SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 1998
Commission file number 000-22611
Compu-DAWN, Inc.
(Exact name of Small Business Issuer as Specified in Its Charter)
Delaware 11-3344575
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
77 Spruce Street, Cedarhurst, New York, 11516
(Address of principal executive offices)
Registrant's telephone number, including area code (516) 374-6700
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of October 26, 1998: 2,839,404
Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE>
Compu-DAWN, Inc.
- INDEX -
<TABLE>
Page
<CAPTION>
PART I Financial Information
<S> > <C>
Condensed Balance Sheets - September 30, 1998 and December 31, 1997 3
Condensed Statements of Operations - Three and Nine Months Ended
September 30, 1998 and 1997 4
Condensed Statements of Cash Flows - Nine Months Ended September 30,
1998 and 1997 5
Notes to Condensed Financial Statements 7
Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
PART II Other Information
Item 2 - Changes in Securities and Use of Proceeds 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
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<TABLE>
<CAPTION>
PART I. Financial Information
ITEM 1. Financial Statements
Compu-DAWN, Inc.
CONDENSED BALANCE SHEETS
- ASSETS -
September 30, December 31,
1998 1997
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash $ 6,407,365 $3,081,253
Accounts receivable, net of allowances for doubtful accounts of $13,635
for 1998 and 1997 117,725 72,454
Prepaid expenses 104,268 121,802
Income tax refund receivable - 29,868
----------- ---------
TOTAL CURRENT ASSETS 6,629,358 3,305,377
----------- ---------
FIXED ASSETS - NET 237,424 278,737
----------- ---------
OTHER ASSETS:
Deferred compensation - 98,270
Security deposits 21,525 21,525
----------- ---------
21,525 119,795
----------- ---------
$ 6,888,307 $3,703,909
============ ==========
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 31,936 $ 278,722
Deferred revenue 27,898 12,000
Current portion of note payable - officer 75,000 100,000
Capitalized lease payable - current 6,427 5,771
------------ ----------
TOTAL CURRENT LIABILITIES 141,261 396,493
------------ ----------
NON-CURRENT LIABILITIES:
Note payable - officer - 50,000
Capitalized lease payable 17,565 22,440
Deferred rent liability 29,644 29,402
------------ -----------
47,209 101,842
------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (Notes 2 and 4):
Preferred stock, $.01 par value; 1,000,000 shares authorized:
Series A Convertible Preferred; 3,250 shares issued and outstanding for 1998 33 -
Series B Convertible Preferred; 1,750 shares issued and outstanding for 1998 17 -
Common stock, $.01 par value, 20,000,000 shares authorized, 3,179,448
and 2,838,450 shares issued for 1998 and 1997, respectively 31,795 28,385
Additional paid-in capital 13,397,783 8,061,443
Retained earnings (deficit) (6,104,079) (4,837,169)
------------ -----------
7,325,549 3,252,659
Less: treasury stock, 340,044 and 8,561 shares at cost, for 1998 and
1997, respectively (625,712) (47,085)
------------ -----------
6,699,837 3,205,574
------------ -----------
$ 6,888,307 $3,703,909
============ ===========
</TABLE>
See notes to financial statements.
3
<PAGE>
Compu-DAWN, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- -------------------------
1998 1997 1998 1997
------------- -------------- -------------- ---------------
REVENUES:
<S> <C> <C> <C> <C>
Software sales $ 320,964 $ 46,303 $ 711,174 $ 187,392
Maintenance income 59,275 76,650 204,955 236,247
------------- ------------- ------------- -------------
380,239 122,953 916,129 423,639
------------- ------------ ------------- -------------
COSTS AND EXPENSES:
Programming costs and expenses 111,877 187,053 395,523 389,078
General and administrative expenses 256,382 420,479 1,212,144 1,667,933
Research and development 130,789 301,173 381,726 447,817
------------ ------------- ------------ -------------
499,048 908,705 1,989,393 2,504,828
------------ ------------ ----------- -------------
(LOSS) FROM OPERATIONS (118,809) (785,752) (1,073,264) (2,081,189)
------------ ------------ ----------- -------------
OTHER INCOME (EXPENSES):
Interest and other income 55,124 62,028 121,246 107,059
Interest expense (7,235) (4,941) (17,940) (77,112)
Loss due to terminated investment transaction (Note 3) (296,952) - (296,952) -
Non-recurring financing charge (Note 2) - - - (1,557,050)
------------ ------------- ------------- -------------
(249,063) 57,087 (193,646) (1,527,103)
------------ ------------- ------------ ------------
(LOSS) BEFORE PROVISION FOR INCOME
TAXES (367,872) (728,665) (1,266,910) (3,608,292)
Provision for income taxes - - - -
----------- ------------ ------------ -----------
NET (LOSS) $ (367,872) $ (728,665) $(1,266,910) $(3,608,292)
=========== =========== =========== ===========
BASIC (LOSS) PER COMMON SHARE $(.12) $(.23) $(.42) $(1.74)
===== ===== ====== ======
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 3,148,730 3,120,112 2,988,978 2,077,757
========= ========= ========= =========
</TABLE>
See notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
Page 1 of 2 CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(Unaudited)
For the Nine Months Ended
September 30,
1998 1997
--------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Cash received from customers $ 886,786 $ 490,146
Cash paid to suppliers and employees (2,321,943) (2,373,310)
Interest paid (17,940) (4,941)
Interest and other income received 121,216 45,369
Income taxes paid (2,775) -
----------------------------------
Net cash (utilized) by operating activities (1,334,656) (1,842,736)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments of officer's loan - 69,247
Purchase of fixed assets (21,186) (210,842)
--------------- ---------------
Net cash (utilized) by investing activities (21,186) (141,595)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan (repaid to) received from officer (75,000) 375,000
Repayment of promissory notes - (770,000)
Payments for common stock and options acquired - (34,710)
Payments of capital lease obligations (4,219) (9,021)
Net proceeds from initial public offering - 5,625,874
Net proceeds from private placement 4,741,837 -
Proceeds from exercise of stock options 19,336 69,900
-------------- --------------
Net cash provided by financing activities 4,681,954 5,257,043
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,326,112 3,237,712
Cash and cash equivalents, at beginning of year 3,081,253 286,497
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,407,365 $ 3,524,209
=========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
CONDENSED STATEMENTS OF CASH FLOWS Page 2 of 2
----------------------------------
(Unaudited)
For the Nine Months
Ended September 30,
1998 1997
-------- ------
RECONCILIATION OF NET (LOSS) TO NET CASH (UTILIZED)
BY OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) $(1,266,910) $(3,608,292)
Adjustments to reconcile net (loss) to net cash (utilized) by operating activities:
Allowance for doubtful accounts - 9,000
Depreciation and amortization 62,499 81,063
Deferred rent liability 242 6,210
Compensatory stock - 372,144
Deferred compensation 98,270 -
Financing charge - 1,557,050
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (45,271) 12,586
Decrease (increase) in prepaid expenses 47,403 (235,394)
(Decrease) in accounts payable and accrued expenses (246,787) (90,659)
Increase in deferred revenue 15,898 18,556
-------------- --------------
NET CASH (UTILIZED) BY OPERATING ACTIVITIES $(1,334,656) $(1,842,736)
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
During 1997, the Company issued (i) 40,000 shares of common stock in lieu of
payment of a note for $200,000, and (ii) 23,000 shares of common stock in
payment of accrued compensation of $115,000.
</TABLE>
See notes to financial statements.
6
<PAGE>
Compu-DAWN, Inc.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - DESCRIPTION OF COMPANY:
Compu-DAWN, Inc., the Company, was incorporated under the name
of Coastal Computer Systems, Inc., in New York on March 31,
1983, and was reincorporated in Delaware under its present name
on October 18, 1996. The Company is engaged in the business of
designing, developing, licensing, installing and servicing
computer software products and systems predominantly for public
safety and law enforcement agencies. The Company's customers,
to date, are primarily located in New York State.
The accounting policies followed by the Company are set forth
in Note 2 to the Company's annual report filed on Form 10-KSB
for the year ended December 31, 1997. Specific reference is
made to that report for a description of certain of the
Company's securities and the notes to the financial statements
included therein.
In the opinion of management, the accompanying unaudited
interim condensed financial statements of Compu-DAWN, Inc.,
contain all adjustments necessary to present fairly the
Company's financial position as of September 30, 1998 and the
results of its operations for the three and nine month periods
ended September 30, 1998 and 1997 and its cash flows for the
nine month periods ended September 30, 1998 and 1997.
The results of operations for the three and nine month periods
ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
NOTE 2 - INITIAL PUBLIC OFFERING:
In June 1997, the Company, through its underwriter,
successfully completed an initial public offering of its common
stock. The Company sold 1,380,000 shares of common stock
(including 180,000 shares in the Underwriter's over allotment
option) at a price of $5.00 per share for aggregate net
proceeds of $5,625,874. A portion of the proceeds realized from
this offering was used to repay promissory notes aggregating
$770,000. In connection with this repayment, the Company fully
amortized deferred financing costs originally capitalized in
connection with the notes. This amount was reflected as a
non-recurring charge on the statement of operations for the
year ended December 31, 1997.
NOTE 3 - TERMINATION OF INVESTMENT TRANSACTION:
On April 22, 1998, the Company entered into an agreement to
acquire an indirect 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 from
the Russian Ministry of Finance to the Union of Journalists of
Russia (the "Union"). The agreement provided that, at the
closing, 40% of Press- Loto was to be owned by the Union and
its charity with a private group holding a minority interest.
7
<PAGE>
Compu-DAWN, Inc.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - TERMINATION OF INVESTMENT TRANSACTION (Continued):
On September 1, 1998, the Company issued a press release
announcing that it had terminated the aforementioned agreement
after conditions to close, which were required by the Company,
were not satisfied by August 31, 1998, the date by which those
conditions had to be fulfilled under the agreement.
In accordance with the termination of the agreement, the
Company has written off all costs incurred regarding this
transaction during the current period, aggregating
approximately $297,000.
NOTE 4 - PRIVATE PLACEMENT:
On June 5, 1998, the Company completed a private offering of
its securities, whereby it sold to the purchasers the
following:
(a) 3,250 shares of the Company's series A convertible preferred
stock, par value $.01 per share (the "Series A Preferred
Stock"), which shares are convertible into Common Shares of the
Company (maximum of 650,000 shares, subject to adjustment under
certain circumstances);
(b) 327,103 Common Shares of the Company; and
(c) warrants to acquire an aggregate of 90,207 Common Shares at an
exercise price of $8.025 per share, subject to adjustment under
certain circumstances.
The aggregate purchase price for the foregoing securities was
$5,000,000; net proceeds from this private placement aggregated
approximately $4,742,000.
On September 25, 1998, pursuant to a Securities Exchange
Agreement between the Company and the purchasers, the Company
issued to the purchasers 1,750 shares of Series B convertible
preferred stock, par value $.01 per share (the "series B
preferred shares"), in exchange for the 327,103 shares of
common stock previously issued. Subject to certain adjustments,
the Series B preferred shares (1,750) are convertible into
327,103 common shares.
NOTE 5 - SUBSEQUENT EVENT:
In October 1998, the Company loaned an aggregate of $1,000,000
to LocalNet Communications, Inc. ("LocalNet"), an unaffiliated
Florida corporation in the telecommunications and internet
services marketing business. LocalNet signed 12%, one (1) year
secured promissory notes due in October 1999, at which time all
interest and principal is payable. The notes are secured by a
collateral interest in all of LocalNet's tangible and
intangible assets and a pledge of the common stock owned by its
Chief Executive Officer and the Chairman of its Board, which
represents a 63.1% ownership interest in LocalNet, in the
aggregate.
Concurrently, LocalNet and its Chief Executive Officer and
Chairman (having an aggregate ownership interest of 63.1%) have
each granted the Company a right of first refusal to acquire
LocalNet, or their equity interests in LocalNet, as the case
may be, for a term expiring 90 days after the loan is repaid.
8
<PAGE>
Compu-DAWN, Inc.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - SUBSEQUENT EVENT(Continued):
The Company and LocalNet also entered into a five (5) year
consulting agreement which provides for Compu-DAWN to perform
certain management consulting services for LocalNet. Under the
Consulting Agreement, the Company will, among other things, act
as LocalNet's exclusive agent to find and negotiate
telecommunication services and reseller agency arrangements for
LocalNet.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION:
The Company was incorporated in the State of New York on March
31, 1983 under the name of Coastal Computer Systems, Inc. The
Company was reincorporated in the State of Delaware under its
present name, Compu-DAWN, Inc., on October 18, 1996. The Company
is engaged in the business of designing, developing, licensing,
installing and servicing computer software products and systems
for the law enforcement and public safety industry.
