SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 1997
OR
[X] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___________ to ____________
Commission file number 000-22611
Compu-DAWN, Inc.
(Name of Small Business Issuer in its Charter)
Delaware 11-3344575
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
77 Spruce Street, Cedarhurst, NY 11516
(Address of Principal Executive Offices) (Zip Code)
(516) 374-6700
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock ($.01 par value per share)
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
As of March 25, 1998, the aggregate market value of the shares held by
non-affiliates was approximately $[ ]. ----------------------
The issuer's revenues for the fiscal year ended December 31, 1997 were $591,375.
APPLICABLE ONLY TO CORPORATE REGISTRANTS.
The number of shares outstanding of each of the issuer's classes of common
equity as of March 25, 1998 is 2,834,223 shares of Common Stock, $.01 par value
per share.
Transitional Small Business Disclosure Format (check one): Yes No X
DOCUMENTS INCORPORATED BY REFERENCE
None
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INDEX
Page No.
Forward Looking Statements ................................................. 1
PART I
Item 1. Description of Business............................................. 1
Item 2. Description of Property............................................. 15
Item 3. Legal Proceedings................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................. 15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters............ 15
Item 6. Management's Discussion and Analysis or Plan of Operation........... 18
Item 7. Financial Statements................................................ 21
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................ 21
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................. 22
Item 10. Executive Compensation............................................. 25
Item 11. Security Ownership of Certain Beneficial Owners and Management..... 30
Item 12. Certain Relationships and Related Transactions..................... 31
PART IV
Item 13. Exhibits and Reports on Form 8-K................................... 33
Signatures
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FORWARD LOOKING STATEMENTS
When used herein, the words "believe," "anticipate," "think," "intend,"
"will be," "expect" and similar expressions identify forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are not guarantees of future performance and involve certain risks
and uncertainties discussed herein, which could cause actual results to differ
materially from those in the forward-looking statements. Readers are cautioned
not to place undue reliance on the forward-looking statements which speak only
as of the date hereof. Readers are also urged to carefully review and consider
the various disclosures made by the Company which attempt to advise interested
parties of the factors which affect the Company's business, including, without
limitation, the disclosures made under the caption "Management's Discussion and
Analysis or Plan of Operation." All references to a fiscal year are to the
Company's fiscal year which ends December 31.
PART I
Item 1. Description of Business
History
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 are primarily located in New York
State. See Item 1 - "Description of Business -Customers."
In October 1996, the Company successfully completed the sale of 77 units,
each unit consisting of a $10,000 Promissory Note (the "Bridge Note") and a
Common Share Purchase Warrant (the "Bridge Warrant") to acquire 5,600 Common
Shares of the Company (the "Bridge Financing Transaction") (Bridge Warrants to
acquire 42,000 Common Shares were canceled subsequent to the closing of the
Bridge Financing Transaction.)
The Bridge Warrants are exercisable at a price of $3.00 per share. Each of
the Bridge Notes was paid upon the closing of the Company's initial public
offering (the "IPO"), which was successfully completed in June 1997, as
discussed below. The terms of the Bridge Warrants provide for a five year
exercise period expiring in June 2002; however the Company, the underwriter of
the Company's IPO, and the Bridge Warrant holders have agreed that the Bridge
Warrants will not be exercised or transferred, and the underlying Common Shares
will not be transferred, for a two-year period expiring in June 1999.
In June 1997, the Company, successfully completed an IPO of its Common
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Shares. The Company sold 1,380,000 Common Shares (including 180,000 shares in
the underwriter's over-allotment option) at a price of $5.00 per share for
aggregate net proceeds, after expenses, of $5,625,874. A portion of the proceeds
realized from this offering was used to repay promissory notes aggregating
$770,000 to the bridge lenders as described above. See Item 5 - "Market for the
Registrant's Common Stock and Related Stockholder Matters - Use of Proceeds from
Initial Public Offering" for a discussion of the use of proceeds from the IPO
through December 31, 1997. See also Item 6 - "Management's Discussion and
Analysis or Plan of Operation - Liquidity and Capital Resources."
General Business Description
The Company is currently primarily engaged in the business of designing,
developing, licensing, installing and servicing computer application software
systems for law enforcement and public safety agencies. The Company's software
systems include computer-aided dispatching ("CAD"), computer interfacing with
local, state and national crime information databases, advanced wireless mobile
on-line communications computing ("AMO") (utilizing radio frequency), automatic
vehicle location ("AVL") (employing dynamic map displays), records management,
and photo-imaging database systems. These modules may be integrated and licensed
as a package, or may be licensed individually.
Certain of these applications utilize telecommunications and space
satellite technology, other infrastructure, and hardware provided by third
parties. The third party providers of such technology and infrastructure, with
respect to a particular customer's system, vary depending on the location of the
customer and whether or not the customer has a business relationship with a
third party provider. Accordingly, the Company is not dependent on any
particular third party's technology or infrastructure for its software systems
to function. These third parties are typically major CDPDs (cellular digital
packet data providers) such as AT&T Wireless Data, Inc. ("AT&T"), Bell Atlantic
Corporation ("Bell Atlantic"), and GTE Mobilnet Service Corp. ("GTE"), or
dedicated radio frequency data network providers such as RAM Mobile Data USA
Limited Partnership ("RAM Mobile Data") and Motorola Inc. ("Motorola"). The
Company's AMO system requires computer hardware and services from third party
providers, and interfaces with dedicated radio frequencies owned by the
Company's customers which require special radio equipment provided by companies
such as Motorola and Dataradio Corp. The Company's customers may purchase such
technology, infrastructure, services and hardware directly from these providers,
and, with respect to radio equipment, through authorized dealers as well.
The Company's software is compatible with virtually all operating systems.
The Company has installed its systems in more than 60 agencies, primarily law
enforcement agencies located in the state of New York. The Company provides a
full range of product support and maintenance services, both on-site and by
remote connection.
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Industry Background
The goal of law enforcement and public safety agencies is to maximize the
safety and improve the quality of life of people and communities. The
effectiveness of a law enforcement or public safety agency is dependent on its
personnel and resources. Such effectiveness is enhanced by maximizing the patrol
time of agency personnel, and the availability of timely, accurate and reliable
information. This allows services to be provided in an efficient, cost-effective
manner. Computer technology is an important tool for providing information to
law enforcement and public safety personnel, reducing administrative time and
streamlining procedures, to support an agency's strategic and operational goals.
Generally, a law enforcement or public safety agency's strategy is not
geared to one overall plan for an entire community, but is based on several
individual plans addressing the unique needs of the neighborhoods that comprise
that community. Agencies need the ability to maximize their resources, customize
information, analyze crime information by sector, district and area, and analyze
repeat call areas that tax agencies' resources. Additionally, agencies have a
need to respond to incidents and 911 calls as rapidly, efficiently and cost
effectively as possible.
Computer technology has been developed for the public safety market to
address these needs. CAD systems, integrated with enhanced 911 ("E911") systems,
allow a dispatcher to retrieve information about the 911 caller, and the
location and the individuals involved in the incident being reported. Mobile
wireless communication systems in vehicles provide agency personnel in the field
with the ability to receive information regarding an incident and the people
involved, such as location, "mug shots" and photographs, and arrest and booking
data. Such systems also enable such personnel to go "on-line" with the agency's
database, and with other vehicles, in real time. Wireless communication systems
also provide personnel with the capability to file reports from their vehicles
instead of having to return to the station. This increases personnel time and
visibility in the community. AVL system technology provides a dispatcher with
the capability of immediately identifying the location of the most appropriate
vehicle to investigate an incident, significantly shortening response time.
Without an AVL system, a dispatcher has to alert the vehicles in the field of an
incident and then wait, as they report their location and/or availability,
before determining which vehicle would be the most appropriate to respond to an
incident. Information sharing technology allows agencies to link their databases
to local, state and national crime databases to access information for more
in-depth and efficient investigation of incidents. Records management and
photograph imaging systems for law enforcement agencies make arrest and booking
procedures and incident investigations more efficient, while similar systems for
fire and EMS departments contribute to the efficient deployment of firefighting
and emergency equipment and investigation of incidents. Without a computerized
records management system, records and reports would need to be handwritten or
typed, and physically stored in various filing cabinets, file rooms, or on
microfilm or microfiche. In such form, such reports are comparatively error
prone, and may be misplaced or unavailable, which makes retrieval difficult and
time consuming. Computerized records systems allow for easy entry and retrieval,
and increased productivity, enabling agency personnel to spend more time "on the
beat" in the community.
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In essence, the foregoing computer technology enables law enforcement and
public safety agencies to allocate and utilize resources and manpower hours to
maximize their goal of public safety.
The Company believes that the market for application software and
technology products utilized in the law enforcement and public safety market is
growing due to (i) an increased public and governmental priority for law
enforcement and public safety, (ii) an awareness that specific computer
technology for the law enforcement and public safety market now exists, (iii)
the availability of federal funding assistance to obtain computer equipment and
technology, (iv) breakthroughs in development of new mobile wireless computer
communications technology and (v) acknowledgment by certain agencies that
computer-aided law enforcement has contributed to a recent drop in crime rates,
and the ability to effectively handle increasing incidents of crime without
increasing personnel. For example, The New York Times reported in 1997 that New
York City's mayor and top police officials attribute that city's drop in crime
rate, in part, to a series of new police strategies which includes, among other
things, the use of computer technology that has allowed the police department to
identify crime patterns much more quickly and flood problem streets with
undercover and beat officers. Also, the city of Chicago has installed an E911
dispatch system which has contributed to a recent decline in crime. In addition
to New York City and Chicago (which do not utilize Company systems), the city of
Glens Falls, New York, a customer of the Company, in 1997, advised the Company
that, although incidents of crime had increased, its computer system enabled the
police department to effectively respond to, and handle, these incidents without
increasing personnel.
Development of Technology
The Company's current technology has been developed and enhanced over
approximately an eight year period. The Company's technology is not patented or
covered by any registered copyrights; however, the Company believes that its
software programs have copyright protection under common law. The Company does
not license any technology from third parties other than technology for certain
operating software. The Company continually undertakes research and development,
under the supervision of Louis Libin, the Company's Chief Technology Officer, to
develop new, and enhance existing, technology and products. See Item I -
"Description of Business - Research and Development and Technology Development
Alliance" for a discussion about the Company's continuing research and
development activities.
Products and Services
Products
The Company's software products consist of CAD systems, computer interface
systems which connect the customer's computer system to local, state and
national crime information databases, AMO communication systems utilizing radio
frequency, AVL systems employing dynamic map displays, records management
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systems, and photo-imaging database systems. Certain of the Company's software
systems also interface with and utilize space satellite technology,
telecommunications technology, computer hardware and other infrastructure
provided by third parties. The Company's software is compatible with virtually
all operating systems, utilizing a variety of software, including Windows(R) and
Unix(R). The Company's software also allows linkage of its products to mainframe
systems and is adaptable to both small and large hardware systems.
The Company markets its products to law enforcement agencies under the
ALECS 2000(TM) (Advanced Law Enforcement Computer System) product line and to
fire and EMS departments under its AFFECT(TM) (Advanced Firefighter Computer
Technology) product line.
The Company licenses its software to customers in modules pursuant to a
perpetual license. Customers may acquire all the modules as an integrated "total
solution" package, or any of the modules individually, on a stand alone basis or
as an addition to, or as a replacement for, an existing system. The software
modules licensed from the Company can be integrated with the customer's other
software systems. The Company's "total solution" package of integrated modules
maximizes efficiency since data entered into one module will be available in all
modules in real time. A hybrid network comprised of certain of the Company's
modules and other software systems may require data to be entered into the
Company modules and other software systems separately.
