As filed with the Securities and Exchange Commission on October 2, 1998
Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMPU-DAWN, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-3344575
State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
77 Spruce Street
Cedarhurst, New York 11516
Telephone: (516) 374-6700
Telecopier: (516) 374-9410
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Mark Honigsfeld
Chairman of the Board and
Chief Executive Officer
Compu-DAWN, Inc.
77 Spruce Street
Cedarhurst, New York 11516
Telephone: (516) 374-6700
Telecopier: (516) 374-9410
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copies of all communications and notices to:
Fred Skolnik, Esq.
Gavin C. Grusd, Esq.
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York 11554
Telephone: (516) 296-7000
Telecopier: (516) 296-7111
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this
Registration Statement.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans,
please check the following box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 of
the Securities Act of 1933, other than securities offered only in
connection with dividend or interest reinvestment plans, check
the following box. [x]
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. [ ]
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. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Proposed Maximum Maximum
Amount to be Offering Price Aggregate Offering Amount of
Title of Each Class of Securities to be Registered Registered Per Share (4) Price (4) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share, issuable
upon conversion of Series A Convertible 1,300,000(1) $1.50 $1,950,000.00 $575.25
Preferred Stock, registered for the benefit of
Selling Stockholders
Common Stock, $.01 par value per share, issuable
upon conversion of Series B Convertible 327,103(2) $1.50 $490,654.50 $144.74
Preferred Stock, registered for the benefit of
Selling Stockholders
Common Stock, $.01 par value per share, issuable 180,414(3) $1.50 $270,621.00 $79.83
upon exercise of outstanding warrants
Common Stock, $.01 par value per share, 125,000 $1.50 $187,500.00 $55.31
registered for the benefit
of Selling Stockholders ______
Total Registration Fee: $855.13
=======
</TABLE>
(1) For purposes of estimating the number of the Company's shares of Common
Stock to be included in this Registration Statement, the Company calculated
<PAGE>
200% of the number of shares of Common Stock issuable upon the conversion
at maturity of 3,250 shares of the Company's Series A Convertible Preferred
Stock, $.01 par value per share (the "Series A Stock"), or otherwise
pursuant to the Certificate of Designations, Preferences and Rights of the
Series A Stock, based on a conversion price of $5.00 per share. Pursuant to
Rule 416 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), the number of shares of Common Stock to be registered
hereunder also includes an indeterminate number of shares which may become
issuable upon conversion, of or otherwise with respect to, the Series A
Stock to prevent dilution resulting from stock splits, stock dividends or
similar transactions.
(2) Pursuant to Rule 416 promulgated under the Securities Act, the number of
shares of Common Stock to be registered hereunder also includes an
indeterminate number of shares which may become issuable upon conversion of
the Company's Series B Convertible Preferred Stock, $.01 per value per
share, to prevent dilution resulting from stock splits, stock dividends or
similar transactions.
(3) For purposes of estimating the number of the Company's shares of Common
Stock to be included in this Registration Statement, the Company calculated
200% of the number of shares of Common Stock issuable upon the exercise of
warrants for the purchase of 90,207 shares of Common Stock based upon an
exercise price of $8.025 per share. Pursuant to Rule 416 promulgated under
the Securities Act, the number of shares of Common Stock to be registered
hereunder also includes an indeterminate number of shares which may become
issuable upon exercise of the warrants to prevent dilution resulting from
stock splits, stock dividends or similar transactions.
(4) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c).
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 this Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
Subject to Completion Dated October 2, 1998
PROSPECTUS
1,932,517 SHARES OF COMMON STOCK, $.01 PAR VALUE
COMPU-DAWN, INC.
This Prospectus relates to the offer and sale from time to time of up to
1,932,517 shares (the "Shares") of common stock, $.01 par value per share
("Common Stock"), of Compu-DAWN, Inc., a Delaware corporation (the "Company"),
by the selling stockholders named herein (the "Selling Stockholders"), or by
their respective pledgees, donees, transferees or other successors in interest
that receive such Shares as a gift, partnership distribution or other non-sale
related transfer.
Of the 1,932,517 Shares being offered hereby, (i) 1,300,000
Shares are issuable upon conversion of, or otherwise with respect to, 3,250
shares of the Company's Series A Convertible Preferred Stock, $.01 par value per
share ("Series A Stock"), held by JNC Opportunity Fund, Ltd. ("Opportunity");
(ii) 327,103 Shares are issuable upon conversion of 1,750 shares of the
Company's Series B Convertible Preferred Stock, $.01 par value per share
("Series B Stock"), held by JNC Strategic Fund, Ltd. ("Strategic" and together
with Opportunity, the "JNC Selling Stockholders"); (iii) 180,414 Shares are
issuable upon the exercise of certain warrants (the 'Warrants") held by the JNC
Selling Stockholders; and (iv) 125,000 Shares are owned by three other
individuals (the "Other Selling Stockholders"). The Series A Stock was issued by
the Company to Opportunity and the Warrants were issued by the Company to the
JNC Selling Stockholders on June 5, 1998 in a private transaction (the "1998
Private Placement"). The Series B Stock was issued by the Company to Strategic
as of September 25, 1998 in connection with the 1998 Private Placement. The
Other Selling Stockholders acquired their respective Shares in non-issuer
private transactions.
The number of Shares indicated as being issuable upon conversion of, or
otherwise with respect to, the Series A Stock and offered hereby represents a
good faith estimate of the number of shares of Common Stock that may be issued
upon conversion of, or otherwise with respect to, the Series A Stock by reason
of the floating rate conversion price mechanism included in the Certificate of
Designations, Preferences and Rights for the Series A Stock (the "Series A
Certificate of Designation"). The estimate is based on 200% of the number of
shares of Common Stock issuable at a conversion price of $5.00 per share.
The number of Shares indicated as being issuable upon the exercise of the
Warrants and offered hereby represents a good faith estimate of the number of
shares of Common Stock that may be issued upon exercise of the Warrants by
reason of certain antidilution adjustment provisions included in the Warrants.
The estimate is based on 200% of the number of shares of Common Stock issuable
at an exercise price of $8.025 per share.
Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), the number of shares of Common Stock underlying
the Series A Stock, Series B Stock and Warrants and offered for sale hereby
includes an indeterminate number of shares as may be issued or issuable
<PAGE>
upon conversion of, or otherwise with respect to, the Series A Stock or Series
B, or upon exercise of the Warrants, by reason of any stock splits, stock
dividends or similar transactions involving the Common Stock, in order to
prevent dilution.