Historically, the Company's products have been marketed and sold
predominantly in the State of New York.
The Company generates revenues from the granting of nonexclusive,
nontransferable and non- assignable licenses to use software it
has developed, through fixed price contracts. Revenues from such
fixed price contracts are recognized using the percentage of
completion method of accounting. The Company retains title to the
software and warrants that it will provide technical support and
repair any defects in the software at no charge. The warranty
period for each contract is negotiated individually, with the
periods ranging from 90 days to three years. To date, repair
costs have been minimal and, therefore, the Company has not had
to establish a reserve for warranty costs.
The Company also provides post-contract, customer support to
licensees of its software. Revenues from such services are
recognized ratably over the period of performance. Fees billed
and/or received prior to performance of services are reflected as
deferred revenues.
The Company's revenues, expenses and operating results have
varied considerably in the past and are likely to vary in the
future. Fluctuations in revenues depend on a number of factors,
some of which are beyond the Company's control. These factors
include, among other things, the timing of contracts, delays in
customer acceptance of the Company's software products and
competition.
During the current quarter the Company terminated a contract to
acquire an indirect 50% beneficial interest in Press-Loto, a
Russian limited liability company which has the right to operate
the first national on-line lottery in Russia. See more detailed
discussion below ("Termination of Potential Investment
Transaction") for a further description.
The financial information presented herein includes: (i)
condensed balance sheets as of September 30, 1998 and December
31, 1997; (ii) condensed statements of operations for the three
and nine month periods ended September 30, 1998 and 1997; and
(iii) condensed statements of cash flows for the nine month
periods ended September 30, 1998 and 1997.
RESULTS OF OPERATIONS:
Revenues
Revenues for the nine months ended September 30, 1998 were
$916,129 compared to $423,639 for the nine months ended September
30, 1997, an increase of approximately 116%. Revenues for the
three months ended September 30, 1998 were $380,239 as compared
to $122,953 for the comparable period of the prior year, an
increase of approximately 209%. These increases were primarily a
result of increases in sales of software which was offset by a
decrease in maintenance income when comparing the nine and three
month periods.
10
<PAGE>
Despite the aforementioned increases, to date the Company has not
generated significant revenues.
However, management believes that through the funds obtained in
its initial offering and recent private placement (see discussion
below) for product enhancement, marketing, the introduction of
new products and working capital, the Company will be able to
increase revenues from software sales and maintenance over the
long-term. Such projects include, among other things, the
revising of computer-aided dispatching (CAD) and visual
computer-aided dispatching (V-CAD) which provides for visual
graphic interface and wireless mobile technology. Backlog at
September 30, 1998 aggregated approximately $474,000.
Costs and Expenses
Total costs and expenses for the nine-month period ended
September 30, 1998 aggregated $1,989,393 as compared to
$2,504,828 for the corresponding period of the prior year, a
decrease of approximately 20.6%. For the comparable three month
periods ended September 30, 1998 and 1997, total costs decreased
to $499,048 from $908,705, a decrease of approximately 45%. The
costs, for both periods, were primarily related to personnel, the
costs related to enhancing current products, rent expense for the
Company's premises and research and development costs incurred to
establish new products.
For the nine and three month periods ended September 30, 1998,
total costs and expenses included approximately $297,000 which
were written off upon the termination of the investment
transaction with Press-Loto as described below.
Income (Loss):
For the nine months ended September 30, 1998, the Company had a
net loss of $1,266,910 ($.42 per share) as compared to a net loss
of $3,608,292 ($1.74 per share) for the nine months ended
September 30, 1997. For the three months ended September 30,
1998, the Company had a net loss of $367,872 ($.12 per share) as
compared to a net loss of $728,665 ($.23 per share) for the
corresponding period of the prior year.
The losses for all periods are principally due to the fact that
the Company has yet to produce significant revenues as mentioned
above. The losses for 1997 were also increased by the
non-recurring financing charge of $1,557,050 which is related to
the promissory notes described in Note 2 of notes to the
condensed financial statements.
LIQUIDITY AND CAPITAL RESOURCES:
In June 1997, the Company completed an initial public offering of
its Common Shares. The Company sold 1,380,000 of its Common
Shares at a price of $5.00 per share and realized net proceeds of
approximately $5,626,000.
In June 1998, the Company completed a private placement of
securities. The Company sold 3,250 Preferred Units (consisting,
in the aggregate, of 3,250 shares of Series A Preferred Stock and
warrants to acquire 57,497 Common Shares) at a price of $1,000
per unit and 1,750 Common Units (consisting, in the aggregate, of
327,103 Common Shares and warrants to acquire 32,710 Common
Shares) also at a price of $1,000 per unit. From this private
placement, the Company realized net proceeds of approximately
$4,742,000.
11
<PAGE>
On September 25, 1998, pursuant to a securities exchange
agreement between the Company and the purchasers, the Company
issued 1,750 shares of Series B convertible preferred stock in
exchange for the 327,103 common shares previously issued. Subject
to certain adjustments, the Series B Preferred Shares are
convertible into an aggregate of 327,103 common shares.
At September 30, 1998, the Company had working capital of
$6,488,097, a current ratio of 46.9:1 and a debt to net worth
ratio of less than .1:1. At its year ended December 31, 1997, the
Company had working capital of $2,908,884, a current ratio of
8.3:1 and a debt to net worth ratio of .1:1. The improvement in
the Company's liquidity and capital resources was primarily due
to the successful private placement of securities mentioned
above.
CASH FLOWS:
For the nine months ended September 30, 1998, the Company
utilized cash for operating activities of approximately
$1,335,000 primarily to pay suppliers and employees. For the
corresponding period of the prior year, the Company used cash for
operating activities of approximately $1,843,000.
The Company utilized cash of approximately $21,000 and $142,000
during the nine months ended September 30, 1998 and 1997,
respectively, for investing activities primarily to acquire fixed
assets.
For the nine months ended September 30, 1998, the Company's
financing activities provided cash of approximately $4,682,000
primarily due to the aforementioned private placement. For the
corresponding period of the prior year, the Company generated
cash from financing activities of approximately $5,257,000
primarily due to its initial public offering.
TERMINATION OF POTENTIAL INVESTMENT TRANSACTION:
On April 22, 1998, the Company entered into an agreement (the
"Merger Agreement") to acquire an indirect 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 (the "Union"). The
Merger Agreement provided that, at the time of the closing, 40%
of Press-Loto was to be owned by the Union and its charity with a
private group holding a minority interest. The transaction was
structured as a merger (the "Merger"), pursuant to which Rugby
Acquisition Corp. , a wholly-owned subsidiary of the Company, was
to merge into Rugby National Corp. ("Rugby") with Rugby as the
surviving entity and a wholly-owned subsidiary of the Company. At
the time of closing, Rugby was to directly own 50% of Press-Loto.
On September 1, 1998, the Company issued a press release
announcing that it had terminated the aforementioned agreement
after conditions to close, which were required by the Company,
were not satisfied by August 31, 1998, the date by which those
conditions had to be fulfilled under the agreement.
12
<PAGE>
SUBSEQUENT EVENT:
In October 1998, the Company loaned an aggregate of $1,000,000 to
LocalNet Communications, Inc. ("LocalNet"), an unaffiliated
Florida corporation in the telecommunications and internet
services marketing business. LocalNet signed 12%, one (1) year
secured promissory notes due in October 1999, at which time all
interest and principal is payable. The notes are secured by a
collateral interest in all of LocalNet's tangible and intangible
assets and a pledge of the common stock owned by its Chief
Executive Officer and the Chairman of its Board, which represent
a 63.1% ownership interest, in the aggregate.
Concurrently, LocalNet and its Chief Executive Officer and
Chairman (having an aggregate ownership interest of 63.1%) have
each granted the Company a right of first refusal to acquire
LocalNet, or their equity interests in LocalNet, as the case may
be, for a term expiring 90 days after the loan is repaid.
The Company and LocalNet also entered into a five (5) year
consulting agreement which provides for Compu-DAWN to perform
certain management consulting services for LocalNet. Under the
Consulting Agreement, the Company will, among other things, act
as LocalNet's exclusive agent to find and negotiate
telecommunication services and reseller agency arrangements for
LocalNet.
OTHER:
The Company believes that the net proceeds from the initial
public offering, the private placement and funds expected to be
generated from operations will be sufficient for at least the
ensuing 12 month period.
FORWARD LOOKING STATEMENTS:
Except for historical information contained herein, the matters
set forth above may contain forward looking statements that
involve certain risks and uncertainties that could cause actual
results to differ from those in the forward looking statements.
Potential risks and uncertainties include such factors as the
level of spending by law enforcement and public safety agencies
for computer application software and hardware, the competitive
environment within the industry, the ability of the Company to
expand its operations, the competency required, and experience,
of management to effectuate the Company's business plan, the
level of costs incurred in connection with the Company's planned
expansion efforts, economic conditions in the industry and the
financial strength of the Company's customers and suppliers.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 2 - Changes in Securities and Use of Proceeds.
Use of Proceeds from Initial Public Offering.
The Company's Registration Statement of Form SB-2 (Registration
No. 333-18667), covering the issuance of 1,380,000 Common Shares,
(including 180,000 Common Shares covering overallotments), at
$5.00 per share, or an aggregate of $6,900,000 (including
overallotment proceeds), was declared effective on June 10, 1997.
The offering, which was underwritten on a firm commitment basis,
and the overallotment, closed on June 16 and June 24, 1997,
respectively. The managing underwriter of the offering was E.C.
Capital Ltd.
The following is a breakdown of the Company's use of the proceeds
from, and expenses incurred in connection with, the offering,
through September 30, 1998:
Offering:
Gross proceeds (including overallotment) $6,900,000
Underwriting discounts and commissions (1) (690,000)
Expenses paid directly to underwriter (322,500)
Other expenses (1) (261,626)
-----------
Net proceeds $5,625,874
==========
Use of Proceeds Through September 30, 1998:
Product enhancement and development (1)(3) $ 1,585,000
Repayment of indebtedness (2) 770,000
Marketing and advertising (1)(3) 410,000
Hiring/training personnel (1)(3) 135,000
Equipment purchases (1)(3) 225,000
Working capital (3)(4) 865,000
Unused proceeds 1,635,874
-----------
$5,625,874
----------
(1) Paid directly to persons other than directors or officers
of the Company or their associates, or persons owning 10
percent or more of any class of equity securities of the
Company, or affiliates of the Company.
(2) Represents the repayment of a bridge loan. $130,000 was
paid to affiliates of the Company who participated in the
bridge loan. $640,000 was paid directly to persons other
than directors or officers of the Company or their
associates, or persons owning 10 percent or more of any
class of equity securities of the Company, or affiliates of
the Company.
(3) Approximate.
(4) Used for general operating activities.
To date, the use of proceeds does not represent any material
changes from the use of proceeds described in the prospectus.
ITEM 5 - Other Information
Reference is made to Part I, Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Subsequent Event" for a discussion of a $1,000,000 loan by the
Company to LocalNet and a consulting arrangement between the
Company and LocalNet.
14
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ITEM 6 - Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
Exhibit 3.1 - Articles of Incorporation of the Company*
Exhibit 3.2 - Certificate of Designations, Preferences and Rights of Series A Convertible
Preferred Stock, filed with the Secretary of State of the State of Delaware on
September 5, 1998**
Exhibit 3.3 - Certificate of Designations, preferences
and rights of Series B preferred stock, filed
with the Secretary of Sate of Delaware on
September 24, 1998
Exhibit 3.4 - By-Laws of the Company*
Exhibit 10.1 - Securities Exchange Agreement between the Company and JNC Strategic Fund
Ltd. dated September 25, 1998
Exhibit 10.2 - Registration Rights Agreement Amendment dated as of September 25, 1998
between the Company and JNC Opportunity Fund Ltd. and JNC Strategic Fund
Ltd.
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
(a) Event dated September 1, 1998 - Items 5 and 7.
(b) Event dated September 25, 1998 - Item 5.
</TABLE>
- ----------------
* Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2, Registration No. 333-18667.
** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the period ended June 30, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Compu-DAWN, Inc.