The price to the customer of the Company's products, whether a "total
solution" package or individual modules, varies depending on several factors,
including the need for, and existence of, communication infrastructure in the
customer's jurisdiction (such as radio towers necessary for AMO radio frequency
modules), volume of use of telecommunications systems (such as telephone lines
and radio cells), and the customer's computer hardware requirements to implement
the software system.
The Company's ALECS 2000(TM) product line for law enforcement and its
AFFECT(TM) product line for fire and EMS are similar in many respects. Both
address the reporting of incidents, the dispatch of resources and the deployment
of personnel.
In May 1997, the Company received the 1997 Long Island Software Awards
("LISA") software product of the year award for its ALECS 2000(TM) software. The
Company competed with 15 finalists for this award including, among others, Long
Island Lighting Company ("LILCO"), Henry Schein, Inc., Life Sciences Associates,
Lightstone Group, and Quantum Research and Technologies, Inc. The 1997 LISA was
sponsored by the Long Island Research Institute, State University of New York at
Stony Brook, Cheyenne Software, Inc., Computer Associates, Inc., LILCO,
Renaissance Technologies and Symbol Technologies, Inc., among others.
The Company's modules are described below.
Computer-Aided Dispatching - CAD and AVL. The Company's CAD system, under
both the ALECS 2000(TM) and AFFECT(TM) product lines, integrates several
software and communications technologies, such as E911 dispatch systems, mapping
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software integrated with global positioning systems for vehicle tracking, and
geo-based mapping systems, which include street addresses and intersections,
longitude/latitude, and other information to identify the locations and
addresses of incidents. The integration of these systems with the Company's CAD
software provides to police and other public safety agencies the capability to
respond rapidly and efficiently to incidents, and streamlines record management,
enhancing productivity and accuracy of record keeping. The Company is currently
developing, and beta site testing, visual CAD software (known as V-CAD, or
Visual Computer-Aided Dispatching), which, in addition to having greater
functionality than the current CAD system, is more user-friendly and provides
the dispatcher with touch screen graphical interfacing and the ability to
dispatch police, fire and/or EMS agencies at the same time.
The CAD system allows the dispatcher receiving the E911 call to immediately
identify the caller's telephone number, the related address, and the name of the
telephone number owner (unless the call is made from a cellular phone). The CAD
system enables the dispatcher to access any records maintained in the agency's
database relative to that person or the location of the incident (e.g. gun
permit issued, prior domestic violence or prank calls) as well as in local,
state and national crime information databases.
Once a decision is made to dispatch a vehicle to an incident, a record is
created and the location of the incident appears on a computer-generated map of
the area. Using AVL software, which links the customer's system and a receiver
in each of the customer's vehicles to GPSs (global positioning satellites), the
map also shows the position of vehicles "in the field" which are available to
respond to the incident. The dispatcher can then select the closest available
vehicle to respond to the incident and can observe the movement of that vehicle
as it responds to the call.
Wireless Mobile Data Communications System - AMO. The Company markets a
wireless AMO data communications system which permits "on-line" real time access
between vehicles in the field and the central database, between the central
database and local, state or national databases, crime information centers and
other centralized computer records, and between vehicles. The Company's AMO
system employs radio frequency networks (i.e. private radio networks, public
radio networks, and cellular and short range spread spectrum technology) to
provide complete communication and access from the vehicle to the central
databases as well as vehicle to vehicle. The Company's AMO system allows the
agency's personnel to log onto the customer's central database directly from
their vehicles and have access to all information in such central database.
Additionally, the AMO technology provides capability for the agency's personnel
to input information into the agency's database directly from their vehicles,
and transfer or access information from vehicle to vehicle. AMO employs "text to
voice" technology which converts data received by the vehicles' systems from
text into voice data, and, by voice recognition, converts voice commands into
text to be sent to the dispatcher. This enhances the safety of vehicle operators
since they can receive and give information without having to divert their
attention to read a computer screen or input information by keyboard.
Furthermore, the main police, fire and EMS radio channels are not employed and
remain available.
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AMO, through the use of photo imaging technology, allows "mug shots" to be
rapidly made available at a crime or incident scene, or the personnel at the
scene can create a permanent computer photograph record of the accident or crime
scene and transmit it directly into the agency's central database or to other
vehicles.
The Company has sold AMO systems to several municipalities and has
successfully installed such AMO systems in, Onondaga County (New York) for its
E911 department which covers multiple agencies such as police, fire and EMS
departments, the Putnam County (New York) Sheriff's Department, the Johnson City
Police Department (in Broome County, New York), the Glens Falls Police
Department (in Warren County, New York), the Johnstown Police Department (in
Fulton County, New York), the City of Lockport (in Niagara County, New York),
the City of Port Jervis (in Westchester County, New York) and the Long Beach,
Garden City and Malverne Police Departments (in Nassau County, New York). See
Item 1 - "Description of Business Customers."
Records Management. The Company's records management systems for law
enforcement and other public safety agencies offers a wide range of options and
flexibility to fit an agency's needs and budget. The ALECS 2000(TM) records
management system processes data from the incident report through prosecution,
and is made up of component sub-modular units, including a records management
system, a photograph/"mug shot" imaging system, a parking violation system, and
a false alarm billing system. The AFFECT(TM) records management system processes
data from the incident report through closing the investigation, and also
provides information such as the location of resources, including, without
limitation, hydrants and secondary sources of water (such as ponds, lakes,
rivers, and seawater access), foam and other chemical fire extinguishing
material, hoses and jaws-of-life.
As discussed above, the Company's records management systems obviate the
need for handwritten or typed reports and physical filing systems which are
cumbersome, comparatively error prone, and make for difficult and time consuming
information retrieval.
Local Court Records Management and Sheriff's Records Management. The
Company's products also include records management systems which are
specifically designed for local courts and sheriff departments. The local court
records management system records summonses, tracks fines payable and enters the
appropriate dates on court calendars. The sheriff's records management system
provides several functions through the following sub-modules: civil
warrants/attachment records management, pistol permit records management, photo
imaging/booking for county jails, property records management, jewelry recovery
and pawn shop records management, and police academy records management. One of
the goals of this technology is to streamline procedures and allow for more
efficient allocation of resources and manpower hours.
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Services
Installation and Training
System installation is an integral part of the Company's services. The
Company's installation procedure commences with an in-depth consultation
with the customer to determine the appropriate modules needed to meet the
customer's particular requirements within budgetary parameters. Once the
customer's needs have been identified, the Company provides customized
system design and file creation. The Company then implements the system,
undertakes system start-up and provides training for the customer's
personnel in the operation of the Company's software products. Customer
training is conducted either at the customer's site or at a remote
location, and can range up to several days, depending on the customer's
particular system.
Support and Maintenance
The Company provides post-installation system software maintenance and
training support for all of its software products. The Company's systems
support teams, which include communications and software technicians and
program developers, are available to assist customers via telephone access,
24 hours a day, seven days a week, 52 weeks a year, and provide on-site
support, pursuant to a software maintenance agreement. Software updates and
enhancements to the modules are included under maintenance contracts.
Customers pay the Company a set monthly service fee (currently ranging
between 1% and 2% of the installation contract value) which is dependent on
the extent and complexity of the customer's system. Currently, the Company
has maintenance agreements with all of its customers. During the fiscal
years ended December 31, 1996 and 1997 support and maintenance income
represented approximately 58% and 53%, respectively, of the Company's
revenues.
Research and Development and Technology Development Alliance
Research and Development
The Company currently employs six computer software programmers /
developers who conduct the Company's research and development activities under
the direction of the Company's Chief Technology Officer, Louis Libin. Since the
Company's IPO, the Company has spent approximately $1,160,000 on product
enhancement and development, including, without limitation, development and
beta-testing the V-CAD technology, development of graphical user interface
technology (which converts text-driven systems to a more user-friendly
menu-driven system), and Structured Query Language (SQL). By utilizing
Structured Query Language in conjunction with the Company's database and the
operating system software used by the Company, any field of data can now be used
as an analysis tool. The data structure provides for the ability to use any of
the information from reported crimes, such as time-of-day or crime type, and
submit a specialized query, which will result in a customized search for a
specific report.
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The Company cannot give any assurance that it will develop any new products
or technology, or enhancements for existing products and technology, or that the
Company will have the services of Mr. Libin indefinitely. If it does develop or
enhance any products or technology, the Company cannot predict the pace or time
period of such new developments or enhancements, the costs relating to such
research and development (which could be significant or prohibitive), or the
availability of qualified technical personnel. See Item 1 - "Description of
Business - Employees" and Item 5 - "Market for the Registrant's Common Stock and
Related Stockholder Matters - Use of Proceeds from Initial Public Offering."
Technology Development Alliance
Effective on January 2, 1998, the Company entered into a development
alliance with Computer Associates International, Inc. ("Computer Associates") to
integrate the Company's AMO technology with Computer Associates' Unicenter(R)
TNG(TM) to form "Air Unicenter." The Company has been advised that Unicenter(R)
TNG(TM) is the only fully integrated management solution covering network
discovery, topology, performance, events and status, security, software
distribution, storage, workload, help desk, change management and other
functions for traditional and distributed computing environments, as well as for
the Internet and intranets. Unicenter(R) TNG(TM)'s intelligent manager/agent
technology delivers highly scalable management of the entire computing
environment, including hardware and software.
The alliance with Computer Associates will enable users to retrieve and
process information across wireless and mobile computing environments.
Communication is placing an important role in the mobilization of the workforce,
not just public safety. The new alliance will help meet this challenge by
integrating dispatch applications with other corporate applications. The Company
believes that, by delivering proactive administrative management of wireless and
mobile computing resources, the integrated technology will provide a common
standard for public safety agencies and law enforcement organizations to manage
mobile computing environments.
The Computer Associates alliance agreement is for successive automatically
renewable 30 day terms which may be terminated at the end of any renewable term
upon ten days prior written notice by either party.
Intellectual Property Rights and Licenses
The Company's products are based on approximately 3,000 interdependent
software application programs and system utility modules, including software
developed for creating applications of the modules. The Company's technology is
not patented and the Company has not obtained, or applied for, copyright
registration for any of its software. Although the registration of a copyright
in the United States copyright office provides a rebuttable presumption of the
copyright's validity, such registration is not required to make a copyright
legally effective, and the Company believes that its software programs have
copyright protection.
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The Company believes that it takes at least two to three months of training
for a programmer to grasp the complete structure of the Company's software. The
Company requires every employee to sign an agreement of nondisclosure and
assignment of development rights. While large software vendors often institute
lawsuits to protect software property rights against infringers, the Company
believes that, in its case, the complexity and total system integration of the
Company's products best protects its trade secrets. There can be no assurance
that the intellectual property and contractual rights on which the Company
relies to protect its intellectual property and confidential and proprietary
information will provide it with meaningful protections.
The Company utilizes certain operating system software (written in the
"Open M" computer programming language and owned by Intersystems, Inc.
("Intersystems")), in the development of its software systems. The Company uses
such operating system software pursuant to a perpetual license that allows the
Company to use such software to create its software modules, and, in some cases,
to "bundle" such operating system software with its own software as part of its
software products. The Company pays Intersystems a monthly fee to sublicense
such operating software (based on the number of product units in which
Intersystem's operating system software is included), and an annual fee to use
such operating software to create software (based on the number of product units
for which the third party's operating system software is used to create). The
termination of this license could have a material adverse effect on the
Company's ability to produce and deliver its software products on a timely
basis. If such license is terminated, the Company would be required to license
alternative operating system software. The Company believes alternative
operating system software written in different versions of the "M" computer
programming language is owned by, and currently available from, other sources.
