the
Shares so purchased. If the Company does not close an initial public offering of
its securities this Warrant shall not be exercisable. Upon the exercise of this
Warrant as aforesaid, the Company shall as promptly as practicable, and in any
event within fifteen (15) days thereafter, execute and deliver to Holder a
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certificate or certificates in the name of Holder for the total number of whole
Shares for which this Warrant is being exercised. Upon receipt by the Company of
this Warrant, together with the Exercise Price, at its office in proper form for
exercise, the Holder shall be deemed to be the Holder of record of the Shares as
issuable upon such exercise, notwithstanding that the stock transfer books of
the Company shall then be closed or that certificates representing such Common
Shares shall not then be actually delivered to the Holder. If this Warrant shall
be exercised with respect to less than all of the Shares, Holder shall be
entitled to receive a similar warrant of like tenor and date covering the number
of Shares in respect of which this Warrant shall not have been exercised. This
Warrant shall lapse and shall be null and void if not exercised by Holder on or
prior to the fifth anniversary from the Initial Exercise Date, subject to (i)
redemption pursuant to the conditions set forth in Section 10; and (ii) earlier
termination of this Warrant upon the occurrence of the conditions set forth in
Section 6 hereof.
3. Covenants of Company. The Company covenants and agrees that all the
Shares which may be issued upon the exercise of this Warrant will, upon
issuance, be fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof (other than taxes in respect of any
transfer occurring contemporaneously with such issue). The Company further
covenants and agrees that during the period within which this Warrant may be
exercised, the Company will at all times have authorized and reserved, a
sufficient number of Shares to provide for the exercise of this Warrant and the
delivery of the Shares upon such exercise.
4. Adjustments of Warrant Exercise Price and Number of Shares.
The warrant Exercise Price and number of Shares purchasable pursuant to the
Warrant shall be subject to adjustment from time to time as follows:
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(a) In the event the Company shall at any time issue or sell
any Shares (including shares held in the Company's treasury, but excluding
shares issued or distributed pursuant to the Company's 1996 Incentive Stock
Option Plan, or similar plans for employees or directors) for a consideration
per share less than the Warrant Exercise Price in effect immediately prior to
the issuance or sale of such Shares, or without consideration, then, and
thereafter successively upon each such issuance or sale, the Warrant Exercise
Price in effect immediately prior to the issuance or sale of such Shares shall
forthwith be reduced to a Warrant Exercise Price (calculated to the nearest full
cent) determined by dividing:
(i) an amount equal to the sum of (A) the number
of Shares outstanding immediately prior to such issuance or sale multiplied by
the Warrant Exercise Price in effect immediately prior to such issuance or
sale and (B) the consideration, if any, received by the Company upon such
issuance or sale, by
(ii) the total number of Shares outstanding
immediately after such issuance or sale.
For the purposes of any computation to be made in accordance with the
provisions of this paragraph (A) the following provisions shall be applicable:
(A) In the event of the issuance or sale
of Shares for cash, the consideration received by the Company therefor shall
be deemed to be the net cash proceeds received by the Company for such
Shares, after deducting commissions or other expenses paid or incurred
by the Company for any underwriting of, or otherwise in connection with,
the issuance or sale of such Shares.
4
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(B) In the event of the issuance or sale
of Shares for consideration other than cash or consideration a part of which
shall be other than cash, the amount of the consideration other than cash
received by the Company for such Shares shall be deemed to be the fair market
value of such consideration as determined by the Board of Directors of the
Company, irrespective of any accounting treatment thereof.
(C) In the event of the issuance of Shares
as a dividend, the Shares shall be deemed to have been issued for
consideration equal to the Warrant Exercise Price at the close of business on
the dividend record date. If no dividend record date is fixed, the date on which
the resolution of the Board of Directors of the Company declaring such dividend
is adopted shall be treated as the record date.
(D) The number of Shares at any time
outstanding shall not include any Shares then owned or held by or for any
retirement plan maintained by the Company for the benefit of its employees
or issued or reserved for issuance under any other stock option plan
maintained by the Company for its directors or employees, or any Shares
issuable under this Warrant until after the exercise hereof and actual issuance
of such underlying Shares, but shall include the aggregate number of Shares
deliverable in respect of the options, warrants, rights and convertible and
exchangeable securities referred to in paragraph (b) of this Section 4 as
therein provided.
(b) In the event the Company shall at any time issue options
or warrants or rights to subscribe for Shares (ircluding Shares now or hereafter
held in the Company's treasury), or issue any securities convertible into or
exchangeable for Shares, other than options or rights issued pursuant to the
Company's 1996 Stock Option Plan, or other plan maintained for the
5
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benefit or employees or directors of the Company, for consideration per share
less than the Warrant Exercise Price in effect immediately prior to the issuance
of such options, warrants or rights or convertible or exchangeable securities,
or without consideration, the Warrant Exercise Price in effect immediately prior
to the issuance of such options, warrants or rights or securities shall be
reduced to a price determined by making a computation in accordance with the
provision of paragraph (a) of this Section 4, provided that
(i) the aggregate maximum number of Shares deliverable
under such options, warrants or rights shall be considered to have been
delivered at the time such options, warrants or rights were issued and for
consideration equal to the minimum purchase price per share of such Shares
provided for in such options, warrants or rights, plus that consideration, if
any, received by the Company for such options, warrants or rights;
(ii) the aggregate maximum number of Shares deliverable
upon conversion or exchange for any such securities shall be considered to have
been delivered at the time of issuance of such securities, and for a
consideration equal to the consideration received by the Company for such
securities, after deducting therefrom commissions or other expenses paid or
incurred by the Company for any underwriting of, or otherwise in connection
with, the issuance of such securities, plus the minimum consideration, if any,
to be received by the Company upon the conversion or exchange thereof; and
(iii) on the expiration of such options, warrants of
rights, or the termination of such rights to convert or exchange, the Warrant
Exercise Price shall forthwith be readjusted to such price as would have been
obtained had the adjustment upon the issuance of such options, warrants, rights
or convertible or exchangeable securities been made upon the basis of
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(a) the delivery of only the number of Shares of the Company actually delivered
upon the exercise of such securities and (b) the receipt by the Company of only
the consideration actually received by it upon the exercise of such options,
warrants or rights, plus the consideration, if , any, received by it for the
options, warrants or rights so exercised, or, as the case may be, the
consideration received by the Company for such securities so converted or
exchanged, after deducting therefrom commissions or other expenses paid or
incurred by it for any underwriting of, or otherwise in connection with, the
issuance of such securities, plus only the consideration, if any, actually
received by it upon the conversion or exchange thereof.
(c) Upon each adjustment of the Warrant Exercise Price
pursuant to paragraphs (a) and (b) of this section 4, Holder shall thereafter
(until another such adjustment) be entitled instead of being entitled to
purchase the applicable number of Shares specified in Section 1 hereof) to
purchase, pursuant to this Warrant, at the adjusted Warrant Exercise Price the
number of whole Shares obtained by multiplying the number of applicable Shares
specified in Section 1 hereof by the initial Warrant Exercise Price and dividing
the product so obtained by the adjusted Warrant Exercise Price.
(d) In the event the Company shall at any time exchange as a
whole, by subdivision or consolidation in any manner or by effecting a stock
dividend, the number of Shares then outstanding into a different number of
Shares, with or without par value, then, thereafter, the number of Shares which
Holder shall have the right to purchase (calculated immediately prior to such
change), shall be increased or decreased, as the case may be, in direct
proportion to the increase or decrease in the number of Shares of the Company
issued and outstanding by reasons of such change, and the Warrant Exercise Price
of the Shares after such change shall, in the event
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<PAGE>
of an increase in the number of Shares be prcportionately reduced, and in the
event of a decrease in the number of Shares, be proportionately increased.
5. Survival of Merqers and Reorqanizations. In the event of the
reclassification of, or change in, the outstanding Shares (other than a change
in par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision, combination or stock dividend), or in
the event of any consolidation or merger of the Company into, another
corporation, the Company, or such successor Company, as the case may be, shall
provide that Holder shall thereafter be entitled to purchase the kind and amount
of shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, or merger by a Holder of the number of
Shares which this Warrant entitled the Holder thereof to purchase immediately
prior to such reclassification, change, consolidation or merger. Such Company,
which thereafter shall be deemed to be the Company for purposes of this Warrant,
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in Section 4 hereof.
6. Sale of Assets, Dissolution. In the event of the sale of all or
substantially all the assets of the Company, or in the event of any distribution
of all or substantially all of its assets in dissolution or liquidation, the
Company shall mail notice thereof by certified mail to holder, at the Holder's
address on the books and records of the Company and shall make no distribution
to the Shareholders of the Company until the expiration of thirty (30) days from
the date of mailing of the aforesaid notice; provided, however, that in any such
event if Holder shall not exercise this Warrant at or before 5:00 p.m. Nassau
County, New York local time on the thirtieth (30th) day after the date of
mailing such notice, this Warrant automatically becomes null and void.
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<PAGE>
The Company shall not, however, be prevented from consummating any such sale
without awaiting the expiration of such thirty (30) day period, it being the
intent and purpose hereof to enable Holder, upon exercise of this Warrant, to
participate in the distribution of the consideration to be received by the
Company upon any such sale or in the distribution of assets upon any dissolution
or liquidation.
7. No Fractional Shares. The number of Shares subject to issuance upon
the exercise of this Warrant shall be rounded down to the nearest whole number
of Shares so that no fractional Share or scrip shall be issued upon the exercise
of this Warrant. Holder shall not be entitled to receive any compensation or
property in lieu of such fractional Share which it may have been entitled to in
the absence of this provision. It is the intent of the Company that all
fractional interest shall be eliminated.
8. Notices. If there shall be any adjustment as provided in Section 4
hereof, or if securities or property other than Shares of the Company shall
become purchasable in lieu of Shares upon exercise of this Warrant, the Company
shall forthwith cause written notice thereof to be sent by registered mail,
postage prepaid, to Holder at its address shown on the books of the Company,
which notice shall be accompanied by a certificate of either independent public
accountants of recognized standing or the Chief Financial officer of the
Company, setting forth in reasonable detail the basis for Holder becoming
entitled to purchase such Shares and the number of Shares which may be purchased
and the Warrant Exercise Price thereof, or the facts requiring any such
adjustment, or the kind and amount of any such securities or property so
purchasable upon the exercise of this, Warrant, as the case may be.
9
<PAGE>
9. Taxes. The issue of any stock or other certificate upon the exercise
of this Warrant shall be made without charge to Holder for any tax in respect of
the issue of such certificate. The Company shall not, however, be required to
pay any tax which may be payable in respect of any transfer involved in the
issue and delivery of any certificate in a name other than that of Holder, as
the registered Holder of this Warrant, and the Company shall not be required to
issue or deliver any such certificate unless and until the person or persons
requesting the issue thereof shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company that such tax
has been paid.
10. Redemption. The Company may redeem this Warrant for $.01 per
Warrant at any time after the Initial Exercise Date upon thirty (30) days prior
written notice to the Holder by certified mail, return receipt requested at the
Holder's address shown on the books of the Company. The notice of redemption
shall fix a date for redemption no earlier than the date thirty (30) days from
the date of such notice at 5:00 p.m. Nassau County, New York local time, and
Holder shall be entitled to exercise this Warrant during such thirty-day period.
On and after the date and time fixed for redemption, Holder shall have no rights
with respect to this Warrant except to receive $.01 per Warrant upon the
surrender of this Warrant.
11. Transferability of Warrant.
(a) Subject to the provisions of Paragraph ll(b) this Warrant
shall be transferable, in whole or in part, and may be exercised, in whole or in
part, by Holder or its permitted assigns which shall be limited to Holder's
successor or the officers of directors of Holder, subject to the provisions of
Section 13 and other applicable provisions hereof. Moreover, the Shares will be
subject to an agreement between the Holder and the underwriter of any public
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<PAGE>
offering of the Company's securities restricting the sale of the Shares for a
period of six (6) months or such longer period as may be required by the
National Association of Securities Dealers rules to avoid having any profit on
the resale of the Shares deemed "underwriter's compensation" for purposes of
such rules. In the event Holder elects to transfer or assign this Warrant, in
whole or in part, it shall do so by completing. executing and delivering a copy
of the appropriate Assignment of Warrant form attached hereto to the permitted
assignee(s) and the Company. If this Warrant is assigned, in whole or in part,
this Warrant shall be surrendered at the principal office of the Company, or
such other office as the Company shall notify the Holder hereof in writing,
along with the appropriate completed and executed Assignment of Warrant attached
hereto, and thereupon, a new Warrant(s) will be issued to the assignee (and the
Holder in the event of a partial assignment) the number of shares covered by
such Warrant(s), as appropriate. Upon the assignment of this Warrant, if any, by
Holder in compliance with the applicable provisions hereof to the satisfaction
of the Company and its counsel, (i) the designated permitted assignee(s) shall
have the same rights and privileges and by subject to the same obligations as
originally granted hereunder to Holder to the extent of such assignment, and
(ii) all references to this Warrant to Holder shall be deemed, and shall upon
delivery of a new Warrant to the permitted assignee be changed, to the permitted
assignee.
(b) Notwithstanding the provisions of Paragraph ll (a),
neither this Warrant nor any Shares may be sold or otherwise disposed of except
as follows: (1) to a person who, in the opinion of counsel satisfactory to the
Company, is a person to whom this Warrant or the Warrant Stock may
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<PAGE>
legally be transferred without registration and without the delivery of a
current prospectus under the Act with respect thereto and then only against
receipt of an agreement of such person to comply with the provisions of
paragraph 3 with respect to any resale or other disposition of such securities;
or (2) to any person upon delivery of a prospectus then meeting the requirements
of the Act relating to such securities and the offering thereof for such sale of
the disposition.
(c) In addition to the foregoing, the Holders acknowledge that
in the event the Company closes a contemplated initial public offering of
securities he will be required to enter into an agreement restricting the
transfer of the Shares as set forth in Paragraph 2.9 of the Subscription and
Registration Rights Agreement.
12. Warrant Holder Not Shareholder. This Warrant does not confer
upon Holder any right to vote or to consent or to receive notice as a
shareholder of the Company in respect of any matters whatsoever, or any other
rights or liabilities as a Shareholder, prior to the exercise thereof as
provided herein.
13. Investment Representations.
(a) The Holder has made the representations and warranties set
forth in Paragraph 2 of the Subscription and Registration Rights Agreement with
respect to the Warrant
(b) The Holder acknowledges that such representations and
warranties are true, correct and accurate in all respects as to the date hereof.
(c) Holder acknowledges that neither the Warrant nor the
Shares may be made subject to a security interest, pledged, hypothecated, sold
or otherwise transferred without an effective registration statement for such
Warrant of Shares under the Act or such applicable state securities law, or an
opinion of counsel satisfactory to the Company and its counsel that
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<PAGE>
registration is not required under the Securities Act or under any applicable
state securities laws. Holder further acknowledges that, unless the Shares
issuable upon exercise of this Warrant have been registered under the Act, the
Shares issued upon the exercise of this Warrant shall be restricted in the same
manner and to the same extent as the Warrant and the certificates representing
such Share shall bear the following legend: "THE SHARES OF COMMON STOCK
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED ("ACT") OR ANY APPLICABLE STATE SECURITIES LAWS. THESE
SHARES HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF THE HOLDER HEREOF AND
MAY NOT BE OFFERED, SOLD, ASSIGNED, MORTGAGED, PLEDGED, HYPOTHECATED,
TRANSFERRED UNTIL EITHER (i) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT
OR SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD
THERETO, OR (ii) THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY AND ITS COUNSEL THAT REGISTRATION UNDER SUCH
SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED UNDER
SUCH ACT OR LAWS.
In making the above representations and warranties, Holder intends that
the Company rely thereon and understands that, as the result of such reliance,
the warranties and the shares are not being registered under the Securities Act
or any applicable state securities laws in reliance upon the applicability of
certain exemptions relating to transactions not involving a public offering.
