As filed with the Securities and Exchange Commission on November 20, 1998
Registration No. 333-65303
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMPU-DAWN, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-3344575
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification
Number)
77 Spruce Street
Cedarhurst, New York 11516
Telephone: (516) 374-6700
Telecopier: (516) 374-9410
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Mark Honigsfeld
Chairman of the Board and
Chief Executive Officer
Compu-DAWN, Inc.
77 Spruce Street
Cedarhurst, New York 11516
Telephone: (516) 374-6700
Telecopier: (516) 374-9410
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copies of all communications and notices to:
Fred Skolnik, Esq.
Gavin C. Grusd, Esq.
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York 11554
Telephone: (516) 296-7000
Telecopier: (516) 296-7111
<PAGE>
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans,
please check the following box. [ ]
If any of the securities being registered on this form are to
be offered on a delayed or continuous basis pursuant to Rule
415 of the Securities Act of 1933, other than securities
offered only in connection with dividend or interest
reinvestment plans, check the following box. [x]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box
and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
====================================================================================================================================
Proposed
Proposed Maximum Maximum
Amount to be Offering Price Aggregate Offering Amount of
Title of Each Class of Securities to be Registered Registered Per Share (4) Price (4) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per share, issuable
<S> <C> <C> <C> <C>
upon conversion of Series A Convertible 1,300,000(1) $1.50 $1,950,000.00 $575.25
Preferred Stock, registered for the benefit of
Selling Stockholders
Common Stock, $.01 par value per share, issuable
upon conversion of Series B Convertible 327,103(2) $1.50 $490,654.50 $144.74
Preferred Stock, registered for the benefit of
Selling Stockholders
Common Stock, $.01 par value per share, issuable 180,414(3) $1.50 $270,621.00 $79.83
upon exercise of outstanding warrants
Common Stock, $.01 par value per share, 125,000 $1.50 $187,500.00 $55.31
registered for the benefit
of Selling Stockholders
Common Stock, $.01 par value per share, issuable 75,000 $2.44 $183,000.00 $50.87
under certain circumstances, registered for benefit
of Selling Stockholders
Total Registration Fee: $ 906.00 (5)
================================================================================================================================
</TABLE>
<PAGE>
(1) For purposes of estimating the number of the Company's shares
of Common Stock to be included in this Registration Statement,
the Company calculated 200% of the number of shares of Common
Stock issuable upon the conversion at maturity of 3,250 shares
of the Company's Series A Convertible Preferred Stock, $.01
par value per share (the "Series A Stock"), or otherwise
pursuant to the Certificate of Designations, Preferences and
Rights of the Series A Stock, based on a conversion price of
$5.00 per share. Pursuant to Rule 416 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), the
number of shares of Common Stock to be registered hereunder
also includes an indeterminate number of shares which may
become issuable upon conversion, of or otherwise with respect
to, the Series A Stock to prevent dilution resulting from
stock splits, stock dividends or similar transactions.
(2) Pursuant to Rule 416 promulgated under the Securities Act, the
number of shares of Common Stock to be registered hereunder
also includes an indeterminate number of shares which may
become issuable upon conversion of the Company's Series B
Convertible Preferred Stock, $.01 per value per share, to
prevent dilution resulting from stock splits, stock dividends
or similar transactions.
(3) For purposes of estimating the number of the Company's shares
of Common Stock to be included in this Registration Statement,
the Company calculated 200% of the number of shares of Common
Stock issuable upon the exercise of warrants for the purchase
of 90,207 shares of Common Stock based upon an exercise price
of $8.025 per share. Pursuant to Rule 416 promulgated under
the Securities Act, the number of shares of Common Stock to be
registered hereunder also includes an indeterminate number of
shares which may become issuable upon exercise of the warrants
to prevent dilution resulting from stock splits, stock
dividends or similar transactions.
(4) Estimated solely for the purpose of calculating the amount of
the registration fee pursuant to Rule 457(c).
(5) Of which $855.13 was previously paid.
The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
The information in this Prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
PROSPECTUS
----------------
COMPU-DAWN, INC.
2,007,517 SHARES OF COMMON STOCK
The shares of common stock offered by this Prospectus are being sold by
stockholders of Compu-DAWN, Inc. See "Selling Stockholders" and "Plan of
Distribution." A purchase of these securities involves a high degree of risk.
See "Risk Factors," beginning on page 5.
The common stock of Compu-DAWN, Inc. is traded
on the Nasdaq SmallCap Market under the symbol "CODI."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Compu-DAWN, Inc.
77 Spruce Street
Cedarhurst, New York 11516
(516) 374-6700
, 1998
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
The Company files reports, proxy and information statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, statements and other information filed by the
Company with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the following Regional Offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048; and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can also be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Furthermore, the Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding the Company. The address of such Web site is
http://www.sec.gov.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by Compu-DAWN, Inc., a
Delaware corporation (the "Company"), with the Commission under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and are incorporated
herein by reference:
(a)The Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997 (the "Form 10-KSB").
(b)The Company's Quarterly Report on Form 10-QSB for the three
months ended March 31, 1998.
(c) The Company's Current Report on Form 8-K for an event
dated April 22, 1998.
(d) The Company's Current Report on Form 8-K for an event
dated April 23, 1998.
(e)The Company's Current Report on Form 8-K for an event dated
June 8, 1998.
(f)The Company's Quarterly Report on Form 10-QSB for the three
months ended June 30, 1998.
(g)The Company's Current Report on Form 8-K for an event dated
September 1, 1998.
(h)The Company's Current Report on Form 8-K for an event dated
September 25, 1998.
(i)The Company's Quarterly Report on Form 10-QSB for the three
months ended September 30, 1998.
(j)The Company's Current Report on Form 8-K for an event dated
November 18, 1998.
(k)The description of the Company's Common Stock contained in
the Company's Registration Statement on Form 8-A (File No.
000-22611), which was declared effective by the Commission
on June 10, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus, and prior to
the termination of the offering of the 2,007,517 shares of common stock, $.01
par value per share ("Common Stock"), of the Company offered hereby (the
"Shares"), shall be deemed to be incorporated by reference into this Prospectus
and to be a part hereof from their respective dates of filing.
3
<PAGE>
The Company will provide without charge to each person to whom a copy
of this Prospectus is delivered, upon the written or oral request of any such
person, a copy of any or all of the documents referred to above which have been
incorporated into this Prospectus by reference (other than exhibits to such
documents). Requests for such copies should be directed to the Secretary,
Compu-DAWN, Inc., 77 Spruce Street, Cedarhurst, New York 11516 (telephone
number: (516) 374-6700).
