SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: April 22, 1998
(Date of earliest event reported)
COMPU-DAWN, INC.
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(Exact name of Registrant as specified in charter)
Delaware 000-22611 11-3344575
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(State or other jurisdiction (Commission File No.) IRS Employer Identification
of incorporation) Number)
77 Spruce Street, Cedarhurst, New York 11516
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 374-6700
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Item 5. Other Events.
On April 22, 1998, Compu-DAWN, Inc. issued a press release (the "Press
Release") announcing that it had entered into a definitive agreement to acquire
an indirect 50% beneficial interest in Press-Loto, a Russian company that has
the right to operate the first national on-line lottery in Russia. The
agreement, which is subject to a number of conditions to closing, and related
information are more particularly described in the Press Release, which is
attached hereto as Exhibit 99.1
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits
99.1 Press Release, dated April 22, 1998
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
COMPU-DAWN, INC.
Dated: April 30, 1998 By: /s/ Mark Honigsfeld
Mark Honigsfeld
Chairman of the Board
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COMPU-DAWN ENTERS INTO DEFINITIVE AGREEMENT TO ACQUIRE 50% BENEFICIAL INTEREST
IN PRESS-LOTO, WHICH HAS RIGHT TO OPERATE FIRST ON-LINE NATIONAL LOTTERY FOR
RUSSIA.
Cedarhurst, NY April 22, 1998 - Compu-DAWN, Inc. (NASDAQ:CODI) (the "Company")
today announced that it has entered into a definitive agreement to acquire a 50%
beneficial interest in Press-Loto, a Russian company which has the right to
operate the first national on-line lottery in Russia pursuant to a license (the
"Lottery License") from the Russian Ministry of Finance to the Union of
Journalists of Russia ("Union"). The remaining 50% of Press-Loto is primarily
owned by the Union and its charity, with a private Russian group holding a
minority interest. The acquisition is subject to, among other things, (i)
receiving a fairness opinion from an investment banking firm, (ii) shareholder
approval, (iii) regulatory approvals, and (iv) completion of additional due
diligence satisfactory to the Company.
In addition to providing Press-Loto with a return to its shareholders, the
lottery is expected to provide Russian society, including the members of the
Union and its charity, with social benefits. The Company has been advised that a
portion of the lottery proceeds may be utilized by Press-Loto to provide support
and financing for emergency services (such as police, fire and medical) to
acquire and maintain state-of-the-art computer software and communications
technology. The technology, which was developed by Compu-DAWN, is similar to
that being used by the Company's current customers in the U.S.
The Acquisition
Pursuant to the transaction, at the closing, the Company will issue (i)3,662,880
Common Shares, (ii) Convertible Redeemable Preferred Shares (the "Preferred
Shares"), (iii) warrants (the "Warrants") to purchase 1,331,956 Common Shares at
$10.00 per share and (iv) the right to receive 332,989 Common Shares (the
"Performance Shares") based upon the attainment of performance thresholds.
The Preferred Shares will be convertible into an aggregate maximum of 6,659,780
Common Shares, provided the income from the lottery business meets certain
pre-tax levels of up to an aggregate of approximately $36 million over a period
of not more than 5 years commencing on January 1, 1999 and ending on December
31, 2003. If such thresholds are not met within such period the Company may
redeem the unconverted Preferred Shares at $.01 per share.
If the Warrants are exercised and the Performance Shares are issued, the current
shareholders of the acquired company will control approximately 80% of the
voting stock of the Company (assuming the Preferred Shares are not redeemed)
based upon the number of shares of voting stock currently outstanding and
issuable under options exercisable currently or within 60 days. Additionally, if
all
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of the warrants issued in the acquisition are exercised, the Company will
receive $13,319,560 in cash proceeds.
Contemporaneously with the signing of the agreement, the Company agreed to make
secured loans from time to time for the continued development of the lottery
operations. Advances under the loan agreement will be made based on budgets
provided that are acceptable to Compu-DAWN.
The License
The Lottery License currently has a term which ends on December 31, 1999. The
Lottery License is renewable thereafter for successive two (2) year terms
subject to certain conditions. A certain number of Common Shares to be issued in
the acquisition will be held in escrow (currently contemplated to be between 2.6
and 2.7 million shares), to be delivered as the license is renewed up to the
fifth anniversary of the closing, and as partial security for indemnification
obligations, under the agreement. Although the Company believes that renewals
will be granted, and that denial will only be for cause, including, among other
things, improper operation of the lottery, the Company can not assure that
renewals of the Lottery License will be granted.
Lottery Operations
Fifty percent of the Russian lottery revenue is expected to go to prizes, and
expenses are expected to range from 25% in the early stages down to an estimated
10-12% of revenues, including management fees, after full operation is reached
in Moscow and in each other Russian city or locality. The balance, after setting
aside the appropriate amount for lottery expansion and Russian taxes, is
anticipated to be distributed among the beneficial owners of Press- Loto. The
License is non-exclusive and no assurance can be given that other national
lottery licenses will not be granted to other parties.