Dated: November 2, 1998 By: /s/ Mark Honigsfeld
---------------------------------------
Chairman of the Board,
Chief Executive Officer and
Chief Accounting Officer
16
<PAGE>
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
of
SERIES B CONVERTIBLE PREFERRED STOCK
of
COMPU-DAWN, INC.
(Pursuant to Section 151 of the Delaware General Corporation Law)
Compu-DAWN, Inc., a corporation organized and existing under the laws
of the State of Delaware (the "Corporation"), hereby certifies that the
following resolutions were adopted by the Board of Directors of the Corporation
pursuant to authority of the Board of Directors as required by Section 151 of
the Delaware General Corporation Law.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Certificate of Incorporation and
Bylaws, each as amended and restated through the date hereof, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $.01 per share (the "Preferred Stock"), and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof as follows:
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<PAGE>
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 1,750 shares of
Preferred Stock, is the Series B Convertible Preferred Stock (the "Series B
Preferred Stock") and the face amount shall be One Thousand U.S. Dollars
($1000.00) per share (the "Face Amount").
II. DIVIDENDS
The Series B Preferred Stock shall bear no dividends, and the holders
of the Series B Preferred Stock shall not be entitled to receive dividends on
the Series B Preferred Stock; provided, however, that in the event that the
Board shall declare a dividend payable upon the then outstanding shares of the
Corporation's Common Stock, par value $.01 per share (the "Common Stock"), the
holders of the Series B Preferred Stock shall be entitled to the amount of
dividends per share of Series B Preferred Stock as would be declared payable on
the largest number of whole shares of Common Stock into which each share of
Series B Preferred Stock held by each holder thereof could be converted pursuant
to the provisions of Article IV hereof, such number determined as of the record
date for the determination of holders of Common Stock entitled to receive such
dividend.
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
A. "Closing Bid Price" means, for any security as of any date, the
closing bid price of such security on the principal United States securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg Financial Markets or a comparable reporting service of national
reputation selected by the Corporation and reasonably acceptable to holders of a
majority of the then outstanding shares of Series B Preferred Stock if Bloomberg
Financial Markets is not then reporting closing bid prices of such security
(collectively, "Bloomberg"), or if the foregoing does not apply, the last
reported sale price of such security on the principal United States securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or if the foregoing does not apply, the last reported sale price
of such security in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg, or, if no sale price is reported for
such security by Bloomberg, the average of the bid prices of any market makers
for such security as reported in the "pink sheets" by the National Quotation
Bureau, Inc., in each case for such date or, if such date was not a trading date
for such security, on the next preceding date which was a trading date. If the
Closing Bid Price cannot be calculated for such security as of either of such
dates on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as reasonably determined by an
investment banking firm selected by the Corporation and reasonably acceptable to
the holders of a majority of
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<PAGE>
the then outstanding shares of Series B Preferred Stock, with the costs of such
appraisal to be borne by the Corporation.
B. "Conversion Date" means, for any Conversion, the date specified in
the notice of conversion in the form attached hereto (the "Notice of
Conversion"), so long as the copy of the Notice of Conversion is faxed (or
delivered by other means resulting in notice) to the Corporation at or before
11:59 p.m., New York City time, on the Conversion Date indicated in the Notice
of Conversion; provided, however, that if the Notice of Conversion is not so
faxed or otherwise delivered before such time, then the Conversion Date shall be
the date the holder or holder's agent faxes or otherwise delivers the Notice of
Conversion to the Corporation.
C. "Conversion Price" means $5.35, and shall be subject to adjustment
as provided herein.
D. "Issuance Date" means the date of the closing under that certain
Securities Exchange Agreement dated as of September 25, 1998 by and between the
Corporation and the purchaser named therein with respect to the issuance of the
Series B Preferred Stock (the "Securities Exchange Agreement").
E. "Registration Rights Agreement" means that certain Registration
Rights Agreement dated as of May 31, 1998 by and among the Corporation and the
other signatories thereto, as amended by the Registration Rights Agreement
Amendment dated as of September 25, 1998 by and among the Corporation and the
other signatories thereto.
F. "business day" and "trading day" means any day on which the New York
Stock Exchange is open for trading.
IV. CONVERSION
A. Conversion at the Option of the Holder. Subject to the limitations
on conversions contained in Paragraph C of this Article IV, each holder of
shares of Series B Preferred Stock may, at any time and from time to time on or
after the Issuance Date, convert (an "Optional Conversion") each of its shares
of Series B Preferred Stock into a number of fully paid and nonassessable shares
of Common Stock determined in accordance with the following formula:
1,000
Conversion Price
B. Mechanics of Conversion. In order to effect an Optional Conversion,
a holder or such holder's agent shall: (x) fax (or otherwise deliver) a copy of
the fully executed Notice of Conversion to the Corporation or the transfer agent
for the Common Stock and (y) surrender or cause to be surrendered the original
certificates representing the Series B Preferred Stock being converted (the
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<PAGE>
"Preferred Stock Certificates"), duly endorsed, along with a copy of the Notice
of Conversion as soon as practicable thereafter to the Corporation or the
transfer agent. Upon receipt by the Corporation of a facsimile copy of a Notice
of Conversion from a holder, the Corporation shall promptly send, via facsimile,
a confirmation to such holder stating that the Notice of Conversion has been
received, the date upon which the Corporation expects to deliver the Common
Stock issuable upon such conversion and the name and telephone number of a
contact person at the Corporation regarding the conversion. The Corporation
shall not be obligated to issue shares of Common Stock upon a conversion unless
either the Preferred Stock Certificates are delivered to the Corporation or the
transfer agent as provided above, or the holder or holder's agent notifies the
Corporation or the transfer agent that such certificates have been lost, stolen
or destroyed and delivers the documentation to the Company required by Article
XIII.B hereof.
(i) Delivery of Common Stock Upon Conversion. Upon the
surrender of Preferred Stock Certificates from a holder of Series B Preferred
Stock or such holder's agent accompanied by a Notice of Conversion and provided
that such holder has complied with the provisions of Article IV.B(x) hereof, the
Corporation shall, no later than the later of (a) the second business day
following the Conversion Date and (b) the business day following the date of
such surrender (or, in the case of lost, stolen or destroyed certificates, after
provision of indemnity pursuant to Article XIII.B) (the "Delivery Period"),
issue and deliver to the holder or its nominee (x) that number of shares of
Common Stock issuable upon conversion of such shares of Series B Preferred Stock
being converted and (y) a certificate representing the number of shares of
Series B Preferred Stock not being converted, if any. If the Corporation's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer program, and so long as the certificates therefor
do not bear a legend and the holder thereof is not obligated to return such
certificate for the placement of a legend thereon, the Corporation shall cause
its transfer agent to electronically transmit the Common Stock issuable upon
conversion to the holder by crediting the account of the holder or its nominee
with DTC through its Deposit Withdrawal Agent Commission system ("DTC
Transfer"). If the aforementioned conditions to a DTC Transfer are not
satisfied, the Corporation shall deliver to the holder physical certificates
representing the Common Stock issuable upon conversion. Further, a holder may
instruct the Corporation to deliver to the holder physical certificates
representing the Common Stock issuable upon conversion in lieu of delivering
such shares by way of DTC Transfer.
(ii) Taxes. The Corporation shall pay any and all taxes which
may be imposed upon it with respect to the issuance and delivery of the shares
of Common Stock upon the conversion of the Series B Preferred Stock.
(iii) No Fractional Shares. If any conversion of Series B
Preferred Stock would result in the issuance of a fractional share of Common
Stock, such fractional share shall be disregarded and the number of shares of
Common Stock issuable upon conversion of the Series B Preferred Stock shall be
the next higher whole number of shares if such fractional share is one-half of a
share or more and the next lower whole number of shares if such fractional share
is less than one-half of a share.
PHIL1\144581-5
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<PAGE>
(iv) Conversion Disputes. In the case of any dispute with
respect to a conversion, the Corporation shall promptly issue such number of
shares of Common Stock as are not disputed in accordance with subparagraph (i)
above. In such case, the Corporation shall submit the disputed calculations to
an independent outside accountant via facsimile within two (2) business days of
receipt of the Notice of Conversion. The accountant, at the Corporation's and
the holders' joint and equal expense, shall review the calculations and the
Corporation shall request that the accountant notify the Corporation and the
holder of the results no later than two (2) business days from the date it
receives the disputed calculations. The accountant's calculation shall be deemed
conclusive, absent manifest error. The Corporation shall then issue the
appropriate number of shares of Common Stock in accordance with subparagraph (i)
above.
C. Limitations on Conversions. The conversion of shares of Series B
Preferred Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):
(i) Cap Amount. Unless permitted by the applicable rules and
regulations of the principal securities market on which the Common Stock is
listed or traded, in no event shall the total number of shares of Common Stock
issued upon conversion of the Series B Preferred Stock exceed the maximum number
of shares of Common Stock that the Corporation can so issue pursuant to any rule
of the principal United States securities market on which the Common Stock
trades (including Rules 4310(c)(25)(H) and 4460(i) of the National Association
of Securities Dealers, Inc. ("NASD") or any successor rules) (the "Cap Amount")
which, as of the date of issuance of the Series B Preferred Stock, shall be
567,596 shares (19.99% of total shares of Common Stock outstanding before the
Issuance Date less the 327,103 shares of Common Stock exchanged for Series B
Preferred Stock pursuant to the Securities Exchange Agreement). The Cap Amount
shall be allocated pro rata to the holders of Series B Preferred Stock as
provided in Article XIII.C. In the event the Corporation is prohibited from
issuing shares of Common Stock as a result of the operation of this subparagraph
(i), the Corporation shall comply with Article VII.
(ii) No Five Percent Holders. Unless a holder of shares of
Series B Preferred Stock or such holder's agent delivers a waiver in accordance
with the last sentence of this subparagraph (ii), in no event shall a holder of
shares of Series B Preferred Stock be entitled to receive shares of Common Stock
upon a conversion to the extent that the sum of (x) the number of shares of
Common Stock beneficially owned by the holder and its affiliates (exclusive of
shares issuable upon conversion of the unconverted portion of the shares of
Series B Preferred Stock or the unexercised or unconverted portion of any other
securities of the Corporation (including, without limitation, the warrants (the
"Warrants") issued by the Corporation pursuant to the Securities Purchase
Agreement dated as of May 31, 1998 by and among the Corporation and the
Purchasers named therein (the "Securities Purchase Agreement")) subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (y) the number of shares of Common Stock issuable upon the
conversion of the shares of Series B Preferred Stock with respect to which the
determination of this subparagraph is being made, would result in beneficial
ownership by the holder and its affiliates of more than 4.99% of the outstanding
shares of Common Stock. For
PHIL1\144581-5
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<PAGE>
purposes of this subparagraph, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13 D-G thereunder, except as otherwise provided in
clause (x) above. Except as provided in the immediately succeeding sentence, the
restriction contained in this subparagraph (ii) shall not be altered, amended,
deleted or changed in any manner whatsoever unless the holders of a majority of
the outstanding shares of Common Stock and each holder of outstanding shares of
Series B Preferred Stock shall approve such alteration, amendment, deletion or
change.
V. RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. Upon the initial issuance of shares of Series B
Preferred Stock, the Corporation shall reserve 327,103 shares of the authorized
but unissued shares of Common Stock for issuance upon conversion of the Series B
Preferred Stock and thereafter the number of authorized but unissued shares of
Common Stock so reserved (the "Reserved Amount") shall not be decreased, except
upon issuances of Common Stock pursuant to conversions hereunder, and shall at
all times be sufficient to provide for the conversion of the shares of Series B
Preferred Stock then outstanding at the then current Conversion Price. The
Reserved Amount shall be allocated to the holders of Series B Preferred Stock as
provided in Article XIII.C.