Any statement contained in a document incorporated herein by reference
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
THE COMPANY
Compu-DAWN, Inc. (the "Company") is primarily engaged in the business
of designing, developing, licensing, installing and servicing computer software
products and systems for law enforcement and public safety agencies. The
software systems include computer-aided dispatching, computer interfacing with
state and national crime information databases, advanced mobile on-line radio
computing, automatic vehicle location (employing dynamic map displays), records
management and photo-image database systems. Certain of these applications
utilize telecommunications and space satellite technology, and other
infrastructure, provided by third parties. The Company has developed, licensed
and installed its systems in approximately 60 agencies primarily located in the
State of New York.
The Company was incorporated under the name Coastal Computer Systems,
Inc. in New York on March 31, 1983 and was reincorporated in Delaware under its
present name on October 18, 1996.
The Company's executive offices are located at 77 Spruce Street,
Cedarhurst, New York 11516 and its telephone number is (516) 374-6700.
FORWARD-LOOKING STATEMENTS
Certain information contained herein and/or incorporated by reference
in this Prospectus includes "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, and is subject to the safe
harbor created by that act. The Company cautions readers that certain important
factors may affect the Company's actual results and could cause such results to
differ materially from any forward-looking statements which may be deemed to
have been made in this Prospectus or which are otherwise made by or on behalf of
the Company. For this purpose, any statements contained in this Prospectus that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate,"
or "continue" or the negative variations thereof or comparable terminology are
intended to identify
4
<PAGE>
forward-looking statements. Factors which may affect the Company's results
include, but are not limited to, the risks and uncertainties associated with the
level of spending by law enforcement and public safety agencies for computer
application software and hardware, the competitive environment within the
industry, the ability of the Company to expand its operations, the competence
required, and experience, of management to effectuate the Company's business
plan, the level of costs incurred in connection with the Company's planned
expansion efforts, economic conditions in the industry, the financial strength
of the Company's customers and suppliers, and unascertainable risks related to
possible unspecified acquisitions. The Company is also subject to other risks
detailed herein or detailed from time to time in the Company's Commission
filings. Factors that could cause or contribute to such difference include, but
are not limited to, those discussed in "Risk Factors" below, as well as those
discussed elsewhere in this Prospectus and in the Company's filings with the
Commission.
RISK FACTORS
An investment by you in the shares offered by this Prospectus is
speculative and involves a high degree of risk. You should only purchase these
securities if you can afford to lose your entire investment. Before making an
investment, you should carefully consider the following risks and speculative
factors, as well as the other information contained in this Prospectus. As
discussed above, this Prospectus contains forward-looking statements that
involve risks and uncertainties. The actual results of the Company's operations
could be significantly different from the information contained in those
forward-looking statements. Those differences could result from the risk factors
discussed immediately below, as well as factors discussed in other places in
this Prospectus.
In this "Risk Factors" section, "we," "our" and "ours" refer to the
Company, and "you," "your" and "yours" refer to a purchaser of the shares of the
Company offered by this Prospectus.
1. Lack of Significant Revenues; Historical and Anticipated Losses.
Period Ended Revenues Net Loss
December 31, 1996 (year) $ 477,527 $ 570,769
December 31, 1997 (year) 591,375 4,436,745
September 30, 1998 (nine months) 916,129 1,266,910
The table above sets out our revenues and net losses for the periods
indicated in the first column. The net losses are the result of significant
expenses, including research and development expenses, enhancing and refining
our product line, marketing costs, employment agreement costs and general
administrative expenses. In addition, the 1997 loss reflects approximately
$1,588,000 in non-recurring deferred financing charges incurred in connection
with a debt offering we made.
5
<PAGE>
Furthermore, the net loss figure for 1998 was higher than it would have been
otherwise because we did not generate significant revenues, but did incur
expenses regarding contemplated business ventures. We believe that we will be
unable to achieve revenues sufficient to offset operating costs for the
foreseeable future; therefore, we anticipate that operating losses will continue
for at least the next 12 months. We cannot predict how long these operating
losses will continue or what impact they will have on our financial condition
and results of operations. We cannot assure you that our technology and products
will be able to compete successfully in the marketplace or that they will
generate significant revenue; nor can we assure you that our business will be
able to operate profitably.
Our operating results have varied widely in the past from quarter to
quarter, and may continue to. Factors such as (a) the amount, timing and
recognition of revenue from significant sales or other business activity, (b)
the timing of new product releases and market acceptance of these new releases,
and (c) increases in operating expenses, will all affect quarterly results.
Conversely, with the fixed nature of costs such as personnel and facilities, a
decline in revenues in any one quarter typically results in lower profitability
for that quarter. We cannot assure you that we will become profitable or avoid
losses in any future period.
2. Evolving Market; New Product Development; Technological
Obsolescence. Our ability to compete will depend on our ability to adapt,
enhance and improve our existing products and technology, and develop and
introduce new products and technology in a timely and cost- competitive manner.
The markets for our software products are characterized by
- evolving industry requirements
- rapid technological change
- frequent introductions of new products
Any one of these factors may result in product or technology obsolescence. Other
companies may be developing technologies or products of which we are unaware and
which may be similar or superior to some or all of the products and technology
we offer. We cannot predict whether or not our competitors will develop
technologies or products that will render ours obsolete or less marketable, or
whether we will be able to enhance and adapt our products and technology
successfully.
All the risks inherent in the development of new technology and
products, including unanticipated delays, expenses and technical problems, will
accompany our new product development efforts. We cannot assure you that (a) we
can develop additional technologies within a reasonable schedule; (b) we will
have sufficient economic or human resources to complete such development; (c) we
will have access to sufficient funding to complete development; or (d) we can
make economically reasonably arrangements for the completion of new products by
third parties.
6
<PAGE>
Therefore, we can make no assurances as to when, or whether, new products will
be successfully developed.
Before we can market any additional product, we must successfully
complete a testing program for it. Although we believe our testing program is
adequate, unforseen technical problems arising out of the testing process may
delay or prevent our production or marketing of a commercially acceptable
product. In addition, our current and proposed products must meet the cost and
performance demands of the marketplace. We cannot assure you that new
technologies or products will be developed by us, or that, if they are, they
will meet cost and performance objectives; neither can we assure you that
unforseen technical problems (or other problems) will not significantly increase
the cost, or delay the introduction, of such products. Furthermore, as discussed
in the first paragraph of this section, if superior technology is developed by
our competitors, it may render our products obsolete and thus have a significant
negative impact on us.