Although the Company will receive the exercise price of any Warrants which
are exercised, the Company will not receive any of the proceeds from the sale of
the Shares by the Selling Stockholders. The expense of registration of the
Shares which may be offered hereby under the Securities Act will be paid by the
Company.
The Company has been advised that the Shares covered under the Registration
Statement of which this Prospectus is a part may be offered for sale from time
to time by or for the account of the Selling Stockholders, or their pledgees,
donees, transferees or other successors in interest, in the open market, in the
over the counter market on the electronic bulletin board, in privately
negotiated transactions, in an underwritten offering, in a combination of such
methods, or by any other legally available means, at market prices prevailing at
the time of such sale, at prices related to such prevailing market prices, at
negotiated prices or at fixed prices. The Company has been advised that the
Shares are intended to be sold through one or more broker-dealers or directly to
purchasers. The Company has been advised that such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders, their successors in interest and/or the purchasers of the
Shares for whom such broker-dealers may act as agent or to whom they may sell as
principal, or both (which compensation as to particular broker-dealer may be in
excess of customary commissions). The Selling Stockholders, their successors in
interest and/or any broker-dealers acting in connection with the sale of the
Shares hereunder may be deemed to be underwriters within the meaning of Section
2(11) of the Securities Act, and any commissions or other compensation received
by them and any profits realized by them on the resale of the Shares as
principals may be deemed underwriting compensation under the Securities Act. The
Company is not aware of any underwriting arrangements with respect to the resale
of the Shares by the Selling Stockholders. See "Selling Stockholders" and "Plan
of Distribution."
A PURCHASE OF THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company's Common Stock is traded on The Nasdaq SmallCap Market under
the symbol "CODI". On __________, 1998, the closing bid price for the Company's
Common Stock, as reported on The Nasdaq SmallCap Market, was $_______ per share.
______________, 1998
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
The Company files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following Regional Offices of the Commission:
7 World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material can also be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Furthermore, the Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company. The address of such Web site is http://www.sec.gov.
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<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company with the
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and are incorporated herein by reference:
(a) The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997 (the "Form 10-KSB").
(b) The Company's Quarterly Report on Form 10-QSB for the three
months ended March 31, 1998.
(c) The Company's Current Report on Form 8-K for an event dated April
22, 1998.
(d) The Company's Current Report on Form 8-K for an event dated April
23, 1998.
(e) The Company's Current Report on Form 8-K for an event dated June
8, 1998.
(f) The Company's Quarterly Report on Form 10-QSB for the three
months ended June 30, 1998.
(g) The Company's Current Report on Form 8-K for an event dated
September 1, 1998.
(h) The Company's Current Report on Form 8-K for an event dated
September 25, 1998.
(i) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A (File No.
000-22611), which was declared effective by the Commission on
June 10, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Shares offered hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from
their respective dates of filing.
The Company will provide without charge to each person to whom
a copy of this Prospectus is delivered, upon the written or oral request of any
such person, a copy of any or all of the documents referred to above which have
been incorporated into this Prospectus by reference (other than exhibits to such
documents). Requests for such copies should be directed to the Secretary,
Compu-DAWN, Inc., 77 Spruce Street, Cedarhurst, New York 11516 (telephone
number: (516) 374-6700).
Any statement contained in a document incorporated herein by reference
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
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<PAGE>
THE COMPANY
Compu-DAWN, Inc. (the "Company") is primarily engaged in the business of
designing, developing, licensing, installing and servicing computer software
products and systems for law enforcement and public safety agencies. The
software systems include computer-aided dispatching, computer interfacing with
state and national crime information databases, advanced mobile on-line radio
computing, automatic vehicle location (employing dynamic map displays), records
management and photo-image database systems. Certain of these applications
utilize telecommunications and space satellite technology, and other
infrastructure, provided by third parties. The Company has developed, licensed
and installed its systems in approximately 60 agencies primarily located in the
State of New York.
The Company was incorporated under the name Coastal Computer Systems, Inc.
in New York on March 31, 1983 and was reincorporated in Delaware under its
present name on October 18, 1996.
The Company's executive offices are located at 77 Spruce Street,
Cedarhurst, New York 11516 and its telephone number is (516) 374-6700.
FORWARD-LOOKING STATEMENTS
Certain information contained herein and/or incorporated by reference in
this Prospectus includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and is subject to the safe
harbor created by that act. The Company cautions readers that certain important
factors may affect the Company's actual results and could cause such results to
differ materially from any forward-looking statements which may be deemed to
have been made in this Prospectus or which are otherwise made by or on behalf of
the Company. For this purpose, any statements contained in this Prospectus that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate,"
or "continue" or the negative variations thereof or comparable terminology are
intended to identify forward-looking statements. Factors which may affect the
Company's results include, but are not limited to, the risks and uncertainties
associated with the 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 competence required, and experience, of management to effectuate
the Company's business plan, the level of costs incurred in connection with the
Company's planned expansion efforts, economic conditions in the industry, the
financial strength of the Company's customers and suppliers, and unascertainable
risks related to possible unspecified acquisitions. The Company is also subject
to other risks detailed herein or detailed from time to time in the Company's
Commission filings. Factors that could cause or contribute to such difference
include, but are not limited to, those discussed in "Risk Factors" below, as
well as those discussed elsewhere in this Prospectus and in the Company's
filings with the Commission.
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<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative and involves
a high degree of risk and should only be purchased by investors who can afford
to lose their entire investment. Prospective purchasers, prior to making an
investment, should carefully consider the following risks and speculative
factors, as well as other information set forth elsewhere in this Prospectus. As
discussed above, this Prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's actual results could differ materially. Factors that could cause
or contribute to such difference include, but are not limited to, those
discussed below, as well as those discussed elsewhere in this Prospectus.
1. Lack of Significant Revenues; Historical and Anticipated Future Losses.
The Company's revenues for the years ended December 31, 1997 and 1996 were
$591,375 and $477,527, respectively. The Company's revenues for the first six
months of 1998 were $535,890. For the years ended December 31, 1997 and 1996,
the Company experienced a net loss of $4,436,745 and $570,769, respectively. For
the first six months of 1998 and 1997, the Company had a net loss of $899,038
and $2,879,627 respectively. The net loss figures are the result of the
incurrence of significant expenses, including, without limitation, research and
development expenses, costs relating to the enhancement and refining of the
Company's current product line, marketing costs, obligations under key employee
compensation agreements, and general administrative expenses. In addition, in
1997, the Company fully amortized approximately $1,588,000 of deferred financing
charges which were capitalized in connection with certain debt incurred prior to
the Company's initial public offering. The debt was fully repaid in 1997.