14. Lost Warrants. In case any Warrant shall be mutilated, lost,
stolen or destroyed, the Company may issue a new Warrant of like date, tenor and
denomination and deliver the same
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<PAGE>
in exchange and substitution for and upon surrender and cancellation of any
mutilated Warrant, or in lieu of any Warrant lost, stolen or destroyed, upon
receipt of evidence satisfactory to the Company of the loss, theft or
destruction of such Warrant, and upon receipt of indemnity satisfactory to the
Company.
The Holder is entitled to certain registration rights with respect to
the Shares, as set forth ins Section 5 of the Subscription and Registration
Rights Agreement.
17. Indemnification by Holder. Holder, by acceptance hereof, agrees to
indemnify and hold harmless the Company, its directors and officers, and each
other person, if any, who controls the Company, against any losses, claims,
damages, or liabilities, joint or several, to which the Company or any such
director or officer or any such person may become subject under the Act, or any
other statute or at common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the
disposition by Holder of this Warrant or the Shares issuable upon the exercise
hereof in violation of the provisions of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be issued
and Holder has approved and accepted the same as of the day and year first above
written.
By:_____________________________
DONG W. LEW, President
__________________ HOLDER;
Secretary
By:____________________
Name:_________________
Title:__________________
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COMPU-DAWN, INC.
1996 Stock Option Plan
1. Purpose of the Plan. The Compu-DAWN, Inc. 1996 Stock Option
Plan (the "Plan") is intended to advance the interests of Compu-DAWN, Inc. (the
"Company") by inducing individual, and eligible entities of outstanding ability
and potential to join and remain with, or provide consulting or advisory
services to, the Company, by encouraging and enabling eligible employees,
non-employee Directors, consultants and advisors to acquire proprietary
interests in the Company, and by providing the participating employees,
non-employee Directors, consultants and advisors with an additional incentive to
promote the success of the Company. This is accomplished by providing for the
granting of "Options," which term as used herein includes both "Incentive Stock
Options" and "Nonstatutory Stock Options" (as hereinafter defined) to employees,
non-employee Directors, consultants and advisors.
2. Administration. The Plan shall be administered by the Board
of Directors of the Company (the "Board of Directors") or by a committee (the
"Committee") chosen by the Board of Directors. Except as herein specifically
provided, the interpretation and construction by the Board of Directors or the
Committee of any provision of the Plan or of any Option granted under it shall
be final and conclusive. The receipt of Options by Directors, or any members of
the Committee, shall not preclude their vote on any matters in connection with
the administration or interpretation of the Plan.
3. Shares Subject to the Plan. The stock subject to Options
granted under the Plan shall be shares of the Company's common stock, par value
$.01 per share (the "Common Stock"), whether authorized but unissued or held in
the Company's treasury, or shares purchased
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from stockholders expressly for use under the Plan. The maximum number of shares
of Common Stock which may be issued pursuant to Options granted under the Plan
shall not exceed in the aggregate two million (2,000,000) shares plus such
number of Common Shares issuable upon the exercise of Reload Options
(hereinafter defined) granted under the Plan, subject to adjustment in
accordance with the provisions of Section 13 hereof. The Company shall at all
times while the Plan is in force reserve such number of shares of Common Stock
as will be sufficient to satisfy the requirements of all outstanding Options
granted under the Plan. In the event any Option granted under the Plan shall
expire or terminate for any reason without having been exercised in full or
shall cease for any reason to be exercisable in whole or in part, the
unpurchased shares subject thereto shall again be available for Options under
the Plan.
4. Participation. The class of individual or entity that shall
be eligible to receive Options under the Plan shall be (a) with respect to
Incentive Stock Options described in Section 6 hereof, all employees (including
officers) of either the Company or any subsidiary corporation of the Company,
and (b) with respect to Nonstatutory Stock Options described in Section 7
hereof, all employees (including officers) and non-employee Directors of, or
consultants and advisors to, either the Company or any subsidiary corporation of
the Company; provided, however, that Nonstatutory Stock Options shall not be
granted to any such consultants and advisors unless (i) bona fide services have
been or are to be rendered by such consultant or advisor and (ii) such services
are not in connection with the offer or sale of securities in a capital raising
transaction. For purposes of the Plan, for an entity to be on eligible entity,
it must be included in the definition of "employee" for purposes of a Form S-8
Registration Statement filed under the Securities Act of 1933, as amended (the
"Act"). The Board of Directors or the Committee, in its sole discretion, but
subject to the
2
<PAGE>
provisions of the Plan, shall determine the employees and non-employee Directors
of, and the consultants and advisors to, the Company and its subsidiary
corporations to whom Options shall be granted, and the number of shares to be
covered by each Option, taking into account the nature of the employment or
services rendered by the individuals or entities being considered, their annual
compensation, their present and potential contributions to the success of the
Company, and such other factors as the Board of Directors or the Committee may
deem relevant.
5. Stock Option Agreement. Each Option granted under the Plan
shall be authorized by the Board of Directors or the Committee, and shall be
evidenced by a Stock Option Agreement which shall be executed by the Company and
by the individual or entity to whom such Option is granted. The Stock Option
Agreement shall specify the number of shares of Common Stock as to which any
Option is granted, the period during which the Option is exercisable, the option
price per share thereof, and such other terms and provisions not inconsistent
with this Plan.
6. Incentive Stock Options. The Board of Directors or the
Committee may grant Options under the Plan, which Options are intended to meet
the requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), and which are subject to the following terms and conditions and
any other terms and conditions as may at any time be required by Section 422 of
the Code (referred to herein as an "Incentive Stock Option"):
(a) No Incentive Stock Option shall be granted to
individuals other than employees of the Company or of a subsidiary corporation
of the Company.
(b) Each Incentive Stock Option under the Plan must be
granted prior to August 1, 2006, which is within ten (10) years from the date
the Plan initially was adopted by the Board of Directors of Coastal
Computer Systems, Inc. ("Coastal"), the predecessor-in-interest to the
3
<PAGE>
Company.
(c) The option price of the shares of Common Stock
subject to any Incentive Stock Option shall not be less than the fair market
value of the Common Stock at the time such Incentive Stock Option is granted;
provided, however, if an Incentive Stock Option is granted to an individual who
owns, at the time the Incentive Stock Option is granted, more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of a parent or subsidiary corporation of the Company (a "Principal
Stockholder"), the option price of the shares subject to the Incentive Stock
Option shall be at least one hundred ten percent (110%) of the fair market
value of the Common Stock at the time the Incentive Stock Option is granted.
(d) No Incentive Stock Option granted under the Plan
shall be exercisable after the expiration of ten (10) years from the date of
its grant. However, if an Incentive Stock Option is granted to a Principal
Stockholder, such Incentive Stock Option shall not be exercisable after the
expiration of five (5) years from the date of its grant. Every Incentive Stock
Option granted under the Plan shall be subject to earlier termination as
expressly provided in Section 12 hereof.
(e) For purposes of determining stock ownership under
this Section 6, the attribution rules of Section 424(d) of the Code shall apply.
(f) For purposes of the Plan, fair market value shall
be determined by the Board of Directors or the Committee. If the Common Stock
is listed on a national securities exchange or traded on the Over-the-Counter
market, fair market value shall be the closing selling price or, if not
available, the closing bid price or, if not available, the high bid price of
the Common Stock quoted on such exchange, or on the Over-the-Counter market as
reported by the National Association of Securities Dealers Automated Quotation
("NASDAQ") system or if the Common Stock is not listed
4
<PAGE>
on NASDAQ, then by the National Quotation Bureau, Incorporated, as the case may
be, on the day immediately preceding the day on which the Option is granted or
exercised, as the case may be, or, if there is no selling or bid price on that
day, the closing selling price, closing bid price or high bid price on the most
recent day which precedes that day and for which such prices are available.
7. Nonstatutory Stock Options. The Board of Directors or the
Committee may grant Options under the Plan which are not intended to meet the
requirements of Section 422 of the Code, as well as Options which are intended
to meet the requirements of Section 422 of the Code but the terms of which
provide that they will not be treated as Incentive Stock Options (referred to
herein as a "Nonstatutory Stock Option"). Nonstatutory Stock Options which are
not intended to meet those requirements shall be subject to the following terms
and conditions:
(a) A Nonstatutory Stock Option may be granted to any
individual or entity eligible to receive an Option under the Plan pursuant to
Section 4(b) hereof.
(b) The option price of the shares of Common Stock
subject to a Nonstatutory Stock Option shall be determined by the Board of
Directors or the Committee, in its sole discretion, at the time of the grant of
the Nonstatutory Stock Option.
(c) A Nonstatutory Stock Option granted under the Plan
may be of such duration as shall be determined by the Board of Directors
or the Committee (subject to earlier termination as expressly provided in
Section 11 hereof).
8. Reload Feature. The Board of Directors or the Committee
may grant Options with a reload feature. A reload feature shall only apply when
the option price is paid by delivery of Common Stock (as set forth in Section
13(b)(ii)). The Stock Option Agreement for the Options containing the reload
feature shall provide that the Option holder shall receive, contemporaneously
5
<PAGE>
with the payment of the option price in shares of Common Stock, a reload stock
option (the "Reload Option") to purchase that number of shares of Common Stock
equal to the sum of (i) the number of shares of Common Stock used to exercise
the Option, and (ii) with respect to Nonstatutory Stock Options, the number of
shares of Common Stock used to satisfy any tax withholding requirement incident
to the exercise of such Nonstatutory Stock Option. The terms of the Plan
applicable to the Option shall be equally applicable to the Reload Option with
the following exceptions: (i) the option price per share of Common Stock
deliverable upon the exercise of the Reload Option, (A) in the case of a Reload
Option which is an Incentive Stock Option being granted to a Principal
Stockholder, shall be one hundred ten percent (110%) of the fair market value of
a share of Common Stock on the date of grant of the Reload Option and (B) in the
case of a Reload Option which is an Incentive Stock Option being granted to a
person other than a Principal Stockholder or is a Nonstatutory Stock Option,
shall be the fair market value of a share of Common Stock on the date of grant
of the Reload Option; and (ii) the term of the Reload Option shall be equal to
the remaining option term of the Option (including a Reload Option) which gave
rise to the Reload Option. The Reload Option shall be evidenced by an
appropriate amendment to the Stock Option Agreement for the Option which gave
rise to the Reload Option. In the event the exercise price of an Option
containing a reload feature is paid by check and not in shares of Common Stock,
the reload feature shall have no application with respect to such exercise.
9. Rights of Option Holders. The holder of any Option
granted under the Plan shall have none of the rights of a stockholder with
respect to the stock covered by his Option until such stock shall be transferred
to him upon the exercise of his Option.
10. Alternate Stock Appreciation Rights.
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<PAGE>
(a) Concurrently with, or subsequent to, the award of
any Option to purchase one or more shares of Common Stock, the Board of
Directors or the Committe may, in its sole discretion, subject to the provisions
of the Plan and such other terms and conditions as the Board of Directors or the
Committe may prescribe, award to the optionee with respect to each share of
Common Stock covered by an Option ("Related Option"), a related alternate stock
appreciation right ("SAR"), permitting the optionee to be paid the appreciation
on the Related Option in lieu of exercising the Related Option. An SAR granted
with respect an Incentive Stock Option must be granted together with the Related
Option. An SAR granted with respect to a Nonstatutory Stock Option may be
granted together with, or subsequent to, the grant of such Related Option.
(b) Each SAR granted under the Plan shall be authorized
by the Board of Directors or the Committee, and shall be evidenced by an SAR
Agreement which shall be executed by the Company and by the individual or entity
to whom such SAR is granted. The SAR Agreement shall specify the period during
which the SAR is exercisable, and such other terms and provisions not
inconsistent with the Plan.
(c) An SAR may be exercised only if and to the extent
that its Related Option is eligible to be exercised on the date of exercise
of the SAR. To the extent that a holder of an SAR has a current right to
exercise, the SAR may be exercised from time to time by delivery by the holder
thereof to the Company at its principal office (attention: Secretary) of a
written notice of the number of shares with respect to which it is being
exercised. Such notice shall be accompanied by the agreements evidencing the
SAR and the Related Option. In the event the SAR shall not be exercised in full,
the Secretary of the Company shall endorse or cause to be endorsed on the SAR
Agreement and the Related Option Agreement the number of shares which have been
exercised thereunder and
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<PAGE>
the number of shares that remain exercisable under the SAR and the Related
Option and return such SAR and Related Option to the holder thereof.
(d) The amount of payment to which an optionee shall be
entitled upon the exercise of each SAR shall be equal to one hundred percent
(100%) of the amount, if any, by which the fair market value of a share of
Common Stock on the exercise date exceeds the exercise price per share of
the Related Option; provided, however, the Company may, in its sole discretion,
withhold from any such cash payment any amount necessary to satisfy the
Company's obligation for withholding taxes with respect to such payment.
(e) The amount payable by the Company to an optionee
upon exercise of a SAR may, in the sole determination of the Company, be paid
in shares of Common Stock, cash or a combination thereof, as set forth in the
SAR Agreement. In the case of a payment in shares, the number of shares of
Common Stock to be paid to an optionee upon such optionee's exercise of an
SAR shall be determined by dividing the amount of payment determined pursuant
to Section 10(d) hereof by the fair market value of a share of Common Stock on
the exercise date of such SAR. For purposes of the Plan, the exercise date of an
SAR shall be the date the Company receives written notification from the
optionee of the exercise of the SAR in accordance with the provisions of
Section 10(c) hereof. As soon as practicable after exercise, the Company shall
either deliver to the optionee the amount of cash due such optionee or a
certificate or certificates for such shares of Common Stock. All such shares
shall be issued with the rights and restrictions specified herein.
(f) SARs shall terminate or expire upon the same
conditions and in the same manner as the Related Options, and as set forth in
Section 12 hereof.
(g) The exercise of any SAR shall cancel and terminate
the right to purchase
8
<PAGE>
an equal number of shares covered by the Related Option.
(h) Upon the exercise or termination of any Related
Option, the SAR with respect to such Related Option shall terminate to the
extent of the number of shares of Common Stock as to which the Related
Option was exercised or terminated.
(i) An SAR granted pursuant to the Plan shall be
exercisable only by the optionee hereof during the optionee's lifetime and,
subject to the provisions of Section 10(f) hereof.
(j) An SAR granted pursuant to the Plan shall not be
assigned, transferred, pledged or hypothecated in any way (whether by operation
of law or otherwise) and shall not be subject to execution, attachment, or
similar process. Any attempted transfer, assignment, pledge, hypothecation,
or other disposition of any SAR or of any rights granted thereunder contrary to
the foregoing provisions of this Section 10(j), or the levy of any attachment or
similar process upon an SAR or such rights, shall be null and void.
11. Transferability. No Option granted under the Plan shall be
transferable by the individual or entity to whom it was granted otherwise than
by will or the laws of descent and distribution, and, during the lifetime of
such individual, shall not be exercisable by any other person, but only by him.
12. Termination of Employment or Death.
(a) Subject to the terms of the Stock Option Agreement,
if the employment of an employee by, or the services of a non-employee Director
for, or consultant or advisor to, the Company or a subsidiary corporation of
the Company shall be terminated for cause or voluntarily by the employee,
non-employee Director, consultant or advisor, then his or its Option shall
expire forthwith. Subject to the terms of the Stock Option Agreement, and except
as provided in
9
<PAGE>
subsections (b) and (c) of this Section 12, if such employment or services shall
terminate for any other reason, then such Option may be exercised at any time
within three (3) months after such termination, subject to the provisions of
subsection (d) of this Section 12. For purposes of the Plan, the retirement of
an individual either pursuant to a pension or retirement plan adopted by the
Company or at the normal retirement date prescribed from time to time by the
Company shall be deemed to be termination of such individual's employment other
than voluntarily or for cause. For purposes of this subsection (a), an employee,
non-employee Director, consultant or advisor who leaves the employ or services
of the Company to become an employee or non-employee Director of, or a
consultant or advisor to, a subsidiary corporation of the Company or a
corporation (or subsidiary or parent corporation of the corporation) which has
assumed the Option of the Company as a result of a corporate reorganization or
the like shall not be considered to have terminated his employment or services.