3. Failure to Integrate Various Product Introductions and Offerings. To
compete successfully, we must be able to integrate our software products with
other systems. We have achieved some success with integration in the past,
although we cannot guarantee that we will continue to do so either with existing
applications or newly created applications. If we are unable to further
integrate our products, there could be a significant negative effect on our
business; even if we do achieve further integration, there is no guarantee that
we will improve our competitive position in the software market.
4. Product Concentration. In 1996, 1997 and the first nine months of
1998, almost all of our revenues came from the licensing of products and the
provision of maintenance and support services to law enforcement and public
safety agencies. A shift in the needs of these customers, or the introduction of
superior competitive products, or any circumstance which would adversely affect
the narrow area in which our products are concentrated, would have a significant
negative effect on our financial condition and results of operations.
5. Lengthy Sales Cycle. The public agencies that buy or license our
products usually have a long internal approval procedure, due to the large
expense and the significant change to the customer's infrastructure that is
represented by a purchase from us. These internal acceptance procedures as well
as the customer's budgetary constraints are beyond our control. Therefore, the
sales cycle associated with our products is typically quite long. Due to this
lengthy sales cycle and the generally large size of customer orders, if revenues
forecast from a specific customer for a specific quarter are not realized in
that quarter, our operating results for that quarter could be materially
adversely affected.
6. Competition. Our products compete with those of numerous
well-established companies. Many of these companies have substantially greater
financial, technical and other resources than we do, and they may have
established reputations for success in the development, licensing, sale and
service of their products and technology. Some of these competitors have the
financial resources to withstand substantial price competition, or downturns in
the market for the products we produce. In addition, we anticipate that
significant sales of our products will be made
7
<PAGE>
through the competitive bidding process. We cannot be certain that we will be
able to compete against these companies effectively in such a process.
7. Limited Sales and Marketing Infrastructure. The Company has a
limited sales, marketing and distribution infrastructure. Our sales and
marketing staff must be expanded. We cannot be certain that we will be able to
build an adequate sales and marketing staff, that we will be able to do it in a
cost-effective manner, or that our sales and marketing efforts will be
successful.
8. Dependence on Significant Customers. We have, so far, depended on a
limited number of customers for the bulk of its revenues. Although the actual
customers have changed from year to year, generally the number of customers
remains small. We generally do not receive repeat business from customers for
whom we have designed and installed software systems. Any additional revenues
from these customers are usually derived from maintenance and support contracts.
With this history, we do not believe that the makeup of our current customers is
important to an understanding of our future business prospects. Although we
expect our customer base to continue to expand, a limited number of large
customers may continue to represent a significant portion of our sales during
any given period for the foreseeable future. Consequently, our financial
condition and results of operations may be adversely affected by the loss of one
or more of these customers, or by such a customer's reduction, delay or
cancellation of orders.
9. Dependence on Strategic Business Alliances and Subcontractor
Relationships. To enter the "large size" market segment for our products, we
will probably need to establish strategic business alliances and/or
subcontractor relationships with large systems integrators and public network
providers.
Our customers have, so far, been in the "small size" and "medium size"
market segments (i.e., fewer than 200 sworn officers or personnel). Our business
strategy includes the development of systems for the large size market and the
establishment of relationships to help us enter that market.
Business alliances have been entered into with AT&T Wireless Data, Inc.
("AT&T") and GTE MobileNet Service Corp. ("GTE"). These arrangements do not
relate to a particular customer; they govern the relationship between us and the
other party for a system installation for a mutual customer. The agreement
between us and AT&T provides for, among other things, minimum technical support
standards and minimum revenue requirements. If we do not meet the technical
support standards, AT&T is entitled to reduce the technical support fees paid to
us; the minimum revenue requirements may entitle us to a goal attainment fee.
Failure to meet the minimum revenue requirements entitles AT&T to terminate the
agreement. The agreement with GTE allows GTE to not pay us during any period in
which we fail to materially perform our obligations.
We cannot be certain that, if any projects are undertaken with AT&T, GTE
or Data General, we will meet the required standards, revenue levels, or
obligations. If not, our compensation may be reduced or eliminated and the early
termination of these agreements is a possibility. Furthermore,
8
<PAGE>
we cannot be certain that we will renew these agreements or enter into others.
Our inability to maintain or enter into business alliances and/or subcontractor
relationships would significantly hinder our implementation of the "large size"
market plan.
10. Intellectual Property Protection and Infringement. Our technology
is not patented and we have not filed any patent applications. We rely on trade
secrets and copyright rights to establish and protect certain proprietary rights
in our products. These measures give limited protection, and it is possible that
they will be inadequate to protect proprietary rights, prevent misappropriation
of our technology, or prevent the independent development by others of similar
technology. This potential inadequacy is compounded by our limited resources and
the potential cost of legal action to enforce our rights.
We have not obtained any copyright registrations. We believe that it
would be impractical and not cost-effective for a third party to attempt to copy
software like that used in our products. Still, unauthorized parties might
attempt to copy or reverse-engineer all or parts of our products, or may obtain
information that we regard as proprietary.
Registration of a copyright with the United States Copyright office is
not a requirement to make a copyright legally effective. However, such a
registration generally reinforces the registrant's claim. In the absence of a
registered copyright, we will be unable to sue anyone for copyright
infringement. A copyright may be registered at any time prior to suing for
infringement. If a copyright is registered before infringement occurs, the law
permits the injured party to recover certain amounts of money even if the actual
harm that's been suffered equal a smaller amount of money. If we register the
copyright after the infringement occurs (and before suing), we may be limited in
our ability to prove our case and in the amount we can recover as damages. The
cost of enforcement by us of our rights could be significant; nevertheless, we
can give no assurance that such proceedings will be effective.
We believe there are no infringement or trade secret misappropriation
claims against us and that there are no grounds for the assertion of any such
claims; however, should such a claim be made, the cost of responding to it could
be significant and we cannot be certain that we would prevail.
11. Dependence on Executive Management; Need to Retain Key Personnel.
Our executive management team consists of Mark Honigsfeld, our Chairman and
Chief Executive Officer, and Louis Libin, our Chief Technology Officer.
The loss of the services of either Mr. Honigsfeld or Mr. Libin could have a
significantly detrimental effect on our business. We have three-year employment
agreements with Messrs. Honigsfeld and Libin. Each agreement includes
non-competition and non-solicitation provisions. However, each agreement also
provides that the employee can terminate it at any time upon 30 days notice for
any reason. Additionally, Mr. Honigsfeld's employment agreement allows him to
devote
9
<PAGE>
up to 10% of his working time to other endeavors that are not competitive with
us. Mr. Libin's employment agreement allows him to devote up to one day a week
to such endeavors.