Furthermore, the net loss figures for the first six months of 1998 and 1997 are
also attributable to the fact that the Company did not generate significant
revenues in such periods and expenses were incurred in connection with
contemplated business ventures (with respect to the 1998 period). The Company
believes that, for the foreseeable future, it will be unable to achieve
sufficient additional revenues to offset the anticipated significant operating
costs described above. Accordingly, the Company anticipates that operating
losses will continue at least for the next 12 months. The Company cannot predict
the length of time such operating losses will continue or the impact such
operating losses will have on its financial condition and results of operations.
There can be no assurance that the Company's technology and products will be
able to compete successfully in the marketplace and/or generate significant
revenue, or that the Company's business will be able to operate profitably.
The Company's quarterly operating results have, in the past, varied and may
in the future vary significantly, depending on facts such as the size, timing
and recognition of revenue from significant software sales and system
integration activity, the time of new product releases and market acceptance of
these new releases, and increases in operating expenses. 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.
2. Evolving Market; New Product Development; Technological Obsolescence.
The markets for the Company's software 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
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<PAGE>
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, and technical problems or difficulties, as well as the possible
insufficiency of funding to complete development. There can be no assurance as
to when, or whether, new products will be successfully developed. In addition,
no assurance can be given that additional technologies can be developed within a
reasonable development schedule, if at all. Further, there can be no assurance
that the Company would have sufficient economic or human resources to complete
such development in a timely manner, or at all, or that it could enter into
economically reasonable arrangements for the completion of such products by
third parties.
Following the development of additional products, the Company must
successfully complete a testing program for the products before they can be
marketed. Although the Company believes that its testing program is adequate,
unforeseen technical problems arising out of such testing could significantly
and adversely affect the Company's ability to produce and market a commercially
acceptable product. In addition, the Company's success will depend upon its
current and proposed technologies and products meeting acceptable cost and
performance criteria in the marketplace. There can be no assurance that the
technologies and products will meet applicable price or performance objectives
or that unanticipated technical or other problems will not occur which would
result in increased costs or material delays. Also, there can be no assurance
that new technologies will be developed in the future by the Company. If
superior technology is developed by the Company's competitors, such products may
render the Company's present products obsolete, and thus would have a materially
negative impact on the Company.
3. Failure to Integrate Various Product Introductions and Offerings. The
Company believes that significant market opportunities exist for a provider of
fully integrated software designed for the public safety marketplace. One of the
Company's business strategies is to provide a "total solution" fully integrated
software product line used in public safety. Although the Company has had some
success in the past integrating its software products with other systems, there
can be no assurance that the Company will be able to fully integrate these
applications, or newly created applications, or that achieving such integration
will enable the Company to improve its competitive position in the software
market. Moreover, the Company's inability to further integrate its products
could have a material adverse effect on the Company's business and results of
operations.
4. 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, 1996 and 1997 and the first six months of 1998, 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.
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<PAGE>
5. 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 procedures, 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.
6. Competition. The Company's products compete with those of numerous
well-established companies, which design, sell, produce or market software
systems for public safety operations. Many of these companies have substantially
greater financial, technical and other resources than those of the Company, and
they may have established reputations for success in the development, licensing,
sale and service of their products and technology. Certain of those competitors
have the financial resources necessary to enable them to withstand substantial
price competition or downturns in the market for computer software products used
by public safety agencies and organizations. In addition, the Company
anticipates that a material portion of the sale of its products will be made
through the competitive bid process. There can be no assurance that the Company
will be able to compete effectively in such process.
7. Limited Sales and Marketing Infrastructure. The Company has a limited
sales, marketing and distribution infrastructure. The Company's sales and
marketing staff will require additional personnel in the future. There can be no
assurance that the Company will be able to build an adequate sales and marketing
staff, that establishing such a sales and marketing staff will be
cost-effective, or that the Company's sales and marketing efforts will be
successful.
8. Dependence on Significant Customers. Although the composition of the
Company's largest customers has changed from year to year, historically the
Company's revenues have been materially dependent on a limited number of
customers. Generally, the Company does not receive repeat business from its
customers for the design and installation of software systems. Further revenues
from customers to whom the Company has licensed software systems are usually
derived from maintenance and support contracts. Accordingly, the Company does
not believe that the make-up of its current customers is material to an
understanding of the Company's future business prospects. While the Company
expects its customer base to continue to expand, a limited number of large
customers may continue to account for a significant portion of the Company's
sales during any given period for the foreseeable future. As such, the Company's
financial condition and results of operations may be adversely affected by a
delay, reduction or cancellation of orders from one or more of its current or
future significant customers or the loss of one or more such customers.
9. Dependence on Strategic Business Alliances and Subcontractor
Relationships. Historically, the Company's customers have been in the "small
size" and "medium size" market segments (i.e. public safety departments or
agencies with fewer than 200 sworn officers or personnel). The Company's
business strategy includes the development of systems for the "large size"
market segment. In order to enter such market, the Company, in all likelihood,
will need to establish strategic business alliances and/or subcontractor
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relationships with large systems integrators and public network providers.
Business alliances have been entered into with AT&T Wireless Data, Inc. ("AT&T")
and GTE Mobilnet Service Corp. ("GTE"), and a subcontractor relationship has
been established with Data General Corporation ("Data General"). These
arrangements set forth the relationship of the parties in the event of a system
installation and do not relate to a particular customer. To date, no customers
have been secured under these arrangements, no revenues have been derived from
these arrangements and no assurances can be given that any revenues will be
derived from these arrangements in the future. The agreement between the Company
and AT&T provides, among other things, (i) minimum technical support standards
(if technical support is required in a particular project) which if not met
could result in a reduction of the amount of technical support fees paid to the
Company, and (ii) minimum revenue requirements to entitle the Company to a goal
attainment fee. Additionally, failure to meet certain minimum revenue
requirements will give AT&T the right to terminate the agreement. The agreement
between the Company and GTE provides, among other things, that GTE has the right
not to pay the Company any compensation during any period in which the Company
fails to materially perform its obligations. No assurances can be given that, in
the event any projects are undertaken under the above described agreements, the
Company will meet any of the imposed standards, minimum revenue levels will be
achieved, or the Company will be able to materially perform its obligations. If
any of these standards or levels are not met, the Company's compensation may be
reduced or eliminated and possibly result in early termination of certain of
these agreements. In addition, no assurances can be given that the Company will
renew its current, or enter into any other, business alliances or subcontractor
relationships. The failure of the Company to maintain or enter into such
alliances or relationships would have a material adverse effect upon the
Company's ability to implement its business plan.