(b) Subject to the terms of the Stock Option Agreement,
if the holder of an Option under the Plan dies (i) while employed by,
or while serving as a non-employee Director for or a consultant or advisor
to, the Company or a subsidiary corporation of the Company, or (ii) within three
(3) months after the termination of his employment or services other than
voluntarily by the employee or non-employee Director, consultant or advisor, or
for cause, then such Option may, subject to the provisions of subsection (d)
of this Section 12, be exercised by the estate of the employee or non-employee
Director, consultant or advisor, or by a person who acquired the right to
exercise such Option by bequest or inheritance or by reason of the death of such
employee or non-employee Director, consultant or advisor at any time within
one (1) year after such death.
(c) Subject to the terms of the Stock Option Agreement,
if the holder of an
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Option under the Plan ceases employment or services because of permanent and
total disability (within the meaning of Section 22(e)(3) of the Code) while
employed by, or while serving as a non-employee Director for or consultant or
advisor to, the Company or a subsidiary corporation of the Company, then such
Option may, subject to the provisions of subsection (d) of this Section 12, be
exercised at any time within one (1) year after his termination of employment,
termination of Directorship or termination of consulting or advisory services,
as the case may be, due to the disability.
(d) An Option may not be exercised pursuant to this
Section 12 except to the extent that the holder was entitled to exercise
the Option at the time of termination of employment, termination of
Directorship, termination of consulting or advisory services, or death, and in
any event may not be exercised after the expiration of the Option.
(e) For purposes of this Section 12, the employment
relationship of an employee of the Company or of a subsidiary corporation of
the Company will be treated as continuing intact while he is on military or sick
leave or other bona fide leave of absence (such as temporary employment by the
Government) if such leave does not exceed ninety (90) days, or, if longer, so
long as his right to reemployment is guaranteed either by statute or by
contract.
13. Exercise of Options.
(a) Unless otherwise provided in the Stock Option
Agreement, any Option granted under the Plan shall be exercisable in whole at
any time, or in part from time to time, prior to expiration. The Board of
Directors or the Committee, in its absolute discretion, may provide in any
Stock Option Agreement that the exercise of any Options granted under the
Plan shall be subject (i) to such condition or conditions as it may impose,
including, but not limited to, a condition that
11
<PAGE>
the holder thereof remain in the employ or service of, or continue to provide
consulting or advisory services to, the Company or a subsidiary corporation of
the Company for such period or periods from the date of grant of the Option as
the Board of Directors or the Committee, in its absolute discretion, shall
determine; and (ii) to such limitations as it may impose, including, but not
limited to, a limitation that the aggregate fair market value of the Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by any employee during any calendar year (under all plans of the
Company and its parent and subsidiary corporations) shall not exceed one hundred
thousand dollars ($100,000). In addition, in the event that under any Stock
Option Agreement the aggregate fair market value of the Common Stock with
respect to which Incentive Stock Options are exercisable for the first time by
any employee during any calendar year (under all plans of the Company and its
parent and subsidiary corporations) exceeds one hundred thousand dollars
($100,000), the Board of Directors or the Committee may, when shares are
transferred upon exercise of such Options, designate those shares which shall be
treated as transferred upon exercise of an Incentive Stock Option and those
shares which shall be treated as transferred upon exercise of a Nonstatutory
Stock Option.
(b) An Option granted under the Plan shall be exercised
by the delivery by the holder thereof to the Company at its principal office
(attention of the Secretary) of written notice of the number of shares with
respect to which the Option is being exercised. Such notice shall be
accompanied, or followed within ten (10) days of delivery thereof, by payment
of the full option price of such shares, and payment of such option price shall
be made by the holder's delivery of (i) his check payable to the order of
the Company, or (ii) previously acquired Common Stock, the fair market value of
which shall be determined as of the date of exercise, or by the holder's
delivery of
12
<PAGE>
any combination of the foregoing (i) and (ii).
14. Adjustment Upon Change in Capitalization.
(a) In the event that the outstanding Common Stock is
hereafter changed by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split-up, combination of shares,
reverse split, stock dividend or the like, an appropriate adjustment shall be
made by the Board of Directors or the Committee in the aggregate number of
shares available under the Plan, in the number of shares and option price per
share subject to outstanding Options, and in any limitation on exerciseability
referred to in Section 13(a)(ii) hereof which is set forth in outstanding
Incentive Stock Options. If the Company shall be reorganized, consolidated,
or merged with another corporation, the holder of an Option shall be entitled
to receive upon the exercise of his Option the same number and kind of shares
of stock or the same amount of property, cash or securities as he would have
been entitled to receive upon the happening of any such corporate event as if
he had been, immediately prior to such event, the holder of the number of shares
covered by his Option; provided, however, that in such event the Board of
Directors or the Committee shall have the discretionary power to take any action
necessary or appropriate to prevent any Incentive Stock Option granted hereunder
which is intended to be an "incentive stock option" from being disqualified
as such under the then existing provisions of the Code or any law amendatory
thereof or supplemental thereto.
(b) Any adjustment in the number of shares shall apply
proportionately to only the unexercised portion of the Option granted hereunder.
If fractions of a share would result from any such adjustment, the adjustment
shall be revised to the next lower whole number of shares.
13
<PAGE>
15. Further Conditions of Exercise.
(a) Unless prior to the exercise of the Option the
shares issuable upon such exercise have been registered with the Securities
and Exchange Commission pursuant to the Act, (the "Act"); the notice of
exercise shall be accompanied by a representation or agreement of the person or
estate exercising the Option to the Company to the effect that such shares are
being acquired for investment purposes and not with a view to the distribution
thereof, and such other documentation as may be required by the Company,
unless in the opinion of counsel to the Company such representation, agreement
or documentation is not necessary to comply with such Act.
(b) The Company shall not be obligated to deliver any
Common Stock until it has been listed on each securities exchange or market
on which the Common Stock may then be listed or until there has been
qualification under or compliance with such federal or state laws, rules or
regulations as the Company may deem applicable. The Company shall use
reasonable efforts to obtain such listing, qualification and compliance.
16. Effectiveness of the Plan. The Plan was adopted by the
Board of Directors of Coastal on August 1, 1996 and adopted as the Plan of the
Company pursuant to the merger of Coastal with and into the Company effective as
of October 18, 1996. The Plan was originally approved by the shareholders of
Coastal on October 16, 1996.
17. Termination, Modification and Amendment.
(a) The Plan (but not Options or SARs previously
granted under the Plan) shall terminate on July 31, 2006, which is within ten
(10) years from the date of its adoption by the Board of Directors of Coastal,
or sooner as hereinafter provided, and no Option shall be granted after
termination of the Plan.
14
<PAGE>
(b) The Plan may from time to time be terminated,
modified, or amended by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock of the Company present at a meeting of
shareholders and entitled to vote thereon (or, in the case of Section b,
written consent, a majority of the outstanding shares of capital stock of the
copy entitled to vote thereon).
(c) The Board of Directors may at any time, on or before
the termination date referred to in Section 16(a) hereof, terminate the Plan,
or from time to time make such modifications or amendments to the Plan as it
may deem advisable; provided, however, that the Board of Directors shall not,
without approval by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock of the Company present at a meeting of
shareholders and entitled to vote thereon (or, in the case of Section b,
written consent, a majority of the outstanding shares of capital stock of
the copy entitled to vote thereon), increase (except as otherwise provided by
Section 14 hereof) the maximum number of shares as to which Incentive Stock
Options may be granted hereunder, change the designation of the employees
or class of employees eligible to receive Incentive Stock Options, or make
any other change which would prevent any Incentive Stock Option granted
hereunder which is intended to be an "incentive stock option" from disqualifying
as such under the then existing provisions of the Code or any law amendatory
thereof or supplemental thereto.
(d) No termination, modification, or amendment of the Plan
may, without the consent of the individual or entity to whom any Option shall
have been granted, adversely affect the rights conferred by such Option.
18. Not a Contract of Employment. Nothing contained in the Plan
or in any
15
<PAGE>
Stock Option Agreement executed pursuant hereto shall be deemed to confer upon
any individual or entity to whom an Option is or may be granted hereunder any
right to remain in the employ or service of the Company or a subsidiary
corporation of the Company or any entitlement to any remuneration or other
benefit pursuant to any consulting or advisory arrangement.
19. Use of Proceeds. The proceeds from the sale of shares
pursuant to Options granted under the Plan shall constitute general funds of the
Company.
20. Indemnification of Board of Directors or Committee. In
addition to such other rights of indemnification as they may have, the members
of the Board of Directors or the Committee, as the case may be, shall be
indemnified by the Company to the extent permitted under applicable law against
all costs and expenses reasonably incurred by them in connection with any
action, suit, or proceeding to which they or any of them may be a party by
reason of any action taken or failure to act under or in connection with the
Plan or any rights granted thereunder and against all amounts paid by them in
settlement thereof or paid by them in satisfaction of a judgment of any such
action, suit or proceeding, except a judgment based upon a finding of bad faith.
Upon the institution of any such action, suit, or proceeding, the member or
members of the Board of Directors or the Committee, as the case may be, shall
notify the Company in writing, giving the Company an opportunity at its own cost
to defend the same before such member or members undertake to defend the same on
his or their own behalf.
21. Definitions. For purposes of the Plan, the terms
"parent corporation" and "subsidiary corporation" shall have the meanings set
forth in Sections 424(e) and 424(f) of the Code, respectively, and the masculine
shall include the feminine and the neuter as the context requires.
22. Governing Law. The Plan shall be governed by, and all
questions arising
16
<PAGE>
hereunder shall be determined in accordance with, the laws of the State of
Delaware.
17
<PAGE>
HYPOTHECATION AND
PLEDGE AGREEMENT
AGREEMENT made this 30th day of October, 1996 by and among
DONG W. LEW, 10 Monroe Boulevard, Apt. 6H, Long Beach, New York 11561 (the
"Pledgor") and Compu-DAWN, Inc., a Delaware Corporation (formerly Coastal
Computer Systems, Inc. a New York Corporation) with offices at 166 West Park
Avenue, Long Beach, New York 11561 (the "Lender");
WHEREAS Pledgor is indebted to Lender on account of a loan in
the amount of Seventy Thousand ($70,000.00) Dollars made by the Lender on
October 30, 1996 as evidenced by a certain Promissory Note of even date herewith
(the "Promissory Note").
WHEREAS in order to induce Lender to make the loan and accept
the Promissory Note, the Pledgor has agreed to pledge and hypothecate 28,000
shares of Common Stock of the Lender (the "Pledged Stock") to the Lender for the
performance of all of its obligations under the Promissory Note;
NOW, THEREFORE, in consideration of the foregoing, the Pledgor
hereby agrees with the Lenders as follows:
1. The term "Pledged Stock" as used herein shall mean and include:
REGISTERED OWNER SHARES CERTIFICATE NUMBER
DONG W. LEW 28,000 # 26 of Coastal Computer Systems in the amount of
250 shares of Common Stock which represents 81,250
shares of Compu-DAWN, Inc, following the
recapitalization and merger.
2. (a) As collateral security for the due payment and performance of all
indebtedness and other liabilities and obligations of the Pledgor to the Lender
under the Promissory Note as they may come due (all hereinafter called the
"Obligations"), the Pledgor hereby pledges, assigns, hypothecates, delivers and
sets over to the Lender all the Pledged Stock, and hereby grants to the Lenders
a security interest in all the Pledged Stock and in the proceeds thereof.
(b) If the Pledgor shall become entitled to receive or shall receive
any stock certificate (including, without limitation, any certificate
representing a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital), option or rights, as an
addition to, in substitution of, or in exchange for any shares of the Pledged
Stock, or otherwise relating to the Pledged Stock, the Pledgor shall accept any
such instruments as the Lender's agent, shall hold them in trust for the Lender,
and shall deliver them forthwith to the Lender in the exact form received, with
the Pledgor's endorsement when necessary and/or appropriate stock powers duly
executed in blank, to be held by the Lender, subject to the terms hereof, as
further collateral security for the Obligations.
<PAGE>
(c) Any or all shares of the Pledged Stock held by the Lender hereunder
may, at the option of the Lender, be registered in the name of the Lender or
nominee, and the Lender or its nominee may thereafter, with notice, but only
after the occurrence of an event of default under the Promissory Note, or
hereunder which shall not be cured ("Event of Default") exercise all voting and
corporate rights at any meeting of stockholders thereof and exercise any and all
rights of conversion, exchange, subscription or any other rights, privileges or
options pertaining to any shares of the Pledged Stock as if they were the
absolute owner thereof, including, without limitation, the right to exchange, at
their discretion, any and all of the Pledged Stock upon the merger,
consolidation, reorganization, recapitalization, or other readjustment of
Pledgor or upon the exercise by Pledgor of any right, privilege or option
pertaining to any shares of the Pledged Stock, and in connection therewith, to
deposit and deliver any and all of the Pledged Stock with any committee,
depository, transfer agent, registrar or other designated agency upon such terms
and conditions as it may determine, all without liability except to account for
property actually received by it, but the Lender shall have no duty to exercise
any of the aforesaid rights, privileges or options and shall not be responsible
to do so or delay in so doing. At any time when the Pledged Stock is registered
in the name of the Lender or nominee and the Lender are not entitled to vote,
pursuant to the foregoing provisions of this subparagraph (c) the Lender shall
deliver to the Pledgor upon request from time to time a proxy to vote the
Pledged Stock at any meeting of the Stockholders of the corporation provided,
however, that any such proxy shall terminate forthwith upon the occurrence of
any Event of Default.
(d) In the event of the occurrence, and during the continuance, of any
Event of Default, the Lender shall have the right to require that all cash
dividends payable with respect to any part of the Pledged Stock be paid to the
Lender to be held by the Lender as additional collateral security hereunder
until applied to the Obligations. In the event that any cash dividends or cash
distributions are paid to the Lender or nominee at a time when the Lender is not
entitled thereto pursuant to the foregoing provisions of this subparagraph (d),
the Lender shall forthwith pay over such dividends to the Pledgor.
(e) In the event of the occurrence, and during the continuance, of any
Event of Default, the Lender without demand of performance or other demand,
advertisement or notice of any kind (except the notice specified below of time
and place of public or private sale) to or upon the Pledgor or any other person
(all and each of which demands, advertisements and/or notices are, to the extent
permitted by law, hereby expressly waived), may forthwith collect, receive,
appropriate and realize upon the Pledged Stock, or any part hereof, and/or may
forthwith sell, assign, give an option or options to purchase, contract to sell
or otherwise dispose of and deliver said Pledged Stock, or any part hereof, in
one or more parcels at public or private sale or sales, at any exchange,
broker's board or at any of the Lender's offices or elsewhere at such prices and
on such terms (including, without limitations, a requirement that any purchaser
of all or any party of the Pledged Stock shall be required to purchase the
shares constituting the Pledged Stock for investment and without any intention
to make a distribution thereof) as it may deem best, for cash or on credit or
for future delivery without assumption of any credit risk, with the right to any
purchaser upon any such sale or sales public or private, to purchase the whole
or any part of the Pledged Stock so sold, free of any right or equity or
redemption in the Pledgor, which right or equity is hereby expressly waived and
released.