We have obtained "key-man" life insurance policies on the lives of
Messrs. Honigsfeld and Libin, each of which policies provides for a death
benefit to us of $1,000,000. We cannot be certain that the death benefit would
be adequate to fund our needs until a successor could be found.
Our success is also partly dependent upon our ability to hire and
retain additional personnel. Qualified and talented executive, technical and
marketing personnel are always in great demand in our business, and our
inability to recruit them could have a materially adverse impact on our business
and results of operations. We cannot say with certainty that we will be able to
retain our current management or other personnel, or that we will be able to
attract and retain qualified personnel in management, engineering and sales in
the future.
12. Dependence on Licensors. We rely on operating system software owned
by unaffiliated third parties for certain software and platform operating
systems which we use to create our products, and in some cases to bundle with
our own software. The licenses under which we use this software require payment
of either an annual maintenance and enhancement fee, or of a monthly sublicense
fee. An annual fee is based on the number of end users of the operating system
software; a monthly fee is based upon the number of customers to which our
products are licensed (including products where such licensed software is
included). We believe that there are alternatives to the operating system
software that we currently use, and that we could revise our software to make it
compatible with these alternatives. However, termination of any of the current
licenses could result in production delays of approximately three to six months;
these delays would have a material adverse effect on our business.
13. Challenges to Management of Growth. We anticipate a period of
growth as a result of the development of our software business that is expected
to strain our administrative, financial and operational resources. Our ability
to manage growth effectively will require us to
- continue to improve our operational, financial and management
- controls continue to improve reporting systems and procedures
- install new management information and control systems train,
- motivate and manage our employees
We cannot be certain that we will achieve improvements or install new management
systems in an efficient and timely manner, or that the improvements and new
systems will be adequate to support our operations. Additionally, many of the
challenges of growth will be unforeseeable and beyond our control. If we are
unable to manage growth effectively, resulting in our sales and marketing
efforts exceeding our capacity to design, develop, install, maintain and service
our products, or if new employees are unable to achieve adequate performance
levels, our business, operating results and financial condition could be
negatively influenced.
10
<PAGE>
Due to the complexity of our software products, we have experienced
(and expect to experience again) a time lag between the date on which technical
and sales personal are hired and the time at which they become fully productive.
Customer satisfaction could be substantially affected by the quality of our
post-sales system implementation process and, in many cases, by our software
maintenance and service capabilities. If we are unable to hire, train and retain
qualified personnel and consultants to perform these services, or fail to
supervise the post-sales process effectively, our ability to attract repeat
sales or obtain references for prospective sales could be negatively impacted.
Such results could limit our growth opportunities.
14. Matters Relating to Terminated Agreement. On September 1, 1998, we
terminated an agreement we had entered into with Rugby National Corp. ("Rugby").
We had entered into an Agreement and Plan of Merger (the "Merger Agreement")
with Rugby regarding the right to operate a national online lottery in Russia.
The Merger Agreement contained conditions to our obligation to close the
transaction; since these conditions had not been satisfied by the deadline
(August 31, 1998), we terminated the Merger Agreement. Subsequently, Rugby and
its counsel claimed that we had breached certain provisions of the Merger
Agreement. We believe that we have legitimate defenses against Rugby's claims.
Rugby has not begun any lawsuit yet; however, if it does, we intend to defend
ourselves vigorously.
The Merger Agreement provided for "liquidated damages" if we did not
close the Merger Agreement even though the conditions to our obligation to close
were met. The maximum amount payable to Rugby as liquidated damages is
$1,000,000; but, since we had loaned approximately $125,000 to Rugby, our
potential liability would be the difference between that loan and the
$1,000,000. We do not believe we have any liability for liquidated damages.
We estimate that the total cost to us of the Merger Agreement and the
related transactions was approximately $300,000, all of which has been included
as an expense in our financial statements.
15. Risks Related to Possible Unspecified Acquisitions. We intend to
explore opportunities to:
- add technology or products to our current product line
- acquire a customer base or sales organization to augment our
infrastructure
- make and/or market products not in our current line of business
The Board of Directors will decide whether any opportunity to add technology or
products is in the best interest of our stockholders. We cannot be certain that
any such opportunities will arise, or that, if they do, we will be able to reach
an agreement on terms acceptable to us. Furthermore, if any such opportunity
involves the acquisition of a business, we cannot be certain that:
- we will successfully integrate the operations of the acquired
- business with ours all the benefits expected from such
- integration will be realized
11
<PAGE>
- delays or unexpected costs related to the integration will not
have a detrimental affect on our combined business,
operating results or financial condition
- our respective operations, management and personnel
will be compatible
- we will not lose key personnel
In most cases, an acquisition will be concluded without stockholder approval, in
which case our stockholders will not have an opportunity to review the financial
statements of the acquisition candidate. Although we will attempt to evaluate
the risks inherent in a particular acquisition, we cannot be certain that we
will properly ascertain or assess such significant risk factors.
If we acquire technology or products in the early stage of development
or growth (including technology or products that have not been fully tested or
marketed), we will be subject to numerous risks inherent in developmental
technology, plus the additional high level of risk associated with high
technology industries. Furthermore, these acquisitions may require us to obtain
additional financing from banks or other financial institutions or to undertake
debt or equity financing. We cannot assure you that we will be able to obtain
financing on commercially reasonable terms or at all. Furthermore, equity
financing will result in a dilution to our existing stockholders, i.e., the
number of shares that you own will represent a smaller percentage of our
outstanding stock. The degree of dilution may be significant. In the case of
debt financing, we run the risks of interest rate fluctuations and insufficiency
of cash flow to pay principal and interest, along with other risks traditionally
associated with incurring indebtedness.
16. International Expansion. Although we have not developed any
international marketing strategy or given significant attention to international
marketing, we do intend to explore opportunities to expand our operations into
international markets. Such an expansion could require significant management
attention and financial resources. In addition, there are risks that are
peculiar to international sales and operations, including:
- potentially longer payment cycles
- unexpected changes in regulatory requirements
- import and export restrictions and tariffs
- difficulties in staffing and managing foreign operations
- compliance with foreign laws
- greater difficulty in collecting accounts receivable
- potentially adverse tax consequences
- currency fluctuations
- potential political and economic instability
- cultural differences relating to day-to-day business operations
Additionally, protecting intellectual property can be more difficult and costly
outside the United States. If we expand internationally, price controls or other
restrictions on foreign currencies could have a significant affect on our
business, operating results and financial condition.