10. Intellectual Property Protection and Infringement. The Company's
technology is not patented and the Company has not filed any patent
applications. The Company instead currently relies on trade secrets and
copyright rights to establish and protect certain proprietary rights in its
products. These measures afford limited protection, and there can be no
assurance that the steps taken by the Company to protect these proprietary
rights will be adequate to prevent misappropriation of its technology or the
independent development by others of similar technology especially in view of
the limited resources of the Company and the potential cost of any legal action
to enforce such rights.
The Company has not obtained any copyright registrations. Registration of a
copyright with the United States copyright office is not a requirement to make a
copyright legally effective, but generally provides a rebuttable presumption of
its validity. In the absence of a registered copyright, the Company will be
unable to bring an action for copyright infringement. A copyright may be
registered at any time prior to bringing an infringement action. If the Company
registers a copyright after the infringement occurs (and prior to bringing the
infringement action), it may be limited in its ability to prove its case and
will be precluded from seeking statutory damages (in lieu of actual damages and
lost profits) and attorney's fees. While the Company believes that it would be
impractical and not cost-effective for a third party to attempt to copy software
such as that used in its products, unauthorized parties, nevertheless, might
attempt to copy aspects, or reverse engineer certain, of the Company's products,
or may obtain and use information that the Company regards as proprietary. The
cost of, and time dedicated to, enforcement by the Company of its rights, if
any, could be significant. Regardless of the outcome of such enforcement
proceedings, there can be no assurance that such proceedings will be effective.
In addition, although the Company believes that there are no infringement or
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trade secret misappropriation claims against the Company and no grounds for the
assertion of any such claims, the cost of responding to any such assertion,
should it be made, could be significant and there is no assurance that the
Company would prevail.
11. Relatively New Management Team; Dependence on Executive Management;
Need to Retain Key Personnel. The Company's executive management team, Mark
Honigsfeld, Chairman of the Board and Chief Executive Officer of the Company,
and Louis Libin, Chief Technology Officer of the Company, have worked together
for only a relatively short 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 and Libin, each of which includes, among other things, a
non-competition and non-solicitation provision. However, each agreement provides
that the employee can terminate his agreement with the Company at any time upon
30 days notice for any reason. Additionally, Mr. Honigsfeld's employment
agreement allows him to devote up to 10% of his working time, and Mr. Libin's
employment agreement allows him to devote up to one day a week, to other
endeavors which are not competitive with the Company. The loss of the services
of either Mr. Honigsfeld or Mr. Libin could have a material adverse effect on
the Company's business.
The Company has obtained "key-man" life insurance policies on
the lives of Messrs. Honigsfeld and Libin, each of which provides for a death
benefit to the Company of $1,000,000. There can be no assurance that the death
benefit would be adequate to fund the Company's needs until a replacement could
be found.
The success of the Company is also dependent upon its ability to hire and
retain additional qualified and talented executive, technical and marketing
personnel. There is always intense competition for qualified personnel in the
Company's business and its inability to recruit qualified personnel could have a
material adverse effect on its business and results of operations. There can be
no assurance that the Company will be able to retain the members of its current
management or personnel, or that it will be able to successfully attract and
retain qualified management, engineering and sales or other personnel in the
future.
12. Dependence on Licensors. The Company currently relies on operating
system software owned by certain third parties for certain software and platform
operating systems which the Company uses to create its products, and in some
cases to bundle with its own software in its products. The licenses are
perpetual in duration subject to the payment of an annual maintenance and
enhancement fee, which is based on the number of end users of such operating
system software, or a monthly sublicense fee, which is based upon the number of
customers to which the Company's products (which includes such licensed
operating system software) are licensed. Although the Company believes that
there are alternatives to the operating system software that the Company
currently uses, termination of any of these licenses could delay the Company
from producing its products for approximately three to six months as a result of
the need to revise the Company's software to make it compatible with such
alternative operating system software. Such result would have a material adverse
effect on the Company.
13. Challenges to Management of Growth. The Company anticipates a period of
growth as a result of the development of its software business that is expected
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to place a strain on the Company's administrative, financial and operational
resources. The Company's ability to manage any growth effectively will require
it to continue to improve its operational, financial and management controls,
reporting systems and procedures, install new management information and control
systems, and train, motivate and manage its employees. There can be no assurance
that the Company will install such management information and control systems in
an efficient and timely manner or that the new systems will be adequate to
support the Company's operations. Because of the complexity of its software
products, the Company has in the past experienced, and expects in the future to
experience, a time lag between the date on which technical and sales personnel
are hired and the time at which such persons become fully productive. In
addition, customer satisfaction could be substantially affected by the quality
of the Company's post-sales system implementation process and, in many cases,
its software maintenance and service capabilities. If the Company is unable to
hire, train and retain qualified personnel and consultants to implement these
services or is unable to manage the post-sales process effectively, its ability
to attract repeat sales or obtain references for new prospective sales could be
adversely affected. Such result could limit the Company's growth opportunities.
Additionally, many of the challenges of growth may be unforeseeable and beyond
the control of the Company. If the Company is unable to manage growth
effectively, such that the Company's sales and marketing efforts exceed its
capacity to design, develop, install, maintain and service its products, or if
new employees are unable to achieve adequate performance levels, the Company's
business, operating results and financial condition could be adversely affected.
14. Matters Relating to Terminated Agreement. Effective April 22, 1998, the
Company entered into an Agreement and Plan of Merger (the "Merger Agreement")
with respect to the contemplated acquisition of Rugby National Corp. ("Rugby"),
a corporation that holds an indirect 50% interest in a company that has the
right to operate a national on-line lottery in Russia. The Merger Agreement
provided that, if the conditions to the obligation of the Company to close were
not satisfied by August 31, 1998, the Company had the right to terminate the
Merger Agreement. On September 1, 1998, since such conditions had not been
satisfied, the Company terminated the Merger Agreement. Following such event,
the Company received correspondence from Rugby and its counsel in which they
allege that, among other things, the Company breached certain provisions of the
Merger Agreement. The Company believes that it has meritorious defenses to
Rugby's claims. No action has been commenced to date; however, if litigation is
instituted, the Company intends to defend the action vigorously.