<PAGE>
(f) The proceeds of any collection, recovery, receipt, appropriation,
realization or sale as aforesaid, shall be applied as follows:
First, to the costs and expenses of every kind incurred in
connection therewith or incidental to the care, safekeeping or otherwise of any
and all of the Pledged Stock or in any relating to the rights of the Lender
hereunder, including reasonable attorneys' fees and legal expenses;
Second, to the satisfaction of the obligations;
Third, to the payment of any other amounts required by
applicable law (including without limitation Section 9-504(1)(c) of the Uniform
Commercial Code); and
Fourth, to the Pledgor to the extent of the surplus proceeds,
if any.
(g) The Lender need not give more than thirty days' notice of the time
and place of any public sale or of the time after which a private sale may take
place and such notice shall be deemed to be reasonable notification of such
matters.
(h) The Lender's rights pursuant to this Agreement and the Promissory
Note to vote and/or realize upon the pledged stock shall be subject to a right
of offset and is subject to any obligations owed to the Pledgor by the Lender
pursuant to any agreements or understandings including but not limited to any
employment agreement.
3. The Pledgor represents and warrants that:
(a) It is the direct and beneficial owner of each share of the Pledged
Stock as of the date hereof;
(b) All of the shares of the Pledged Stock have been duly and validly
issued, are fully paid and non-assessable and are owned by the Pledgor free and
clear of any pledge, mortgage, hypothecation, lien, charge, encumbrance or any
security interest in such shares or the proceeds thereof except for the security
interest granted to the Lender hereunder; and
(c) Upon delivery of the Pledged Stock and the Promissory Note to the
Lender, this Agreement creates and grants a valid first lien on the perfected
security interest in the shares of the Pledged Stock and then proceeds thereof,
subject to no prior security interest, lien, charge, or encumbrance nor to any
agreement purporting to grant to any third party a security interest in the
property or assets of the Pledgor which would include the Pledged Stock.
4. The Pledgor hereby covenants that so long as the Obligations shall be
outstanding and unpaid, in whole or in Part, the Pledgor will not sell, convey
or otherwise dispose of any shares of the Pledged Stock or any interest therein,
nor will the Pledgor create, incur or permit to exist any pledge, mortgage,
lien, charge, encumbrance or any security interest whatsoever with respect to
any of the Pledged Stock or the proceeds thereof other than that created hereby;
<PAGE>
5. The Pledgor shall at any time and from time to time upon the written
request of the Lender, execute and deliver such further documents and do such
further acts and things as the Lender may reasonably request in order to
effect the purposes of this Agreement.
6. (a) The Pledged Stock will be held in escrow by ROBERT H.SOLOMON, ESQ.,
68 West Park Avenue, Long Beach, New York ("Escrow Agent") until the performance
in full of the Obligations or such time as Lender shall be entitled to the
delivery thereof pursuant to an Event of Default hereunder, at which time the
Escrow Agent shall deliver the Pledged Stock then entitled thereto without
further authorization. Said Escrow Agent has agreed to act as Escrowee as a
convenience to both parties and not as agent to either and Escrowee shall not be
liable for any action taken by him as such in good faith, absent gross
negligence or willful wrongdoing. The Escrowee shall act only as a Stakeholder
and in the event of litigation involving the Pledged Stock, he shall deposit
same in court whereupon Escrowee will be completely discharged and released from
any further obligation or liability with respect thereto. Beyond the exercise
of reasonable care to assure the safe custody of the Pledged Stock while held
hereunder, the Escrow Agent shall have not duty or liability to preserve rights
pertaining thereto.
(b) No course of dealing between the Pledgor and the Lender, nor any
failure to exercise, nor any delay in exercising, on the part of the Lender, any
right, power or privilege hereunder or under the Promissory Note shall operate
as a waiver thereof; nor shall any single or partial exercise of any right,
power or privilege hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
(c) The rights and remedies herein provided, and provided in the
Promissory Note, cumulative and are in addition to, and not exclusive of, any
rights or remedies provided by law including, without limitation, the rights and
remedies of a secured party under the Uniform Commercial Code.
(d) The provisions of this Agreement are severable, and if any clause
or provision shall be held invalid or unenforceable in whole or in part in any
jurisdiction, then such invalidity or unenforceability shall affect only such
clause or provision, or part hereof, in such jurisdiction and shall not in any
manner affect such clause or provisions in any other jurisdiction, or any other
clause or provision in this Agreement in any jurisdiction.
7. This Agreement shall inure to the benefit of, and be binding upon, the
successors and assigns of the parties hereto.
8. This Agreement shall be construed in accordance with the laws of the
State of New York.
9. The term of this Agreement shall commence on the date hereof and this
Agreement shall continue in full force and effect, and be binding upon the
Pledgor, until all of the payments due under this Agreement have been paid
according to the terms of the Promissory Note, and such payments have been
acknowledged in writing by the Lender or proof provided to the Escrow Agent of
such payments, whereupon this Agreement shall terminate and the Agent shall
return the Pledged Stock to the Pledgor.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused these
presents to be duly executed and delivered the day and year first above written.
/s/ Dong W. Lew
---------------
DONG W. LEW
COMPU-DAWN, INC.
By:/s/ Mark Honigsfeld
----------------------
Mark Honigsfeld
Chairman of the Board
<PAGE>
LOAN AGREEMENT
(Revolving)
Agreement, made January 21, 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. Loan. The Lender shall lend to the Borrower during the term
of this agreement sums of money not to exceed the aggregate amount of Two
Hundred Thousand ($200,000.00) Dollars.
2. The Borrower may borrow sums from the Lender up to the loan
commitment at any time from the date of this agreement to January 21, 1998.
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. The principal sum of each note shall be due and payable in
eight (8) equal quarterly installments commencing six (6) months from the date
of issuance, and the entire amount shall be payable upon the earlier to occur of
the initial public offering of the Borrower's common stock or 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 $5,000.00 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 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;
<PAGE>
(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. 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.
10. 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.
11. 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
/s/ Mark Honigsfeld
-------------------
MARK HONIGSFELD
Borrower
--------
COMPU-DAWN, INC.
/s/ Dong W. Lew
---------------
DONG W. LEW, President
<PAGE>
EXHIBIT A
Promissory Note
$100,000.00 Date: January 21, 1997
Due : June 1, 1999
On the sooner to occur of the initial public offering of the common
stock of Compu- Dawn, Inc. or thirty (30) months after the date hereof the
undersigned, for value received, promises to pay to the order of Mark Honigsfeld
at 969 East End, Woodmere, New York,, the sum of $100,000.00, payable in eight
(8) quarterly installments of $12,500.00, the first installment due June 1,
1997, with interest at the rate of 10% per annum from the date hereof, payable
quarterly commencing on June 1, 1997, on the principal remaining unpaid.
This note evidences an indebtedness incurred under a loan commitment
agreement dated January 21, 1997 between the undersigned therein called the
Borrower, and the payee, therein called the Lender, to which reference is made
for a statement of the terms and conditions under which installments of this
note may be paid prior to the due date and under which the due date of
installments may be accelerated.
Presentation and demand for payment, notice of dishonor, protest, and
notice of protest are hereby waived.
COMPU-DAWN, INC.
By: /s/ Dong. W. Lew
DONG W. LEW, President
<PAGE>
EXHIBIT A
Promissory Note
$50,000.00 Date: February 19, 1997
Due: June 1, 1999
On the sooner to occur of the initial public offering of the common
stock of Compu-Dawn, Inc. or thirty (30) months after the date hereof the
undersigned, for value received, promises to pay to the order of Mark Honigsfeld
at 969 East End, Woodmere, New York, the sum of $50,000.00, payable in eight (8)
quarterly installments of $6,250.00, the first installment due June 1, 1997,
with interest at the rate of 10% per annum from the date hereof, payable
quarterly commencing on June 1, 1997, on the principal remaining unpaid.
This note evidences an indebtedness incurred under a loan commitment
agreement dated January 21, 1997 between the undersigned, therein called the
Borrower, and the payee, therein called the Lender, to which reference is made
for a statement of the terms and conditions under which installments of this
note may be paid prior to the due date and under which the due date of
installments may be accelerated.
Presentation and demand for payment, notice of dishonor, protest, and
notice of protest are hereby waived.
COMPU-DAWN, INC.
By:/s/ Dong W. Lew
------------------
DONG W. LEW, President
<PAGE>
EXHIBIT A
Promissory Note
$50,000.00 Date: March 5, 1997
Due: June 1, 1999
On the sooner to occur of the initial public offering of the common
stock of Compu-Dawn, Inc. or thirty (30) months after the date hereof the
undersigned, for value received, promises to pay to the order of Mark Honigsfeld
at 969 East End, Woodmere, New York, the sum of $50,000.00, payable in eight (8)
quarterly installments of $6,250.00, the first installment due June 1, 1997,
with interest at the rate of 10% per annum from the date hereof, payable
quarterly commencing on June 1, 1997, on the principal remaining unpaid.
This note evidences an indebtedness incurred under a loan commitment
agreement dated January 21, 1997 between the undersigned, therein called the
Borrower, and the payee, therein called the Lender, to which reference is made
for a statement of the terms and conditions under which installments of this
note may be paid prior to the due date and under which the due date of
installments may be accelerated.
Presentation and demand for payment, notice of dishonor, protest, and
notice of protest are hereby waived.
COMPU-DAWN, INC.
By:/s/Dong W. Lew
---------------
DONG W. LEW, President
<PAGE>
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement"), dated as of
__________________, 1997, is by the between COMPU-DAWN, INC., a Delaware
corporation (the "Company"), and _______________________ (the "Indemnitee").
W I T N E S S E T H
WHEREAS, the Indemnitee currently serves as a director and/or an
officer of the Company and in such capacity is performing a valuable service to
the Company; and
WHEREAS, the Company's Certificate of Incorporation, as amended (the
"Certificate") and Bylaws (the "Bylaws") provide for the indemnification of the
directors and officers of the Company; and
WHEREAS, the Certificate provides that the Company shall indemnify the
directors and officers of the Company to the fullest extent permitted by any
applicable law, including, without limitation, the Delaware General Law, as
amended to date and as may be amended from time to time (the "Law"); and
WHEREAS, the Law specifically provides that indemnification and
advancement of expenses provided in such statute shall not be deemed exclusive
of any other rights under any agreement, and thereby contemplates that
agreements may be entered into between the Company and directors and officers of
the Company with respect to the indemnification of such directors and officers;
and
WHEREAS, in accordance with the authorization provided in the Law, the
Company may purchase one or more policies of directors' and officers' liability
insurance (the "Insurance") covering certain liabilities which may be incurred
by the Company's directors and officers in the performance of their services to
the Company; and
WHEREAS, applicability, amendment and enforcement of statutory and
bylaw indemnification provisions have raised questions concerning the adequacy
and reliability of the protection afforded thereby; and
WHEREAS, in order to resolve such questions and to induce the
Indemnitee to continue to serve as a director or an officer of the Company for
the remainder of his term and for any subsequent terms to which the Indemnitee
is elected by the shareholders and/or the directors of the Company, the Company
has deemed it to be in its best interests to enter into this Agreement;
NOW, THEREFORE, in consideration of the Indemnitee's agreement to serve
as a director and/or an officer of the Company after the date hereof, the
parties hereto agree as follows:
1. Definitions. As used in this Agreement, the following terms
shall have the following meanings:
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(a) Change in Control. A "Change in Control" shall be
deemed to have occurred if (i) any "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act") is or becomes, through one or a series of related
transactions or through one or more intermediaries, the
"beneficial owner" (as such term is defined in Rule 13(d)
under the Exchange Act), directly or indirectly, of securities
of the Company representing 25% or more of the combined voting
power of the outstanding securities of the Company, other than
a person who is such a beneficial owner on the effective date
of this Agreement of an affiliate of such person on such date;
(ii) as a result of, or in connection with, any tender offer
or exchange offer, merger or other business combination, sale
of assets or contested election, or any combination of the
foregoing transactions (a "Transaction"), the individuals who
were Directors of the Company before the Transaction cease for
any reason to constitute a majority of the Board of Directors
of the Company or any successor to the Company; (iii) the
Company is merged or consolidated with any other entity and as
a result of such merger or consolidation less than 40% of the
outstanding voting securities of the surviving corporation
shall then be owned in the aggregate by the former
shareholders of the Company, other than (x) any party to such
merger or consolidation, or (y) any affiliates of any such
party; (iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of the Company
representing 25% or more of the combined voting power of the
Company's then outstanding voting securities; or (v) the
Company transfers more than 50% of its assets, or the last of
a series of transfers results in the transfer of more than 50%
of the assets of the Company, to another corporation that is
not a wholly owned subsidiary of the Company. For purposes of
this subsection 1(a), the determination of what constitutes
more than 50% of the assets of the Company shall be determined
based on the sum of the values attributed to the net book
value of all assets of the Company, each taken as of the date
of the Transaction involved. Notwithstanding the foregoing,
events otherwise constituting a Change in Control if such
events are solicited by the Company and are approved,
recommended or supported by the Board of Directors of the
Company (the "Board") in actions taken prior to, and with
respect to, such events.
(b) Reviewing Party. A "Reviewing Party" means (i) the Board
of Directors of the Company, provided, that a determination by
the Board under this Agreement shall require a majority vote
of a quorum of directors of the Board of the Company who are
not or were not parties to the action, suit or proceeding or
(ii) independent legal counsel selected by the Board.
2. Indemnification of Indemnitee. The Company hereby agrees that it
shall hold harmless and indemnify the Indemnitee to the fullest extent
authorized and permitted by the provisions of the Certificate and Bylaws and the
provisions authorizing or permitting such indemnification which are adopted
after the date hereof. Subject to the exclusions and provisions set forth in
this Agreement, the Law, the Certificate and the Bylaws, the Company hereby
agrees that it shall hold harmless and indemnify the Indemnitee against any and
all judgments, penalties
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(including excise and similar taxes), fines, settlements and reasonable
expenses, including attorneys' fees and court costs, actually and reasonably
incurred by the Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, any appeal in such action, suit or proceeding, and
any inquiry or investigation that could lead to such an action, suit or
proceeding (a "Proceeding"), including, without limitation, an action by or on
behalf of the shareholders of the Company or by or in the right of the Company
(collectively, "Derivative Suits") to which the Indemnitee is, was or at any
time becomes a party, or is threatened to be made a party, or was or is a
witness without being named a party, by reason of the fact that the Indemnitee
is or was a director or an officer of the Company, or, while a director, officer
of the Company, or, while a director, officer, partner, venturer, proprietor,
trustee, employee, agent of similar functionary of another corporation,
partnership, joint venture, sole proprietorship, trust, nonprofit entity,
employee benefit plan, or other enterprise.
3. Requirements for Indemnification. Unless otherwise provided by the
Law, the indemnification provided for in this Agreement shall be paid by the
Company if the Reviewing Party determines that the Indemnitee (i) acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the Company, and (ii) with respect to any Proceeding which
is a criminal action, that he or she had no reasonable cause to believe his or
her conduct was unlawful; provided, however, that with respect to any Proceeding
pursuant to a Derivative Suit, no indemnification shall be made in respect of
any claim, issue or matter as to which such person has been adjudged to be
liable to the Company.
4. Insurance
(a) So long as the Indemnitee may be subject to any Proceeding
by reason of the fact that the Indemnitee is or was a director
or an officer of the Company, to the extent that the Company
maintains one or more insurance policies providing directors'
and officers' liability insurance, the Indemnitee shall be
covered by such policy or policies in accordance with its or
their terms, to the maximum extent of the coverage applicable
to any director or officer then serving the Company.
(b) The Company shall not be required to maintain directors'
and officers' liability insurance or any policy or policies of
comparable insurance if such insurance is not reasonably
available or if, in the reasonable business judgment of the
Board, or any appropriate committee thereof, which shall be
conclusively established by such determination by the Board,
or such appropriate committee thereof, either (i) the premium
cost for such insurance is significantly disproportionate to
the amount of coverage thereunder or (ii) the coverage
provided by such insurance is so limited by exclusions that
there is insufficient benefit from such insurance.