VI. FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) a holder of shares
of Series B Preferred Stock submits a Notice of Conversion and the Corporation
fails for any reason (other than because such issuance would exceed such
holder's allocated portion of the Reserved Amount or Cap Amount for which
failure the holders shall have the other remedies referred to herein) to
deliver, on or prior to the fourth (4th) business day following the expiration
of the Delivery Period for such conversion, such number of shares of Common
Stock in accordance with the Notice of Conversion to which such holder is
entitled upon such conversion, or (y) the Corporation provides notice to any
holder of shares of Series B Preferred Stock at any time of its intention not to
issue freely tradeable shares in accordance with the Notice of Conversion of
Common Stock upon exercise by any holder of its conversion rights in accordance
with the terms of this Certificate of Designation (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount or
Cap Amount) or (z) the Corporation fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the holders of Series B
Preferred Stock upon conversion of the Series B Preferred Stock as and when
required by this Certificate of Designation, Section 5(c) of the Securities
Exchange Agreement or the Registration Rights Agreement (a "Legend Removal
Failure"), and any such failure continues uncured for four (4) business days
after the conditions to the delivery of such unlegended shares of Common Stock
have been satisfied (the "Legend Removal Period") (each of (x), (y) and (z)
being a "Conversion Default"), then the Corporation
PHIL1\144581-5
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<PAGE>
shall pay to the affected holder, in the case of a Conversion Default described
in clause (x) or (z) above, and to all holders, in the case of a Conversion
Default described in clause (y) above, an amount equal to:
(.24) x (D/365) x (Default Amount)
where:
"D" means the number of days after the expiration of the Delivery
Period; in the case of a Conversion Default described in clauses (x) or (y) of
its definition, or the Legend Removal Period, in the case of a Legend Removal
Failure, through and including the Default Cure Date;
"Default Amount" means the product of (x) the Closing Bid Price of the
Common Stock in effect on the first day of the Conversion Default and (y) the
number of shares of Common Stock which are the subject of such Conversion
Default; and
"Default Cure Date" means (i) with respect to a Conversion Default
described in clause (x) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series B Preferred Stock and (ii)
with respect to a Conversion Default described in clause (y) of its definition,
the date the Corporation issues shares of Common Stock in accordance with the
Notice of Conversion in satisfaction of all conversions of Series B Preferred
Stock in accordance with Article IV.A, and (iii) with respect to a Legend
Removal Failure, the date the Corporation issues freely tradeable shares of
Common Stock in accordance with this Certificate of Designation, Section 5(c) of
the Securities Exchange Agreement or the Registration Rights Agreement and (iv)
with respect to any type of a Conversion Default, the date on which the
Corporation redeems shares of Series B Preferred Stock or Common Stock held by
such holder pursuant to Paragraph C of this Article VI.
The payments to which a holder shall be entitled pursuant to this
Paragraph A are referred to herein as "Conversion Default Payments." A holder
may elect to receive accrued Conversion Default Payments in cash or to convert
all or any portion of such accrued Conversion Default Payments, at any time,
into Common Stock at the Conversion Price in effect during the period beginning
on the date of the Conversion Default through the Conversion Date with respect
to such Conversion Default Payments. In the event a holder elects to receive any
Conversion Default Payments in cash, it shall so notify the Corporation in
writing. Such payment shall be made in accordance with and be subject to the
provisions of Article XIII.E. In the event a holder elects to convert all or any
portion of the Conversion Default Payments into Common Stock, the holder shall
indicate on a Notice of Conversion such portion of the Conversion Default
Payments which such holder elects to so convert and such conversion shall
otherwise be effected in accordance with the provisions of Article IV.
B. Buy-In Cure. Unless the Corporation has notified the applicable
holder in writing prior to the delivery by such holder or such holder's agent of
a Notice of Conversion that the
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<PAGE>
Corporation is unable to honor conversions, if (i) (a) the Corporation fails for
any reason to deliver during the Delivery Period shares of Common Stock to a
holder upon a conversion of shares of Series B Preferred Stock or (b) there
shall occur a Legend Removal Failure and (ii) thereafter, such holder purchases
(in an open market transaction or otherwise in a bona fide arms-length
transaction) shares of Common Stock to make delivery in satisfaction of a sale
by such holder of the unlegended shares of Common Stock (the "Sold Shares")
which such holder anticipated receiving upon such conversion (a "Buy-In"), the
Corporation shall pay such holder (in addition to any other remedies available
to the holder) the amount by which (x) such holder's total purchase price
(including brokerage commissions, if any) for the unlegended shares of Common
Stock so purchased exceeds (y) the net proceeds received by such holder from the
sale of the Sold Shares. For example, if a holder purchases unlegended shares of
Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to shares of Common Stock it sold for $10,000, the Corporation will be
required to pay the holder $1,000. A holder shall provide the Corporation
written notification and supporting documentation indicating any amounts payable
to such holder pursuant to this Paragraph B. The Corporation shall make any
payments required pursuant to this Paragraph B in accordance with and subject to
the provisions of Article XIII.E.
C. Redemption Right. If the Corporation fails, and such failure
continues uncured for (a) five (5) business days after the Corporation has been
notified thereof in writing by the holder, for any reason (other than because
such issuance would exceed such holder's allocated portion of the Reserved
Amount or Cap Amount, for which failures the holders shall have the other
remedies referred to herein) to issue shares of Common Stock within ten (10)
business days after the expiration of the Delivery Period with respect to any
conversion of Series B Preferred Stock or (b) ten (10) business days after the
expiration of the Legend Removal Period, for any reason to deliver shares of
Common Stock with respect to any request for legend removal pursuant to this
Certificate of Designation, Section 5(c) of the Securities Exchange Agreement or
the Registration Rights Agreement, then the holder may elect at any time and
from time to time prior to the Default Cure Date for such Conversion Default, by
delivery of a written notice (a "Mandatory Redemption Notice") to the
Corporation, to have all or any portion of such holder's outstanding shares of
Series B Preferred Stock, in the case of the failure described in clause (a)
above, or Common Stock that is subject to such Legend Removal Failure, in the
case of the failure described in clause (b) above, purchased by the Corporation
for cash, at an amount per share equal to the product of (x) the highest Closing
Bid Price in effect during the period beginning on the first day of the
Conversion Default and ending on the date immediately preceding the date of
payment for such shares and (y) the number of shares of Common Stock which are
the subject of such Conversion Default.
D. Non-Exclusive Remedy. Nothing herein or in the Securities Exchange
Agreement or Registration Rights Agreement shall limit a holder's right to
pursue actual damages for the Corporation's failure to deliver unlegended Common
Stock pursuant to this Certificate of Designation, Section 5(c) of the
Securities Exchange Agreement or the Registration Rights Agreement, and a holder
shall have the right to pursue all remedies available at law or in equity
(including a decree of specific performance and for injunctive relief).
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<PAGE>
VII. INABILITY TO CONVERT DUE TO CAP AMOUNT
A. Obligation to Cure. If at any time the then unissued portion of any
holder's Cap Amount is less than the number of shares of Common Stock then
issuable upon conversion of such holder's shares of Series B Preferred Stock (a
"Trading Market Trigger Event"), the Corporation shall immediately notify the
holders of Series B Preferred Stock of such occurrence and shall take immediate
action (including, if necessary, seeking the approval of its stockholders to
authorize the issuance of the full number of shares of Common Stock which would
be issuable upon the conversion of the then outstanding shares of Series B
Preferred Stock but for the Cap Amount) to eliminate any prohibitions under
applicable law or the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Corporation or any of its securities on the Corporation's ability to issue
shares of Common Stock in excess of the Cap Amount (collectively, the "Trading
Market Prohibitions").
B. Remedies. In the event the Corporation fails to eliminate all such
prohibitions on its ability to issue shares of Common Stock in excess of the Cap
Amount within ninety (90) days after the Trading Market Trigger Event and
thereafter the Corporation is prohibited, at any time following the initial date
that conversion can occur hereunder, from issuing shares of Common Stock upon
conversion of Series B Preferred Stock to any holder because such issuance would
exceed the then unissued portion of such holder's Cap Amount because of
applicable law or the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Corporation or its securities, any holder who is so prohibited from
converting its Series B Preferred Stock may elect either or both of the
following remedies:
(i) to require, with the consent of holders of at least fifty
percent (50%) of the outstanding shares of Series B Preferred Stock (including
any shares of Series B Preferred Stock held by the requesting holder), the
Corporation to terminate the listing of its Common Stock on the SmallCap (or any
other stock exchange, interdealer quotation system or trading market) and to
cause its Common Stock to be eligible for trading on the over-the-counter
electronic bulletin board; or
(ii) to require the Corporation to issue shares of Common
Stock in accordance with such holder's Notice of Conversion at a conversion
price equal to the greater of (x) the Closing Bid Price of the Common Stock and
(y) the book value per share of Common Stock, each in effect as of the date of
the holder's written notice to the Corporation of its election to receive shares
of Common Stock pursuant to this subparagraph (iii).
VIII. RANK
All shares of the Series B Preferred Stock shall rank (i), to the
extent of the Liquidation Preference, prior to the Corporation's Common Stock
and thereafter in accordance with Article IX.D; (ii) prior to any class or
series of capital stock of the Corporation hereafter created (unless such class
or series of capital stock specifically, by its terms, ranks senior to or pari
passu
PHIL1\144581-5
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<PAGE>
with the Series B Preferred Stock) (collectively with the Common Stock, "Junior
Securities"); (iii) pari passu with any class or series of capital stock of the
Corporation hereafter created specifically ranking, by its terms, on parity with
the Series B Preferred Stock (the "Pari Passu Securities"); and (iv) junior to
the Series A Convertible Preferred Stock of the Corporation and any class or
series of capital stock of the Corporation hereafter created specifically
ranking, by its terms, senior to the Series B Preferred Stock (collectively, the
"Senior Securities"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
IX. LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of 60 consecutive days and,
on account of any such event, the Corporation shall liquidate, dissolve or wind
up, or if the Corporation shall otherwise liquidate, dissolve or wind up,
including, but not limited to, the sale or transfer of all or substantially all
of the Corporation's assets in one transaction or in a series of related
transactions (a "Liquidation Event"), no distribution shall be made to the
holders of any shares of capital stock of the Corporation (other than Senior
Securities) upon liquidation, dissolution or winding up unless prior thereto the
holders of shares of Series B Preferred Stock shall have received the
Liquidation Preference with respect to each share. If, upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series B Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series B Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation Preference payable on each such share bears to
the aggregate Liquidation Preference payable on all such shares.
B. The purchase or redemption by the Corporation of stock of any class,
in any manner permitted by law, shall not, for the purposes hereof, be regarded
as a liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other entity nor the
sale or transfer by the Corporation of less than substantially all of its assets
PHIL1\144581-5
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<PAGE>
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Corporation.
C. The "Liquidation Preference" with respect to a share of Series B
Preferred Stock means an amount equal to $.01 per share. The Liquidation
Preference with respect to any Pari Passu Securities shall be as set forth in
the Certificate of Designation filed in respect thereof.
D. After the payment of the Liquidation Preference shall have been made
in full to the holders of the Series B Preferred Stock or funds necessary for
such payment shall have been set aside by the Corporation in trust for the
account of holders of the Series B Preferred Stock so as to be available for
such payment, the remaining assets available for distribution shall be
distributed ratably among the holders of the Common Stock and the Series B
Preferred Stock, with the holders of Series B Preferred Stock deemed to hold
that number of shares equal to the number of shares of Common Stock into which
such shares of Series B Preferred Stock are then convertible.
X. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time
as follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or after the
Issuance Date, the number of outstanding shares of Common Stock is increased by
a stock split, stock dividend, combination, reclassification or other similar
event, the Conversion Price shall be proportionately reduced, or if the number
of outstanding shares of Common Stock is decreased by a reverse stock split,
combination or reclassification of shares, or other similar event, the
Conversion Price shall be proportionately increased. In such event, the
Corporation shall notify the Corporation's transfer agent of such change on or
before the effective date thereof.
B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after
the Issuance Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged, (iii)
any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property (each of
(i) - (iv) above being a "Corporate Change"), then the holders of Series B
Preferred Stock shall thereafter have the right to receive upon conversion, in
lieu of the shares of Common Stock otherwise issuable, such shares of stock,
securities and/or other property as would have been issued or payable in such
Corporate Change with respect to or in exchange for the number of shares of
Common Stock which would have been issuable upon conversion (without giving
effect to the limitations contained in Article IV.C) had such Corporate Change
not taken place, or, at the holder's option, shares of preferred stock of the
surviving entity having the same rights and benefits as provided in this
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Certificate of Designation (subject to such adjustments as may be necessary to
reflect the terms of such merger or consolidation), and in any such case,
appropriate provisions shall be made with respect to the rights and interests of
the holders of the Series B Preferred Stock to the end that the provisions
hereof (including, without limitation, provisions for adjustment of the
Conversion Price and of the number of shares of Common Stock issuable upon
conversion of the Series B Preferred Stock) shall thereafter be applicable, as
nearly as may be practicable in relation to any shares of stock or securities
thereafter deliverable upon the conversion thereof. The Corporation shall not
effect any Corporate Change unless (i) each holder of Series B Preferred Stock
has received any notice of such transaction that the holders of the Common Stock
have received from the Corporation, which notice shall be sent to the holders of
the Series B Preferred Stock by the same means and at the same time it is sent
to the holders of the Common Stock.