The Merger Agreement provides that, in the event the Company should fail to
consummate the transactions contemplated thereby notwithstanding that the
conditions to its obligation to close were timely satisfied, then, as liquidated
damages and as the sole and exclusive remedy for such default, the Company would
be obligated to forgive all amounts loaned to Rugby (approximately $125,000 has
been loaned) and pay to Rugby the difference between $1,000,000 and the amount
so loaned. As indicated above, the Company does not believe it has any liability
for such liquidated damages.
15. Unascertainable Risks Related to Possible Unspecified Acquisitions. The
Company intends to explore opportunities to add, through acquisition or
licensing, technology or products to enhance or add to its current product line,
or to acquire a customer base or sales organization to augment the Company's
infrastructure. Additionally, the Company has explored (see "Matters Related to
Terminated Agreement" above) and, in the future may continue to explore,
opportunities which are not in the Company's current line of business. Such
determination will be made if the Board of Directors believes that such
opportunities are in the best interest of the Company's stockholders. Although
the Company anticipates it will follow certain general criteria in determining
whether or not to pursue any acquisition or license, management will have sole
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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. 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
incurrence of indebtedness, including the risks of interest rate fluctuations
and insufficiency of cash flow to pay principal and interest. To the extent any
such transaction involves the acquisition of a business, there can be no
assurance that the Company will successfully integrate the operations of the
acquired business with those of the Company, or that all of the benefits
expected from such integration will be realized. Any delays or unexpected costs
incurred in connection with such integration could have an adverse effect on the
combined company's business, operating results or financial condition.
Furthermore, there can be no assurance that the operations, management and
personnel of the companies will be compatible or that the Company will not
experience the loss of key personnel. In most cases, each acquisition may be
consummated without seeking and obtaining shareholder approval, in which case,
the stockholders will not have an opportunity to review the financial statements
of an acquisition candidate. Although the Company will endeavor to evaluate the
risks inherent in a particular acquisition, there can be no assurance that the
Company will properly ascertain or assess such significant risk factors.
16. International Expansion. As part of the Company's long range marketing
and business plans, the Company intends 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. International sales and operations 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, potential political and economic instability and, cultural
differences relating to the manner in which day to day business operations are
conducted. 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.
17. Control by Existing Management and Stockholders; Effect of Certain
Anti-Takeover Considerations. The Company's directors and executive officers own
beneficially approximately 29% of the outstanding Common Stock. The holders of
the Series A Stock, Series B Stock and Warrants have the right to acquire, upon
conversion of the Series A Stock and Series B Stock and exercise of the Warrants
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(subject to certain conditions as set forth in Series A Certificate of
Designation, the Certificate of Designations, Preferences and Rights of the
Series B Stock and the Warrants, including a limitation on beneficial ownership
to 4.99% of the Company's outstanding Common Stock, subject to waiver of the
restriction by the security holder, all as discussed under "Selling
Stockholders"), shares of Common Stock that would represent, in the aggregate,
approximately 27% of the outstanding Common Stock following such issuance (based
on a conversion price of $5.00 per share for the Series A Stock and without
giving effect to any shares of Common Stock issuable upon conversion of the
premium amount due with respect to the Series A Stock or as a result of the
antidilution provisions of the Warrants) (see "Selling Stockholders").
Accordingly, such holders, if acting together, have the ability, or would 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 or potential 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, shares of preferred stock, $.01 par value per share ("Preferred
Stock"), in addition to the outstanding Series A Stock and Series B Stock, may
be issued by the Company in the future without approval by the holders of the
Common Stock and upon such terms as the Board of Directors may determine. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock could have the effect of
discouraging a third party from acquiring a majority of the outstanding Common
Stock of the Company and preventing stockholders from realizing a premium on
their Common Stock. The Certificate of Incorporation also provides for staggered
terms for the members of the Board of Directors. A staggered Board of Directors,
and certain provisions of the Company's by-laws and of Delaware law applicable
to the Company (which law prohibits the Company from engaging in a "business
combination" with an "interested shareholder" for a period of three years after
the date of the transaction in which the person became an interested
shareholder, unless it is approved in a prescribed manner), could delay or make
more difficult a merger, tender offer or proxy contest involving the Company.
18. Impact of Nasdaq SmallCap Market Rules. The Company's Common Stock is
currently traded on the Nasdaq SmallCap Market. The Nasdaq Stock Market, Inc.
rules provide that, for continued listing on the Nasdaq SmallCap Market, a
company is required 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, (ii) a minimum market value of public
float of $1,000,000 and (iii) a minimum bid price of $1.00 per share.
Additionally, the Company is required to have at least two independent
directors, and an Audit Committee, a majority of the members of which must be
independent directors.
If the Company is unable to satisfy the requirements for continued
quotation on the Nasdaq SmallCap Market, trading, if any, in the Company's
Common Stock would be conducted in the over-the-counter market in what is
commonly referred to as the "pink sheets" or on the NASD OTC Electronic Bulletin
Board. As a result, a purchaser of the Common Stock offered hereby may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, such securities. The above-described rules may adversely affect the
liquidity of the market for the Company's securities. The price of the Company's
Common Stock is currently below $5.00. Because certain restrictions may be
placed upon the sale of securities under such price $5.00 per share, unless such
Common Stock qualifies for an exemption from the "penny stock" rules, such as
continued listing on the Nasdaq SmallCap Market, some brokerage firms will not
effect transactions in the Company's securities and it is unlikely that any bank
or financial institution will accept such securities as collateral. Such factors
could have a material adverse effect in sustaining any market for the Common
Stock. See "Risk Factors - 'Penny Stock' Regulations May Impose Certain
Restrictions on Marketability of Securities."
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19. Securities Market Factors. In recent years, the securities markets have
experienced a high level of volume volatility and market prices for many
companies, particularly small and emerging growth companies, have been subject
to wide fluctuations in response to quarterly variations in operating results.
The securities of many of these companies, which trade in the over-the-counter
market, have experienced wide price fluctuations, which in many cases were
unrelated to the operating performance of, or announcements concerning, the
issuers of the affected stock. Factors such as announcements by the Company or
its competitors concerning technological innovations, new products or
procedures, government regulations and developments or disputes relating to
proprietary rights or the acquisitions or sale of a business as assets may have
a significant impact on the market for the Company's securities. General market
price declines or market volatility in the future could adversely affect the
future price of the Company's securities.