However, the Company would have to revise its software to make it compatible
with such alternative operating system software, which the Company believes
would result in production and delivery delays of approximately three to six
months.
Sales and Marketing
According to the National Directory of Fire Chiefs and Emergency Department
(1993) and the National Directory of Law Enforcement Administration (1996), the
national law enforcement and public safety market is estimated to have more than
18,000 law enforcement agencies and more than 35,000 fire departments. Based on
management's exposure to the marketplace, the Company believes that the majority
of such agencies currently have limited or no computerization of their law
enforcement and public safety activities. The Company believes that mobile
wireless computer communications, computer-aided dispatching, integrated mapping
and photo-imaging technology have not been marketed extensively to a majority of
these agencies.
The Company's marketing strategy primarily relies on direct marketing
efforts by salespersons who represent the Company.
As a result of the Company's alliance with Computer Associates and the
development of a mobile agent for Computer Associates' Unicenter TNG, along with
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a recent influx of orders and the additional showing of interest for the
Company's new products in the New York - New Jersey - Connecticut tri-state
area, the Company has recently decided to reduce its direct marketing efforts,
not its selling efforts, in remote areas of the country. This will enable the
Company to utilize its current resources more efficiently. See Item 1 -
"Description of Business - Research and Development and Technology Development
Alliance."
Direct Marketing. The Company currently participates to a limited extent in
public safety conferences and trade shows, holds regional seminars, presents and
conducts demonstrations, and conducts targeted mailings and phone campaigns.
Current Customers. Generally, once a system is designed and installed for a
customer, there is little repeat business other than maintenance and support,
and the provision of software enhancements or updates. Accordingly, the Company
sales efforts to current customers for add-on products is minimal.
Subcontracting and Strategic Business Alliance Opportunities. The Company
is continuously pursuing a strategy whereby it seeks to create strategic
business alliances and subcontractor relationships with large system integrators
and public network providers in order to have the resources needed to establish
a presence in the "large size" market segment (i.e. departments or agencies with
more than 200 sworn officers or personnel). The purpose of the strategic
business alliance agreements is to establish a relationship between the Company
and large system integrators or public network providers (each an "Alliance
Partner") which provides for the Company and the Alliance Partner to cooperate
and complement each other's efforts in identifying, proposing and marketing
their own products and services and integrated systems to public safety
customers. The strategic business alliance agreements which the Company seeks to
establish typically will provide that the Company and its Alliance Partner will
agree upon a particular teaming arrangement with each party assuming defined
roles and responsibilities in order to more effectively compete for future
business opportunities and programs, and, with respect to mutually agreed
projects, to jointly market and support each other's services without soliciting
services or products from other sources or offering services and products to
other contractors. Strategic business alliances are currently in place with AT&T
(which expires in February 1999 and is automatically renewable for successive
one year terms), GTE (which expires in November 1998) and Alpine Software
Incorporated (which expires in March 2001) and a subcontractor relationship has
been established with Data General (which is terminable by either party upon 30
days prior notice). The Company is also seeking subcontractor relationships with
system integrators and network providers including International Business
Machines Corp. ("IBM") (with which the Company has acted as a subcontractor in
the past, as described below), Bell Atlantic, Motorola and RAM Mobile Data. No
significant revenues have been derived to date from the Company's established
strategic alliances (which set forth the relationship of the parties in the
event of a system installation and do not relate to any particular customer
contracts) and no assurances can be given that the Company will derive revenues
therefrom. In addition, no assurances can be given that the Company will enter
into any other business alliance or subcontractor relationships.
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The Company monitors governmental announcements of officially published
requests for proposals ("RFPs") to find business alliance or subcontracting
opportunities. The selection of the appropriate large system integrator by the
Company as a potential business alliance partner or prime contractor often
depends on the specifications in the RFP. The Company's strategy includes
contact with large system integrators to demonstrate the Company's product
capabilities and, more importantly, to establish a credible presence for
participating in "large size" market segment projects. Although, in the past,
the Company has had some success in strategic alliances with large system
integrators, no assurance can be given that the Company will be viewed by these
entities as an acceptable business partner or subcontractor in the future. If
the Company is unable to establish such a business relationship, its plans to
expand into the "large size" market segment may be delayed or hindered due to a
limitation of resources needed to respond competitively to RFPs or to meet
"large size" market segment agency requirements.
Customers
The Company has installed various modules of its software systems for, and
provides maintenance and support services to approximately 60 customers, 57 of
which are law enforcement agencies and four of which are county-wide systems
including police, fire and EMS departments. The following customers accounted
for the following percentages of software sales for the year ended December 31,
1996: Madison County (New York), 28.2%; and Westchester County (New York),
18.6%. No other customer accounted for 10% or more of the Company's software
sales during such period. The following customers accounted for the following
percentages of software sales for the year ended December 31, 1997: Chemung
County (New York), 12.6%; and the Malverne Police Department (Nassau County, New
York), 10.2%. No other customer accounted for 10% or more of the Company's
software sales during such period. The Company sold to, and installed in,
Madison County a records management system, a CAD system, and a specialized
version of a network wireless radio system between fixed points, for that
county's fire department. The Company sold to, and installed in, Westchester
County a records management system, a CAD system, a photo imaging system and
special modules such as civil warrant processing, jury duty processing, pawn
shop records and police academy records. The Company sold to, and installed in,
the Malverne Police Department an AMO System and a photo imaging system to allow
photographs to be sent to and from the field. The Company does not rely on past
customers for future revenues from sales and installations of software systems.
Accordingly, the Company will not suffer any material adverse effect if the
Company does not sell software systems to such customers in the future.
Based on the experience of management in the marketplace, management's
discussions with a senior New York State Division of Criminal Justice Services
official and an E911 consultant to a major telecommunications company, a recent
referendum in Bergen County, New Jersey supporting the regionalized sharing of
services by towns and municipalities, and the specifications of RFPs received by
the Company soliciting bids for law enforcement and public safety software
systems, the Company believes that there is a trend away from town and
municipality dispatching and toward county-wide dispatching. As a result of this
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trend, the Company believes that there will be a need in the near future for
comprehensive public safety systems which will address and integrate the needs
of police, fire and EMS departments. As a "total solution" software system
provider, the Company believes that, with its marketing and product development
plan, it is in a position to meet such needs.
Typically, a customer will procure a software system from the Company under
a perpetual license, pursuant to which the Company will be paid a percentage of
the license fee at the time the contract is entered into, and then will receive
further installments as certain performance milestones are met, until completion
of the contract. After the contract is completed, any further revenues from that
customer are usually derived from a maintenance and support contract. From time
to time, however, the Company may receive additional contracts from an existing
customer for add-on modules.
The length of time that it takes to complete a systems installation
contract varies (generally from three to twelve months), depending on the nature
and complexity of the system and the customer's internal procurement procedures.
During the period of time that installments are being paid, the customer, or a
small number of customers with contracts in progress, may account for a
significant percentage of the Company's revenues. However, once those contracts
are completed, such customers will no longer represent a material portion of the
Company's future revenues. Accordingly, the Company does not rely on such
customers for a continuing revenue stream and the Company does not believe that
the make-up of its current significant customers is material to an understanding
of the Company's future business prospects. However, the Company anticipates
that at any particular time a limited number of large customers will continue to
represent a significant portion of its revenues for the foreseeable future.
The following two examples are illustrative of the diverse application of
the Company's products and services: (i) The Onondaga County Police Department
utilizes an AMO application, designed, developed and installed by the Company,
which links over 700 police, fire and EMS vehicles. For this project, the
Company was retained by IBM as a subcontractor to design, develop, install and
service all the required AMO software. The project included integration by the
Company of IBM and Digital Equipment Corp. hardware which already contained
application software provided by other subcontractors for both records
management and computer-aided dispatch; and (ii) The Company, as prime
contractor, designed, developed and installed a "total solution" system for the
Putnam County Sheriff's Office, a comparatively small agency of seven vehicles.
The system consisted of a records management system, a CAD system and an AMO
system.
Competition
The Company faces competition in the "small size" market segment (which the
Company views as departments or agencies with 20 or fewer sworn officers or
personnel) and the "medium size" market segment (which the Company views as
departments or agencies with 21 to 200 sworn officers or personnel) from
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companies such as NewWorld Systems, Pamet Systems, Inc. and Software Corporation
of America. Although such competitors have significantly greater financial,
technical and other resources than those of the Company, the Company feels that
it has been able to compete in such market due to its "total solution" system
integration technology and local presence, the Company having installed systems
in over 50 "small size" and "medium size" law enforcement agencies in the state
of New York.
The Company believes that more intense competition exists in the "large
size" market segment in which the system price ranges widely (between $1 million
and $100 million) depending on the size of the customer and the complexity of
the system (as compared to the Company's typical sale in the "small size" and
"medium size" market segments, which historically has ranged between $25,000 and
$350,000). The "large size" market is dominated by software vendors, such as PRC
Public Safety, Inc. and Systemhouse, Ltd., and large system integrators such as
IBM, Andersen Consulting, Electronic Data Systems and Harris Corporation. In
order to penetrate the "large size" market segment, the Company is pursuing
strategic business alliances or subcontracting relationships with large systems
integrators having greater financial resources and name recognition than the
Company. The Company believes that, in the future, through an extensive
marketing plan, it can build brand name awareness for its products and services.
The Company cannot, however, assure that it will be successful in this strategy.
The Company believes that the mobile wireless computer communication
technology sub-market is in its infancy. With the development of the Company's
AMO system utilizing radio frequency networks as discussed above, the Company
believes that, with sufficient resources, it will be capable of increasing its
sale price range to between $75,000 and $1 million per installation, depending
on the customer size and the extent and complexity of the system.
The Company further believes that large software companies, communication
equipment companies and computer hardware companies are currently not
concentrating their resources on the law enforcement and public safety market
because of that market's special requirements for secure radio operations and
the particular applications and expertise needed to meet those special
requirements. Additionally, most "large size" agencies have a general need for
highly specific customized systems and systems integration. Generally, such
companies that do have an interest in pursuing the law enforcement and public
safety markets look for a business partner, like the Company, that has the
necessary expertise to design and install law enforcement and public safety
systems. The Company also believes that, as a "total solution" provider in the
field of law enforcement and public safety computer technology, it is, subject
to obtaining the appropriate resources, positioned to develop generic
communications software protocols for secure on-line radio frequency mobile data
transmission basic to almost all mobile computers for police, fire and EMS
departments.
Employees
The Company currently has 16 full-time employees and one part-time
employee, including six software developers/programmers, one technical writer,
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one sales person, and eight executive and administrative personnel. The Company
also has two part-time industry consultants. Management believes that its
relations with its employees are satisfactory.
The Company's Product Development Group performs research and development
activities and its Customer Service Support Group handles installations,
maintenance and service. The Company's new customers are trained by consultants
who generally are retired and active-duty police officers from police
departments that have systems installed by the Company. The Company's daily
operations are managed by a software development manager, a manager of
operations, and a director of technology.
Item 2. Description of Property
The Company's executive offices are located at 77 Spruce Street,
Cedarhurst, New York where it leases approximately 5,000 square feet of space.
The premises are held pursuant to a five year double net lease expiring in
September 2001 that provides for a base annual rental of approximately $85,000.
The Company believes that its premises are adequate for its needs for the
foreseeable future.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
Market Information
Upon completion of the Company's IPO on June 10, 1997, the Company's Common
Shares began trading under the symbol "CODI" on The Nasdaq SmallCap Market.