5. Advancement of Expenses. In the event of any Proceeding in which the
Indemnitee is a party or is involve and which may give rise to a right of
indemnification under this Agreement, following written request to the Company
by the Indemnitee, the Company shall promptly pay to the Indemnitee amounts to
cover expenses incurred by the Indemnitee in such Proceeding in advance of its
final disposition upon the receipt by the Company of (i) a written affirmation
by the
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Indemnitee of his good faith belief that he has met the standard of conduct
necessary for indemnification cation under Section 3 of this Agreement (the
"Standard of Conduct"), (ii) a written undertaking executed by or on behalf of
the Indemnitee to repay the advance if it shall ultimately be determined by the
Reviewing Party that the Indemnitee is not entitled to be indemnified by the
Company for such expenses as provided in this Agreement, the Law or the
Certificate and Bylaws and (iii) satisfactory evidence as to the amount of such
expenses.
6. Repayment of Expenses. Indemnitee shall reimburse the Company for
all reasonable expenses paid by the Company in defending any Proceeding against
the Indemnitee in the event and only to the extent that it shall be determined
by the Reviewing Party that the Indemnitee is not entitled to be indemnified by
the Company for such expenses under the Certificate, the Bylaws, this Agreement,
the provisions of the Law or any other applicable law.
7. Determination of Indemnification: Burden of Proof. With respect to
all matters concerning the rights of the Indemnitee to indemnification and
payment of expenses under this Agreement, the Law or under the provisions of the
Certificate and Bylaws now or hereafter in effect, any determination by the
Reviewing Party shall be conclusive and binding on the Company. If the
entitlement of the Indemnitee to be indemnified under this Agreement depends on
whether the Standard of Conduct has been met, the burden of proof of
establishing that the Indemnitee did not act in accordance with such Standard of
Conduct shall rest with the Company. The Indemnitee shall be presumed to have
acted in accordance with such Standard of Conduct and shall be entitled to
indemnification or advancement of expenses hereunder, as the case may be, unless
it shall be determined by the Reviewing party that the Indemnitee did not meet
such Standard of Conduct, which determination shall be final. For purposes of
this Agreement, unless otherwise expressly stated herein, the termination of any
Proceeding by judgment, order, settlement, whether with or without court
approval, or conviction, or upon a plea of nolo contendre or its equivalent
shall not create a presumption that the Indemnitee did not meet the Standard of
Conduct or have any particular belief or that a court has determined that
indemnification is not permitted by applicable law.
8. Effect of Change of Control. If there has not been a Change of
Control after the date of this Agreement, the determination of (i) the rights of
the Indemnitee to indemnification and payment of expenses under the Agreement or
under the provisions of the Certificate and the Bylaws, (ii) whether the
Standard of Conduct has been met and (iii) the reasonableness of amounts claimed
by the Indemnitee, shall be made by the Reviewing Party or such other body or
persons as may be permitted by the Law. If there has been a Change of Control
after the date of this Agreement, such determination and evaluation shall be
made by a special, independent counsel who is selected by the indemnitee and
approved by the Company, which approval shall not be unreasonably withheld, and
who has not otherwise performed services for the Indemnitee or the Company.
9. Continuation of Indemnification. All agreements and obligations of
the Company contained herein shall continue during the period that the
Indemnitee is a director or an officer of the Company, or, while a director or
officer of the Company, is or was serving at the request of the Company as a
director, officer, partner, venturer, proprietor, trustee, employee, agent or
similar functionary of another corporation, partnership, joint venture, sole
proprietorship, trust, nonprofit entity, employee benefit plan, or other
enterprise, and shall continue following the period that the
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Indemnitee served in such capacities during any period that the Indemnitee shall
be subject to any Proceeding, any appeal in any such Proceeding, or any inquiry
or investigation that could lead to any such proceeding, by reason of the fact
that the Indemnitee was a director or an officer of the Company or served in any
other capacity referred to herein.
10. Notification and Defense of Claim. Subject to the provisions of the
Certificate and the Bylaws, within 30 calendar days after receipt by the
Indemnitee of notice of the commencement of any Proceeding, the Indemnitee
shall, if a claim in respect hereof is to be made against the Company under this
Agreement, notify the Company of the commencement thereof. With respect to any
such Proceeding as to which the Indemnitee notifies the Company of the
commencement thereof:
(a) The Company shall be entitled to participate therein at
its own expense:
(b) Except as otherwise provided below, to the extent that it
may wish, the Company, jointly with any other indemnifying
party similarly notified, shall be entitled to assume the
defense thereof and to employ counsel reasonably satisfactory
to the Indemnitee. After notice from the Company to the
indemnitee of its election to so assume the defense thereof,
the Company shall not be liable to the Indemnitee under this
Agreement for any legal or other expenses subsequently
incurred by the Indemnitee in connection with the defense
thereof other than reasonable costs of investigation or as
otherwise provided below. The Indemnitee shall have the right
to employ counsel of his own choosing in such Proceeding but
the fees and expenses of such counsel incurred after notice
from the Company of assumption by the Company of the defense
thereof shall be at the expense of the Indemnitee unless (i)
the employment of counsel by the indemnitee has been
specifically authorized by the Company, such authorization to
be conclusively established by action by disinterested members
of the Board though less than quorum; (ii) representation by
the same counsel of both the Indemnitee and the Company,
would, in the reasonable judgment of the Indemnitee and the
Company, be inappropriate due to an actual or potential
conflict of interest between the Company and the Indemnitee in
the conduct of the defense of such Proceeding, such conflict
of interest to be conclusively established by an opinion of
counsel to the Company to such effect; (iii) the counsel
employed by the Company and reasonably satisfactory to the
indemnitee has advised the Indemnitee in writing that such
counsel's representation of the Indemnitee would likely
involve such counsel in representing differing interests which
could adversely affect the judgment or loyalty of such counsel
to the indemnitee, whether it be a conflicting, inconsistent,
diverse or other interest; or (iv) the Company shall not in
fact have employed counsel to assume the defense of such
action, in each of which cases the fees and expenses of
counsel shall be paid, as provided herein, by the Company. The
Company shall not be entitled to assume the defense of any
Proceeding brought by or on behalf of the Company or as to
which a conflict of interest has been established as provided
in subsection (ii) hereof; and
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(c) The Company shall not be liable to indemnify the
Indemnitee under this Agreement for any amounts paid in
settlement of any Proceeding affected without its written
consent. The Company shall not settle any Proceeding in any
manner which would impose any liability or penalty on the
Indemnitee without the Indemnitee's written consent. Neither
the Company nor the Indemnitee shall unreasonably withhold
consent to any proposed settlement.
11. Enforcement.
(A) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations
imposed on the Company hereby in order to induce the
Indemnitee to serve as director and/or officer of the Company
and acknowledges that the Indemnitee is relying upon this
Agreement in serving in such capacity.
(b) Absent a determination by the Reviewing Party that the
Indemnitee is not entitled to indemnification hereunder, if a
claim for indemnification or advancement of expenses is not
paid in full by the Company within thirty (30) days after a
written claim by the Indemnitee has been received by the
Company, the Indemnitee may at any time bring suit against the
Company to recover the unpaid amount of the claim. In the
event the Indemnitee is required to bring any action to
enforce or to collect monies due under this Agreement and is
successful in such action, the Company shall reimburse the
Indemnitee for all of the Indemnitee's reasonable attorneys'
fees and expenses in bringing and pursuing such action.
12. Effectiveness. This Agreement is effective for, and shall apply to
(i) any claim which is asserted or threatened before, on or after the date of
this Agreement but for which no Proceeding has been brought prior to the date
hereof and (ii) any Proceeding which is threatened before, on or after the date
of this Agreement but which is not pending prior to the date hereof. This
Agreement shall not apply to any Proceeding which was brought before the date of
this Agreement. So long as the foregoing is satisfied, this Agreement shall be
effective for, and be applicable to, acts or omissions occurring prior to, on or
after the date hereof.
13. Nonexclusivity. The rights of the Indemnitee under this Agreement
shall not be deemed exclusive, or in limitation of, any rights to which the
Indemnitee may be entitled under any applicable common or statutory law, or
pursuant to the Certificate, the Bylaws, vote of shareholders or otherwise.
14. Other Payments. The Company shall not be liable to make any payment
under this Agreement in connection with any Proceeding against the indemnitee to
the extent the Indemnitee has otherwise received payments of the amounts
otherwise payable by the Company hereunder from a third party.
15. Subrogation. In the event the Company makes any payment under
this Agreement, the Company shall be subrogated, to the extent of such payment,
to all rights of recovery of the Indemnitee with respect thereto, and the
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Indemnitee with respect thereto, and the indemnitee shall execute all
agreements, instruments, certificates or other documents and do or cause to be
done all things necessary or appropriate to secure such recovery rights to the
Company including, without limitation, executing such documents as shall enable
the Company to bring an action or suit to enforce such recovery rights.
16. Survival: Continuation. The rights of the Indemnitee under this
Agreement shall inure to the benefit of the Indemnitee, his heirs, executors,
administrators and personal representatives, and this Agreement, shall be
binding upon the Company, its successors and assigns. The rights of the
indemnitee under this Agreement shall continue as provided in Section 9, hereof.
17. Amendment and Termination. No amendment, modification, termination
or cancellation of this Agreement shall be effective unless made in writing and
signed by both parties hereto.
18. Headings. Section headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
19. Choice of Law. This Agreement shall be governed and construed in
accordance with the internal laws of the State of Delaware without giving effect
to the princi
ples of conflicts of laws
thereof.
20. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally,
mailed by certified mail (return receipt requested) or sent by overnight
delivery service, cable, telegram, facsimile transmission or telex to the
parties at the following addresses or at such other addresses as shall be
specified by the parties by like notice.
(a) If the Company, to:
77 Spruce Street
Cedarhurst, New York 11516
(b) If the Indemnitee, to:
==========================
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Notice so give shall, in the case of notice so given by mail, be deemed to be
given and received on the fourth calendar day after posting, in the case of
notice so given by overnight delivery service, on the date of actual delivery
and, in the case of notice so given by cable, telegram, facsimile transmission,
telex or personal delivery, on the date of actual transmission or, as the case
may be, personal delivery,
21. Severability. If any provision of this Agreement shall be held to
be illegal, invalid or unenforceable under any applicable law, then such
contravention or invalidity shall not invalidate the entire Agreement. Such
provision shall be deemed to be modified to the extent necessary to
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render it legal, valid and enforceable, and if no such modification shall render
it legal, valid and enforceable, then this Agreement shall be construed as if
not containing the provision held to be invalid, and the rights and obligations
of the parties shall be construed and enforced accordingly,
22. Complete Agreement. This Agreement and those documents expressly
referred to herein embody the complete agreement and understanding among the
parties hereto and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
23. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, with the
same effect as if all parties had signed the same document. All such
counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
COMPU-DAWN, INC.
By:_________________
President
---------------------
INDEMNITEE
INDEMN
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CONSULTANT AGREEMENT
AGREEMENT, made this 27th day of September 1996 by and between COASTAL
COMPUTER SYSTEMS, INC., a New York corporation having an office at 166 West Park
Avenue, Long Beach, New York (hereinafter referred to as "COASTAL" or the
"Corporation") and ALAN DANIELS and GERALDINE LUM DANIELS both having a
residence at 302 Donner Avenue, Ventura, California 93003 (hereinafter
collectively referred to as "CONSULTANTS").
W I T N E S S E T H
WHEREAS, COASTAL desires to have available to it the consulting
services of CONSULTANTS and CONSULTANTS desire to make such services available
to COASTAL, upon and subject to the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto agree as follows:
1. CONSULTANTS' SERVICES.
COASTAL hereby employs CONSULTANTS and CONSULTANTS shall serve
as consultants with respect to technical and marketing issues. It is expressly
agreed and understood that either ALAN DANIELS or GERALDINE LUM DANIELS may
provide the services required under this paragraph via telephone. It is
understood and agreed that Consultants' duties shall not include day to day
operations. In the event that either CONSULTANT is incapacitated due to illness
or death, and are unable to provide the services required under this Agreement
COASTAL, in recognition of the CONSULTANTS' past contributions and services, and
as an inducement to enter into this Agreement, agrees to pay the remainder of
consulting fees to CONSULTANTS' or their assigns pursuant to the terms hereof.
2. TERM.
CONSULTANTS' employment hereunder shall commence on the date
hereof and shall continue until the consummation of a private debt and equity
financing in the aggregate amount of $765,000 (the "Private Offering").
3. COMPENSATION.
COASTAL shall pay to CONSULTANTS and CONSULTANTS shall accept
from COASTAL, as compensation in full for services rendered hereunder,
compensation in the amount of Twenty-Five Thousand Two Hundred and Ninety
($25,290.00) Dollars due and payable within fifteen (15) days of the closing of
the Private Offering. In the event that the Private Offering does not close
within ninety (90) days hereof this Agreement will be null and void and the
compensation will not be due and payable.
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4. WAIVER OF BREACH.
Waiver by the Corporation of any breach or provision of this
Agreement shall not be effective unless it is in writing, signed on behalf of
the Corporation by a duly authorized officer and making specific reference to
this Agreement. Any such waiver shall not operate or be construed as a waiver of
any subsequent breach.
5. ASSIGNMENT.
This Agreement shall be binding upon and inure to the benefit
of the Corporation and CONSULTANTS. CONSULTANTS shall not be entitled to assign
any of their rights or delegate any of THEIR duties hereunder. Any such
purported assignment or delegation shall be null and void.
6. ENTIRE AGREEMENT.
This Agreement constitutes the entire Agreement between the
parties hereto with respect to the subject matter hereof, and supersedes all
prior Agreements or understandings, oral or written, with respect thereto. No
representation or warranty of any kind whatsoever has been made by the
Corporation. This Agreement may not be amended orally, but only in writing
executed by each party hereto.
7. NOTICES.
Any notices or consents required or permitted to be given
hereunder shall be in writing, sent by registered or certified mail, return
receipt requested, and addressed as follows:
To CONSULTANTS
302 Donner Avenue
Ventura, California 93003
To Corporation at:
Robert H. Solomon, Esq.
68 West Park Avenue, PO Box 58
Long Beach, New York 11561
or to such other address that shall be indicated by notice given as aforesaid.
Any such notice shall be deemed given when mailed as aforesaid.
8. GOVERNING LAW.
This Agreement has been executed and delivered in, and shall
be governed by and construed in accordance with the laws of, the State of New
York.
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9. ARBITRATION.
Any controversy or claim arising out of, resulting from or
relating to this Agreement shall be settled exclusively by arbitration conducted
in Nassau County, New York in accordance with the Commercial Arbitration Rules
of the American Arbitration Association (or organization which is the successor
thereto). The parties hereto agree that service of process or notice of motion
or other application in connection with any arbitration may be served by the
means by which notices are to be given under this Agreement, provided that a
reasonable time for appearance is allowed. Any award in such arbitration may be
enforced on application of either party by the order or judgment of any Federal
or state court in the State of New York as the party making such application
shall elect, having jurisdiction over the subject matter thereof. Each of the
parties hereto hereby submits itself to the jurisdiction of any such court and
agrees that service of process on it in any action, suit or proceeding to
enforce any such award may be effected by the means by which notices are to be
given to it under this Agreement. The fees and expenses of any arbitration shall
be borne by the parties equally, but each party shall bear the expenses of its
own attorneys and experts and the additional expenses of presenting its own
proof.
10. SEVERABILITY AND ENFORCEABILITY.
In the event that any one or more of the provisions of this
Agreement shall be held invalid, illegal, or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions shall not, in
any way, be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
COASTAL COMPUTER SYSTEMS, INC.