C. Adjustment Due to Distribution. If, at any time after the Issuance
Date, the Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including any
dividend or distribution to the Corporation's stockholders in cash or shares (or
rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"Distribution"), then the holders of Series B Preferred Stock shall be entitled,
upon any conversion of shares of Series B Preferred Stock after the date of
record for determining stockholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the holder with
respect to the shares of Common Stock issuable upon such conversion (without
giving effect to the limitations contained in Article IV.C) had such holder been
the holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to such Distribution.
D. Purchase Rights. If, at any time after the Issuance Date, the
Corporation issues any Convertible Securities or rights to purchase stock,
warrants, securities or other property (the "Purchase Rights") pro rata to the
record holders of any class of Common Stock, then the holders of Series B
Preferred Stock will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock acquirable
upon complete conversion of the Series B Preferred Stock (without giving effect
to the limitations contained in Article IV.C) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
E. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Article X, the
Corporation, at the Corporation's and the holders' joint and equal expense,
shall promptly compute such adjustment or readjustment and prepare and furnish
to each holder of Series B Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series B Preferred Stock, furnish to such
holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number of shares
of Common Stock and the
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amount, if any, of other securities or property which at the time would be
received upon conversion of a share of Series B Preferred Stock.
XI. VOTING RIGHTS
The holders of the Series B Preferred Stock shall have no voting rights
whatsoever, except as otherwise provided by the Delaware General Corporation Law
(the "Business Corporation Law"), in this Article XI and in Article XII below.
Notwithstanding the above, the Corporation shall provide each holder of
Series B Preferred Stock with prior notification of any meeting of the
stockholders (and copies of proxy materials and other information sent to
stockholders). If the Corporation takes a record of its stockholders for the
purpose of determining stockholders entitled to (a) receive payment of any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (b) to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the
Corporation, or any proposed merger, consolidation, liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least twenty (20) days prior to the record date specified therein (or
seventy-five (75) days prior to the consummation of the transaction or event,
whichever is earlier, but in no event earlier than public announcement of such
proposed transaction), of the date on which any such record is to be taken for
the purpose of such vote, dividend, distribution, right or other event, and a
brief statement regarding the amount and character of such vote, dividend,
distribution, right or other event to the extent known at such time.
To the extent that under the Business Corporation Law the vote of the
holders of the Series B Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of the Series B Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Series B Preferred Stock
(except as otherwise may be required under the Business Corporation Law) shall
constitute the approval of such action by the class. To the extent that under
the Business Corporation Law holders of the Series B Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series B Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible (subject to the limitations contained in Article IV.C(ii)) using the
record date for the taking of such vote of stockholders as the date as of which
the Conversion Price is calculated.
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XII. PROTECTION PROVISIONS
So long as any shares of Series B Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Law) of the holders of all of
the then outstanding shares of Series B Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series B Preferred Stock;
(b) alter or change the rights, preferences or privileges of any
capital stock of the Corporation so as to affect adversely the Series
B Preferred Stock;
(c) increase the authorized number of shares of Series B
Preferred Stock;
(d) issue any shares of Series B Preferred Stock other than
pursuant to the Securities Exchange Agreement;
(e) redeem, or declare or pay any cash dividend or distribution
on, any Junior Securities if the terms of such amendment and such
preferred stock are more favorable to the Company than those presently
provided for in the Merger Agreement); or
(f) increase the par value of the Common Stock.
Notwithstanding the foregoing, no change pursuant to this Article XII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series B Preferred Stock then outstanding.
XIII. MISCELLANEOUS
A. Cancellation of Series B Preferred Stock. If any shares of Series B
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be cancelled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series B Preferred Stock.
B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to the Corporation, or (z) in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Corporation shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date. However, the Corporation shall not be
obligated to reissue such lost or stolen Preferred Stock Certificate(s) if the
holder contemporaneously requests the Corporation to convert such Series B
Preferred Stock.
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<PAGE>
C. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount
and Reserved Amount shall be allocated pro rata among the holders of Series B
Preferred Stock based on the number of shares of Series B Preferred Stock issued
to each holder. Each increase to the Cap Amount and the Reserved Amount shall be
allocated pro rata among the holders of Series B Preferred Stock based on the
number of shares of Series B Preferred Stock held by each holder at the time of
the increase in the Cap Amount or Reserved Amount. In the event a holder shall
sell or otherwise transfer any of such holder's shares of Series B Preferred
Stock, each transferee shall be allocated a pro rata portion of such
transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or
Reserved Amount which remains allocated to any person or entity which does not
hold any Series B Preferred Stock shall be allocated to the remaining holders of
shares of Series B Preferred Stock, pro rata based on the number of shares of
Series B Preferred Stock then held by such holders.
D. Payment of Cash; Defaults. Whenever the Corporation is required to
make any cash payment to a holder under this Certificate of Designation (as a
Conversion Default Payment, upon redemption or otherwise), such cash payment
shall be made to the holder within five (5) business days after delivery by such
holder or such holder's agent of a notice specifying that the holder elects to
receive such payment in cash and the method (e.g., by check, wire transfer) in
which such payment should be made. If such payment is not delivered within such
five (5) business day period, such holder shall thereafter be entitled to
interest on the unpaid amount at a per annum rate equal to the lower of
twenty-four percent (24%) and the highest interest rate permitted by applicable
law until such amount is paid in full to the holder.
E. Status as Stockholder. Upon submission of a Notice of Conversion by
a holder of Series B Preferred Stock, and provided that the certificate
representing such shares are surrendered to the transfer agent as soon as
practicable thereafter, (i) the shares covered thereby (other than the shares,
if any, which cannot be issued because their issuance would exceed such holder's
allocated portion of the Reserved Amount or Cap Amount) shall be deemed
converted into shares of Common Stock and (ii) the holder's rights as a holder
of such converted shares of Series B Preferred Stock shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to such holder because of a failure by the Corporation to comply with the terms
of this Certificate of Designation. Notwithstanding the foregoing, if a holder
has not received certificates for all shares of Common Stock prior to the tenth
(10th) business day after the expiration of the Delivery Period with respect to
a conversion of Series B Preferred Stock for any reason, then (unless the holder
otherwise elects to retain its status as a holder of Common Stock by so
notifying the Corporation within five business days after the expiration of such
ten (10) business day period after expiration of the Delivery Period) the holder
shall regain the rights of a holder of Series B Preferred Stock with respect to
such unconverted shares of Series B Preferred Stock and the Corporation shall,
as soon as practicable, return such unconverted shares and share certificates to
the holder. In all cases, the holder shall retain all of its rights and remedies
(including, without limitation, the right to receive Conversion Default Payments
pursuant to Article VI.A to the extent required thereby for such Conversion
Default and any subsequent Conversion Default) for the Corporation's failure to
convert Series B Preferred Stock.
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<PAGE>
F. Remedies Cumulative. The remedies provided in this Certificate of
Designation shall be cumulative and in addition to all other remedies available
under this Certificate of Designation, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Certificate of Designation. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series B Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, that the holders
of Series B Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
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IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation this 23 day of September, 1998.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
Name: Mark Honigsfeld
Title: Chairman and Chief Executive Officer
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<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series B Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series B Preferred Stock (the "Conversion"), represented by stock certificate
Nos(s). ___________ (the "Preferred Stock Certificates"), into shares of Common
Stock, par value $.01 per share ("Common Stock"), of COMPU-DAWN, INC. (the
"Corporation") according to the conditions of the Certificate of Designations,
Preferences and Rights of Series B Convertible Preferred Stock (the "Certificate
of Designation"), as of the date written below. If securities are to be issued
in the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof). The certificates are to be delivered as follows:
o WITHOUT RESTRICTIVE LEGEND. The undersigned intends to sell
the Common Stock within five (5) business days of the receipt
of certificates representing such Common Stock and hereby
agrees to return the certificates (which presently bear no
restrictive legend) representing the Common Stock to the
Corporation's transfer agent for placement of a legend upon
such certificates if such Common Stock is not sold within five
(5) business days of the receipt of such certificates by the
undersigned.
o WITH RESTRICTIVE LEGEND.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series B Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "Act"), or pursuant to
an exemption from registration under the Act.
The Corporation shall electronically transmit the Common Stock issuable pursuant
to this Notice of Conversion to the account of the undersigned or its nominee
(which is _________________) with DTC through its Deposit Withdrawal Agent
Commission System ("DTC Transfer").
o In lieu of receiving the shares of Common Stock issuable pursuant to
this Notice of Conversion by way of DTC Transfer, the undersigned
hereby requests that the Corporation issue and deliver to the
undersigned physical certificates representing such shares of Common
Stock.
Date of Conversion:
Applicable Conversion Price:
Amount of Conversion Default Payments
to be Converted, if any:
Number of Shares of
Common Stock to be Issued:
Signature:
Name:
Address:
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<PAGE>
SECURITIES EXCHANGE AGREEMENT
SECURITIES EXCHANGE AGREEMENT (this "Agreement"), dated as of September
25, 1998, by and among COMPU-DAWN, INC., a corporation organized under the laws
of the State of Delaware (the "Company"), and the purchaser (the "Purchaser")
set forth on the execution pages hereto (the "Execution Pages").
WHEREAS:
A. The Company and the Purchaser are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("Regulation D"), as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "Securities Act").
B. The Company previously entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement") dated as of May 31, 1998 by and among the
Company, the Purchaser, and JNC Opportunity Fund Ltd. (the "Series A Purchaser"
and together with the Purchaser, the "Purchasers") pursuant to which the Company
sold, and the Series A Purchaser purchased, (x) 3,250 units (the "Preferred
Units"), each Preferred Unit consisting of (i) one share of the Company's Series
A Convertible Preferred Stock, par value $.01 per share, convertible into shares
of the Company's Common Stock, par value $.01 per share (the "Common Stock"),
and (ii) warrants (the "Warrants") to acquire 57,497 shares of Common Stock; and
the Company sold, and the Purchaser purchased (y) 1,750 units (the "Common
Units"), each Common Unit consisting of (i) 186.916 shares of Common Stock (the
"Common Shares"), and (ii) Warrants to acquire 32,710 shares of Common Stock.
The Company and the Purchaser each desire to exchange, upon the terms and
conditions stated in this Agreement, all of the Common Shares held by the
Purchaser for 1,750 shares of the Company's Series B Convertible Preferred
Stock, par value $.01 per share (the "Preferred Shares"), convertible into
shares of Common Stock. The rights, preferences and privileges of the Preferred
Shares, including the terms upon which such Preferred Shares are convertible
into shares of Common Stock, are set forth in the form of Certificate of
Designations, Preferences and Rights attached hereto as Exhibit A (the
"Certificate of Designation"). The shares of Common Stock issuable upon
conversion of the Preferred Shares or otherwise pursuant to the Certificate of
Designation are referred to herein as the "Conversion Shares." The Preferred
Shares and the Conversion Shares are sometimes collectively referred to herein
as the "Securities" and each of them may sometimes individually be referred to
herein as a "Security."
C. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering an amendment to the Registration
Rights Agreement dated as of May 31, 1998 by and among the Company and the
Purchasers, in the form attached hereto as
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Exhibit B (the "Registration Rights Agreement Amendment" and such Registration
Rights Agreement, as so amended, shall be referred to herein as the
"Registration Rights Agreement"), pursuant to which the Company has agreed to
provide certain registration rights under the Securities Act and the rules and
regulations promulgated thereunder, and applicable state securities laws.