Prior to June 10, 1997 there was no public trading market for the Company's
securities. The following table sets forth, for the periods indicated, the range
of high and low bid prices of the Company's Common Shares as furnished by The
Nasdaq Stock Market, Inc. The quotations set forth below reflect interdealer
prices without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
High Low
1997
Second Quarter (1) ........................ $6.1875 $5.00
Third Quarter ............................. $6.125 $5.25
Fourth Quarter............................. $9.25 $5.375
(1) Commencing on June 10, 1997, the effective date of the Company's IPO.
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Holders
The Company has been advised by its transfer agent (American Stock Transfer
& Trust Co.) that the approximate number of record holders of the Common Shares
as of March 25, 1998 was seven. The Company has been advised by ADP that there
are approximately 725 beneficial owners of its Common Shares.
Dividend Policy
Holders of the Company's Common Shares are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company has not declared or paid any dividends in the past and
does not currently anticipate declaring or paying any dividends in the
foreseeable future. The Company intends to retain earnings, if any, to finance
the development and expansion of its business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent upon
future earnings, if any, the Company's financial condition, capital
requirements, general business conditions, and other factors. Therefore, there
can be no assurance that any dividends of any kind will ever be paid.
Recent Sales of Unregistered Securities
In addition to the sales of unregistered securities disclosed in the
Company's Form 10-QSB for the period ended September 30, 1997, the Company sold
the following unregistered securities during the period covered by this report.
In April 1997, the Company issued 233,000 Common Shares to the Mark
Honigsfeld Living Trust (the "Honigsfeld Trust") upon the exercise of a certain
option by Mr. Honigsfeld for the purchase of such shares at an exercise price of
$.30 per share.
In June 1997, upon the closing of the Company's IPO, $100,000 of accrued
unpaid salary and $200,000 of indebtedness owed to Mr. Honigsfeld were converted
into an aggregate of 60,000 Common Shares, and an accrued unpaid signing bonus
of $15,000 payable to Mr. Lew was converted into 3,000 Common Shares.
These transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof. The Company determined that Mr. Honigsfeld and
Mr. Lew were sophisticated investors. The sales of the Common Shares to Mr.
Honigsfeld, the Honigsfeld Trust and Mr. Lew were without the use of an
underwriter, and the certificates evidencing the Common Shares issued to Mr.
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Honigsfeld, the Honigsfeld Trust and Mr. Lew bear restrictive legends permitting
the transfer thereof only upon registration of such securities or pursuant to an
exemption under the Securities Act. See Item 10 "Executive Compensation -
Aggregated Option Exercises in Fiscal Year ended December 31, 1997 and Fiscal
Year - End Option Value" table. Item 10 - "Executive Compensation - Summary
Compensation" table; and Item 12 - "Certain Relationships and Related
Transactions".
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, $.01 par value per
share, (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 December 31, 1997:
Offering:
Gross proceeds (including over-allotment) $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 December 31, 1997:
Product enhancement and development (1)(3) $ 1,160,000
Repayment of indebtedness (2) 770,000
Marketing and advertising (1)(3) 400,000
Hiring/training personnel (1)(3) 65,000
Equipment purchases (1)(3) 205,000
Unused proceeds (4) 3,025,874
-----------
$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.
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(3) Approximate.
(4) Unused proceeds are invested in government securities and certificates
of deposit.
To date, the use of proceeds does not represent any material changes from
the use of proceeds described in the prospectus.
Item 6. Management's Discussion and Analysis or Plan of Operation
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 non-exclusive,
non-transferable and non-assignable licenses to use software it has developed,
through fixed price contracts. Revenues from such fixed price contracts are
recognized using the percentage of completion method of accounting. The Company
retains title to the software and warrants that it will provide technical
support and repair any defects in the software at no charge. The warranty period
for each contract is negotiated individually, with the periods ranging from 90
days to three years. To date, repair costs have been minimal and, therefore, the
Company has not had to establish a reserve for warranty costs.
The Company also provides post-contract, customer support to licensees of
its software. Revenues from such services are recognized ratably over the period
of performance. Fees billed and/or received prior to performance of services are
reflected as deferred revenues.
The Company's revenues, expenses and operating results have varied
considerably in the past and are likely to vary in the future. Fluctuations in
revenues depend on a number of factors, some of which are beyond the Company's
control. These factors include, among other things, the timing of contracts,
delays in customer acceptance of the Company's software products and
competition.
Results of Operations
Revenues:
Total revenues for the year ended December 31, 997 were $591,375 as
compared to $477,527 for the prior year, an increase of $113,848 or 23.8%. This
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increase was a result of a 37% increase in software sales and a 14% increase in
maintenance income. As a result of the new systems licensed during 1996,
maintenance income for the year ended December 31, 1997 increased by
approximately $38,000 from $275,016 to $313,389, when compared to the year ended
December 31, 1996.
To date, the Company has not generated significant revenues. However,
management believes that through the funds obtained in its initial public
offering (see discussion below) for, among other things, product enhancement,
marketing and the introduction of new products, the Company will be able to
increase revenues from the sale of software 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 computing technology. Management of the Company
does not believe that product obsolescence is a significant factor in the
Company's business since it is continually updating and enhancing its software
products.
Costs and Expenses:
Total costs increased from $1,087,020 to $3,537,773 when comparing the
years ended December 31, 1996 to 1997.
Programming costs increased from $268,915 for the year ended December 31,
1996 to $406,563 for the year ended December 31, 1997. This increase primarily
encompasses salaries and wages and license fees for the Company's main computer
operating system. General and administrative expenses increased from $660,006
for 1996 to $2,195,406 for 1997. This increase was primarily a result of
increased payroll due to the hiring of new sales, marketing and management
personnel and the related benefits as well as the amortization of deferred
compensation associated with stock options granted. A portion of the increase
($216,000) is also due to an accrual for severance pay benefits in connection
with the termination of an officer's employment contract. The Company also
experienced increases in professional and consulting fees, advertising expenses
and rent expense for the Company's new premises. Research and development costs
increased from $158,099 to $935,804 when comparing 1996 to 1997. This increase
was due to increased payroll and related costs incurred in connection with the
Company's decision to focus on the development of enhanced and improved
technology.
In addition, in 1997, the Company fully amortized approximately $1,588,000
of deferred financing charges which were capitalized in connection with certain
debt incurred prior to the Company's initial public offering. The debt was fully
repaid during this period.
Income/(Loss):
For the year ended December 31, 1997, the Company had a net loss of
$4,436,745 or $1.95 per share. For the year ended December 31, 1996, the Company
had a net loss of $570,769 or $.34 per share. The principal reason for this
increased loss is the increases in costs as described above and the one-time
amortization of the deferred financing costs which were recognized in connection
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with the bridge financing received in 1996. See "Financial Statements, Note 7".
Liquidity and Capital Resources
In January 1997, the Company entered into a secured credit facility loan
agreement (the "Credit Agreement") with Mark Honigsfeld of the Board and Chief
Executive Officer of the Company, pursuant to which the Company borrowed
$200,000. The Company and Mr. Honigsfeld agreed to convert this loan into 40,000
common shares (an effective conversion price of $5.00 per share) upon the
closing of the IPO. In April 1997, the Company and Mr. Honigsfeld amended the
Credit Agreement to provide for a new line of credit of $500,000. In May 1997,
the Company borrowed an additional $200,000 under the Credit Agreement of which
$150,000 is outstanding at December 31, 1997. The repayment of up to $200,000
under the Credit Agreement is secured by a first priority security interest in
all the assets owned by the Company. See Item 12 - "Certain Relationships and
Related Transactions."
In June 1997, the Company successfully completed an initial public offering
of its common stock. The Company sold 1,380,000 shares of its common stock at a
price of $5.00 per share and realized net proceeds of approximately $5,626,000.
At December 31, 1997, the Company had cash of $3,081,253, accounts
receivable of $72,454, a current ratio of 8.3:1 and a net worth of $3,205,574.
At December 31, 1996, the Company had cash of $286,497, accounts receivable of
$100,010, a current ratio of 1.5:1 and net worth of $1,279,701. This significant
improvement in liquidity is due to the completion of the IPO as discussed above.
In 1996, the Company moved its facilities to new and more costly space and
signed new compensation agreements with certain key employees. Both the new
space and the continued employment of these key individuals are needed in order
for the Company to develop new, and enhance existing, products and to grow in
the future. There can be no assurance, however, that either of these commitments
will result in increased revenues and earnings. Until such time that the Company
significantly increases revenues, the new lease and compensation agreements are
likely to result in continuing operating losses.
Cash Flows
For the years ended December 31, 1997 and 1996, cash utilized by operating
activities was $2,311,314 and $289,383, respectively. This increase in negative
cash flow is a direct result of the increased operating costs incurred by the
Company during 1997.
For the year ended December 31, 1997, $135,205 was utilized by investing
activities, primarily for the purchase of fixed assets net of the repayment of
an officer's loan. For the year ended December 31, 1996, $176,609 was utilized
by investing activities primarily for purchases of fixed assets and for a loan
to this officer.
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For the year ended December 31, 1997, cash provided by financing activities
aggregated $5,241,275, primarily due to the completion of the IPO and loans
received from an officer, net of the repayment of the bridge loans received in
1996. For the year ended December 31, 1996, cash provided by financing
activities aggregated $646,527, primarily due to the completion of the bridge
financing received in October 1996 in the amount of $770,000.
Back-Log
The Company's back-log of software contracts as of March 5, 1998 aggregated
$767,000. These contracts when completed (usually within six months to one year)
are expected to generate approximately $150,000 of additional annual maintenance
revenue.
Other
The Company believes that the net proceeds from the IPO will be sufficient
for at least the ensuing 12 month period.
The Company believes its technology addresses year 2000 issues.
Forward Looking Statements
Except for historical information contained herein, the matters set forth
above contain forward looking statements that involve certain risks and
uncertainties that could cause actual results to differ from those in the
forward looking statements. See "Forward Looking Statements" above on page 1.
Item 7. Financial Statements
The audited financial statements of the Company as at December 31, 1997 and
1996 and for the years then ended are included in this Annual Report on Form
10-KSB following Item 13 hereof.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16(a) of the Exchange Act
Directors and Executive Officers.
The names and ages of, and the positions held by, the executive officers
and directors of the Company are set forth below.
Class of
Name Age Positions Held Directorship
Dong W. Lew(1) 68 President, Chief I
Operating Officer,
Treasurer and Director
Mark Honigsfeld 43 Chairman of the Board, II
Chief Executive Officer,
Secretary and Director
Louis Libin 39 Chief Technology Officer III
and Director
William D. Rizzardi 55 Director I
Harold Lazarus, Ph.D. 71 Director II
- ------------------
(1) Pursuant to an agreement discussed under Item 10 - "Executive Compensation
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements" below, Dong Lew is to resign as a director and officer of the
Company effective on or before April 24, 1998.
Dong W. Lew
Mr. Lew joined the Company in 1988. He was elected a director and the
President in August 1992 and was elected Treasurer in August 1996. He graduated
from the Massachusetts Institute of Technology ("M.I.T.") with a Bachelor of
Arts Degree in Business and Engineering Administration, and has over 25 years of
experience in the computer industry. From 1981 to 1988, Mr. Lew was an
independent computer consultant providing turnkey computer systems with custom
software to the manufacturing and publishing industries. Prior to 1981, he was
employed in computer systems design and managerial capacities by such firms as
Mergenthaler, Inc., Harris-Intertype, Inc., and Codesco International, Inc.