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. The Company's
Common Stock currently trades below $5.00 per share. At the present time, the
Common Stock offered hereby is authorized for quotation on the Nasdaq SmallCap
Market; therefore, such securities are exempt from the definition of "penny
stock." If the Common Stock offered hereby is removed from listing on the Nasdaq
SmallCap Market at any time, however, based on the current market price of the
Company's Common Stock, such Common Stock will be 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), until and while the Company's
Common Stock trades above $5.00 per share in which case they will no longer be
classified as "penny stock." For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
such securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the rules require the delivery, prior to the
transaction, of a risk disclosure document mandated by the Commission relating
to the penny stock market. The broker-dealer must also disclose the commission
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is the sole market
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Consequently, the "penny
stock" rules may restrict the ability of broker-dealers to sell the Company's
Common Stock and may affect the ability of purchasers in this offering to sell
the Company's Common Stock in the secondary market as well as the price at which
such purchasers can sell any such Common Stock.
21. No Dividends. The Company has never paid any dividends on its Common
Stock and does not intend to pay dividends on its Common Stock 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.
22. Limitations on Director Liability. The Company's Certificate of
Incorporation provides, pursuant to Delaware law, that a director of the Company
shall not be personally liable to the Company or its 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
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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.
SELLING STOCKHOLDERS
The Shares being offered for resale by the JNC Selling Stockholders were
acquired in connection with the 1998 Private Placement and consist of (i) the
shares of Common Stock issuable upon the conversion of, or otherwise with
respect to, the Series A Stock, (ii) the shares of Common Stock issuable upon
conversion of the Series B Stock and (iii) the shares of Common Stock issuable
upon exercise of the Warrants. In connection with the 1998 Private Placement,
the Company granted the JNC Selling Stockholders certain registration rights
pursuant to which the Company agreed to keep the Registration Statement, of
which this Prospectus is a part, effective until the earlier of (i) the date
that all of such shares have been sold pursuant to the Registration Statement,
or (ii) the date upon which such shares may be immediately sold to the public
without registration or restriction pursuant to Rule 144(k) promulgated under
the Securities Act. The Company has agreed to indemnify the JNC Selling
Stockholders and each of their officers, directors, members, employees,
partners, agents and each person who controls either of the JNC Selling
Stockholders against certain expenses, claims, losses, damages and liabilities
(or action, proceeding or inquiry by any regulatory or self-regulatory
organization in respect thereof). The Company has agreed to pay its expenses of
registering the Shares under the Securities Act, including registration and
filing fees, blue sky expenses, printing expenses, accounting fees,
administrative expenses and its own counsel fees.
The following table sets forth the name of each Selling Stockholder, the
number of shares of Common Stock of the Company beneficially owned by such
Selling Stockholder as of September 30, 1998 and the number of Shares being
offered by such Selling Stockholder. The Shares being offered hereby are being
registered to permit public secondary trading, and the Selling Stockholders may
offer all or part of the Shares for resale from time to time. However, such
Selling Stockholders are under no obligation to sell all or any portion of such
Shares nor are such Selling Stockholders obligated to sell any Shares
immediately under this Prospectus. All information with respect to share
ownership has been furnished by the Selling Stockholders. Because the Selling
Stockholders may sell all or part of their Shares, no estimates can be given as
to the number of Shares that will be held by any Selling Stockholder upon
termination of any offering made hereby. See "Plan of Distribution."
In the case of the Shares underlying the Series A Stock, the number of
Shares offered for sale hereby represents an estimate of the number of shares of
Common Stock issuable upon conversion of, or otherwise with respect to, the
Series A Stock, based on 200% of the number of shares of Common Stock issuable
at a conversion price of $5.00 per share. In the case of the Shares underlying
the Warrants, the number of Shares offered for sale hereby represents an
estimate of the number of shares of Common Stock issuable upon exercise of the
Warrants based on 200% of the number of shares of Common Stock issuable at an
exercise price of $8.025 per share. Pursuant to Rule 416 under the Securities
Act, the JNC Selling Stockholders may also offer and sell Shares issued with
respect to the Series A Stock, the Series B Stock and/or the Warrants as a
result of stock splits, stock dividends or similar transactions. This is not
intended to constitute a prediction as to the number of Shares into which the
Series A Stock or Series B Stock will be converted or the Warrants will be
exercised.
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Shares Beneficially Shares to be
Name of Selling Owned Prior to the Sold in the Shares Owned after
Stockholder Offering Offering the Offering (1)
- ------------------------------------------------------------------------------
JNC Opportunity Fund, Ltd. 141,686(2) 1,414,994(2)(3) 0
JNC Strategic Fund, Ltd. 141,686(2) 392,523(2)(3) 0
Edwin J. Gerstley 62,500 62,500 0
Gusti Gross 54,500 54,500 0
Sidney Blumenthal 8,000 8,000 0
(1) Assumes all Shares offered hereby are sold in the Offering.
(2) The number of "Shares Beneficially Owned Prior to the Offering" for
each of Opportunity and Strategic equals 4.99% of the out
standing
Common Stock of the Company as of September 30, 1998. Pursuant to the
terms of the Series A Stock, Series B Stock and the Warrants, the
shares of Series A Stock and Series B Stock and the Warrants are
currently convertible or exercisable by any holder only to the extent
that the number of shares of Common Stock thereby issuable, together
with the number of shares of Common Stock owned by such holder and its
affiliates (but not including shares of Common Stock underlying
unconverted shares of Series A Stock and Series B Stock or unexercised
portions of the Warrants) would not exceed 4.99% of the then
outstanding Common Stock as determined in accordance with Section
13(d) of the Exchange Act. The holders of the Series A Stock, Series B
Stock and Warrants may waive such restriction upon not less than 61
days notice. Therefore, the number of shares set forth herein and
which a JNC Selling Stockholder may sell pursuant to this Prospectus
(as provided for in footnote (3) hereof) may exceed the number of
shares such JNC Selling Stockholder may beneficially own as determined
pursuant to Section 13(d) of the Exchange Act. Moreover, pursuant to
the regulations of the National Association of Securities Dealers, in
the absence of stockholder approval, the aggregate number of shares of
Common Stock issuable to Opportunity at a discount from market prices
upon the conversion of the Series A Stock may not exceed 19.99% of the
outstanding shares of Common Stock of the Company as of June 5, 1998.
Unless stockholder approval is obtained to issue shares of Common
Stock in excess of the maximum amount set forth above, Opportunity
will not be entitled to acquire more than such maximum amount. Any
Series A Stock which may not be converted because of such limitation
is subject to redemption at the request of Opportunity.