NOW, THEREFORE, the Company and the Purchaser hereby agree as follows:
1. EXCHANGE OF SECURITIES.
a. Exchange of Common Shares and Preferred Shares. On the Closing Date
(as defined below), subject to the satisfaction (or waiver) of the conditions
set forth in Section 6 and Section 7 below, the Company shall issue to the
Purchaser 1,750 Preferred Shares in exchange for 327,103 Common Shares and the
Purchaser agrees to exchange such 327,103 Common Shares in return for such 1,750
Preferred Shares.
b. Form of Exchange. On the Closing Date, the Purchaser shall deliver
the certificates representing the Common Shares being exchanged by the Purchaser
at the Closing hereunder to the Company, against delivery of duly executed
certificates representing the Preferred Shares, and the Company shall deliver
such duly executed certificates against delivery of such certificates
representing the Common Shares by the Purchaser to the Company.
c. Closing Date. The date and time of the exchange of Common Shares and
Preferred Shares pursuant to this Agreement (the "Closing") shall be as soon as
practicable after the satisfaction (or waiver) of the conditions thereto set
forth in Section 6 and Section 7 below, or such other time as may be mutually
agreed upon by the Company and the Purchaser (the "Closing Date"). The Closing
shall occur at the offices of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP,
1401 Walnut Street, Philadelphia, Pennsylvania 19102.
2. PURCHASER'S REPRESENTATIONS AND WARRANTIES
The Purchaser represents and warrants to the Company as follows:
a. Exchange Purpose. The Purchaser is exchanging the Common Shares for
the Preferred Shares and no commission or other remuneration has been, is being,
or shall be, paid or given directly or indirectly by the Purchaser or its
affiliates or on behalf of the Purchaser for soliciting such exchange.
b. Reliance on Exemptions. The Purchaser understands that the Preferred
Shares are being exchanged for Common Shares held by the Purchaser in reliance
upon specific exemptions from the registration requirements of United States
federal and state securities laws and that the Company is relying upon the truth
and accuracy of, and the Purchaser's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Purchaser set
PHIL1\144578-6
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forth herein in order to determine the availability of such exemptions and the
eligibility of the Purchaser to acquire the Preferred Shares.
c. Governmental Review. The Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
d. Transfer or Resale. The Purchaser understands that (i) except as
provided in the Registration Rights Agreement, the sale or resale of the
Securities have not been and are not being registered under the Securities Act
or any state securities laws, and the Securities may not be transferred unless
(a) the resale of the Securities has been registered thereunder; or (b) the
Purchaser shall have delivered to the Company an opinion of counsel (which
opinion shall be in form, substance and scope customary for opinions of counsel
in comparable transactions) to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration; or (c) the Securities are sold under Rule 144 promulgated under
the Securities Act (or a successor rule) ("Rule 144"); or (d) the Securities are
sold or transferred to an affiliate of the Purchaser who agrees to sell or
otherwise transfer the Securities only in accordance with the provisions of this
Section 2(d) and who is an Accredited Investor (as that term is defined in Rule
501(a) of Regulation D); and (ii) neither the Company nor any other person is
under any obligation to register such Securities under the Securities Act or any
state securities laws (other than pursuant to the Registration Rights
Agreement). Notwithstanding the foregoing or anything else contained herein to
the contrary, the Securities may be pledged as collateral in connection with a
bona fide margin account or other lending arrangement.
e. Legends. The Purchaser understands that the Preferred Shares and,
until such time as the Common Shares and the Conversion Shares have been
registered under the Securities Act (including registration pursuant to Rule 416
thereunder) as contemplated by the Registration Rights Agreement or otherwise
may be sold by the Purchaser under Rule 144, the certificates for the Preferred
Shares, Common Shares and the Conversion Shares may bear a restrictive legend in
substantially the following form:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or the securities laws of
any state of the United States. The securities represented hereby may
not be offered, sold, transferred or assigned in the absence of an
effective registration statement for the securities under applicable
securities laws unless offered, sold, transferred or assigned under an
available exemption from the registration requirements of those laws.
The legend set forth above shall be removed and the Company shall issue
a certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by state securities laws, (a) the sale of
such Security is registered under the Securities Act (including registration
pursuant to Rule 416 thereunder) as contemplated by the Registration Rights
Agreement; (b) such holder or such holder's agent provides the Company with an
opinion of counsel,
PHIL1\144578-6
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<PAGE>
in form, substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Security may
be made without registration under the Securities Act; or (c) such holder or
such holder's agent provides the Company with reasonable assurances that such
Security can be sold under Rule 144. The Purchaser agrees to sell all
Securities, including those represented by a certificate(s) from which the
legend has been removed, pursuant to an effective registration statement or
under an exemption from the registration requirements of the Securities Act. In
the event the above legend is removed from any Security and thereafter the
effectiveness of a registration statement covering such Security is suspended or
the Company determines that a supplement or amendment thereto is required by
applicable securities laws, then upon reasonable advance notice to the Purchaser
the Company may require that the above legend be placed on any such Security
that cannot then be sold pursuant to an effective registration statement or
under Rule 144 and the Purchaser shall cooperate in the replacement of such
legend. Such legend shall thereafter be removed when such Security may again be
sold pursuant to an effective registration statement or under Rule 144.
f. Authorization; Enforcement. This Agreement, the Registration Rights
Agreement Amendment and the Registration Rights Agreement have been duly and
validly authorized, executed and delivered on behalf of Purchaser and are valid
and binding agreements of Purchaser enforceable in accordance with their terms.
g. Residency. The Purchaser is a resident of the jurisdiction set forth
under such Purchaser's name on the Execution Page hereto executed by such
Purchaser.
h. Organization and Qualification. The Purchaser is duly organized and
existing in good standing under the laws of the jurisdiction in which it was
formed, and has the requisite power to own its properties and to carry on its
business as now being conducted. The Purchaser is duly qualified to do business
and is in good standing in every jurisdiction in which the nature of the
business conducted by it makes such qualification necessary, except where the
failure to so qualify would have a material adverse effect on the ability of the
Purchaser to perform its obligations hereunder or under the Registration Rights
Agreement.
i. Investment Purpose. The Purchaser is exchanging the Common Shares
for the Preferred Shares for the Purchaser's own account for investment purposes
and not with a present view towards the public sale or distribution thereof,
except pursuant to sales that are exempt from the registration requirements of
the Securities Act and/or sales registered under the Securities Act. The
Purchaser understands that the Purchaser must bear the economic risk of this
investment indefinitely, unless the Securities are registered pursuant to the
Securities Act and any applicable state securities or blue sky laws or an
exemption from such registration is available, and that the Company has no
present intention of registering the resale of any such Securities other than as
contemplated by the Registration Rights Agreement. Notwithstanding anything in
this Section 2(i) to the contrary, by making the representations herein, the
Purchaser does not agree to hold the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities
PHIL1\144578-6
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<PAGE>
at any time in accordance with or pursuant to a registration statement or an
exemption from the registration requirements under the Securities Act.
j. Accredited Investor Status. The Purchaser is an "Accredited
Investor" as that term is defined in Rule 501(a) of Regulation D.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Purchaser as follows:
a. Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement and the Registration Rights Agreement, to issue and exchange the
Preferred Shares for the Common Shares in accordance with the terms hereof, and
to issue the Conversion Shares upon conversion of the Preferred Shares in
accordance with the terms of the Certificate of Designation; (ii) the execution,
delivery and performance of this Agreement and the Registration Rights Agreement
by the Company and the consummation by it of the transactions contemplated
hereby and thereby (including, without limitation, the issuance of the Preferred
Shares, the exchange of the Preferred Shares for the Common Shares, and the
issuance and reservation for issuance of the Conversion Shares) have been duly
authorized by the Company's Board of Directors and no further consent or
authorization of the Company, its Board of Directors or any committee of the
Board of Directors is required; (iii) this Agreement has been duly executed and
delivered by the Company; and (iv) this Agreement constitutes, and, upon
execution and delivery by the Company of the Registration Rights Agreement
Amendment, the Registration Rights Agreement will constitute, valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms.
b. Certificate of Designation. The Certificate of Designation, in the
form attached hereto, will be duly filed prior to Closing with the Secretary of
State of the State of Delaware and, upon issuance of the Preferred Shares in
accordance with the terms hereof, the Purchaser shall be entitled to the rights
set forth therein.
c. Issuance of Shares. The Preferred Shares are duly authorized and
upon issuance in accordance with the terms of this Agreement, the Preferred
Shares will be validly issued, fully paid and non-assessable, and free from all
taxes, liens, claims and encumbrances and will not be subject to any preemptive
or other similar rights of stockholders of the Company and will not impose
personal liability on the holders thereof. The Conversion Shares are duly
authorized and reserved for issuance, and, upon conversion of the Preferred
Shares in accordance with the terms thereof, will be validly issued, fully paid
and non-assessable, and free from all taxes, liens, claims and encumbrances and
will not be subject to any preemptive or other similar rights of stockholders of
the Company and will not impose personal liability upon the holder thereof.
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<PAGE>
d. No Conflicts. Except as set forth on Schedule 3(d), the execution,
delivery and performance of this Agreement and the Registration Rights Agreement
by the Company, the performance by the Company of its obligations under the
Certificate of Designation and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation, the
issuance and reservation for issuance, as applicable, of the Preferred Shares
and the Conversion Shares and the exchange of the Preferred Shares for the
Common Shares) will not (i) result in a violation of the Company's Certificate
of Incorporation as in effect on the date hereof or the Company's By-laws as in
effect on the date hereof or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment (including, without
limitation, the triggering of any anti-dilution provisions), acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including U.S. federal and state
securities laws and regulations and rules or regulations of any self-regulatory
organizations to which either the Company or its securities are subject)
applicable to the Company or any of its subsidiaries or by which any property or
asset of the Company or any of its subsidiaries is bound or affected (except,
with respect to clause (ii), for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect). "Material
Adverse Effect" means any material adverse effect on (i) the Securities, (ii)
the ability of the Company to perform its obligations hereunder or under the
Certificate of Designation or the Registration Rights Agreement or (iii) the
business, operations, properties, prospects or financial condition of the
Company and its subsidiaries, taken as a whole. Except as specifically
contemplated by this Agreement and the Registration Rights Agreement, the
Company is not required to obtain any consent, approval, authorization or order
of, or make any filing or registration with, any court or governmental agency or
any regulatory or self regulatory agency in order for it to execute, deliver or
perform any of its obligations under this Agreement or the Registration Rights
Agreement or to perform its obligations under the Certificate of Designation, in
each case in accordance with the terms hereof or thereof.
e. Acknowledgment Regarding Exchange of Common Shares for Preferred
Shares. The Company acknowledges and agrees that the Purchaser is not acting as
a financial advisor or fiduciary of the Company (or in any similar capacity)
with respect to this Agreement or the transactions contemplated hereby, the
relationship between the Company and the Purchaser is "arms-length" and any
statement made by the Purchaser or any of its respective representatives or
agents in connection with this Agreement and the transactions contemplated
hereby is not advice or a recommendation and is merely incidental to the
Purchaser's exchange of Securities and has not been relied upon by the Company,
its officers or directors in any way. The Company further acknowledges that the
Company's decision to enter into this Agreement has been based solely on an
independent evaluation by the Company and its representatives.
f. Exchange Purpose. The Company is issuing the Preferred Shares
exclusively in exchange for the Common Shares and no commission or other
remuneration has been, is being, or
PHIL1\144578-6
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<PAGE>
shall be, paid or given, directly or indirectly by the Company or on behalf of
the Company for soliciting such exchange.
g. Exclusivity. Other than the transactions contemplated hereby, the
Company is not offering, selling or issuing any shares of Common Stock in any
transaction which would constitute part of a plan of financing which includes
the transactions contemplated hereby.
h. No Brokers. Except for fees paid to HNY Associates, LLC in
connection with the Securities Purchase Agreement, no fees or commissions are
payable by the Company to any broker, financial advisor, finder, investment
banker, or bank with respect to the transactions contemplated hereby. The
Purchaser shall have no obligation with respect to any fees or with respect to
any claims made by or on behalf of other persons for fees of a type described in
this Section 3(h) that may be due in connection with the transactions
contemplated hereby. The Company shall indemnify and hold harmless the
Purchaser, its respective employees, officers, directors, agents and partners,
and its respective Affiliates (as such term is defined under Rule 405
promulgated under the Securities Act), from and against all claims, losses,
damages, costs (including the costs of preparation and reasonable attorney's
fees) and expenses suffered in respect of any such claimed or existing fees. In
the event such a claim is made against the Purchaser, the Company shall have the
right to participate in, and to assume control of, the defense thereof with
counsel mutually satisfactory to the Purchaser and the Company; provided,
however, that the Company shall not be entitled to assume such defense and the
Purchaser shall have the right to retain its own counsel with the fees and
expenses to be paid by the Company, if, in the reasonable opinion of counsel
retained by the Company, the representation by such counsel of the Purchaser
would be inappropriate due to actual or potential conflicts of interest.
i. Securities Purchase Agreement Representations. The representations
and warranties of the Company contained in the Securities Purchase Agreement
were true and correct when made and as of the Closing Date thereunder as though
made at that time (except for representations and warranties that spoke as of a
specific date, which representations and warranties were true and correct as of
such date).