12
<PAGE>
17. Control By Existing Management and Stockholders; Effect of Certain
AntiTakeover Considerations. Our directors and executive officers beneficially
own approximately 29% of our outstanding Common Stock. The holders of our Series
A Convertible Preferred Stock ("Series A Stock"), Series B Convertible Preferred
Stock ("Series B Stock") and certain warrants held by such holders (the
"Warrants") currently may not convert or exercise their securities to acquire
more than 4.99% of our outstanding Common Stock. Each of the holders may waive
that limitation. If all of them waive the limitation, the holders of the Series
A Stock, the Series B Stock and the Warrants have the right to acquire
approximately 27% of the Common Stock that would be outstanding following
conversion or exercise of their securities. Thus, these two groups of
stockholders, if acting together, have the potential voting strength to exert
significant influence over the election of our directors and over other matters
submitted to our stockholders for approval. (The percentages given in this
paragraph do not account for some of the rights given to the holders of the
Series A and Series B Stock and the Warrants. There is additional information
about the conversion of the Series A Stock and the Series B Stock and the
exercise of the Warrants in the section of this Prospectus entitled "Selling
Stockholders.")
We may issue additional Preferred Stock without approval of the holders
of Common Stock. If we issue Preferred Stock, it could discourage a third party
from buying a majority of our outstanding Common Stock. This, in turn, could
prevent our stockholders from selling their shares at a price above the market
price. The rights that the holders of Common Stock have will be subject to, and
may be negatively affected by, the rights that holders of Preferred Stock might
be given. In addition, our being governed by a staggered Board of Directors,
certain provisions of our By-Laws, and certain provisions of Delaware Law that
are applicable to us all could delay or complicate a merger, tender offer or
proxy contest involving us.
18. Impact of Nasdaq SmallCap Market Rules. Our Common Stock is
currently traded on the Nasdaq SmallCap Market. If we are unable to satisfy the
requirements for continued quotation on that market, trading of our Common Stock
would be conducted in the over-the-counter market, in what is commonly referred
to as the "pink sheets" or on the NASD OTC Electronic Bulletin Board.
For continued listing on the Nasdaq SmallCap Market, we are required to
have, among other things, all of the following:
- either net tangible assets of $2,000,000, or market
capitalization of $35,000,000, or net income for two of the last
three fiscal years of $500,000
- minimum market value or public float of $1,000,000
- minimum bid price of $1.00 per share
Nasdaq also requires that we have at least two independent directors and an
Audit Committee, a majority of whose members must also be independent directors.
13
<PAGE>
If you buy the Common Stock offered by this Prospectus and our Common
Stock is afterwards traded only in the "pink sheets" or on the Electronic
Bulletin Board, you may find it more difficult to dispose of the shares or
obtain accurate quotations as to their price.
19. Securities Market Factors. In recent years, the securities markets
have experienced a high level of volume volatility. Market prices for many
companies, particularly small and emerging growth companies, which trade in the
over-the-counter market, have been subject to wide fluctuations in response to
quarterly variations in operating results. The fluctuations in many cases were
unrelated to the performance of, or announcements concerning, the issuers of the
affected stock. Thus, factors such as announcements by us or our competitors
concerning any of the following may have a significant impact on the market for
our securities:
- technological innovations
- new products or procedures
- government regulations and developments
- disputes relating to proprietary rights
- the acquisition or sale of a business or assets
General market price declines or market volatility in the future could adversely
affect the price of our securities.
20. "Penny Stock" Regulations May Impose Certain Restrictions on
Marketability of Securities. The Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
of less than $5.00 per share. Our Common Stock currently trades below $5.00 per
share. The Common Stock offered by this Prospectus is authorized for quotation
on the Nasdaq SmallCap Market; therefore, it is exempt from the definition of
"penny stock". However, if the Common Stock offered hereby is removed from the
SmallCap Market at any time, then, based on the current market price of our
Common Stock, it will be subject to rules that impose additional sales practice
requirements. For transactions covered by these rules, the broker-dealer must
make a special suitability determination for the purchase of the Common Stock
and must have received the purchaser's written consent to the transaction prior
to the purchase. The "penny stock" rules also require the delivery, prior to the
transaction, of a risk disclosure document mandated by the Commission relating
to the penny stock market. The broker-dealer must also disclose (a) the
commission payable to both the broker-dealer and the registered representative,
(b) current quotations for the securities, and (c) if the broker-dealer is the
sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. These rules would
apply to sales by broker-dealers to persons other than established customers and
accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 together with their spouse), until
our Common Stock trades above $5.00 per share. Consequently, the "penny stock"
rules may restrict the ability of broker-dealers to sell our Common Stock, and
may affect the ability to sell our Common Stock in the secondary market as well
as the price at which
14
<PAGE>
such sales can be made. Also, some brokerage firms will decide not to effect
transactions in "penny stocks" and it is unlikely that any bank or financial
institution will accept "penny stock" as collateral.
21. No Dividends. We have never paid any dividends on our Common Stock
and do not intend to in the foreseeable future. We anticipate retaining any
earnings which we may realize in the foreseeable future to finance our growth.
22. Limitations on Director Liability. Our Certificate of Incorporation
provides that a director shall not be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
with certain exceptions. These provisions may discourage stockholders from suing
a director for breach of fiduciary duty and may reduce the likelihood of
derivative lawsuits against any director. (A "derivative lawsuit" is one in
which a stockholder sues an officer or director of the corporation on behalf of
the corporation, claiming that the officer or director did some harm to the
corporation). In addition, our Certificate of Incorporation provides for
mandatory indemnification of directors and officers to the fullest extent
permitted or not prohibited by Delaware law.
SELLING STOCKHOLDERS
Of the 2,007,517 Shares being offered hereby, (i) 1,300,000 Shares are
issuable upon conversion of, or otherwise with respect to, 3,250 shares of
Series A Stock held by JNC Opportunity Fund, Ltd. ("Opportunity"); (ii) 327,103
Shares are issuable upon conversion of 1,750 shares of Series B Stock held by
JNC Strategic Fund, Ltd. ("Strategic" and together with Opportunity, the "JNC
Selling Stockholders"); (iii) 180,414 Shares are issuable upon the exercise of
the Warrants held by the JNC Selling Stockholders; (iv) 75,000 Shares may be
issuable to the JNC Selling Stockholders pursuant to certain
registration-related rights the Company has agreed in principle to grant to
them; and (v) 125,000 Shares are owned by three other individuals (the "Other
Selling Stockholders"). The Series A Stock was issued by the Company to
Opportunity and the Warrants were issued by the Company to the JNC Selling
Stockholders on June 5, 1998 in a private transaction (the "1998 Private
Placement"). The Series B Stock was issued by the Company to Strategic as of
September 25, 1998 in connection with the 1998 Private Placement. The Other
Selling Stockholders acquired their respective Shares in non-issuer private
transactions.