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Mark Honigsfeld
Mr. Honigsfeld joined the Company as Chairman of the Board, Secretary and a
director in August 1996 and, effective October 1, 1996, he was elected Chief
Executive Officer of the Company. In 1978, he founded Facelifters Home Systems,
Inc. ("FACE"), a cabinet manufacturing and installation company for which he
served as Chief Executive Officer and Chairman of the Board until April 25,
1996. On such date, FACE, a publicly-traded company, was acquired by a New York
Stock Exchange company in a transaction valued at approximately $70 million to
FACE's stockholders. Prior to the merger, FACE's revenues on an annualized basis
approached $50 million. As the founder, Chief Executive Officer and Chairman of
the Board, Mr. Honigsfeld was directly involved in the planning and development
of almost all areas of FACE's business, including corporate finance, public
offerings, investor relations, mergers and acquisitions, licensing, product
design and engineering, sales and marketing, manufacturing, field installation,
customer service, management information services and management training. Prior
to the sale transaction, FACE had approximately 600 employees and associates
representing its products and services at 28 locations in 14 states,
approximately 135 telemarketing personnel, 180 direct sellers, 120 manufacturing
employees and 165 supervisory, management and administrative personnel. In
addition, FACE had working arrangements with approximately 175 independent
contracting companies nationwide. Since the fourth quarter of 1997, Mr.
Honigsfeld has also been a director of U.S. Pawn, Inc., a public company
(Nasdaq: USPN) which owns and operates pawn shops. Mr. Honigsfeld holds a
Bachelor of Science Degree in Industrial Arts, magna cum laude, and a Master of
Science Degree in Industrial Arts, with honors, from City College of the City
University of New York.
Louis Libin
Mr. Libin joined the Company in January 1997 on a per diem basis as Chief
Technology Officer and a director. Effective March 10, 1997, he began to serve
as the Company's Chief Technology Officer on a full-time basis. Since 1989, Mr.
Libin has represented the United States on satellite and transmission issues at
the International Telecommunications Union (the "ITU") in Geneva, Switzerland.
Mr. Libin has also been Chairman of the Expert Group On Broadcast Interactive
Services of the ITU since 1991. From 1987 to 1997, Mr. Libin served as the
Director of Technology (specializing in broadcast transmission systems) for the
General Electric Corporation ("GE") and the National Broadcasting Corporation.
From 1995 to 1997, Mr. Libin also served as Assistant Secretary of all of GE's
wholly-owned subsidiaries that are involved in broadcast media, with the
responsibility for technical developments and all Federal Communications
Commission (the "FCC") issues and licenses. From 1983 to 1986, Mr. Libin was a
project manager for Radio Corporation of America ("RCA") until RCA's acquisition
by GE. From 1981 to 1982, Mr. Libin was employed by the Loral Corporation as an
electronic design engineer where he designed radio frequency systems for the
United States military. From 1980 to 1981, Mr. Libin was a design engineer for
the Chryon Corporation, a computer graphics company. From 1979 to 1980, he
worked for Burroughs Computer Systems, Inc. (now part of Unisys) as a field
engineer. Additionally, since 1988, Mr. Libin has acted as a consultant and
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advisor to the FCC in connection with the planning of communications systems and
logistics for major events in the United States and abroad, including political
conventions, presidential inaugurations, and the 1996 Summer Olympics in
Atlanta. Mr. Libin is an active member of the National Society of Professional
Engineers and the Association of Federal Communications Consulting Engineers. He
also sits on the Engineering Advisory Board of the National Association of
Broadcasters. Mr. Libin received a B.S.E.E. Degree in Electrical Engineering
from the Pratt Institute and completed his graduate studies in optical
electronics at M.I.T.'s Executive Program in 1991. Mr. Libin has planned and
managed telecommunications projects in the United States and in Europe. Mr.
Libin was responsible for the planning and implementation of a new television
and telecommunications network in New Zealand in 1990. Mr. Libin has also
provided expert consulting on satellite issues in certain of the republics of
the former Soviet Union. Mr. Libin was also instrumental in the development of
the new transmission technology and the algorithms for software modeling of the
new North American digital terrestrial television system which was approved by
the FCC in 1996. Mr. Libin has published numerous scientific papers in radio
frequency and telecommunications.
William D. Rizzardi
Mr. Rizzardi joined the Company in January 1997 as a director. Since
December 1996, Mr. Rizzardi has been the President of Perlucid Corporation
(f/k/a Environmental Solutions Corporation), a privately held bio-remediation
company. From 1995 to 1996, Mr. Rizzardi was an independent management
consultant to the Long Island Research Institute, a not-for-profit technology
development laboratory. From 1979 to 1994, Mr. Rizzardi held various positions
with Northrop Grumman Corporation and its affiliates, including a Vice President
of Grumman Data Systems Division, where he was responsible for the development,
operations and support of all information systems for the Grumman Corporation,
Corporate Vice President of Information Management and Chief Information Officer
of Grumman Corporation, and a Vice President of Northrop Grumman Corporation -
Data Systems and Services Division following the acquisition of Grumman
Corporation by Northrop Corporation. Mr. Rizzardi received a Bachelor of Science
Degree in Nuclear Physics from City College of the City University of New York
and a P.S.E.E. Degree in Management from the Sloan School of M.I.T.
Harold Lazarus, Ph.D
Dr. Lazarus joined the Company as a director in March 1997. Dr. Lazarus has
been a Professor of Management at the Hofstra University Frank G. Zarb School of
Business (the "Hofstra Business School") since 1980. From 1973 to 1980, Dr.
Lazarus served as Dean of the Hofstra Business School. Dr. Lazarus is an
organization development consultant who lectures in Europe, Asia, North America
and South America on leadership, time management, total quality management,
managing change, effective meetings, problem solving, decision making, mission
statements, management by objectives, and communications. Dr. Lazarus was
Professor of Management at the New York University Leonard N. Stern School of
Business for ten years, and he also taught at Columbia University Graduate
School of Business and Harvard University Business School. Dr. Lazarus currently
serves as a director of Graham-Field Health Products, Inc., a New York Stock
24
<PAGE>
Exchange - listed manufacturer and wholesaler with $200 million in annual sales.
Dr. Lazarus has served on several boards of directors of public companies in the
past, including FACE, Ideal Toy Corporation, Superior Surgical Manufacturing
Company, and Stage II Apparel Corporation. Dr. Lazarus has published seven books
and 65 articles on business management. He also chairs the board of Phi Beta
Kappa Alumni of Long Island (New York). Dr. Lazarus received a Masters of
Science Degree and a Doctor of Philosophy Degree in Management and Marketing
from Columbia University.
The Company's Certificate of Incorporation provides for three classes of
directors, each having a three year term. Each director will hold office until
the next annual meeting of stockholders during the year in which the term of his
class of directorship expires and until his successor is elected and qualified.
The initial terms of Class II and Class III directorships expire at the
Company's annual meeting in 1998 and 1999, respectively. The initial term of the
Class I directors was scheduled to expire in 1997; however, the Company did not
hold an annual meeting in 1997. Accordingly, elections for the Class I
directorships for a term ending in 2000 (the next scheduled expiration year for
that class) will be held at the annual meeting in 1998, along with the elections
for the Class II directorships. Executive officers serve at the pleasure of the
Board of Directors.
There is no family relationship among any of the Company's executive
officers and directors.
Section 16(a) Beneficial Ownership Reporting Compliance
To the Company's knowledge, based solely upon a review of copies of Forms
3, 4 and 5 furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to the Company's officers,
directors and 10% shareholders were complied with, except that six directors and
executive officers each filed his Form 3 ten days late.
Item 10. Executive Compensation
The following table provides summary information concerning cash and
certain other compensation paid or accrued by the Company to, or on behalf of,
Mr. Lew, the Company's President, Mr. Honigsfeld, the Company's Chairman of the
Board and Chief Executive Officer, and Mr. Libin, the Company's Chief Technology
Officer, during the last three fiscal years. Mr. Honigsfeld was elected Chairman
of the Board and Chief Executive Officer in August 1996 and October 1996,
respectively. Mr. Libin was elected Chief Technology Officer in January 1997. No
other executive officer of the Company had a combined salary and bonus in excess
of $100,000 for the year ended December 31, 1997.
25
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Restricted
Name and Other Annual Stock Securities LTIP All Other
Principal Positions Year Salary Bonus Compensation Award(s) Underlying Options Payout Compensation
- ------------------- ---- ------ ------ ------------ --------- ------------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark Honigsfeld(1) 1997 $250,000 - - - 100,000 - -
Chairman of the Board, 1996 $62,500(2) - - - 233,000 - -
Chief Executive 1995 - - - - - - -
Officer and
Secretary
Dong W. Lew (3) 1997 $125,000 - - - 8,561 - -
President and 1996 $87,500(4) $15,000(5) - - 156,950 - -
Treasurer 1995 $70,980 - - - - - -
Louis Libin 1997 $178,651 - - - 100,000 - -
Chief Technology 1996 - - - - - - -
1995 - - - - - - -
- --------------------
</TABLE>
(1) Mr. Honigsfeld was elected Chief Executive Officer of the Company and was
entitled to compensation effective as of October 1, 1996.
(2) Represents accrued and unpaid salary relating to 1996 (based on a salary of
$250,000 per annum) which was converted into 12,500 Common Shares upon the
closing of the IPO.
(3) Mr. Lew acted as the Company's Chief Executive Officer during 1994, 1995
and from the period January 1, 1996 to September 30, 1996.
(4) Based upon a salary of $75,000 per annum from January 1, 1996 to September
30, 1996 and $125,000 per annum from October 1, 1996 to December 31, 1996.
(5) Represents an accrued and unpaid signing bonus (relating to the execution
of Mr. Lew's employment agreement in October 1996) which was converted into
3,000 Common Shares upon the closing of the IPO.
Each non-employee director of the Company is entitled to receive a
director's fee of $500 per meeting (other than telephonic meetings) and options
to purchase 5,000 Common Shares of the Company each year, which options will be
exercisable for a period of ten years from the date of grant, at an exercise
price equal to the market price of the Company's Common Shares on the date of
the grant. Additionally, each non-employee director is reimbursed for reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors
of the Company. The members of the Board of Directors meet regularly, as needed.
26
<PAGE>
<TABLE>
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1997
<CAPTION>
Number of Common Percentage of Total
Shares Underlying Options Granted To
Name Options Granted Employees in Fiscal Year Exercise Price Expiration Date
----- --------------- ------------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Mark Honigsfeld 100,000 36.6% $3.00 January 6, 2007
Dong Lew 8,561(1) 3.1% $5.50 August 27, 2002
Louis Libin 50,000 23.3% $3.00 January 6, 2007
50,000 23.3% $6.75 December 1, 2007
</TABLE>
- ---------------
(1) These options were granted as a reload feature at the time Mr. Lew
surrendered 8,561 Common Shares valued in the aggregate of $47,085.50 (or
$5.50 per share) to exercise options to purchase 156,950 Common Shares.
<TABLE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR
EXPIRED DECEMBER 31, 1997AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Number of Options at Fiscal at Fiscal Year End
Shares Acquired Value Year End Exercisable /
Name On Exercise Realized Exercisable/Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Mark Honigsfeld 233,000 $629,100 0 / 100,000 0 / $625,000
Dong Lew 156,950 $816,140 8,561 / 0 $ 32,104
Louis Libin - - 0 / 100,000 0 / $437,500
</TABLE>
Employment Contracts, and Termination of Employment and Change-in-Control
Arrangements
Employment Agreements
The Company is a party to Employment Agreements with Mark Honigsfeld and
Dong W. Lew, each for a term of three years commencing as of October 1, 1996,
subject to continuing, automatic one-year extensions, unless either the Company
or the individual notifies the other, at least 90 days prior to any annual
anniversary date, of its desire not to extend the term thereof. Each Employment
Agreement provides for earlier termination as discussed below. See Item 10 -
"Executive Compensation" - Employment Contracts, and Termination of Employment
and Change-in-Control Arrangements - Retirement of Dong Lew" below for a
27
<PAGE>
discussion of Mr. Lew's impending retirement and termination of his employment
agreement.