4. COVENANTS.
a. Best Efforts. The parties shall use their reasonable best efforts
timely to satisfy each of the conditions described in Section 6 and Section 7 of
this Agreement.
b. Reporting Status. So long as any Purchaser beneficially owns any of
the Securities, the Company shall timely file all reports required to be filed
with the SEC pursuant to the Exchange Act, and the Company shall not terminate
its status as an issuer required to file reports under the Exchange Act even if
the Exchange Act or the rules and regulations thereunder would permit such
termination. In addition, the Company shall take all actions necessary to
continue to be eligible to register the resale of its Common Stock on a
registration statement on Form S-3 under the Securities Act.
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<PAGE>
c. Expenses. The Purchaser shall pay to the Company, or at its
direction, at the Closing, reimbursement for the expenses reasonably incurred by
the Company and its affiliates and advisors in connection with the negotiation,
preparation, execution and delivery of this Agreement and the other agreements
to be executed in connection herewith, including, without limitation, the
Purchaser's and its affiliates' and advisors' reasonable attorneys' fees and
expenses (the "Expenses"). In addition, from time to time thereafter, upon the
written request of the Company, the Purchaser shall pay to the Company such
additional Expenses, if any, not covered by such payment, in each case to the
extent reasonably incurred by the Company in connection with the negotiation,
preparation, execution and delivery of this Agreement and the other agreements
to be executed in connection herewith.
d. Reservation of Shares. The Company shall at all times have
authorized and reserved for the purpose of issuance a sufficient number of
shares of Common Stock to provide for the full conversion of the outstanding
Preferred Shares and the issuance of the Conversion Shares in connection
therewith subject to and as otherwise required by the Certificate of
Designation. In that regard, a "sufficient number of shares" with respect to the
Preferred Shares shall be deemed to be equal to the number of shares of Common
Stock required to be reserved for issuance by the Company pursuant to Article V
of the Certificate of Designation. The Company shall not reduce the number of
shares reserved for issuance upon conversion of the Preferred Shares (except as
a result of any such conversion) without the consent of the Purchaser.
e. Listing. The Company shall promptly secure the listing of the
Conversion Shares upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed (subject to
official notice of issuance), unless such listing has already been accomplished
by the listing by the Company of the Common Shares, and shall maintain, so long
as the Purchaser (or any of its affiliates) own any Securities, such listing of
all Common Shares issued pursuant hereto and all Conversion Shares from time to
time issuable upon conversion of the Preferred Shares. The Company will take all
action necessary to continue the listing and trading of its Common Stock on the
New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX"), the
Nasdaq National Market ("NNM") or the Nasdaq SmallCap Market ("SmallCap") and
will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the National Association of Securities
Dealers (the "NASD") and such exchanges, as applicable. The Company shall
promptly provide to the Purchaser copies of any notices it receives regarding
the continued eligibility of the Common Stock for trading on the SmallCap or, if
applicable, any securities exchange or automated quotation system on which
securities of the same class or series issued by the Company are then listed or
quoted, if any.
f. Corporate Existence. Subject to the provisions of the Certificate of
Designation, so long as the Purchaser (or any of its affiliates) beneficially
owns any Securities, the Company shall maintain its corporate existence, and in
the event of a merger, consolidation or sale of all or substantially all of the
Company's assets, the Company shall ensure that the surviving or successor
entity in such transaction (i) assumes the Company's obligations hereunder and
under the Certificate of Designation, and the agreements and instruments entered
into in connection herewith regardless
PHIL1\144578-6
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<PAGE>
of whether or not the Company would have had a sufficient number of shares of
Common Stock authorized and available for issuance in order to effect the full
conversion of all Preferred Shares outstanding as of the date of such
transaction and (ii) is a publicly traded corporation whose common stock is
listed for trading on the NNM, SmallCap, NYSE or AMEX.
g. Stockholder Approval. The Company shall hold an annual or special
meeting of its stockholders no later than November 3, 1998 and use its best
efforts to obtain at such meeting such approvals of the Company's stockholders
as may be required (i) to ratify the issuance of the Common Shares pursuant to
the Securities Purchase Agreement, and (ii) to issue all of the shares of Common
Stock issuable upon conversion of, or otherwise with respect to, the Preferred
Shares without violating NASD Rules 4310(c)(25)(H) or 4460(i) (or any successor
rules thereto which may then be in effect) (the "Stockholder Approval"). The
Company shall comply with the filing and disclosure requirements of Section 14
promulgated under the Exchange Act in connection with the solicitation,
acquisition and disclosure of such Stockholder Approval. The Company represents
and warrants that its Board of Directors has adopted resolutions to, among
things, unanimously recommend that the Company's stockholders approve the
proposal contemplated by this Section 4(g) and shall so indicate such
recommendation in the proxy statement used to solicit such Stockholder Approval.
5. TRANSFER AGENT INSTRUCTIONS.
a. The Company shall instruct its transfer agent to issue certificates,
registered in the name of the Purchaser or its nominee, for the Conversion
Shares in such amounts as specified from time to time by the Purchaser or the
Purchaser's agent to the Company (including upon conversion of the Preferred
Shares). To the extent and during the periods provided in Sections 2(d) and 2(e)
of this Agreement, all such certificates shall bear the restrictive legend
specified in Section 2(e) of this Agreement.
b. The Company warrants that no instruction other than such
instructions referred to in this Section 5, and stop transfer instructions to
give effect to Section 2(d) hereof in the case of the transfer of the Conversion
Shares prior to registration thereof under the Securities Act or without an
exemption therefrom, will be given by the Company to its transfer agent and that
the Securities shall otherwise be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement, the Certificate
of Designation, and the Registration Rights Agreement. Nothing in this Section
shall affect in any way each Purchaser's obligations and agreement set forth in
Section 2(e) hereof to resell the Securities pursuant to an effective
registration statement or under an exemption from the registration requirements
of applicable securities law.
c. If (i) (A) the Conversion Shares have been registered under the
Securities Act as contemplated by the Registration Rights Agreement, or (B) the
Purchaser provides the Company and the transfer agent with an opinion of
counsel, which opinion of counsel shall be in form, substance and scope
customary for opinions of counsel in comparable transactions, to the effect that
the Securities to be sold or transferred may be sold or transferred pursuant to
an exemption from registration, or (C) the Purchaser provides the Company with
reasonable assurances that such
PHIL1\144578-6
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<PAGE>
Securities may be sold under Rule 144, and (ii) (A) the Purchaser or the
Purchaser's agent has delivered to the Company certificates representing the
Conversion Shares along with a written request for the removal of any
restrictive legend set forth thereon or (B) in the case of the conversion by the
Purchaser of the Preferred Shares, the Purchaser has complied with the
procedures for conversion set forth in Article IV of the Certificate of
Designation, the Company shall permit the transfer and promptly instruct its
transfer agent to issue the Conversion Shares in such name and in such
denominations as specified by the Purchaser. If the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer program, the Company shall cause its transfer agent to electronically
transmit the Conversion Shares to such Purchaser or its transferee by crediting
the account of such Purchaser or its transferee with DTC through its Deposit
Withdrawal Agent Commission system ("DTC Transfer"). If the aforementioned
conditions to a DTC Transfer are not satisfied, the Company shall deliver to the
Purchaser or its transferee physical certificates representing the Conversion
Shares which certificates shall not bear any legend restricting transfer of the
Conversion Shares represented thereby. Further, the Purchaser may instruct the
Company to deliver to the Purchaser or its transferee unlegended physical
certificates representing the Conversion Shares in lieu of delivering such
shares by way of DTC Transfer.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO EXCHANGE.
The obligation of the Company hereunder to issue the Preferred Shares
and deliver the Preferred Shares to the Purchaser at the Closing is subject to
the satisfaction, on or before the Closing Date, of each of the following
conditions thereto, provided that these conditions are for the Company's sole
benefit and may be waived by the Company at any time in its sole discretion.
a. The Purchaser shall have executed the signature page to this
Agreement and the Registration Rights Agreement Amendment, and delivered the
same to the Company.
b. The Series A Purchaser shall have executed the signature page to the
Registration Rights Agreement Amendment and the Consent attached hereto and
delivered the same to the Company.
c. The Purchaser shall have delivered the certificates representing the
Common Shares being exchanged for the Preferred Shares in accordance with
Section 1(b) above.
d. The representations and warranties of the Purchaser shall be true
and correct as of the date when made and as of the Closing Date as though made
at that time (except for representations and warranties that speak as of a
specific date, which representations and warranties shall be true and correct as
of such date), and the Purchaser shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by the Purchaser at
or prior to the Closing Date.
PHIL1\144578-6
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<PAGE>
e. No litigation, statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.
f. The Purchaser shall deliver at least 327,103 Common Shares to the
Company at the Closing.
7. CONDITIONS TO THE PURCHASER'S OBLIGATION TO EXCHANGE.
The obligation of the Purchaser hereunder to deliver the Common Shares
to be exchanged by it for the Preferred Shares at the Closing is subject to the
satisfaction, on or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Purchaser's sole benefit
and may be waived by the Purchaser at any time at the Purchaser's sole
discretion:
a. The Company shall have executed this Agreement, and the Registration
Rights Agreement Amendment, and delivered the same to the Purchaser.
b. The Series A Purchaser shall have executed the signature page to the
Registration Rights Agreement Amendment and the Consent attached hereto and
delivered the same to the Company.
c. The Certificate of Designation shall have been accepted for filing
with the Secretary of State of the State of Delaware and a copy thereof
certified by the Secretary of State of the State of Delaware shall have been
delivered to the Purchaser.
d. The Company shall have delivered to the Purchaser duly executed
certificates (in such denominations as such Purchaser shall request)
representing the Preferred Shares being delivered to the Purchaser in exchange
for the Common Shares at the Closing in accordance with Section 1(b) above.
e. The Common Stock shall be authorized for quotation and listed on the
SmallCap and trading in the Common Stock (or the SmallCap generally) shall not
have been suspended by the SEC or the SmallCap, nor shall any such suspension be
pending or threatened.
f. The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date, which representations and warranties shall be true and correct as of such
date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Closing Date.
PHIL1\144578-6
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<PAGE>
g. No litigation, statute, rule, regulation, executive order, decree,
ruling, injunction, action or proceeding shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction or any self-regulatory organization having authority over the
matters contemplated hereby which questions the validity of, or challenges or
prohibits the consummation of any of the transactions contemplated by this
Agreement.
h. Such Purchaser shall have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to such Purchaser and in substantially the form of Exhibit C
attached hereto.
i. The Company shall have delivered evidence reasonably satisfactory to
the Purchasers that the Company's transfer agent has agreed to act in accordance
with irrevocable instructions in the form attached hereto as Exhibit D.
j. The Company shall deliver at least 1,750 Preferred Shares to the
Purchaser at the Closing.
k. Each of the officers and directors of the Company identified on
Exhibit G-1 to the Securities Purchase Agreement shall have executed and
delivered to the Purchaser an agreement, similar to the form attached as Exhibit
G-2 to the Securities Purchase Agreement, pursuant to which such officers and
directors agree to vote all shares of capital stock of the Company which they
own and/or control in favor of the proposals set forth in Section 4(g) hereof.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts and
the state courts located in the State of New York in any suit or proceeding
based on or arising under this Agreement and irrevocably agrees that all claims
in respect of such suit or proceeding may be determined in such courts. The
Company irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. The parties hereto agree that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
b. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party. This Agreement, once executed by a party, may be
delivered to the other parties hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
In the event any signature is delivered by facsimile transmission, the party
using such means of delivery shall cause the manually executed Execution Page(s)
to be physically delivered to the other party within five (5) days of the
execution hereof.
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<PAGE>
c. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein. The parties intend that the
Securities Purchase Agreement and related documents remain in full force and
effect. Notwithstanding the foregoing, in the event of a conflict between the
Securities Purchase Agreement and related documents, on the one hand, and this
Agreement and related documents on the other hand, the terms and provisions of
this Agreement and related documents shall govern with respect to such conflict.