In connection with the 1998 Private Placement, the Company granted the
JNC Selling Stockholders certain registration rights pursuant to which the
Company agreed to keep the Registration Statement, of which this Prospectus is a
part, effective until the earlier of (i) the date that all of their above Shares
have been sold pursuant to the Registration Statement, or (ii) the date upon
which such Shares may be immediately sold to the public without registration or
restriction pursuant to Rule 144(k) promulgated under the Securities Act of
1933, as amended (the "Securities Act"). The Company has agreed to indemnify the
JNC Selling Stockholders and each of their officers, directors, members,
employees, partners, agents and each person who controls either of the JNC
Selling Stockholders against certain expenses, claims, losses, damages and
liabilities (or action, proceeding or inquiry by any regulatory or
self-regulatory organization in respect thereof). The
15
<PAGE>
Company has agreed to pay its expenses of registering the Shares under the
Securities Act, including registration and filing fees, blue sky expenses,
printing expenses, accounting fees, administrative expenses and its own counsel
fees.
The following table sets forth the name of each Selling Stockholder,
the number of shares of Common Stock of the Company beneficially owned by such
Selling Stockholder as of November 15, 1998 and the number of Shares being
offered by such Selling Stockholder. The Shares being offered hereby are being
registered to permit public secondary trading, and the Selling Stockholders may
offer all or part of the Shares for resale from time to time. However, such
Selling Stockholders are under no obligation to sell all or any portion of such
Shares nor are such Selling Stockholders obligated to sell any Shares
immediately under this Prospectus. All information with respect to share
ownership has been furnished by the Selling Stockholders. Because the Selling
Stockholders may sell all or part of their Shares, no estimates can be given as
to the number of Shares that will be held by any Selling Stockholder upon
termination of any offering made hereby. See "Plan of Distribution."
In the case of the Shares underlying the Series A Stock, the number of
Shares offered for sale hereby represents an estimate of the number of shares of
Common Stock issuable upon conversion of, or otherwise with respect to, the
Series A Stock, based on 200% of the number of shares of Common Stock issuable
at a conversion price of $5.00 per share. In the case of the Shares underlying
the Warrants, the number of Shares offered for sale hereby represents an
estimate of the number of shares of Common Stock issuable upon exercise of the
Warrants based on 200% of the number of shares of Common Stock issuable at an
exercise price of $8.025 per share. Pursuant to Rule 416 under the Securities
Act, the JNC Selling Stockholders may also offer and sell Shares issued with
respect to the Series A Stock, the Series B Stock and/or the Warrants as a
result of stock splits, stock dividends or similar transactions. This is not
intended to constitute a prediction as to the number of Shares into which the
Series A Stock or Series B Stock will be converted or the Warrants will be
exercised.
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------------
Shares Beneficially Shares to be
Name of Selling Stockholder Owned Prior to the Sold in the Shares Owned after
Offering Offering the Offering (1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JNC Opportunity Fund, Ltd.(2) 141,686(3) 1,463,744(3)(4) 0
- -------------------------------------------------------------------------------------------------------------------------------
JNC Strategic Fund, Ltd.(2) 141,686(3) 418,773(3)(4) 0
- -------------------------------------------------------------------------------------------------------------------------------
Edwin J. Gerstley 62,500 62,500 0
- -------------------------------------------------------------------------------------------------------------------------------
Gusti Gross 54,500 54,500 0
- -------------------------------------------------------------------------------------------------------------------------------
Sidney Blumenthal 8,000 8,000 0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
(1) Assumes all Shares offered hereby are sold in the Offering.
(2) Opportunity and Strategic are the beneficial owners of the
Shares to be sold by them hereunder. They do not hold the
Shares as nominees for any other person. Encore Capital
Management, L.L.C. ("Encore"), a registered investment adviser
under the Investment Advisers Act of 1940, acts as investment
adviser to, and manager of, Opportunity and Strategic. James
Q. Chau and Neil T. Chau are the managing members of Encore.
(3) The number of "Shares Beneficially Owned Prior to the
Offering" for each of Opportunity and Strategic equals 4.99%
of the outstanding Common Stock of the Company as of November
15, 1998. Pursuant to the terms of the Series A Stock, Series
B Stock and the Warrants, the shares of Series A Stock and
Series B Stock and the Warrants are currently convertible or
exercisable by any holder only to the extent that the number
of shares of Common Stock thereby issuable, together with the
number of shares of Common Stock owned by such holder and its
affiliates (but not including shares of Common Stock
underlying unconverted shares of Series A Stock and Series B
Stock or unexercised portions of the Warrants) would not
exceed 4.99% of the then outstanding Common Stock as
determined in accordance with Section 13(d) of the Exchange
Act. The holders of the Series A Stock, Series B Stock and
Warrants may waive such restriction upon not less than 61 days
notice. Therefore, the number of shares set forth herein and
which a JNC Selling Stockholder may sell pursuant to this
Prospectus (as provided for in footnote (3) hereof) may exceed
the number of shares such JNC Selling Stockholder may
beneficially own as determined pursuant to Section 13(d) of
the Exchange Act.