By:/s/ Dong Lew
------------------
DONG LEW, President
/s/ Alan Daniels
------------------
ALAN DANIELS
/s/ Geraldine Lum Daniels
--------------------------
GERALDINE LUM DANIELS
K:\WPDOC\CORP\COMPUDAW\REGISTRA\EXHIBITS\CONSULT.DAN
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") by and between COMPU-DAWN,
INC., a Delaware corporation with offices at 77 Spruce Street, Cedarhurst, New
York 11516 ("Company"), and LOUIS LIBIN, residing at 949 Greenfield Road,
Woodmere, New York 11598 ("Executive") is made and entered as of January 6,
1997, ("Effective Date").
RECITALS
WHEREAS on January 6, 1997 Executive became Chief Technology Officer
and a Director of the Company;
WHEREAS commencing January 6, 1997, Executive agrees to devote no less
than two (2) full business days per week as a consultant to the Company and
further agrees to increase the number of days per week devoted to the Company
until March 10, 1997 (the "Per Diem Period"); at which time he will assume his
responsibilities as a full-time employee of the Company pursuant to the terms of
this Agreement.
WHEREAS the Company has agreed to compensate the Executive at the rate
of $850.00 per day (the "Per Diem Rate") during the Per Diem Period until the
Executive assumes his roles as a full-time employee of the Company pursuant to
the terms of this Agreement;
WHEREAS the parties have agreed that compensation to the Executive
during the Per Diem Period is limited to the Per Diem Rate and that the
Executive shall not be entitled to any other benefits as a full-time employee
pursuant to the terms hereof during the Per Diem Period; and
WHEREAS the parties have agreed that it is in their mutual best
interests to enter into this agreement with respect to the full-time employment
of the Executive.
NOW THEREFORE, in consideration of the premises and of the respective
covenants and agreements contained herein, the parties hereto agree as follows:
1.1 Retention. The Company hereby retains the Executive as Chief
Technology Officer of the Company for and during the term hereof. The Executive
hereby accepts employment under the terms and conditions set forth in this
Agreement.
1.2 Duties of Executive. The Executive shall perform in the capacity
described in Section 1.1 hereof and shall have such duties, responsibilities,
and authorities as are designated for such offices pursuant to the Bylaws, as
amended, of the Company, and as may be reasonably assigned to him from time to
time by the Chief Executive Officer of the Company. The Executive agrees to
devote his full time during normal business hours, best efforts,
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abilities, knowledge and experience to the faithful performance of the duties,
responsibilities, and authorities which may be reasonably assigned to him and
which are consistent with his executive offices under Section 1.1 of this
Agreement. The Executive shall be free to devote up to one (1) day per work week
which day may vary from week to week to other business including but not limited
to providing consulting services to General Electric Corporation, Turner
Telecommunications, Inc., and the Federal Communications Commission provided the
Executive shall use his best efforts to pursue such activities in such a manner
so that such activities shall not prevent the Executive from fulfilling his
obligations to the Company hereunder, and provided further, the Executive shall
resolve any conflict between his obligations to the Company and his obligations
to any other entity in favor of the Company. Notwithstanding the preceding, the
Executive may, without being in violation of his obligations hereunder, (i)
serve on corporate, civic or charitable boards or committees which are not
engaged in business in the computer software, radio or telecommunications
industries, with the exceptions of Turner Telecommunications L.L.C. and CarComm
L.L.C., provided, however, the Executive may serve on boards or committees
otherwise prohibited hereunder or director of a trade or business association
related to the computer software, radio or telecommunications industries,
provided, however, that with the prior written consent of the Chief Executive
Officer, Employee may serve on Boards or committees otherwise prohibited
hereunder, (ii) invest the Executive's personal assets in such form or manner as
will not require any material services by the Executive in the operation of the
entities in which such investments are made, provided the Executive shall use
his best efforts to pursue such activities in such a manner so that such
activities shall not prevent the Executive from fulfilling his obligations to
the Company hereunder, and provided further, the Executive shall resolve any
conflict between his obligations to the Company and his obligations to any other
entity in which the Executive has a financial interest in favor of the Company.
To the extent such conflict exists and is resolved in favor of the Company, the
Company agrees to replace all reasonable and provable financial losses sustained
by the Executive as a result of such conflict, and in any event this amount is
not to exceed $100,000.
1.3 Term. This Agreement shall become effective as of the Effective
Date and shall continue in force and effect until December 31, 1999, unless
sooner terminated as provided in Section 1.6 hereof. This Agreement shall
automatically renew for additional one (1) year periods unless either party has
given at least sixty (60) days prior written notice of their intention not to
renew.
1.4 Compensation. The Company shall pay the Executive, as full
compensation for services rendered by the Executive under the Agreement, as
follows:
(a) Base Salary. The Company shall pay the Executive a base
salary of TWO HUNDRED THOUSAND DOLLARS ($200,000.00) per year for the year ended
March 10, 1998 at the rate of $3,846.16 per week; and TWO HUNDRED TWENTY FIVE
THOUSAND ($225,000.00) DOLLARS per year for the year ended March 10, 1999 at the
rate of $4,326.93 per week; and the equivalent per annum salary of TWO HUNDRED
AND FIFTY
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THOUSAND ($250,000) DOLLARS for the eight month period ending December 31, 1999
at the rate of $4,807.70 per week, or such higher salary as may be determined
from time to time during the term hereof either in accordance with the
provisions of Section 1.4(b) hereof or by the Board of Directors in its sole
discretion, prorated for any partial period of employment ("Salary"). Such
Salary shall be paid by the Company to the Executive in twenty-six (26) equal
installments in accordance with the regular payroll payment dates of the Company
or in such installments and on such days during the month as the Company and the
Executive shall mutually determine. In the event this agreement renews
automatically as provided in paragraph 1.2 hereof increases in base salary will
be a minimum of the cumulative annual average increase for the prior year as
stated in the consumer price index all urban consumers New York - Northern New
Jersey - Long Island - Metropolitan Area publicized by the U.S. Department of
Commerce. If such index is terminated or no longer in existence use of a
comparable index will be accepted.
(b) Annual Bonus Based on Earnings (Pre-tax Earnings) In
addition to the Salary set forth in Section 1.4(a) hereof, the Executive shall
receive a bonus each year during the term of this Agreement in an amount equal
to a varying percentages of the pre-tax consolidated taxable income of the
Company and its subsidiaries ("Pre-Tax Earnings") for the preceding taxable year
ended December 31 (or such other fiscal year as the Company may adopt inthe
future), commencing with the taxable year ending December 1, 1997 as determined
by the Company's independent accountant in accordance with generally accepted
accounting principles (except as hereinafter set forth) prorated for any partial
period of employment ("Earnings Annual Bonus"). The Earnings Annual Bonus
payable to the Executive shall be the amount determined by multiplying the
PRE-TAX EARNINGS of the Company as determined above by the applicable percentage
based upon PRE-TAX EARNINGS of the Company as set forth in the table below,
prorated for any partial period of employment:
PRE-TAX EARNINGS Earnings Annual Bonus
Less than $500,000 None
$500,000 or more but 2.0% of the PRE-TAX EARNINGS
less than $1,000,000 of the Company
$1,000,000 or more but 3.0% of the PRE-TAX EARNINGS
less than $1,500,000 of the Company
$1,500,000 or more 4.0% of the PRE-TAX EARNINGS
of the Company
For example, if the Executive worked a full twelve months during the employment
year and the PRE-TAX EARNINGS of the Company for the preceding year ended
December
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31 was either: $100,000, $500,000, $800,000, $1,200,000 or 1,700,000, then the
Earnings Annual Bonus due the Executive would be $0, $10,000 ($500,000 x 2%),
$16,000 ($800,000 x 2%), and $36,000 ($1,200,000 x 3%), and $68,000 (1,700,000 x
4%) respectively. Such Earnings Annual Bonus, shall be paid to the Executive
within ninety (90) days after the end of the taxable year of the Company for
which the Executive is entitled to receive the Earnings Annual Bonus.
(c) Discretionary Bonus Compensation. In addition to the
Earnings Annual Bonus set forth in Section 1.4(b) hereof, the Company may also
pay the Executive discretionary annual bonus compensation ("Discretionary Bonus
Compensation") in an amount determined by the Board of Directors of the Company
(excluding the Executive) in its sole discretion to be proper and appropriate
based upon such factors as the Board of Directors deems appropriate including
(i) the Executive's contributions to the design, engineering and development of
software, radio frequency and data communications solutions (ii) the
consolidated revenues of the Company and its subsidiaries for the taxable year,
and (iii) the general overall performance of the Company and its subsidiaries
for the taxable year. Such Discretionary Bonus Compensation shall be paid by the
Company to the Executive in the manner set forth in the resolution of the Board
of Directors of the Company authorizing and declaring the payment of such
Discretionary Bonus Compensation to the Executive ("Discretionary Bonus
Resolution"). Notwithstanding anything herein to the contrary, the Executive
shall not be entitled to any Discretionary Bonus Compensation for any Employment
Year during the term of this Agreement unless and until such Discretionary Bonus
Compensation is determined and declared by the Board of Directors of the
Company.
1.5 Employment Benefits. In addition to the Salary, the Earnings Annual
Bonus, and any Discretionary Bonus Compensation payable to the Executive
hereunder, the Executive shall be entitled to the following benefits upon
satisfaction by the Executive of the eligibility requirements therefor, subject
to the following limitations:
(a) Sick Leave Benefits and Disability Insurance. Unless this
Agreement is terminated pursuant to the provisions of Section 1.6(b) hereof and
provided that Executive has been employed on a full time basis for a minimum of
three (3) months, the Executive shall be paid sick leave benefits for a period
of up to three (3) months at his then prevailing Salary rate during his absence
due to illness or other incapacity, reduced by the amount, if any, of worker's
compensation, social security entitlement, or disability benefits, if any, under
the Company's group disability insurance plan, if any.
(b) Life Insurance;" Key Man" Life Insurance. The Company, at
its own expense, shall provide the Executive, subject to the Executive passing
any physical examination required by the Company's insurance company, life
insurance benefits under and consistent with any group term life insurance plan
which the Company, at its election, may adopt. Any such life insurance coverage
shall be upon terms and conditions comparable
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to the coverage, if any, provided other executive officers of the Company, and
provided further, however, that the Company shall not be obligated to incur a
premium of more than $1,000 per year for any such coverage. In addition, the
Company may obtain "key man" life insurance upon the life of the Executive in an
amount determined by the Company in its sole discretion. The Executive shall
fully cooperate in obtaining said life insurance, including submitting to any
physical examination.
(c) Hospitalization, Accident, Major Medical and Dental
Insurance. The Company, at its own expense, shall provide the Executive (and all
dependents of the Executive at the request of the Executive) with group
hospitalization, group accident, major medical, and dental insurance in amounts
of coverage comparable to the coverage, if any, provided other executive
officers of the Company.
(d) Vacations. The Executive shall be entitled to a reasonable
paid vacation of not less that ten (10) business days each year during the term
of this Agreement, exclusive of national and religious holidays and weekends,
which vacation shall be taken by the Executive in accordance with the business
requirements of the Company at the time and its personnel policies then in
effect relative to this subject.
(e) Working Facilities. During the term of this Agreement, the
Company shall provide at its expense, adequate office space, furniture,
equipment, supplies, and personnel (including professional, clerical, support
and other personnel) as shall be suitable in the opinion of the Chief Executive
Officer of the Company to the Executive's position and adequate for the
Executive's use in performing his duties and responsibilities under this
Agreement.
(f) Automobile Allowance. During the term of this Agreement,
the Company shall provide the Executive with a monthly automobile allowance of
SEVEN HUNDRED AND FIFTY DOLLARS ($750.00). Any allowance due the Executive
pursuant to the preceding provisions of this paragraph shall be paid by the
Company concurrently with payroll.
(g) Signing Bonus Incentive Stock Options. Upon signing this
Agreement in connection with the Executive becoming Chief Technology Officer
and a Director of the Company, the Company shall grant to the Executive
qualified stock options, in accordance with the terms and conditions of the
Company's 1996 Stock Option Plan and Agreement, to purchase (1) 50,000 shares of
common stock of the Company at an exercise price of $2.00 per share below the
public offering price of the common stock in the Initial Public Offering, and
(2) an additional 50,000 shares of common stock at an exercise price equal to
the average trading price of the Company's common stock on the day prior to
the grant as reflected in the National Association of Securities Dealers
Automated Quotation System between now and March 10, 1998, provided however that
the Executive must serve as an officer of the Company, a full-time employee and
on the Board of Directors at the time of exercise. Such
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options shall vest ratably over a three (3) year period, and shall be
exercisable for a period of ten (10) years thereafter.
(h) Future Minimum Incentive Stock Options. With respect to
each of the Company's fiscal year (commencing December 31, 1998), the Company
shall grant the Executive incentive stock options, in accordance with the terms
and conditions of the Company~s 1996 Stock Option Plan and Agreement effective
as of December 31 of that year, to the extent permissible under incentive stock
option plans maintained by the Company, to purchase 1000 shares of common stock
of the Company for each full $100,000 of the PRE-TAX EARNINGS of the Company and
its subsidiaries for such fiscal year as determined by the Company's independent
accountant in accordance with generally accepted accounting principles. The
number of shares of common stock covered by the incentive stock options to be
granted to the Executive pursuant to this paragraph, and the exercise price per
share thereof, shall be proportionately adjusted for any increase or decrease in
the number of issued shares of common stock of the Company resulting from a
subdivision or consolidation of shares or the payment of a stock dividend (but
only on the common stock) or any other increase or decrease in the number of
shares affected without receipt of consideration by the Company. Notwithstanding
the preceding, nothing contained herein shall preclude the Board of Directors of
the Company from terminating one or more incentive stock option plans currently
or hereafter maintained by the Company or issuing additional incentive stock
options to the Executive in its discretion. In the event the Company determines
to discontinue one or more incentive stock options plan and does not replace
said plan by a substantially similar plan than immediately prior to the
termination date of the plan the Company shall issue to the Executive the
options to which he is then entitled.
1.6 Termination. This Agreement and the Executive's employment
hereunder may be terminated without any breach of this Agreement at any time
during the term hereof only by reason of and in accordance with the following
provisions:
(a) Death. If the Executive dies during the term of this
Agreement and while in the employ of the Company, this Agreement shall
automatically terminate as of the date of the Executive's death, and the Company
shall have no further liability hereunder to the Executive or his estate except
to the extent set forth in Section 1.7(a) hereof.
(b) Disability. If, during the term of this Agreement, the
Executive shall be prevented from performing his duties hereunder by reason of
becoming totally disabled as hereinafter defined for six (6) months out of
twelve (12) month period, then the Company may terminate this Agreement
immediately upon written notice to the Executive without any further liability
hereunder to the Executive except as set forth in Section 1.7(b) hereof. For
purposes of this Agreement, the Executive shall be deemed to have become
disabled when (i) he either receives "disability benefits" under (a) Social
Security, or (b) the Companys disability plan, if any (whether funded with
insurance or
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self-funded by the Company), or (ii) the Board of Directors of the Company, upon
the written report of a qualified physician (after complete examination of the
Executive) designated by the Board of Directors of the Company or its insurers,
shall have determined that the Executive has become physically and/or mentally
incapable of performing his duties under this Agreement.
(c) Termination by the Company for Cause. Prior to the
expiration of the term of this Agreement, the Company may discharge the
Executive for cause and terminate this Agreement immediately upon written notice
to the Executive without any further liability hereunder to the Executive or his
estate, except to the extent set forth in Section 1.7(c) hereof. For purposes of
this Agreement, a "discharge for cause" shall mean termination of the Executive
upon written notice to the Executive limited, however, to one or more of the
following reasons:
(1) Misappropriation or embezzlement by the Executive
in connection with the Company as determined by the affirmative unanimous vote
of the Board of Directors of the Company other than the Executive;
(2) Mismanagement or neglect of the Executive's duties
as determined by the affirmative unanimous vote of the Board of Directors of
the Company (other than the Executive) after notice to the Executive of
the particular details thereof and a period of thirty (30) days thereafter
within which to cure such act or acts of mismanagement or neglect, and the
failure of the Executive to cure such act or acts within such thirty (30) day
period;
(3) Indictment and convicted felony; or
(4) Willful and unauthorized disclosure of Trade
Secrets (as defined in Section 1.8 hereof) of the Company as determined by the
affirmative unanimous vote of the Board of Directors of the Company, other
than the Executives.