(3) The number of "Shares to be Sold in the Offering" for Opportunity
includes an estimate of the number of shares of Common Stock that
would be issuable upon conversion of, or otherwise with respect to,
the Series A Stock based on 200% of the number of shares of Common
Stock that would be issuable at a conversion price of $5.00 per share
(1,300,000 shares). In addition, the Registration Statement covers
327,103 shares that are issuable to Strategic upon conversion of the
Series B Stock. Further, the number of "Shares to be Sold in the
Offering" for the JNC Selling Stockholders includes an estimate of the
number of shares of Common Stock that would be issuable upon the
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exercise of director for breach of fiduciary duty and may the Warrants
based on 200% of the number of shares of Common Stock that would be
issuable at an exercise price of $8.025 per share (114,994 shares for
Opportunity and 65,420 shares for Strategic). The actual number of
shares of Common Stock issuable upon conversion of the Series A Stock
is determined by a formula based on the market price at the time of
conversion, and is therefore subject to adjustment and could be
materially less or more than such estimated number depending on
factors which cannot be predicted by the Company. Specifically, at any
given time, the Series A Stock is convertible into a number of shares
of Common Stock determined by dividing (X) the sum of (a) the stated
value of the Series A Stock, (b) a premium amount equal to 5% (on an
annualized basis) of the stated value of the Series A Stock and (c)
any Conversion Default amount (as defined in the Series A Certificate
of Designation), by (Y) the then applicable conversion price
(calculated generally as the lesser of (i) $8.025 and (ii) 85% of the
average of the five (5) lowest closing bid prices of the Common Stock
for the twenty-five (25) consecutive trading date immediately
preceding the date of determination) (such 85% calculation as of June
5, 1998, the date of issuance of the Series A Stock, resulting in a
conversion price of $5.6525 per share), subject to certain
restrictions and adjustments. The number of shares of Common Stock
issuable upon exercise of the Warrants is subject to increase to the
extent the exercise price is reduced pursuant to the antidilution
adjustment provisions set forth in the Warrants. The Shares offered
hereby, and included in the Registration Statement of which this
Prospectus is a part, include such additional number of shares of
Common Stock as may be issued or issuable upon conversion of the
Series A Stock or Series B Stock or upon exercise of the Warrants by
reason of any stock split, stock dividend or similar transaction
involving the Common Stock, in each case in order to prevent dilution,
in accordance with Rule 416.
To the Company's knowledge, no Selling Stockholder has had any position,
office or other material relationship with the Company or any of its affiliates
during the past three years (other than as a holder of the Company's
securities).
USE OF PROCEEDS
All the Shares offered hereby are being offered for the account of the
Selling Stockholders. Accordingly, the Company will not receive any proceeds of
any sales made hereunder, but will receive the exercise price of any Warrants
exercised by the JNC Selling Stockholders. Based on currently available
information, the Company intends to utilize any proceeds received from the
exercise of Warrants for working capital and general corporate purposes. The
Company may use all or a portion of such proceeds for other purposes, should a
reapportionment or redirection of funds be determined to be in the best
interests of the Company.
PLAN OF DISTRIBUTION
The Shares may be sold or distributed from time to time by the Selling
Stockholders or by pledgees, donees or transferees of, or successors in interest
to, the Selling Stockholders directly to one or more purchasers (including
pledgees) or through brokers, dealers or underwriters who may act solely as
agents or may acquire Shares as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices, which may be changed. The distribution of the Shares
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<PAGE>
may be effected in one or more of the following methods: (i) ordinary brokers
transactions, which may include long or short sales, (ii) purchases by brokers,
dealers or underwriters as principal and resale by such purchasers for their own
accounts pursuant to this Prospectus, (iii) "at the market" to or through market
makers or into an existing market for the Common Stock, (iv) in other ways not
involving market makers or established trading markets, including direct sales
to purchasers or sales effected through agents, (v) through transactions in
options, swaps or other derivatives (whether exchange listed or otherwise), or
(vi) any combination of the foregoing, or by any other legally available means.
In addition, the Selling Stockholders or their successors in interest may enter
into hedging transactions with broker-dealers who may engage in short sales of
shares of Common Stock in the course of hedging the positions they assume with
the Selling Stockholders. The Selling Stockholders or their successors in
interest may also enter into option or other transactions with broker-dealers
that require that delivery by such broker-dealers of the Shares, which Shares
may be resold thereafter pursuant to this Prospectus.
Brokers, dealers, underwriters or agents participating in the distribution
of the Shares may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of Shares for
whom such broker-dealers may act as agent or to whom they may sell as principal,
or both (which compensation as to a particular broker-dealer may be in excess of
customary commissions). The Selling Stockholders and any broker-dealers acting
in connection with the sale of the Shares hereunder may be deemed to be
underwriters within the meaning of Section 2(11) of the Securities Act, and any
commission received by them and any profit realized by them on the resale of
Shares as principals may be deemed underwriting compensation under the
Securities Act. Neither the Company nor any Selling Stockholder can presently
estimate the amount of such compensation. The Company knows of no existing
arrangements between any Selling Stockholder and any such stockholder, broker,
dealer, underwriter or agent relating to the sale or distribution of the Shares.
Each Selling Stockholder and any other person participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, Selling Stockholders and
other persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions or
exemptions. All of the foregoing may affect the marketability of the securities
offered hereby.
Any securities covered by this Prospectus that qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under that Rule rather than
pursuant to this Prospectus.
There can be no assurance that the Selling Stockholders will sell any or
all of the shares of Common Stock offered by them hereunder.
LEGAL MATTERS
Certain matters relating to the legality of the securities being offered
hereby are being passed upon for the Company by Certilman Balin Adler & Hyman,
LLP, 90 Merrick Avenue, East Meadow, New York 11554.
17
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EXPERTS
The consolidated financial statements of the Company appearing in the Form
10-KSB, have been audited by Lazar Levine & Felix, LLP, independent auditors, as
set forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-3 (together with
all amendments thereto, the "Registration Statement") with the Commission under
the Securities Act with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
to the exhibits filed therewith, copies of which may be obtained upon payment of
a fee prescribed by the Commission, or may be examined free of charge at the
public reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. Each statement made in this
Prospectus referring to a document filed as an exhibit to the Registration
Statement is qualified by reference to the exhibit for a complete statement of
its terms and conditions.
18
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (estimated except for the
Registration Fee) in connection with the offering described in the Registration
Statement:
Registration Fee.....................................................$ 855.13
Accountants' Fees and Expenses....................................... 1,000.00
Legal Fees and Expenses.............................................. 12,000.00
Miscellaneous........................................................ 1,144.87
--------
Total................................................................$15,000.00
==========
Item 15. 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.