(4) The number of "Shares to be Sold in the Offering" for
Opportunity includes an estimate of the number of shares of
Common Stock that would be issuable upon conversion of, or
otherwise with respect to, the Series A Stock based on 200% of
the number of shares of Common Stock that would be issuable at
a conversion price of $5.00 per share (1,300,000 shares). In
addition, the Registration Statement covers 327,103 shares
that are issuable to Strategic upon conversion of the Series B
Stock. Further, the number of "Shares to be Sold in the
Offering" for the JNC Selling Stockholders includes (A) an
estimate of the number of shares of Common Stock that would be
issuable upon the exercise of the Warrants based on 200% of
the number of shares of Common Stock that would be issuable at
an exercise price of $8.025 per share (114,994 shares for
Opportunity and 65,420 shares for Strategic) and (B) 75,000
shares of Common Stock that may be issuable to them pursuant
to certain registration-related rights that the Company has
agreed in principle to grant to them (48,750 shares for
Opportunity and 26,250 shares for Strategic). The actual
number of shares of Common Stock issuable upon conversion of
the Series A Stock is determined by a formula based on the
market price at the time of conversion, and is therefore
subject to adjustment and could be materially less or more
than such
17
<PAGE>
estimated number depending on factors which cannot be
predicted by the Company. Specifically, at any given time, the
Series A Stock is convertible into a number of shares of
Common Stock determined by dividing (X) the sum of (a) the
stated value of the Series A Stock, (b) a premium amount equal
to 5% (on an annualized basis) of the stated value of the
Series A Stock and (c) any Conversion Default amount (as
defined in the Certificate of Designations, Preferences and
Rights for the Series A Stock), by (Y) the then applicable
conversion price (calculated generally as the lesser of (i)
$8.025 and (ii) 85% of the average of the five (5) lowest
closing bid prices of the Common Stock for the twenty-five
(25) consecutive trading date immediately preceding the date
of determination) (such 85% calculation as of June 5, 1998,
the date of issuance of the Series A Stock, resulting in a
conversion price of $5.6525 per share), subject to certain
restrictions and adjustments. The number of shares of Common
Stock issuable upon exercise of the Warrants is subject to
increase to the extent the exercise price is reduced pursuant
to the antidilution adjustment provisions set forth in the
Warrants. The Shares offered hereby, and included in the
Registration Statement of which this Prospectus is a part,
include such additional number of shares of Common Stock as
may be issued or issuable upon conversion of the Series A
Stock or Series B Stock or upon exercise of the Warrants by
reason of any stock split, stock dividend or similar
transaction involving the Common Stock, in each case in order
to prevent dilution, in accordance with Rule 416. In the event
the number of shares of Common Stock issuable upon conversion
of the Series A Stock or upon exercise of the Warrants exceeds
the number of Shares included in the Registration Statement,
an additional Registration Statement would be required to
cover the excess.
To the Company's knowledge, no Selling Stockholder has had any
position, office or other material relationship with the Company or any of its
affiliates during the past three years (other than as a holder of the Company's
securities).
USE OF PROCEEDS
All the Shares offered hereby are being offered for the account of the
Selling Stockholders. Accordingly, the Company will not receive any proceeds of
any sales made hereunder, but will receive the exercise price of any Warrants
exercised by the JNC Selling Stockholders. Based on currently available
information, the Company intends to utilize any proceeds received from the
exercise of Warrants for working capital and general corporate purposes. The
Company may use all or a portion of such proceeds for other purposes, should a
reapportionment or redirection of funds be determined to be in the best
interests of the Company.
PLAN OF DISTRIBUTION
The Shares may be sold or distributed from time to time by the Selling
Stockholders or by pledgees, donees or transferees of, or successors in interest
to, the Selling Stockholders directly to
18
<PAGE>
one or more purchasers (including pledgees) or through brokers, dealers or
underwriters who may act solely as agents or may acquire Shares as principals,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at negotiated prices or at fixed prices, which may be
changed. The distribution of the Shares may be effected in one or more of the
following methods: (i) ordinary brokers transactions, which may include long or
short sales, (ii) purchases by brokers, dealers or underwriters as principal and
resale by such purchasers for their own accounts pursuant to this Prospectus,
(iii) "at the market" to or through market makers or into an existing market for
the Common Stock, (iv) in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales effected through
agents, (v) through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise), or (vi) any combination of the foregoing, or by
any other legally available means. In addition, the Selling Stockholders or
their successors in interest may enter into hedging transactions with
broker-dealers who may engage in short sales of shares of Common Stock in the
course of hedging the positions they assume with the Selling Stockholders. The
Selling Stockholders or their successors in interest may also enter into option
or other transactions with broker-dealers that require that delivery by such
broker-dealers of the Shares, which Shares may be resold thereafter pursuant to
this Prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the Shares may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of Shares for whom such broker-dealers may act as agent or to whom they may sell
as principal, or both (which compensation as to a particular broker-dealer may
be in excess of customary commissions). The Selling Stockholders and any
broker-dealers acting in connection with the sale of the Shares hereunder may be
deemed to be underwriters within the meaning of Section 2(11) of the Securities
Act, and any commission received by them and any profit realized by them on the
resale of Shares as principals may be deemed underwriting compensation under the
Securities Act. Neither the Company nor any Selling Stockholder can presently
estimate the amount of such compensation. The Company knows of no existing
arrangements between any Selling Stockholder and any such stockholder, broker,
dealer, underwriter or agent relating to the sale or distribution of the Shares.
Each Selling Stockholder and any other person participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, Selling Stockholders and
other persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions or
exemptions. All of the foregoing may affect the marketability of the securities
offered hereby.
Any securities covered by this Prospectus that qualify for sale
pursuant to Rule 144 under the Securities Act may be sold under that Rule rather
than pursuant to this Prospectus.
19
<PAGE>
There can be no assurance that the Selling Stockholders will sell any
or all of the shares of Common Stock offered by them hereunder.
LEGAL MATTERS
Certain matters relating to the legality of the securities being
offered hereby are being passed upon for the Company by Certilman Balin Adler &
Hyman, LLP, 90 Merrick Avenue, East Meadow, New York 11554.
EXPERTS
The consolidated financial statements of the Company appearing in the
Form 10-KSB, have been audited by Lazar Levine & Felix, LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such consolidated financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-3 (together
with all amendments thereto, the "Registration Statement") with the Commission
under the Securities Act with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
to the exhibits filed therewith, copies of which may be obtained upon payment of
a fee prescribed by the Commission, or may be examined free of charge at the
public reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. Each statement made in this
Prospectus referring to a document filed as an exhibit to the Registration
Statement is qualified by reference to the exhibit for a complete statement of
its terms and conditions.
20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (estimated except for the
Registration Fee) in connection with the offering described in the Registration
Statement:
Registration Fee...................................................$ 906.00
Accountants' Fees and Expenses..................................... 1,000.00
Legal Fees and Expenses............................................. 12,000.00
Miscellaneous...................................................... 1,094.00
Total...............................................................$15,000.00
Item 15. Indemnification of Directors and Officers.
Article X of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by Section 102 of the Delaware General Corporation Law, provided that
this provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) arising under Section 174 of the
Delaware General Corporation Law (with respect to unlawful dividend payments and
unlawful stock purchases or redemptions), or (iv) for any transaction from which
the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of
Incorporation and its by-laws provisions to indemnify its directors, officers,
employees and agents and to purchase insurance with respect to liability arising
out of the performance of their duties as directors, officers, employees and
agents as permitted by Section 145 of the Delaware General Corporation Law. The
Delaware General Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors, officers, employees and agents may be entitled under the
Company's by-laws, any agreement, vote of stockholders or otherwise.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers, directors, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
II-1
<PAGE>
In connection with this Registration Statement, the JNC Selling
Stockholders, severally but not jointly, have agreed to indemnify the Company,
its directors, each of its officers who signed this Registration Statement, its
employees, agents and each person who controls it within the meaning of Section
15 of the Securities Act with respect to any statement in or omission from the
Registration Statement or the Prospectus or any amendment or supplement thereto
if such statement or omission was made in reliance upon information furnished in
writing to the Company by the JNC Selling Stockholders specifically for use in
connection with the preparation of the Registration Statement. Each JNC Selling
Stockholder's indemnification obligations are limited to the amount such JNC
Selling Stockholder actually receives as a result of the sale of the shares
registered for resale hereunder.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Item 16. Exhibits.