(d) Termination by the Company with Notice. The Company may
terminate this Agreement, for a reason other than as set forth in subparagraphs
(a), (b), (c) or (g) of this Section 1.6 at any time immediately upon written
notice to the Executive without any further liability hereunder to the Executive
except to the extent set forth in Section 1.7(d) hereof.
(e) Termination by the Executive with Notice. The Executive
may terminate this Agreement without liability to the Company arising solely
from the resignation of the Executive at any time upon thirty (30) days written
notice to the Company in which event the Company shall have no further liability
hereunder to the Executive except to the extent set forth in Section 1.7(e)
hereof.
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(f) Termination by the Executive for Good Reason. The
Executive may terminate this Agreement at any time for Good Reason (as
hereinafter defined) in which event the Company shall have no further liability
hereunder to the Executive except to the extent set forth in Section 1.7(f)
hereof. For purposes of this Agreement, the term "Good Reason" shall mean,
without the Executive's express written consent, the occurrence of any the
following circumstances (which changes shall constitute a "Change"):
(1) The assignment to the Executive of any duties
inconsistent in any material respect (unless in the nature of a promotion) with
the Executive's position in the Company immediately prior to such Change
(including, but not limited to, the Executive's status, offices and titles),
or a significant adverse alteration or diminution in the nature or status of the
Executive's authority, duties or responsibilities from those in effect
immediately prior to such Change, other than an isolated, insubstantial and
inadvertent action that is fully corrected within thirty (30) days after receipt
of written notice from the Executive;
(2) Any material failure by the Company to comply
with any of the provisions of Section 1.4 or 1.5 of this Agreement, other
than an isolated, insubstantial and inadvertent action that is fully corrected
within thirty (30) days after receipt of written notice from the Executive;
(3) The Company's requiring the Executive to be
based anywhere other than within a reasonable travel distance from Cedarhurst,
New York, except for travel reasonably required of the Executive in the
performance of the Executive's duties on behalf of the Company;
(4) The failure of the Company to obtain an agreement,
satisfactory to the Executive, from any and all successors to assume and
agree to perform this Agreement, as contemplated in Section 1.9 hereof; or
(5) Any failure by the Company to comply with any
material provision of this Agreement that has not been cured within thirty (30)
days after notice of such noncompliance has been given by the Executive to the
Company.
During a period of six (6) months immediately following any
such termination of this Agreement by the Executive, the Executive agrees to
provide such consulting services to the Company as it may reasonably request, at
such time or times within such period as may be mutually agreed upon between the
Company and the Executive. The Executive shall be compensated for any such
consulting services at a daily rate equal to one thirtieth (1/30) of the monthly
Salary paid to the Executive at the time of the Executive's resignation from the
Company, plus reimbursement for any reasonable out-of-pocket expenses incurred
by the Executive in rendering such consulting services.
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(g) Termination upon Change in Control. The Company may
terminate this Agreement at any time within twelve (12) months after a Change in
Control (as hereinafter defined) immediately upon written notice to the
Executive without any further liability hereunder to the Executive except to the
extent set forth in Section 1.7(g) hereof. For purposes of this Agreement, the
terms "Change of Control" shall mean:
(1) The transfer, through one transaction or a
series of related transactions, either directly or indirectly, or through one or
more intermediaries, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934) of 25% or more of either
the then outstanding shares of common stock or the combined voting power of the
Company's then outstanding voting securities entitled to vote generally in the
election of directors, or the last of any series of transfers that results in
the transfer of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934) of 25% or more of either
the then outstanding shares of common stock or the combined voting power of the
Company's then outstanding voting securities entitled to vote generally in the
election of directors;
(2) Approval by the shareholders of the Company of
a merger or consolidation, with respect to which persons who were the
shareholders of the Company immediately prior to such merger or consolidation
do not, immediately thereafter, own more than 50% of the combined voting power
entitled to vote generally in the election of directors of the merged or
consolidated company's then outstanding voting securities, or a liquidation or
dissolution of the Company or the sale of all or substantially all of the assets
of the Company;
(3) The transfer, through one transaction or a
series of related transactions, of more than 50% of the assets of the Company,
or the last of any series of transfers that results in the transfer of more than
50% of the assets of the Company. For purposes of this paragraph, the
determination of what constitutes more than 50% of the assets of the Company
shall be determined based on the most recent financial statement prepared by
the Company's independent accountants; or
(4) During any calendar year, individuals who at
the beginning of such year constituted the Board of the Company and any new
director or directors whose election by the Board was approved by a vote of a
majority of the directors then still in office who either were directors at the
beginning of the year or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof
provided, however, that this provision will not be triggered in the event the
Executive votes or causes other stockholders to vote their shares to cause
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said change to the directorship of the Company.
1.7 Compensation upon Termination.
(a) Death. In the event the Executive's employment hereunder
is terminated pursuant to the provisions of Section 1.6 (a) hereof due to the
death of the Executive, the Company shall have no further obligation to the
Executive or his estate, except to pay to the Executive's spouse, or if he
leaves no spouse, to the estate of the Executive (provided, however, that the
Executive, with the written consent of the Executive's spouse, if any, may
affirmatively designate a beneficiary other than his spouse or estate): (i) any
accrued, but unpaid, Salary, any authorized but unreimbursed business expenses,
and any vacation or sick leave benefits, which have accrued as of the date of
death, but were then unpaid or unused, (ii) any accrued, but unpaid, Earnings
Annual Bonus and any declared, but unpaid, Discretionary Bonus Compensation,
but without accelerating the bonus payment date, (iii) accrued stock options
pursuant to paragraph 1.4 (h), (iv) an amount equal to the difference between
(a) the full monthly Salary payable hereunder as of the date of death of the
Executive for a period consisting of that number of months equal to one (1)
month multiplied by the number of full years that the Executive was an employee
of the Company or a subsidiary or a predecessor in interest thereof, and (b) the
monthly payment, if any, payable to the Executive under the Company's salary
continuation plan, if any, for the corresponding month during the period set
forth in clause (iv)(a) above. Any amount due the Executive under clause (i)
of this paragraph shall be paid in a lump sum in cash within thirty (30) days
after the death of the Executive, any amount due the Executive under clause
(ii) of this paragraph shall be paid in accordance with the Discretionary
Bonus Resolution; provided, however, that any unpaid Earnings Annual Bonus
shall be paid to the Executive within thirty (30) days after the audited
financial statements for the fiscal year is made available by the Company's
auditors for which such Earnings Annual Bonus is due, and any amount due the
Executive under clause (iii) of this Paragraph shall be paid in accordance
with the Company's regular payroll periods during the period set forth in said
clause (iii).
(b) Disability. In the event the Executive's employment
hereunder is terminated pursuant to the provisions of Section 1.6(b) hereof due
to the Disability of the Executive, the Company shall be relieved of all of its
obligations under this Agreement, except to pay the Executive (i) any accrued,
but unpaid Salary, any authorized but unreimbursed business expenses, and any
vacation or sick leave benefits which have accrued as of the date on which such
permanent disability is determined, but then remain unpaid, (ii) any accrued,
but unpaid, Earnings Annual Bonus, and any declared, but unpaid, Discretionary
Bonus Compensation but without accelerating the bonus payment date, and (iii) an
amount equal to the difference between (a) the full monthly Salary payable
hereunder as of the date of termination of the Executive's employment hereunder
for a period consisting of that number of months equal to one (1) month
multiplied by the number of full years that the Executive was an employee of the
Company or a subsidiary or predecessor in interest thereof, and subject to a
minimum of three (3) months (b) the monthly payment, if any, payable to the
Executive
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under the Company's salary continuation plan and/or disability plan, if any,
for the corresponding month during the period set forth in clause (iii)(a)
above. The provisions of the preceding sentence shall not affect the Executive's
rights to receive payments under the Company's disability insurance plan, if
any. Any amount due the Executive under clause (i) of this paragraph shall be
paid in a lump sum in cash within thirty (30) days after the termination of the
Executives employment hereunder, any amount due the Executive under clause (ii)
of this paragraph shall be paid in accordance with the Discretionary Bonus
Resolution; provided, however, that any unpaid Earnings Annual Bonus shall be
paid to the Executive within thirty (30) days after the issuance of the
Company's fiscal year audited financial results for which such Earnings Annual
Bonus is due, and any amount due the Executive under clause (iii) of this
paragraph shall be paid in accordance with the Company's regular payroll periods
during the period set forth in clause (iii).
(c) Cause. In the event the Executive's employment hereunder
is terminated by the Company for Cause pursuant to the provisions of Section
1.6(c) hereof, the Company shall have no further obligation to the Executive
under this Agreement except to pay the Executive (i) any accrued, but unpaid,
Salary, any authorized but unreimbursed business expenses, and any vacation or
sick leave benefits, which have accrued as of the date of termination of this
Agreement, but were then unpaid or unused, and (ii) any accrued, but unpaid,
Earnings Annual Bonus, and any declared, but unpaid, Discretionary Bonus
Compensation, but without accelerating the bonus payment date. Any amount due
the Executive under clause (i) of this paragraph shall be paid in a lump sum in
cash within thirty (30) days after the termination of the Executive's employment
hereunder, and any amount due the Executive under clause (ii) of this Paragraph
shall be paid in accordance with the Discretionary Bonus Resolution; provided,
however, that any unpaid Earnings Annual Bonus shall be paid to the Executive
within thirty (30) days after the end of the Company's taxable year for which
such Earnings Annual Bonus is due.
(d) Termination by the Company with Notice. In the event the
Executive's employment hereunder is terminated by the Company pursuant to the
provisions of Section 1.6(d) hereof, the Executive shall be entitled to receive
(i) any accrued, but unpaid, Salary, any authorized but unreimbursed business
expenses, and any vacation or sick leave benefits which have accrued as of the
date of termination of the Agreement, but were then unpaid or unused, (ii) any
accrued, but unpaid, Earnings Annual Bonus and any declared, but unpaid,
Discretionary Bonus Compensation, and (iii) the full monthly Salary payable
hereunder for the unexpired term of the Agreement subject to mitigation in the
event the Executive has sought or obtained employment elsewhere after the
termination of the Executive's employment pursuant to the provisions of section
1.6(d) hereof. Any amount due the Executive under clauses (i), (ii) and (iii) of
this paragraph (other than for any Earnings Annual Bonus) shall be paid in a
lump sum in cash within thirty (30) days after the termination of the
Executive's employment thereunder; provided, however, that any unpaid Earnings
Annual Bonus shall be paid to the Executive within ninety (90) days after the
end of the Company's taxable year for which such Earnings Annual Bonus is due.
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(e) Termination by the Executive with Notice. In the event the
Executive's employment hereunder is terminated by the Executive pursuant to the
provisions of Section 1.6(e) hereof, the Executive shall be entitled to receive
(i) any accrued, but unpaid, Salary, any authorized but unreimbursed business
expenses, and any vacation or sick leave benefits which have accrued as of the
date of termination of this Agreement, but were then unpaid or unused, and (ii)
any accrued, but unpaid, Earnings Annual Bonus, and any declared, but unpaid,
Discretionary Bonus Compensation. Any amount due the Executive under clause (i)
of this paragraph shall be paid in a lump sum in cash within thirty (30) days
after the termination of the Executive's employment hereunder, and any amount
due the Executive under clause (ii) of this paragraph shall be paid in
accordance with the Discretionary Bonus Resolution; provided, however, that any
unpaid Earnings Annual Bonus shall be paid to the Executive within ninety (90)
days after the end of the Company's taxable year for which such Earnings Annual
Bonus is due. In addition, the Company may, at its option, cancel the
Executive's unexercised stock options and terminate Executive's unexercised
stock options.
(f) Termination by the Executive for Good Reason.
(1) Prior to Change of Control. In the event this
Agreement is terminated by the Executive pursuant to the provisions of Section
1.6(f) hereof prior to the occurrence of a Change of Control, the Executive
shall be entitled to receive (i) any accrued, but unpaid, Salary, any authorized
but unreimbursed business expenses, and any vacation or sick leave benefits
which have accrued as of the date of termination of the Agreement, but were
then unpaid or unused, (ii) any accrued, but unpaid, Earnings Annual Bonus,
and any declared, but unpaid, Discretionary Bonus Compensation, and (iii)an
amount equal to One Hundred (100%) percent of the full monthly Salary payable
hereunder for the unexpired term of the Agreement whether or not the Executive
has sought or obtained employment elsewhere after the termination of the
Executive's employment. Any amount due the Executive under clauses (i), (ii) and
(iii) of this paragraph (other than for any Earnings Annual Bonus) shall be paid
in a lump sum in cash within thirty (30) days after the termination of the
Executive's employment hereunder; provided, however, that any unpaid Earnings
Annual Bonus shall be paid to the Executive within ninety (90) days after the
end of the Company's taxable year for which such Earnings Annual Bonus is due.
In addition, in the event this Agreement is terminated by the Executive pursuant
to the provisions of Section 1.6(f) hereof prior to the occurrence of a Change
of Control, the Company at its expense shall continue to provide the Executive
with the benefits set forth in Section 1.5(b), 1.5(c) 1.5(f) and 1.5(h) above
for the unexpired term of this Agreement whether or not the Executive has
sought or obtained employment elsewhere after the termination of the Executive's
employment pursuant to the provisions of Section 1.6(f) hereof; provided,
however, if the Executive obtains employment elsewhere during the aforesaid
period, then the Company shall continue to provide the benefits set forth in
Sections 1.5(b), 1.5(c), 1.5(f) and 1.5(h) hereof only to the extent the
Executive does not receive such benefits in their entirety from the Executive's
then current employer.
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(2) After Change of Control. In the event this Agreement
is terminated by the Executive pursuant to the provisions of Section 1.6(f)
hereof after the occurrence of a Change of Control, the executive shall be
entitled to receive (i)any accrued, but unpaid, salary, any authorized but
unreimbursed business expenses and any vacation or sick leave benefits which
have accrued as of the date of termination of the Agreement, but were then
unpaid or unused, (ii) any accrued, but unpaid, Earnings Annual Bonus, and any
declared, but unpaid, Discretionary Bonus Compensation and (iii) an amount equal
to One Hundred (100%) percent of the full monthly Salary payable hereunder
for the unexpired term of the Agreement whether or not the Executive has sought
or obtained employment elsewhere after the termination of the Executive's
employment pursuant to the provisions of section 1.6(f) hereof. Any amount due
the Executive under clauses (i), (ii) and (iii) of this paragraph (other than
for any Earnings Annual Bonus) shall be paid in a lump sum in cash within thirty
(30) days after the termination of the Executive's employment hereunder;
provided, however, than any unpaid Earnings Annual Bonus and shall be paid to
the Executive within ninety (90) days after the end of the Company's taxable
year for which such Earnings Annual Bonus is due. In addition, in the event this
Agreement is terminated by the Executive pursuant to the provisions of Section
1.6(f) hereof after the occurrence of a Change of Control, the Company at its
expense shall continue to provide the Executive with the benefits set forth in
Section 1.5(b), 1.5(c), 1.5 (f) and 1.5(h) above for the unexpired term of this
Agreement whether or not the Executive has sought or obtained employment
elsewhere after the termination of the Executive's employment; provided,
however, if the Executive obtains employment elsewhere during the aforesaid
period, then the Company shall continue to provide the benefits set forth in
Sections 1.5(b), 1.5(c), 1.5(f) and 1.5(h) hereof only to the extent the
Executive does not receive such benefits in their entirety from the Executive's
current employer.