No provision of this Agreement may be waived other than by an instrument in
writing signed by the party to be charged with enforcement and no provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and each Purchaser.
f. Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
If to the Company:
Compu-Dawn, Inc.
77 Spruce Street
Cedarhurst, NY 11516
Telecopy: (516) 374-3410
Attention: Mark Honigsfeld, Chief Executive Officer
with a copy simultaneously transmitted by like means to:
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, NY 11554
Telecopy: (516) 296-7111
Attention: Fred Skolnik, Esquire and
Gavin C. Grusd, Esquire
If to the Purchaser, to the address set forth under the Purchaser's
name on the Execution Page hereto executed by the Purchaser.
PHIL1\144578-6
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<PAGE>
Each party shall provide notice to the other parties of any change in
address.
Upon the Purchaser's submission of a Notice of Conversion to the
Company in accordance with the Certificate of Designation, the Purchaser shall
also send a courtesy copy of such Notice of Conversion to:
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, NY 11554
Telecopy: (516) 296-7111
Attention: Fred Skolnik, Esquire and
Gavin C. Grusd, Esquire
The failure of the Purchaser to send a courtesy copy of the Notice of
Conversion as set forth above shall not render the Notice of Conversion so
submitted invalid or defective and, notwithstanding the failure to provide such
Notice of Conversion as aforesaid, such Notice of Conversion shall be deemed to
be valid and effective.
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. Except as
provided herein or therein, neither the Company nor the Purchaser shall assign
this Agreement or the Registration Rights Agreement or any rights or obligations
hereunder or thereunder. Notwithstanding the foregoing, any Purchaser may assign
its rights hereunder to any of its "affiliates" (as that term is defined under
the Exchange Act) who are Accredited Investors without the consent of the
Company (provided such assignees agree to be bound by all of the terms and
conditions hereof), or to any other person or entity with the consent of the
Company, which consent shall not be unreasonably withheld. This provision shall
not limit the Purchaser's right to transfer the Securities pursuant to the terms
of the Certificate of Designation and this Agreement or to assign the
Purchaser's rights hereunder and/or thereunder to any such transferee.
h. Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. The respective representations, warranties, agreements and
covenants of the parties set forth in Sections 2, 3, 4, 5 and 8 hereof shall
survive the Closing hereunder notwithstanding any investigation conducted by or
on behalf of the Purchaser, except that the representations set forth in Section
3(i) shall survive only so long as the representations set forth in Section 3 of
the Securities Purchase Agreement. Moreover, none of the representations and
warranties made by the Company herein shall act as a waiver of any rights or
remedies the Purchaser may have under applicable federal or state securities
laws. The Company agrees to indemnify and hold harmless the Purchaser and each
of the Purchaser's officers, directors, employees, partners, members, agents and
affiliates for loss or damage arising as a result of or related to any breach or
alleged breach by the Company of any of its representations or covenants set
forth herein, including
PHIL1\144578-6
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<PAGE>
advancement of reasonable expenses as they are incurred. In the event such a
claim is made against the Purchaser by a third party relating to the foregoing,
the Company shall have the right to participate in and to assume control of, the
defense thereof with counsel mutually satisfactory to the Purchaser and the
Company; provided, however, that the Company shall not be entitled to assume
such defense and the Purchaser shall have the right to retain its own counsel
with the fees and expenses to be paid by the Company, if, in the reasonable
opinion of counsel retained by the Company, the representation by such counsel
of the Purchaser would be inappropriate due to actual or potential conflicts of
interest.
j. Publicity. The Company and the Purchaser shall have the right to
review before issuance any press releases, SEC or NASD filings, or any other
public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior review
of the Purchaser, to make any press release or SEC or NASD filings with respect
to such transactions as is required by applicable law and regulations (although
the Purchaser shall be consulted by the Company in connection with any such
press release and filing prior to its release and shall be provided with a copy
thereof).
k. Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Closing shall not have occurred
on or before September 30, 1998, unless the parties agree otherwise, this
Agreement shall terminate at the close of business on such date. Notwithstanding
any termination of this Agreement, any party not in breach of this Agreement
shall preserve all rights and remedies it may have against another party hereto
for a breach of this Agreement prior to or relating to the termination hereof.
m. Joint Participation in Drafting. Each party to this Agreement has
participated in the negotiation and drafting of this Agreement, the Certificate
of Designation and the Registration Rights Agreement Amendment. As such, the
language used herein and therein shall be deemed to be the language chosen by
the parties hereto to express their mutual intent, and no rule of strict
construction will be applied against any party to this Agreement.
n. Equitable Relief. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Purchaser by
vitiating the intent and purpose of the transactions contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations hereunder (including, but not limited to, its obligations pursuant
to Section 5 hereof) will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Agreement (including,
but not limited to, its obligations pursuant to Section 5 hereof), that the
Purchaser shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach and requiring immediate issuance and transfer
of the
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<PAGE>
Securities, without the necessity of showing economic loss and without any bond
or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the undersigned Purchaser and the Company have
caused this Agreement to be duly executed as of the date first above written.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
Name: Mark Honigsfeld
Title: CEO
PURCHASER:
JNC STRATEGIC FUND LTD.
By: /s/ Neil Chau
Name:
Title:
RESIDENCE: Cayman Islands
ADDRESS:
c/o Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House
20 Reid Street
Hamilton HM11
Bermuda
Telecopy: (441) 295-2305
Attention: Thomas Davis
with copies of all notices to:
Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive
Suite 460
Reston, VA 20191
Telecopy: (703) 476-7711
Attention: Neil T. Chau
AGGREGATE EXCHANGE AMOUNTS
Number of Series B Preferred Shares to be Received 1,750
----------------
at Closing
Number of Common Shares to be Delivered at Closing 327,103
----------------
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<PAGE>
CONSENT
Dated as of September 25, 1998
JNC OPPORTUNITY FUND LTD. ("JNCO") hereby consents to the issuance of the
Series B Preferred Stock and the other transactions contemplated by the
Securities Exchange Agreement (the "Agreement") of even date herewith between
Compu-Dawn, Inc. and JNC Strategic Fund Ltd.
IN WITNESS WHEREOF, JNCO has caused this Consent attached to the Agreement
to be duly executed as of the date first above written.
JNC OPPORTUNITY FUND LTD.
By: /s/ Neil Chau
Name:
Title:
PHIL1\144578-6
-18-
<PAGE>
REGISTRATION RIGHTS AGREEMENT AMENDMENT
This AMENDMENT dated as of September 25, 1998 is between COMPU-DAWN, INC.,
a Delaware corporation (the "Company"), and JNC OPPORTUNITY FUND LTD. ("JNCO")
and JNC STRATEGIC FUND LTD. ("JNCS," and, together with JNCO, the "Initial
Investors").
R E C I T A L S
(a) The Company previously entered into a Securities Purchase Agreement
dated as of May 31, 1998, among the Company and the Initial Investors (the
"Securities Purchase Agreement"), pursuant to which the Company agreed, upon the
terms and subject to the conditions contained therein, to issue and sell to the
Initial Investors (i) 3,250 shares of its Series A Convertible Preferred Stock
that are convertible into shares of the Company's Common Stock, par value $.01
per share (the "Common Stock"), and (ii) 327,103 shares of Common Stock issued
at the closing under the Securities Purchase Agreement (the "Common Shares") and
(iii) warrants to acquire 90,207 shares of Common Stock. In connection with the
Securities Purchase Agreement, the Company agreed to provide certain
registration rights pursuant to the Registration Rights Agreement dated as of
May 31, 1998, among the Company and the Initial Investors (the "Registration
Rights Agreement").
(b) In connection with the Securities Exchange Agreement of even date
herewith between the Company and JNCS (the "Securities Exchange Agreement") the
Company agreed to issue and exchange 1,750 shares of its Series B Convertible
Preferred Stock (the "Series B Preferred Stock") for all of the Common Shares
which are held by JNCS. The rights, preferences and privileges of the Series B
Preferred Stock, including the terms upon which such Series B Preferred Stock
are convertible into shares of Common Stock, are set forth in the Certificate of
Designations, Preferences and Rights relating to the Series B Preferred Stock
(the "Certificate of Designation"). The shares of Common Stock issuable upon
conversion of the Series B Preferred Stock or otherwise pursuant to the
Certificate of Designation are referred to herein as the "Series B Conversion
Shares." As a condition to the Closing under the Securities Exchange Agreement,
the Company and the Initial Investors have agreed to amend the Registration
Rights Agreement as set forth herein.
PHIL1\144925-6
1
<PAGE>
SECTION 1. Amendments to Registration Rights Agreement. The Registration Rights
Agreement is, effective as of the date hereof, hereby amended as follows:
(a) The definition of the term "Preferred Stock" in Introductory
Paragraph A shall be deemed to include the Series B Preferred
Stock.
(b) All references to the term "Conversion Shares" in the
Registration Rights Agreement shall be deemed to include the
Series B Conversion Shares.
(c) Section 2(a) thereof is amended by deleting from the first
sentence thereof the words "the seventy-fifth (75th) day
following the Closing Date" and replacing such words with the
words "October 2, 1998."
(d) Section 2(c) thereof is amended by deleting from the first
sentence thereof the words "the one hundred and fiftieth
(150th) day following the date hereof" and replacing such
words with the words "December 15, 1998."
(e) All remaining terms and provisions of the Registration Rights
Agreement shall continue and survive this Amendment and remain
in full force and effect.
SECTION 2. Consent of Initial Investors. The Initial Investors hereby consent to
the inclusion of 125,000 shares of Common Stock in the Registration Statement
referred to in Section 2(a) of the Registration Rights Agreement to register the
resale thereof on behalf of certain selling stockholders; provided, however,
that in the event such shares are included, the number of shares of Common Stock
covered for resale by such Registration Statement shall be increased by 125,000.
SECTION 3. Miscellaneous.
(a) Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in the State of Delaware.
(b) Counterparts. This Amendment may be executed in two or more
counterparts, all of which shall be considered one and the same Amendment and
shall become effective when counterparts have been signed by each party and
delivered to the other party. This Amendment, once executed by a party, may be
delivered to the other parties hereto by facsimile transmission of a copy of
this Amendment bearing the signature of the party so delivering this Amendment.
In the event any signature is delivered by facsimile transmission, the party
using such means of delivery shall cause the manually executed signature page
hereof to be physically delivered to the other party within five (5) days of the
execution hereof.
(c) Headings. The headings of this Amendment are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Amendment.
PHIL1\144925-6
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
PHIL1\144925-6
3
<PAGE>
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
Name: Mark Honigsfeld
Its: CEO
INITIAL INVESTORS:
JNC OPPORTUNITY FUND LTD.
By: /s/ Neil Chau
Name:
Its:
JNC STRATEGIC FUND LTD.
By: /s/ Neil Chau
Name:
Its:
PHIL1\144925-6
4
<PAGE>
<TABLE>
Compu-DAWN, Inc.
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited)
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- ----------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
------------ ------------ -------------- ---------------
NET (LOSS) $(367,872) $(728,665) $(1,266,910) $(3,608,292)
========= ========= =========== ===========
WEIGHTED AVERAGE SHARES:
Common shares outstanding 3,148,730 2,662,700 2,988,978 1,694,429
Assumed conversion of cheap options and warrants - 457,412 - 383,328
---------------- ---------- ---------------- ----------
3,148,730 3,120,112 2,988,978 2,077,757
========= ========= ========= =========
BASIC (LOSS) PER COMMON SHARE $(.12) $(.23) $(.42) $(1.74)
===== ===== ===== ======
</TABLE>
- Exhibit 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for the nine months ended September 30, 1998
and is qualified in its entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 6,407,365
<SECURITIES> 0
<RECEIVABLES> 131,360
<ALLOWANCES> 13,635
<INVENTORY> 0
<CURRENT-ASSETS> 6,629,358
<PP&E> 481,479
<DEPRECIATION> 244,055
<TOTAL-ASSETS> 6,888,307
<CURRENT-LIABILITIES> 141,261
<BONDS> 47,209
0
50
<COMMON> 31,795
<OTHER-SE> 6,667,992
<TOTAL-LIABILITY-AND-EQUITY> 6,888,307
<SALES> 916,129
<TOTAL-REVENUES> 916,129
<CGS> 0
<TOTAL-COSTS> 1,989,393
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,940
<INCOME-PRETAX> (1,266,910)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,266,910)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,266,910)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