Exhibit Number Description of Exhibit
4 Specimen Stock Certificate1
5 Opinion of Certilman Balin Adler & Hyman, LLP
23.1 Consent of Lazar Levine & Felix, LLP
23.2 Consent of Certilman Balin Adler & Hyman, LLP
(included in its opinion filed as Exhibit 5)
24 Powers of Attorney (included in signature page forming
a part hereof).
-----------
(1) Filed as Exhibit 4.1 to the Company's Registration Statement
on Form SB-2 (Registration No. 333-18667) and incorporated
herein by reference.
Item 17. Undertakings.
The undersigned Company hereby undertakes:
(l) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement to:
II-2
<PAGE>
(i) Include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the Prospectus any facts or events which,
individually or together represent a fundamental change in the
information set forth in the Registration Statement; notwithstanding
the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered would not
exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement; and
(iii) Include any additional or changed material information on
the plan of distribution; provided, however, that paragraphs (l)(i)
and (l)(ii) do not apply if the Registration Statement is on Form S-3
or Form S-8, and the information required in a post-effective
amendment is incorporated by reference from periodic reports filed by
the Company under the Exchange Act.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment as a new Registration Statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) File a post- effective amendment to remove from
registration any of the securities being registered which remain unsold at the
end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described under Item 15 above, or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Cedarhurst, New York, on the 20th day of November, 1998.
COMPU-DAWN, INC.
By:/s/ Mark Honigsfeld
Mark Honigsfeld
Chief Executive Officer and
Chairman of the Board
-------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Capacity Date
* Chief Executive Officer, November 20, 1998
- ----------------- Chairman of the Board,
Mark Honigsfeld Secretary and Director
(Principal Executive Officer and
Principal Financial and
Accounting Officer)
*
- ----------------- Chief Technology Officer November 20, 1998
Louis Libin and Director
* Director November 20, 1998
- -------------------
William D. Rizzardi
* Director November 20, 1998
- -------------------
Harold Lazarus, Ph.D.
* Director November 20, 1998
- -------------------
Alfred J. Luciani
<PAGE>
* Mark Honigsfeld, pursuant to Powers of Attorney (executed by each of the
persons listed above and indicated as signed above, and filed with the
Securities and Exchange Commission), by signing his name hereto does hereby sign
and execute this amendment to the Registration Statement on behalf of each of
the persons named above and indicated as signing above in the capacities in
which the names of each appear above, and does hereby sign and execute this
amendment to the Registration Statement in his own behalf in the capacity of
Chief Executive Officer, Chairman of the Board, Secretary and Director.
November 20, 1998 /s/ Mark Honigsfeld
Mark Honigsfeld
II-5
<PAGE>
Exhibit 5
November 20, 1998
Compu-DAWN, Inc.
77 Spruce Street
Cedarhurst, NY 11516
Re: Compu-DAWN, Inc. Registration Statement on Form S-3
Gentlemen:
In our capacity as counsel to Compu-DAWN, Inc., a Delaware corporation
(the "Company"), we have been asked to render this opinion in connection with
Amendment No. 1 to the Company's Registration Statement on Form S-3
(Registration No. 333-65303) (the "Registration Statement") being filed
contemporaneously by the Company with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, covering an additional 75,000
shares of Common Stock, $.01 par value, of the Company which are issuable by the
Company to certain entities pursuant to certain registration-related rights the
Company has agreed in principle to grant to such entities (the "Additional
Shares") and are being registered for resale by such entities.
In connection with our opinion, we have examined the Certificate of
Incorporation and By-Laws of the Company, each as amended, and the Registration
Statement. We are also familiar with proceedings of the Board of Directors of
the Company, or otherwise have relied upon representations made by officers of
the Company, relating to the authorization of the issuance of the Additional
Shares. We have also examined such other instruments and documents as we deemed
relevant under the circumstances.
For purposes of the opinions expressed below, we have assumed (i) the
authenticity of all documents submitted to us as originals, (ii) the conformity
to the originals of all documents submitted as certified, photostatic or
facsimile copies and the authenticity of the originals, (iii) the legal capacity
of natural persons, (iv) the due authorization, execution and delivery of all
documents by all parties and the validity and binding effect thereof and (v) the
conformity to the proceedings of the Board of Directors of all minutes of such
proceedings and all representations, oral and written, made by officers of the
Company with respect thereto. We have also assumed that the
<PAGE>
Compu-DAWN, Inc. November 20, 1998 Page 2 corporate records furnished to us by
the Company include all corporate proceedings taken by the Company to date.
Based upon and subject to the foregoing, including the assumptions
made, we are of the opinion that the Additional Shares will be, upon issuance
pursuant to certain registration-related rights which the Company has agreed in
principle to grant, duly and validly authorized and issued, fully paid and
nonassessable shares of Common Stock, $.01 par value, of the Company.
We hereby consent to the use of our opinion as herein set forth as an
exhibit to the Registration Statement and to the use of our name under the
caption "Legal Matters" in the Prospectus forming a part of the Registration
Statement.
This opinion is as of the date hereof, and we do not undertake, and
hereby disclaim, any obligation to advise you of any changes in any of the
matters set forth herein.
We are rendering this opinion only as to the matters expressly set
forth herein, and no opinion should be inferred as to any other matters.
This opinion is for your exclusive use only and is to be utilized and
relied upon only in connection with the matters expressly set forth herein.
Very truly yours,
/s/ Certilman Balin Adler & Hyman, LLP
CERTILMAN BALIN ADLER & HYMAN, LLP
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment No. 1 to
the Registration Statement on Form S-3 of our report dated March 5, 1998 (except
as to Note 13c which is dated March 17, 1998) which appears on page F-1 of the
annual report on Form 10-KSB of Compu- DAWN, Inc. for the year ended December
31, 1997 and to the reference to our firm under the caption "Experts" in the
prospectus.
/s/ Lazar Levine & Felix, LLP
New York, New York
November 20, 1998