It is expected that ETI International Limited ("ETI"), the affiliate of Experts
en Traitement de l'Information Montreal, Inc. (the company which developed and
owns the proprietary software and designed and manufactured the gaming terminals
for the Quebec lottery, and provides software, equipment and consultation
services for the Quebec lottery) will provide terminals, equipment, software and
services to Press-Loto and will oversee and manage the Russian lottery project.
Management
Upon the closing of the acquisition, Mr. Harvey Weinstein, the principal and
founder of the acquired company is expected to become Chairman of the Board and
President of the Company. As part of the employment agreement contemplated to be
entered into with Mr. Weinstein, he would be entitled to receive, among other
compensation, a bonus equal to 10% of the pre-tax net income derived from the
lottery business (up to a maximum bonus of $4 million).
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Alfred Luciani, an experienced gaming industry consultant and a former Assistant
Attorney General for the State of New Jersey, has agreed to become a director of
Compu-DAWN as well as a consultant to the Company upon the closing of the
acquisition. He was also President and Chief Executive Officer of the Golden
Nugget Casino Hotel in Las Vegas and of the Mashantucket Pequot Gaming
Enterprise. In addition to various other positions held in the gaming industry
he is widely credited with the success of the Foxwoods Resort and Casino. In
April 1993, Mr. Luciani directed the restructuring of Gamma International into
American Gaming & Entertainment, Ltd. Mr. Rosaire Bachand, the former Vice
President of Operations of ETI who was a principal director and officer of
Loto-Quebec from its inception in 1977 though 1997 has indicated to the Company
that he is interested in becoming an advisor to the Board of Directors. The
chairman of the Union, Vsevolod Bogdanov, has also agreed to become a director
of Compu-DAWN. Mr. Mark Honigsfeld, the Company's current Chairman of the Board
will stay on as Chief Executive Officer, Chief Financial Officer and director.
Marketplace
The Russian Federation consists of 22 major market areas. The Russian lottery
system at maturity is expected to consist of tens of thousands of terminals
located in retail outlets throughout Russia. Press-Loto has previously
negotiated with 600 retail outlets in Moscow for placement of terminals
purchased from ETI to begin the Lottery. Central computer systems for the retail
system will be housed and maintained by ITAR-TASS, the Russian government news
agency ("TASS") at their headquarters in Moscow. TASS is also a member of the
Union.
Russia is by far the largest independent country which resulted from the
break-up of the former Soviet Union. It stretches across eleven time zones and
is estimated to have a current population of 170 million. Russia has never had a
computerized on-line national lottery, although localized instant winner
scratch-off lottery tickets have been sold for over twenty years. Moscow has a
population estimated at 12 million, with another 10 million people living in the
ring of the suburbs surrounding Moscow. Nizhny Novgorod, Russia's third largest
city, has a population estimated at 2.5 million, with another 2 million in its
suburbs. The Lottery is expected to commence operations in Moscow and expand
into Nizhny Novgorod within the first 2 years of operation.
Industry
Computer-driven on-line lotteries have been operating in the world since 1977,
when Canada's Quebec province installed the first on-line lottery. The advantage
of an on-line lottery is that multiple games, and within those games multiple
price-level payoffs, can be offered to individual ticket-buyers, including a
grand prize that can build to an extremely large payoff, thus attracting far
more ticket sales.
Other countries have national or regional on-line lotteries. The United Kingdom
("UK"), which has 55 million residents, commenced its first on-line lottery in
January, 1995. This lottery generated over $7 billion (U.S.) in sales in its
first full year of operation. The UK lottery is managed by the Camelot Group,
plc ("Camelot") of which Cadbury Schweppes, plc (NYSE:CSD-A) and Gtech
(NYSE:GTK)
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are amongst the principal owners. In the UK arrangement Camelot retains a 5% fee
for its operating costs and profit.
Quebec has 6.5 million people and recognized revenues of $1.75 billion (U.S.) in
1996 from its lottery operations, Loto-Quebec.
The UK or Quebec lottery has no relationship to the lottery in Russia. The
performance of such UK or Quebec lotteries is no indication of the performance
of a Russian lottery and no inference should be drawn that any Russian lottery
will perform similarly to the UK or Quebec lottery.
Compu-DAWN presently intends to continue pursuing the public safety software and
wireless data communication business on a regular basis and may utilize some of
its current products and experience in the wireless data communications segment
for this new Russian on-line lottery venture.
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This press release includes certain forward-looking statements about the Company
and the lottery business that are based on management's current expectations.
Actual results may differ materially as a result of any one or more of the risks
identified in the Company's filings under the Securities and Exchange Act of
1934, political events in Russia, the lack of operating history of a national
lottery in Russia, and the lack of legal precedent in Russia with respect to
business relationships, licensing, secured loans, fluctuation in currency values
and exchange rates, and the possible inability to engage or retain key personnel
to operate the lottery, obtain license renewals and/or enter into necessary
contractual arrangements for the operation and administration of the lottery,
among other things.
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