II-1
<PAGE>
In connection with this Registration Statement, the JNC Selling
Stockholders, severally but not jointly, have agreed to indemnify the Company,
its directors, each of its officers who signed this Registration Statement, its
employees, agents and each person who controls it within the meaning of Section
15 of the Securities 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 JNC Selling Stockholders specifically for use in
connection with the preparation of the Registration Statement. Each JNC Selling
Stockholder's indemnification obligations are limited to the amount such JNC
Selling Stockholder actually receives as a result of the sale of the shares
registered for resale hereunder.
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 16. Exhibits.
Exhibit Number Description of Exhibit
4 Specimen Stock Certificate1
5 Opinion of Certilman Balin Adler & Hyman, LLP
23.1 Consent of Lazar Levine & Felix, LLP
23.2 Consent of Certilman Balin Adler & Hyman, LLP (included in its
opinion filed as Exhibit 5)
24 Powers of Attorney (included in signature page forming a part
hereof).
- ----------
(1) Filed as Exhibit 4.1 to the Company's Registration Statement on Form
SB-2 (Registration No. 333- 18667) and incorporated herein by
reference.
Item 17. Undertakings.
The undersigned Company hereby undertakes:
(l) To 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-2
<PAGE>
(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; notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered
would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii)Include any additional or changed material information on the
plan of distribution; provided, however, that paragraphs (l)(i)
and (l)(ii) do not apply if the Registration Statement is on Form
S-3 or Form S-8, and the information required in a post-effective
amendment is incorporated by reference from periodic reports
filed by the Company under the Exchange Act.
(2) For determining any 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 being registered which remain unsold at the end of the offering.
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 described under Item 15 above, 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 person 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, 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Cedarhurst, New York, on the 2nd day of October, 1998.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
Mark Honigsfeld
Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Mark Honigsfeld 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 full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Capacity Date
/s/ Mark Honigsfeld Chief Executive Officer, October 2, 1998
- ------------------------
Mark Honigsfeld Chairman of the Board,
Secretary and Director
(Principal Executive Officer
and Principal Financial
and Accounting Officer)
/s/ Louis Libin Chief Technology Officer October 2, 1998
- ------------------------
Louis Libin and Director
/s/ William D. Rizzardi Director October 2, 1998
- ------------------------
William D. Rizzardi
/s/ Harold Lazarus Director October 2, 1998
- ------------------------
Harold Lazarus, Ph.D.
/s/ Alfred J. Luciani Director October 2, 1998
- ------------------------
Alfred J. Luciani
II-4
<PAGE>
Exhibit 5
October 2, 1998
Compu-DAWN, Inc.
77 Spruce Street
Cedarhurst, NY 11516
Re: Compu-DAWN, Inc. Registration Statement on Form S-3
Gentlemen:
In our capacity as counsel to Compu-DAWN, Inc., a Delaware corporation (the
"Company"), we have been asked to render this opinion in connection with the
Company's Registration Statement on Form S-3 (the "Registration Statement")
being filed contemporaneously by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, covering 1,932,517
shares of Common Stock, $.01 par value, of the Company which are either (i)
issuable by the Company to certain entities upon the conversion of shares of
Series A Convertible Preferred Stock, $.01 par value, of the Company (the
"Series A Preferred Shares") and shares of Series B Convertible Preferred Stock,
$.01 par value, of the Company (the "Series B Preferred Shares") and the
exercise of certain warrants (the "Issuable Shares") and are being registered
for resale by such entities; or (ii) shares of issued and outstanding Common
Stock, $.01 par value, of the Company (the "Outstanding Shares") which are owned
by certain persons and are being registered for resale by such persons. The
Issuable Shares and the Outstanding Shares are collectively referred to herein
as the "Shares".
In connection with our opinion, we have examined the Certificate of
Incorporation and By-Laws of the Company, each as amended, the Registration
Statement, and certain agreements entered into, and warrants issued, by the
Company in connection with the issuance of the Shares. We are also familiar with
proceedings of the Board of Directors of the Company, or otherwise have relied
upon representations made by officers of the Company, relating to the
authorization of the issuance of the Shares. We have also examined such other
instruments and documents as we deemed relevant under the circumstances.
For purposes of the opinions expressed below, we have assumed (i) the
authenticity of all documents submitted to us as originals, (ii) the conformity
<PAGE>
to the originals of all documents Compu-DAWN, Inc. October 2, 1998 Page 2
submitted as certified, photostatic or facsimile copies and the authenticity of
the originals, (iii) the legal capacity of natural persons, (iv) the due
authorization, execution and delivery of all documents by all parties and the
validity and binding effect thereof and (v) the conformity to the proceedings of
the Board of Directors of all minutes of such proceedings and all
representations, oral and written, made by officers of the Company with respect
thereto. We have also assumed that the corporate records furnished to us by the
Company include all corporate proceedings taken by the Company to date.
Based upon and subject to the foregoing, including the assumptions made, we
are of the opinion that (i) the Outstanding Shares were duly and validly
authorized and issued and are fully paid and nonassessable shares of Common
Stock, $.01 par value, of the Company, and (ii) the Issuable Shares will be,
upon issuance in accordance with the terms of the respective Series A Preferred
Shares, Series B Preferred Shares and warrants, duly and validly authorized and
issued, fully paid and nonassessable shares of Common Stock, $.01 par value, of
the Company.
We hereby consent to the use of our opinion as herein set forth as an
exhibit to the Registration Statement and to the use of our name under the
caption "Legal Matters" in the Prospectus forming a part of the Registration
Statement.
This opinion is as of the date hereof, and we do not undertake, and hereby
disclaim, any obligation to advise you of any changes in any of the matters set
forth herein.
We are rendering this opinion only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters.
This opinion is for your exclusive use only and is to be utilized and
relied upon only in connection with the matters expressly set forth herein.
Very truly yours,
/s/ Certilman Balin Adler & Hyman, LLP
--------------------------------------
CERTILMAN BALIN ADLER & HYMAN, LLP
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this registration
statement on Form S-3 of our report dated March 5, 1998 (except as to Note 13c
which is dated March 17, 1998) which appears on page F-1 of the annual report on
Form 10-KSB of Compu-DAWN, Inc. for the year ended December 31, 1997 and to the
reference to our firm under the caption "Experts" in the prospectus.
/s/ Lazar Levine & Felix, LLP
New York, New York
October 1, 1998
<PAGE>