(g) Termination by the Company After Change of Control. In the
event this Agreement is terminated by the Company pursuant to the provisions of
Section 1.6(g) hereof after the occurrence of a Change of Control, the Executive
shall be entitled to receive (i) any accrued, but unpaid, Salary, any authorized
but unreimbursed business expenses, and any vacation or sick leave benefits
which have accrued as of the date of termination of the Agreement, but were then
unpaid or unused, (ii) any accrued, but unpaid, Earnings Annual Bonus, and any
declared, but unpaid, Discretionary Bonus compensation, and (iii) an amount
equal to One Hundred (100%) percent of the full monthly Salary payable hereunder
for the unexpired term of the Agreement whether or not the Executive has sought
or obtained employment elsewhere after the termination of the Executive's
employment pursuant to the provisions of Section 1.6 (g) hereof. Any amount due
the Executive under clauses (i) and (ii) of this paragraph shall be paid in a
lump sum in cash within thirty (30) days after the termination of the
Executive's employment hereunder, and any amount due the Executive under clause
(iii) of this paragraph shall be paid in a lump sum in cash within ninety (90)
days after the termination of the Executive's employment hereunder. In addition,
in the event this Agreement is terminated by the Company pursuant to the
provisions of Section 1.6(g) hereof after the occurrence of a Change of Control,
the Company at its expense shall continue to provide the Executive with the
benefits set forth in Sections 1.5(b), 1.5(c), 1.5(f) and 1.5(h) above for the
unexpired term of this Agreement whether or not the Executive has sought or
obtained
13
<PAGE>
employment elsewhere after the termination of the Executive's employment
pursuant to the provisions of Section 1.6(g) hereof; provided, however, if the
Executive obtains employment elsewhere during the aforesaid period, then the
Company shall continue to provide the benefits set forth in Sections 1.5(b),
1.5(c), 1.5 (f) and 1.5(h) hereof only to the extent the Executive does not
receive such benefits in their entirety from the Executive's then current
employer.
(h) Termination of Obligations of the Company Upon Payment of
Compensation. Upon payment of the amount, if any, due the Executive pursuant to
the preceding provisions of this Section, the Company shall have no further
obligation to the Executive under this Agreement.
1.8 Protective Covenants. The Executive recognizes that his employment
by the Company is one of the highest trust and confidence because (i) the
Executive will become fully familiar with all aspects of the Company's business
and that of its subsidiaries during the period of his employment with the
Company, and (ii) certain information of which the Executive will gain knowledge
during his employment is proprietary and confidential information which is of
special and peculiar value to the Company or its subsidiaries (the "Proprietary
Information"). If any such Proprietary Information were imparted to or became
known by any person, including the Executive, engaging in a business in
competition with that of the Company or its subsidiaries, hardship, loss and
irreparable injury and damage could result to the Company or its subsidiaries,
the measurement of which would be difficult if not impossible to ascertain. The
Executive acknowledges that any and all Proprietary Information shall be the
sole and absolute property of the Company in perpetuity, that the Executive
shall promptly disclose such Proprietary Information to the Company, and the
Executive shall have no right, title or interest therein or to receive
additional monies therefor, regardless of whether development occurred during
working hours or any other time during the term of the Executive's employment
with the Company. The Executive shall assist the Company in obtaining patents on
all such Proprietary Information deemed patentable by the Company and shall
execute all documents necessary to obtain such patents and to vest the Company
with full and extensive title to the patents and to protect the patents against
infringement by others. The Executive agrees that any patent application filed
by the Executive within one (1) year after a termination of the Executive's
employment with the Company shall be conclusively presumed to relate to an
invention made during the term of the Executive's employment with the Company.
The Executive further acknowledges that the Company or its subsidiaries has
developed unique skills, concepts, sales presentations, marketing programs,
marketing strategy, business
practices, methods of operation, trademarks, licenses, technical information,
Proprietary Information, computer software programs, tapes and discuss
concerning its operations systems, customer lists, customer leads, documents
identifying past, present and future customers, hiring and training methods,
investment policies, financial and other confidential and proprietary
information concerning its operations and expansion plans ("Trade Secrets").
Therefore, the Executive agrees that it is necessary for the Company to protect
its business and that of its subsidiaries from such damage, and the Executive
further agrees that the following covenants constitute a reasonable and
appropriate means, consistent with the best interest of both the
14
<PAGE>
Executive and the Company, to protect the Company or its subsidiaries against
such damage and shall apply to and be binding upon the Executive as provided
herein:
(a) Trade Secrets. The Executive recognizes that his position
with the Company is one of the highest trust and confidence by reason of the
Executive's access to and contact with certain Trade secrets of the Company and
its subsidiaries. The Executive agrees and covenants to use his best efforts and
exercise utmost diligence to protect and safeguard the Trade Secrets of the
Company and its subsidiaries. The Executive further agrees and covenants that,
except as may be required by the Company in connection with this Agreement, or
with the prior written consent of the Company, the Executive shall not, either
during the term of this Agreement or for a period of two (2) years thereafter,
directly or indirectly, use for the Executive's own benefit or for the benefit
of another, or disclose, disseminate, or distribute to another, any Trade Secret
(whether or not acquired, learned, obtained, or developed by the Executive alone
or in conjunction with others) of the Company or its subsidiaries or of others
with whom the Company or its subsidiaries has a business relationship. All
memoranda, notes, records, drawings, documents, or other writings whatsoever
made, compiled, acquired, or received by the Executive during the term of this
Agreement, arising out of, in connection with, or related to any activity or
business of the Company or its subsidiaries, including, but not limited to, the
customers, suppliers, or others with whom the Company or its subsidiaries has a
business relationship, the arrangements of the Company or its subsidiaries with
such parties, and the pricing and expansion policies and strategy of the Company
or its subsidiaries, are, and shall continue to be, the sole and exclusive
property of the Company or its subsidiaries, are, and shall continue to be, the
sole and exclusive property of the Company or its subsidiaries, as applicable,
and shall, together with all copies thereof and all advertising literature, to
be returned and delivered to the Company by the within five (5) days of the
termination of this Agreement, or at any time upon the Company's demand.
(b) Inventions as Sole Property of Company. Employee agrees
promptly to disclose to the Company any and all inventions, ideas, discoveries,
improvements, trade secrets, formulas, techniques, processes, developments, know
how, and writings or other materials, whether or not patentable and whether or
not reduced to practice, conceived, made or learned by the Employee during the
period of his/her employment, either alone or jointly with others, which relate
to or result from the actual or anticipated business, work, research or
investigations of the Company, or which result, to any extent, from use of the
Company's premises or property (such inventions, ideas, discoveries,
improvements, trade secrets, formulas, techniques, processes, developments
know-how, and writings or other materials being hereinafter collectively
referred to as the "Inventions"). Employee acknowledges and agrees that all the
Inventions (including all rights of copyright therein) shall be the sole
property of the Company or any other entity designated by it, and the Employee
hereby assigns to the Company his/her entire right and interest in and to all
the Inventions. The Company or any other entity designated by it shall be the
sole owner of all domestic and foreign rights pertaining to the Inventions.
Employee further agrees as to all the Inventions to assist the
15
<PAGE>
Company in every way (at the company's expense) to obtain and from time to time
enforce patents on the Inventions in any and all countries, and to execute all
instruments and do all other things reasonable necessary or appropriate to vest
more fully in the Company all right, title and interest in and to such
Inventions. To that end, by way of illustration but not limitation, Employee
will testify in any suit or other proceeding involving any of the Inventions,
execute all documents which the Company reasonably determines to be necessary or
convenient for use in applying for and obtaining patents thereon and enforcing
same, and execute all necessary assignments thereof to the Company or persons
designated by it. Employee's obligation to assist the Company in perfecting its
rights to the Inventions shall continue beyond the termination for the time
actually spent by Employee at the Company's request on such assistance. The
Executive shall be compensated for any such services at a daily rate equal to
one thirtieth (1/30) of the monthly Salary paid to the Executive at the time of
the Executive's termination from the Company, plus reimbursement for any
reasonable out-of-pocket expenses incurred by the Executive in rendering such
services. All inventions, if any, which Employee made prior to his/her
employment by the Company are excluded from the scope of this Agreement. As a
matter of record, Employee has set forth on Exhibit A attached hereto a complete
list of all inventions, discoveries, improvements, writings or other materials
relating to the Company's business which have been made by Employee prior to
his/her employment with the Company. Employee represents and covenants that such
list is complete.
(c) Restiction on Soliciting Customers of the Company
and its Subsidiaries. The Executive covenants that for a period of twenty-four
(24) months following the termination of this Agreement, he will not, either
directly or indirectly, (i) disclose or otherwise make known to any person or
entity the names and addresses of any of the customers of the Company, or (ii)
call on, solicit, or take away, or attempt to call on solicit or take away any
of the customers of the Company or its subsidiaries with whom he became
acquainted during his employment with the Company, either for himself or for
any other person, firm, corporation or other entity.
(d) Covenant Not to Compete. The Executive hereby covenants
and agrees that for a period of twelve (12) months following the termination, of
his employment hereunder, he will not directly or indirectly, either as an
employee, employer, consultant, agent, principal, partner, shareholder (other
than through ownership of public traded capital stock of a corporation which
represent less than five percent (5%) of the outstanding capital stock of such
corporation), corporate officer, director, investor, financier or in any other
individual or representative capacity, engage or participate in any business
located in a county in which the Company or any of its subsidiaries is doing
business as of the date of termination of the Executive's employment hereunder
which is directly competitive with the business of the Company or any of its
subsidiaries as of such date.
(e) Survival of Covenants. Each covenant of the Executive
set forth in this Section 1.8 shall survive the termination of this Agreement
and shall be construed as an agreement independent of any other provision
of this Agreement, and the existence of any
16
<PAGE>
claim or cause of action of the Executive against the Company whether predicated
on this Agreement or otherwise shall not constitute a defense to the enforcement
by the Company of said covenant.
(f) Remedies. In the event of breach or threatened breach by
the Executive of any provision of this Section 1.8, the Company shall be
entitled to relief by temporary restraining order, temporary injunction, or
permanent injunction or otherwise, in addition to other legal and equitable
relief to which it may be entitled, including any and all monetary damages which
the Company may incur as a result of said breach, violation or threatened breach
or violation. The Company may pursue any remedy available to it concurrently or
consecutively in any order as to any breach, violation, or threatened breach or
violation, and the pursuit of one of such remedies at any time will not be
deemed an election of remedies or waiver of the right to pursue any other of
such remedies as to such breach, violation, or threatened breach or violation,
or as to any other breach violation, or threatened breach or violation.
However, in the event the Company commences an
action and does not prevail, the Company shall pay the Executive all reasonable
legal costs and expenses in connection with the defense or any action brought
by the Company against him.
1.9 Merger or Acquisition. In the event the Company should consolidate,
or merge into another corporation, or transfer all or substantially all of its
assets to another entity, or divide its assets among a number of entities, this
Agreement shall continue in full force and effect. The Company will require any
and all successors (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, to expressly assume and agree pursuant to an appropriate
written assumption agreement to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such successor shall be a breach of this
Agreement and shall entitle the Executive to terminate his employment and this
Agreement for Good Reason. As used in this Agreement, the term "Company" shall
mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which executes and delivers the assumption agreement
provided for in this Section 1.9 or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
1.10 Reimbursement of Employee Expenses. The Executive is authorized to
incur ordinary, necessary and reasonable expenses in connection with the
performance of his duties and responsibilities under this Agreement and for the
promotion of the business and activities of the Company during the term hereof,
including, without limitation, expenses for necessary travel and necessary
travel and entertainment and other items of expenses required ir, the normal and
routine course of the Executive's employment hereunder. The Company will
reimburse the Executive from time to time for all such business expenses
incurred pursuant to and in conformity with the provisions of this Section
17
<PAGE>
provided that the Executive presents to the Company:
(a) An accounting in which the Executive recorded at or near
the time each expenditure was made; (i) the amount of the expenditures, (ii) the
time, place and designation of the type of entertainment and travel or other
expenses, or the date and description of the gift (gifts made to one individual
are not to exceed a total of Twenty-Five and No/100 Dollars ($25.00) in any
taxable year); (iii) the business reason for the expenditure and the nature of
the business benefit derived or expected to be derived as the result of the
expenditure; and (iv) the names, occupations, addresses and other information
concerning each person who was entertained or given a gift sufficient to
establish the business relationship to the Company; and
(b) Documentary evidence (such as receipts or paid bills)
which state sufficient information to establish the amount, date, place and
essential character of the expenditure, for such expenditure (i) of Twenty-Five
and No/100 Dollars ($25.00) or more except for transportation charges if not
readily available) and (ii) for lodging or traveling away from home.
GENERAL PROVISIONS
2.1 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date deposited in a
receptacle maintained by the United States Postal Service for such purpose,
postage prepaid, by certified mail, return receipt requested, addressed to the
respective parties as follows:
If to the Executive:
Louis Libin
949 Greenfield Road
Woodmere, New York 11598
If to the Company:
Compu-Dawn, Inc.
77 Spruce Street
Cedarhurst, New York 11516
ATTN: Mark Honigsfeld,
Chairman of the Board
Either party hereto may designate a different address by providing written
notice of such new address to the other party hereto.
18
<PAGE>
2.2 Severability. If any provision contained in this Agreement is
determined to be void, illegal or unenforceable, in whole or in part, then the
other provisions contained herein shall remain in full force and effect as if
the provision which was determined to be void, illegal, or unenforceable had not
been contained herein.
2.3 Waiver, Modification, and Integration. The waiver by any party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by any party. This instrument
contains the entire agreement of the parties concerning employment and
supersedes all prior and contemporaneous representations, understandings and
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Executive by the Company and all such prior or
contemporaneous representations, understandings and agreements, both oral and
written, are hereby terminated provided, however that the terms and conditions
of that separate Confidential Proprietary Information Agreement entered into by
and between the Company and the Executive shall control with respect to the
subject matter thereof. The terms of this Agreement may not be modified, altered
or amended except by written agreement of the Executive and the Company, subject
to the prior approval of the Board of Directors of the Company.
2.4 Binding Effect. This Agreement shall be binding and effective
upon the Company and its successors and permitted assigns, and upon the
Executive, his heirs and representatives.
2.5 Choice of Law and Venue. The parties agree that this Agreement is
made and entered into in Nassau County, New York and shall be governed by and
construed in accordance with the laws of the State of New York.
2.6 Representation of Executive. The Executive hereby represents and
warrants to the Company that he has not previously assumed any obligations
inconsistent with those contained in this Agreement. The Executive further
represents and warrants to the Company that the Executive has entered into this
Agreement pursuant to his own initiative and that the Company did not induce the
Executive to execute this Agreement in contravention of any existing
commitments. The Executive acknowledges that the Company has entered into this
Agreement in reliance upon the foregoing representations of the Executive.
2.7 Independent Counsel. The Company has been represented by ROBERT H.
SOLOMON, ESQ. The Executive has been represented by Sholom Maidenbaum, Esq.
Each has made his or its own determination with respect to counsel without
coercion from the other. Each has thoroughly reviewed the provisions of this
Agreement and all matters concerning the consulting with the benefit of
independent counsel.
2.8 Arbitration Any controversy or claim arising out of or relating to
this Agreement shall be settled by binding arbitration in Nassau County, New
York under the rules
19
<PAGE>
of the American Arbitration Association. Judgment upon the award may be
entered in any court having jurisdiction. Arbitrator(s) may not award the
prevailing party in such arbitration attorney's fees, expenses and costs of
arbitration.
2.9 Counterpart Execution. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written effective as of the Effective Date.
COMPU-DAWN, INC.
BY:/s/ Dong Lew
---------------
DONG LEW, PRESIDENT
EXECUTIVE:
/s/ Louis Libin
---------------
LOUIS LIBIN
Attest
/s/ Mark Honigsfeld
- -------------------
Secretary
20
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Amendment No. 1 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
March 13, 1997
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