Pursuant to their respective Employment Agreements, Mr. Honigsfeld serves
as Chairman of the Board and Chief Executive Officer of the Company and Mr. Lew
serves as President and Chief Operating Officer of the Company.
The Employment Agreements provide for base annual compensation of $250,000
and $125,000 for Messrs. Honigsfeld and Lew, respectively. The employment
agreement for Mr. Lew provided for a signing bonus in the amount of $15,000,
which was paid in 3,000 Common Shares (valued at $5.00 per share) at the closing
of the IPO. In addition, $100,000 of accrued and unpaid compensation payable to
Mr. Honigsfeld under his Employment Agreement was converted into 20,000 Common
Shares (valued at $5.00 per share) at the closing of the IPO.
In addition to base compensation, each of Messrs. Honigsfeld and Lew is
entitled to receive (i) an annual bonus amount equal to a percentage of base
salary (ranging from 7% to 20%) based upon the Company achieving certain sales
levels (ranging from $3,750,000 to $6,000,000 in the initial year, with
$1,000,000 increased sales level thresholds per year if the bonus is earned in a
particular year) and (ii) an annual bonus based on the Company's EBITANC (as
defined below), if any. Such latter bonus for each ranges from 5% to 10% of
EBITANC based on EBITANC thresholds ranging from $250,000 to $1,500,000. EBITANC
is an amount equal to the Company's earnings before deducting the following:
interest expense, taxes, and any one time nonrecurring charges resulting from
divestitures, acquisitions, consolidations, restructurings and changes in
accounting principles. The use of EBITANC, as opposed to earnings, has the
effect of increasing the earnings base (by the amount of the excluded
deductions) for the purpose of calculating the bonus.
The Employment Agreements for Messrs. Honigsfeld and Lew also provide that
each is entitled to receive, for each year thereof, options for the purchase of
5,000 Common Shares of the Company for each $100,000 of EBITANC. Such options
would be exercisable for a five year period at an exercise price of no less than
110% of the market value of the Common Shares on the date of the grant. Messrs.
Honigsfeld and Lew are also entitled to receive an expense allowance of up to
$500 per month and an automobile allowance in the amount of $1,000 per month.
Each Employment Agreement provides that, notwithstanding the rolling three
year term thereof, it may be terminated prior to such expiration date under the
following circumstances: (i) death; (ii) total disability (as provided for in
the Employment Agreements); (iii) termination by the Company for "cause" (as
defined in the Employment Agreements); (iv) termination by the Company at any
time upon written notice to the employee; (v) termination by the employee upon
30 days written notice to the Company; (vi) termination by the employee at any
time for "good reason" (as defined in the Employment Agreements); or (vii)
termination by the Company at any time within 12 months after a "change in
control" (as defined in the Employment Agreements). Additionally, Mr.
Honigsfeld's Employment Agreement allows him to devote up to 10% of his working
time to other endeavors which are not in competition with the Company.
28
<PAGE>
The Employment Agreements provide for compensation under certain
circumstances upon termination of employment (in addition to accrued but unpaid
compensation) as follows: (i) in the event of the employee's death, the
employee's estate or spouse shall be entitled to receive an amount equal to the
employee's monthly salary as of the date of death multiplied by the number of
full years that he was an employee of the Company or a subsidiary or a
predecessor in interest thereof; (ii) in the event of termination of an
Employment Agreement due to disability, the employee shall be entitled to
receive an amount equal to his monthly salary as of the date of termination of
such Employment Agreement, multiplied by the number of full years that he was an
employee of the Company or a subsidiary or a predecessor in interest thereof
(but, in no event, would the disabled employee be entitled to an amount equal to
less than six months of salary); and (iii) in the event of termination of
employment by the Company following a "change of control" or for any reason
other than death, disability or "cause", or in the event of termination of an
Employment Agreement by the employee for "good reason", the employee shall be
entitled to receive his full salary for the unexpired term of such agreement,
without mitigation of damages based upon employment obtained elsewhere.
The Employment Agreements provide for a restriction on the solicitation of
customers of the Company for a period of two years following termination
thereof, and a covenant not to compete with the Company for a period of six
months following termination of employment for cause.
Effective January 6, 1997, the Company and Louis Libin entered into a
three-year Employment Agreement, providing for Mr. Libin to serve as the
Company's Chief Technology Officer on a non-full-time per diem basis until March
10, 1997, and on a full-time basis commencing on such date. Such Employment
Agreement provides for a salary of $200,000, $225,000 and $250,000 per annum in
the first, second and third years, respectively. Additionally, Mr. Libin's
Employment Agreement allows him to devote up to one day a week to other
endeavors which are not in competition with the Company. Other terms of Mr.
Libin's Employment Agreement conform in structure to the material provisions of
Messrs. Honigsfeld's and Lew's Employment Agreements such as bonuses, benefits,
restrictive covenants and termination.
Retirement of Dong Lew
On December 9, 1997, Dong Lew advised the Board of Directors that he
desired to retire, subject to reaching an agreement on the termination of his
Employment Agreement.
As of March 17, 1998, the Company and Mr. Lew entered into an agreement
(the "Termination Agreement") which provides that, on or before April 24, 1998,
Mr. Lew's Employment Agreement will be terminated and Mr. Lew will resign as an
officer and director of the Company. The Termination Agreement provides that the
Company will pay Mr. Lew $216,000 at the closing. The closing of the Termination
Agreement is conditioned upon the closing of a stock purchase agreement (the
"Stock Purchase Agreement") between Mr. Lew and Mark Honigsfeld that will close
simultaneously with the Termination Agreement.
29
<PAGE>
The Stock Purchase Agreement provides that Mr. Lew will sell to Mr.
Honigsfeld and/or his designee(s) (i) 457,639 Common Shares of the Company, plus
8,561 Common Shares of the Company, which Mr. Lew will acquire upon the exercise
of a stock option less any Common Shares surrendered by Mr. Lew to exercise such
option in a cashless transaction, less (ii) the number of Common Shares Mr. Lew
sells prior thereto pursuant to the Company's Registration Statement on Form S-8
and Rule 144 promulgated under the Securities Act of 1933, as amended. The
purchase price for the Common Shares to be purchased by Mr. Honigsfeld and/or
his designee shall be $820,000, less the sales proceeds realized by Mr. Lew from
sales under the Form S-8 and Rule 144. Following full performance of the Stock
Purchase Agreement, Mr. Lew shall own 100,000 Common Shares of the Company
(unless any of such Common Shares are otherwise disposed of or transferred).
Following Mr. Lew's disposition of his Common Shares and assuming he continues
to own 100,000 Common Shares, Mr. Lew would beneficially own approximately 3.5%
of the outstanding Common Shares of the Company, based on the current number of
outstanding Common Shares.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Management
The following table sets forth certain information as of February 28, 1998
with respect to the beneficial ownership of the outstanding Common Shares of the
Company by (i) any holder of more than 5% of the outstanding Common Shares; (ii)
the Company's directors; (iii) the directors and executive officers of the
Company as a group.
Name and Address
of Beneficial Owner Number Percent
Mark Honigsfeld 723,200(1)(2) 24.6%
77 Spruce Street
Cedarhurst, New York
Dong W. Lew 566,200(2)(3) 19.9%
1350 Grand Summit Drive
Reno, Nevada
Louis Libin 16,667(4) *
77 Spruce Street
Cedarhurst, New York
William D. Rizzardi 1,667(4) *
77 Spruce Street
Cedarhurst, New York
30
<PAGE>
Harold Lazarus 1,667(4) *
134 Hofstra University
Hempstead, New York
Directors and executive officers 1,309,401(5) 44.1%
as a group (5 persons)
- -------------------
*Represents less than 1%.
(1) Includes (i) 363,200 shares held by the Honigsfeld Trust whose sole
beneficiary is Mr. Honigsfeld's wife; Mr. Honigsfeld, the settlor and
trustee of the trust, has the right to terminate the Honigsfeld Trust and
receive the shares; (ii) 200,000 shares held by the Mardee Charity Fund
Foundation, a private charitable foundation of which Mr. Honigsfeld and his
wife are the sole trustees; and (iii) 100,000 shares issuable upon the
exercise of a currently exercisable option. Excludes 33,600 shares issuable
upon the exercise of Bridge Warrants that are not exercisable within 60
days.
(2) Does not give effect to the contemplated sale of an aggregate of 466,200
Common Shares by Mr. Lew as described under Item 10 - "Executive
Compensation - Employment Contracts, and Termination of Employment and
Change-in-Control Arrangement - Retirement of Dong Lew", a portion of which
shares may be purchased by Mr. Honigsfeld as described therein.
(3) Includes 8,561 shares issuable upon the exercise of currently exercisable
option.
(4) Shares issuable upon the exercise of options that are currently exercisable
or exercisable within 60 days.
(5) Includes an aggregate of 128,562 Common Shares issuable upon the exercise
of options which are currently exercisable or exercisable within 60 days
(including those referred to in footnotes 1,3 and 4 above).
Changes-in-Control
Reference is hereby made to Item 10 - "Executive Compensation - Employment
Contracts, and Termination of Employment and Change-in-Control Arrangements -
Retirement of Dong Lew" for a discussion of an agreement between Dong Lew and
Mark Honigsfeld providing for the sale of an aggregate of 466,200 Common Shares
by Mr. Lew.
Item 12. Certain Relationships and Related Transactions
Effective August 1996, the Company issued 330,200 Common Shares to the
Honigsfeld Trust in consideration for $.30 per share or an aggregate price of
$99,060. Upon Mr. Honigsfeld accepting the position as Chairman of the Board, he
was issued a five year option for the purchase of up to 233,000 Common Shares of
the Company at an exercise price of $.30 per share. This option was exercised in
full in April 1997 and the underlying Common Shares were issued to the
Honigsfeld Trust. See Item 11- "Security Ownership of Certain Beneficial Owners
and Management."
31
<PAGE>
In October 1996, the Company loaned $70,000 to Mr. Lew for purposes of his
participation in the Bridge Financing Transaction. Such loan was evidenced by a
promissory note (the "Lew Note"), providing for the payment of principal and
interest at the rate of 8% per annum in 120 equal monthly installments, subject
to acceleration on the closing date of the IPO. Payment of the Lew Note was
secured by a pledge of 28,000 Common Shares of the Company. In March 1997, Mr.
Honigsfeld purchased the Lew Note from the Company in consideration for the
payment in cash of the outstanding principal amount of the Lew Note. Mr.
Honigsfeld concurrently received an assignment of the Company's rights as
pledgee of Mr. Lew's Common Shares. In May 1997, the Lew Note was amended to
make it nonrecourse except to the pledged Common Shares and to conform the
payment terms to those of the Bridge Notes. The Lew Note was satisfied
contemporaneously with the closing of the IPO.
In January 1997, the Company entered into the secured Credit Agreement with
Mr. Honigsfeld. Pursuant to the Credit Agreement, the Company initially borrowed
$200,000. In April 1997, the Company and Mr. Honigsfeld amended the Credit
Agreement to provide for an additional line of credit of $500,000. Outstanding
principal under the Credit Agreement bears interest at the rate of 10% per
annum. The repayment of up to $200,000 under the Credit Agreement is secured by
a first priority security interest in all the assets of the Company. The Company
entered into the Credit Agreement because it required additional financing to
fund the Company's working capital needs and no other sources of financing were
available at that time. Contemporaneously with the closing of the IPO, $200,000
of indebtedness was converted into 40,000 Common Shares pursuant to an agreement
between the Company and Mr. Honigsfeld. In May 1997, the Company borrowed an
additional sum of $200,000 under the Credit Agreement. As of March 25, 1998,
$150,000 in principal is outstanding under the Credit Agreement. In 1997, the
Company paid Mr. Honigsfeld an aggregate of $9,316 in interest under the Credit
Agreement. The Company believes that the terms of the Credit Agreement are
commercially reasonable and are at least as favorable to the Company as the
Company could have obtained from an unrelated third party. The Credit Agreement
was approved by, among others, all the disinterested directors of the Company.
Reference is hereby made to Item 10 - "Executive Compensation - Employment
Contracts, and Termination of Employment and Change-in-Control Arrangements -
Retirement of Dong Lew" for a discussion of an agreement between Dong Lew and
Mark Honigsfeld providing for the sale of an aggregate of 466,200 Common Shares
by Mr. Lew and the payment to Mr. Lew of a severance payment in the amount of
$216,000.
To the extent that the Company may enter into any agreements with related
parties in the future (of which none are presently contemplated), the Board of
Directors of the Company has determined that the terms of such agreements must
be commercially reasonable and no less favorable to the Company than the Company
could obtain from unrelated third parties. Additionally, the Board of Directors
of the Company has further determined that such agreements must be approved by a
majority of disinterested directors.
32
<PAGE>
PART IV
Item 13. Exhibits, Lists and Reports on Form 8-K
Exhibits Description of Exhibit
2 Agreement of Merger between the Company and Coastal Computer
Systems, Inc., a New York corporation.*
3.1 Articles of Incorporation of the Company.*
3.2 By-Laws of the Company.*
4.1 Specimen Common Share Certificate.*
4.2 Form of Underwriter's Common Share Purchase Warrant.*
10.1 Restated and Amended Employment Agreement dated as of October 1,
1996 between the Company and Dong W. Lew.*
10.2 Restated and Amended Employment Agreement dated as of October 1,
1996 between the Company and Mark Honigsfeld.*
10.3 $70,000 Promissory Note dated October 30, 1996 from Dong W. Lew
to the Company.*
10.4 Form of Warrant between the Company and each of the Bridge
Lenders.*
10.5 1996 Stock Option Plan.*
10.6 Lease dated October 1, 1996 between Summit Equities Corp. and the
Company.*
10.7 Pledge and Hypothecation Agreement dated October 30, 1996 between
the Company and Dong W. Lew.*
10.8 Credit Agreement dated January 20, 1997 between the Company and
Mark Honigsfeld.*
10.9 Form of Promissory from the Company to Mark Honigsfeld relating
to amounts borrowed under the Credit Agreement.
33
<PAGE>
10.10 Form of Indemnification Agreement between the Company and the
Company's directors and officers.*
10.11 Employment Agreement dated January 6, 1997 between the Company
and Louis Libin.*
10.12 Amended and Restated Credit Agreement dated April 30, 1997
between the Company and Mark Honigsfeld.*
10.13 Mobile Data Services Business Agreement dated as of November 15,
1996 between the Company and GTE Mobilnet Service Corp.*
10.14 Wireless Data Channels Program Agreement dated as of February
19, 1997 between the Company and AT&T Wireless Data, Inc.*
10.15 Master Supplier Agreement dated as of March 3, 1997 between the
Company and Data General Corporation.*
10.17 Agreement between the Company (executed on September 3, 1997)
and Computer Associates International, Inc. (executed on January
2, 1998).
10.18 Termination Agreement dated as of March 17, 1998 between the
Company and Dong Lew.
10.19 Business Alliance Agreement dated March 25, 1998 between the
Company and Alpine Software Incorporated.
11 Computation of Earnings Per Common Share
23 Consent of Lazar, Levine & Felix LLP, independent auditors.
27 Financial Data Schedule.
*Previously filed as on exhibit to the Company's Registration
Statement of Form SB-2, Registration No. 333-18667.
(b) Current Reports on Form 8-K
No report on Form 8-K was filed by the Company during the last quarter of
the fiscal year ended December 31, 1997.
34
<PAGE>
- INDEX TO FINANCIAL STATEMENTS -
Page(s)
Independent Auditors' Report F - 2
Financial Statements:
Balance Sheets as of December 31, 1997 and 1996 F - 3
Statements of Operations for the Years Ended
December 31, 1997 and 1996 F - 4
Statement of Shareholders' Equity for the Two
Years in the Period Ended December 31, 1997 F - 5
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 F - 6
Notes to Financial Statements F - 8
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Compu-DAWN, Inc.
Cedarhurst, New York
We have audited the accompanying balance sheets of Compu-DAWN, Inc. as of
December 31, 1997 and 1996 and the statements of operations, shareholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Compu-DAWN, Inc. as of December
31, 1997 and 1996 and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
/s/ Lazar Levine & Felix LLP
LAZAR LEVINE & FELIX LLP
New York, New York March 5, 1998 except as to Note 13c which is dated March 17,
1998
F - 2
<PAGE>
<TABLE>
Compu-DAWN, Inc.
BALANCE SHEETS
<CAPTION>
- ASSETS (Note 8) -
December 31,
--------------------------
1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash (Note 2b) $3,081,253 $ 286,497
Accounts receivable, net of allowances for doubtful accounts of $13,635 and
$30,000 for 1997 and 1996, respectively (Note 2b) 72,454 100,010
Prepaid expenses 121,802 19,281
Loan receivable from officer (Note 3) - 69,247
Income tax refund receivable (Note 12) 29,868 36,004
---------- ----------
TOTAL CURRENT ASSETS 3,305,377 511,039
---------- ----------
FIXED ASSETS (Notes 2c, 4 and 6) 278,737 138,814
---------- ----------
OTHER ASSETS:
Deferred offering costs (Note 9) - 139,326
Deferred compensation (Note 10) 98,270 34,056
Financing costs (Note 7) - 1,588,400
Security deposits 21,525 21,525
---------- ----------
119,795 1,783,307
---------- ----------
$3,703,909 $2,433,160
========== ==========
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable $ 50,847 $ 123,473
Accrued expenses and other current liabilities (Note 5) 227,875 136,661
Deferred revenue (Note 2d) 12,000 28,100
Note payable - officer (Note 8) 100,000 -
Due to former shareholders (Note 9) - 34,710
Capitalized lease payable - current (Note 6) 5,771 7,859
---------- ----------
TOTAL CURRENT LIABILITIES 396,493 330,803
---------- ----------
NON-CURRENT LIABILITIES:
Note payable - officer (Note 8) 50,000 -
Capitalized lease payable (Note 6) 22,440 29,541
Deferred rent liability (Note 13a) 29,402 23,115
Promissory notes payable (Note 7) - 770,000
---------- ----------
101,842 822,656
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 13)
SHAREHOLDERS' EQUITY (Notes 9 and 10):
Preferred stock, $.01 par value; 1,000,000 shares authorized, none issued or outstanding - -
Common stock, $.01 par value, 20,000,000 shares authorized, 2,838,450 and 986,700
shares issued for 1997 and 1996, respectively 28,385 9,867
Additional paid-in capital 8,061,443 1,670,258
Retained earnings (deficit) (4,837,169) (400,424)
---------- ----------
3,252,659 1,279,701
Less: treasury stock, 8,561 shares at cost (47,085) -
---------- ----------
3,205,574 1,279,701
---------- ----------
$3,703,909 $2,433,160
========== ==========
The accompanying notes are an integral part of these financial statements.
F - 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
<S> <C> <C>
1997 1996
REVENUES (Notes 2d and 11):
Software sales $ 277,986 $ 202,511
Maintenance income 313,389 275,016
------------ -----------
591,375 477,527
------- -------
COSTS AND EXPENSES:
Programming costs and expenses 406,563 268,915
General and administrative expenses (Note 2f) 2,195,406 660,006
Research and development (Note 2e) 935,804 158,099
------------ -----------
3,537,773 1,087,020
--------- ---------
LOSS FROM OPERATIONS (2,946,398) (609,493)
------------ -----------
OTHER INCOME (EXPENSES):
Interest and other income 120,158 4,845
Interest expense and financing costs (Note 7) (1,610,505) (36,274)
Loss on abandonment of leasehold improvements (Note 13a) - (5,378)
------------ ------------
(1,490,347) (36,807)
---------- -------
LOSS BEFORE PROVISION (CREDIT) FOR INCOME TAXES (4,436,745) (646,300)
Provision (credit) for income taxes (Notes 2g and 12) - (75,531)
------------ ------------
NET LOSS $(4,436,745) $ (570,769)
============ ===========
BASIC EARNINGS (LOSS) PER SHARE (Note 2h) $(1.95) $(.34)
======= =====
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note 2h) 2,270,047 1,678,913
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 4
<PAGE>
<TABLE>
Compu-DAWN, Inc.
STATEMENT OF SHAREHOLDERS' EQUITY
<CAPTION>
Total
Additional Retained Shareholders'
Preferred Common Stock Paid-in Earnings Treasury Equity
Stock Shares Amount Capital (Deficit) Stock (Deficit)
--------- --------- --------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 - 1,157,000 $11,570 $ 54,430 $ 170,345 $(71,500) $ 164,845
Cancellation of shares held in treasury
(Note 9) - (685,750) (6,858) (64,642) - 71,500 -
Issuances of common stock (Note 9) - 580,450 5,805 168,330 - - 174,135
Warrants issued pursuant to debt offering
(Note 7) - - - 1,509,200 - - 1,509,200
Options issued below fair value (Note 9) - - - 37,000 - - 37,000
Purchase of outstanding options (Note 9) - - - (15,210) - - (15,210)
Purchases and cancellation of outstanding
shares (Note 9) - (65,000) (650) (18,850) - - (19,500)
Net loss - - - - (570,769) - (570,769)
-------- ----------- -------- ---------- ----------- --------- -----------
Balance at December 31, 1996 - 986,700 9,867 1,670,258 (400,424) - 1,279,701
Options issued below fair value (Note 9) - - - 374,500 - - 374,500
Exercise of stock options (Note 9) - 408,750 4,088 122,297 - - 126,385
Treasury stock, 8,561 shares at cost (Note 9) - - - - - (47,085) (47,085)
Conversion of debt (Note 8) - 40,000 400 199,600 - - 200,000
Conversion of accrued compensation (Note 9) - 23,000 230 114,770 - - 115,000
Initial public offering (Note 9) - 1,380,000 13,800 5,612,074 - - 5,625,874
Cancellation of options (Note 9) - - - (32,056) - - (32,056)
Net loss - - - - (4,436,745) - (4,436,745)
-------- --------- ------- ---------- ----------- --------- -----------
BALANCE AT DECEMBER 31, 1997 - 2,838,450 $28,385 $8,061,443 $(4,837,169) $(47,085) $3,205,574
======== ========= ======= ========== =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 5
<PAGE>
<TABLE>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 1 of 2
------------------------
<CAPTION>
For the Year Ended
December 31,
1997 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Cash received from customers $ 628,198 $ 582,053
Cash paid to suppliers and employees (3,028,563) (825,948)
Interest paid (22,105) (1,995)
Interest and other income received 111,156 3,791
Income taxes paid - (47,284)
------------ -----------
Net cash (utilized) by operating activities (2,311,314) (289,383)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to officer - (70,000)
Principal repayments of officer's loan 69,247 753
Purchase of fixed assets (204,452) (95,117)
Proceeds from sale of fixed assets - 2,500
Payment of security deposits - (14,745)
------------ ----------
Net cash (utilized) by investing activities (135,205) (176,609)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan received from officer 400,000 -
Repayment of officer's loan (50,000) -
Proceeds from debt offering - 770,000
Repayment of promissory notes (770,000) -
Expenses associated with debt offering - (100,100)
Payments for common stock and options acquired (34,710) (21,583)
Principal payments of other long-term debt - (3,726)
Payments of capital lease obligations (9,189) (2,828)
Expenses associated with initial public offering - (139,326)
Proceeds from sale of shares 5,625,874 144,090
Proceeds from exercise of stock options 79,300 -
----------- ----------
Net cash provided by financing activities 5,241,275 646,527
------------ ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,794,756 180,535
Cash and cash equivalents, at beginning of year 286,497 105,962
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $3,081,253 $ 286,497
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F - 6
<PAGE>
<TABLE>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 2 of 2
<CAPTION>
For the Year Ended
December 31,
1997 1996
RECONCILIATION OF NET LOSS TO NET CASH (UTILIZED) BY
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(4,436,745) $(570,769)
Adjustments to reconcile net loss to net cash (utilized) by operating activities:
Allowance for doubtful accounts 19,000 12,000
Depreciation and amortization 64,529 45,947
Deferred tax expense - 6,200
Deferred rent liability 6,287 (3,315)
Compensatory stock 278,230 32,988
Financing charge 1,588,400 -
Loss on disposal of fixed assets - 7,617
Changes in assets and liabilities:
Decrease in accounts receivable 8,556 106,456
Decrease (increase) in prepaid expenses 36,805 (16,714)
Decrease (increase) in tax refund receivable 6,136 (36,004)
Increase in accounts payable and accrued expenses 133,588 221,692
(Decrease) in deferred revenue (16,100) (1,930)
(Decrease) in income taxes payable - (93,551)
----------- ---------
NET CASH (UTILIZED) BY OPERATING ACTIVITIES $(2,311,314) $(289,383)
=========== =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
(a) During 1996, the Company incurred capital lease obligations of $33,595
in connection with the purchase of office equipment.
(b) During 1997, an officer of the Company converted $200,000 of a loan
payable to him into 40,000 shares of common stock.
(c) During 1997, two officers of the Company converted $115,000 of accrued
compensation into 23,000 shares of common stock.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 7
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - DESCRIPTION OF COMPANY:
Compu-DAWN, Inc., the Company, was incorporated under the name
of Coastal Computer Systems, Inc., in New York on March 31,
1983, and was reincorporated in Delaware under its present name
on October 18, 1996. The Company is engaged in the business of
designing, developing, licensing, installing and servicing
computer software products and systems predominantly for public
safety and law enforcement agencies. The Company's customers,
to date, are primarily located in New York State.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with
generally accepted accounting principles. Outlined below are
those policies which are considered particularly significant.
(a) Use of Estimates:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain
estimates and assumptions, where applicable, that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period. While actual results
could differ from those estimates, management does not expect
such variances, if any, to have a material effect on the
financial statements.
(b) Concentration of Credit Risk /Fair Value:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash
investments and accounts receivable.
The Company maintains, at times, deposits in federally insured
financial institutions in excess of federally insured limits.
Management monitors the soundness of these financial
institutions and feels the Company's risk is negligible.
Management believes that concentrations of credit risk with
respect to accounts receivable are limited due to the Company's
methods of progress billings and collections.
As of December 31, 1997 and 1996, the fair value of cash and
cash equivalents, receivables, obligations under accounts
payable and debt instruments approximate the carrying value.
F - 8
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(c) Fixed Assets:
Fixed assets are recorded at cost. Depreciation of fixed assets
is provided on a straight-line basis as follows:
Computer equipment 3 years
Furniture and fixtures 5 years
Motor vehicles 5 years
Maintenance and repairs are expensed as incurred. Leasehold
improvements are amortized over the useful life of the asset or
the lease, whichever is shorter. Capital leases are amortized
over the term of the respective leases or the useful lives of
the related assets, whichever is shorter.
Depreciation and amortization expense for the years ended
December 31, 1997 and 1996 aggregated $64,529 and $25,046,
respectively.
(d) Revenue Recognition:
The Company generates revenues from the granting of
non-exclusive, non-transferable and non- assignable licenses to
use software it has developed, through fixed price contracts.
Revenues from such fixed price contracts are recognized using
the percentage of completion method of accounting. The Company
retains title to the software and warranties that it will
provide technical support and repair any defects in the software
at no charge. The warranty period for each contract is
negotiated individually, for periods ranging from 90 days to
three years. To date, repair costs have been minimal and
therefore the Company has not established a reserve for such
warranty costs.
In addition, the Company provides post-contract customer support
to licensees of its software. Revenues from such services are
recognized ratably over the period of performance. Fees billed
and/or received prior to performance of services are reflected
as deferred revenue.
(e) Software Development Costs:
The Company reflects costs incurred in establishing the
technological feasibility of a computer software product to be
leased or sold, as research and development costs, and expenses
such costs in the period incurred. Research and development
costs for the years ended December 31, 1997 and 1996 aggregated
$935,804 and $158,099, respectively.
After technological feasibility has been established, all costs
incurred on the software product are to be capitalized and
amortized on a product by product basis. Capitalization of
computer software costs is discontinued when the product is
available to be sold or leased.
To date, the Company has only sold or leased software which has
been developed for specific customers. As such, all costs
incurred have been expensed as research and development costs.
Costs associated with post-contract customer support
(maintenance) are charged to expense when related revenue is
recognized or when those costs are incurred, whichever occurs
first.
F - 9
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(f) Advertising Costs:
Advertising costs, which are included in general and
administrative expenses, are expensed as incurred. For the
years ended December 31, 1997 and 1996, advertising costs
aggregated $131,868 and $20,294, respectively.
(g) Income Taxes:
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases, and to
net operating loss and tax credit carryforwards, measured by
enacted tax rates for years in which taxes are expected to be
paid or recovered.
Deferred taxes are provided for temporary differences between
financial and tax accounting, principally for differences in
the basis of fixed assets, allowance for doubtful accounts and
other nondeductible expenses, as well as for net operating loss
carryforwards.
(h) Earnings Per Share:
The Company has adopted SFAS 128 "Earnings Per Share" ("SFAS
128"), which has changed the method of calculating earnings per
share. SFAS 128 requires the presentation of "basic" and
"diluted" earnings per share on the face of the income
statement. Prior period loss per share data has been restated
in accordance with Statement 128. The loss per common share is
computed by dividing net loss by the weighted average number of
common shares and common equivalent shares outstanding during
each period.
(i) Statements of Cash Flows:
For purposes of the statements of cash flows, the Company
considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(j) New Accounting Pronouncements:
SFAS 130 "Reporting Comprehensive Income" is effective for
years beginning after December 15, 1997 and early adoption is
permitted. This statement prescribes standards for reporting
comprehensive income and its components. Since the Company
currently does not have any items of other comprehensive income
a statement of comprehensive income is not yet required.
SFAS 131 "Disclosures About Segments of an Enterprise and
Related Information", is effective for years beginning after
December 15, 1997 and early adoption is encouraged. The Company
does not presently believe that it operates in more than one
identifiable segment.
See also Earnings Per Share, above.
F - 10
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(k) Impact of the Year 2000 Issue:
The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that
have date- sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could
potentially result in a system failure or miscalculations
causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send
invoices, or engage in other similar normal business
activities. The Company has ensured that its software is
already year 2000 compliant, and as such this issue is not
expected to have a material effect on the operations of the
Company.
NOTE 3 - LOAN RECEIVABLE - OFFICER:
In October 1996, the Company made a loan of $70,000 to its
President and Chief Operating Officer for the purpose of such
officer's participation in a debt offering (see Note 7). This
loan was made to allow such officer to maintain an equity
ownership in the Company that aligned his interest with that of
the other shareholders. The loan was made since the officer did
not have the resources or the ability to obtain the necessary
funds otherwise. Such loan was evidenced by a promissory note
requiring 120 equal monthly payments, at an annual interest
rate of 8% and secured by shares of common stock owned by the
individual with a value equal to 120% of the outstanding
balance. This note was also due and payable upon the closing of
a public offering of the Company's common stock should such
occur within three years of the date of the note and yield
gross proceeds of at least $4,500,000.
In March 1997, the Chairman of the Board of the Company
purchased this note from the Company in consideration for the
payment in cash of the then outstanding amount. The Chairman of
the Board concurrently received an assignment of the Company's
collateral for this note.
NOTE 4 - FIXED ASSETS:
Fixed assets consist of the following:
December 31,
1997 1996
Computer equipment $312,136 $139,916
Furniture and fixtures 28,495 16,499
Motor vehicles 12,597 12,597
Leasehold improvements 65,581 45,345
Assets under capitalized leases 41,484 41,484
--------- -------
460,293 255,841
Less: accumulated depreciation and amortization 181,556 117,027
--------- -------
$278,737 $138,814
======== ========
F - 11
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 5 - ACCRUED EXPENSES:
Accrued expenses is comprised of the following:
December 31,
1997 1996
Payroll and payroll taxes $226,000 $121,037
Interest 1,875 15,624
-------- --------
$227,875 $136,661
======== ========
In December 1997, the President and Chief Operating Officer of
the Company entered in negotiations to terminate his employment
agreement (see Note 13c). In connection therewith, the Company
has accrued for severance pay benefits of $216,000, as of
December 31, 1997.
NOTE 6 - CAPITALIZED LEASE OBLIGATIONS:
The Company has entered into various capital leases for
furniture, fixtures and equipment which expire in years through
2001. The assets and liability under these capital leases are
recorded at the lower of the present value of the minimum lease
payments or the fair market value of the assets. The assets are
depreciated over their estimated useful lives. Depreciation of
assets under capital leases for the years ended December 31,
1997 and 1996 aggregated $9,349 and $5,989, respectively.
Minimum future lease payments under capital leases as of
December 31, 1997 are as follows:
1998 $ 9,474
1999 9,474
2000 9,474
2001 8,684
-------
Total minimum lease payments 37,106
Less: amount representing interest 8,895
-------
$28,211
=======
NOTE 7 - DEBT OFFERING:
In October 1996, the Company successfully completed the sale of
77 units in a private offering, each unit consisting of a
$10,000 principal amount 12% promissory note ("bridge note")
and a redeemable stock purchase warrant to acquire 5,600 shares
of the Company's common stock for aggregate gross proceeds of
$770,000. The warrants were exercisable at a price of $.50 per
share only upon the successful completion of an Initial Public
Offering ("IPO"), of the Company's common stock.
F - 12
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 7 - DEBT OFFERING (Continued):
The agreement stated that each of the bridge notes is due and
payable upon the closing of the IPO. In the event such closing
occurs on or before September 15, 1997, no interest will be
payable on these notes. In the event that the Company closes an
IPO after September 15, 1997 but before September 15, 1999, the
notes shall bear interest at a rate of 8% per annum and be
payable upon the closing of the IPO. In the event the Company
does not close an IPO by September 15, 1999, interest shall
accrue at a rate of 12% per annum through such date and the
notes shall be payable in 120 equal monthly installments with
interest at a rate of 8% per annum beginning September 16,
1999.
In accordance with APB No. 14, the proceeds of debt issued with
stock purchase warrants should be allocated based on the fair
values of the debt without the warrants and of the warrants
themselves when issued. Accordingly, the Company reflected
deferred financing costs and additional paid-in capital based
upon the difference between the deemed fair value of the
warrants ($4.00) and the warrant exercise price.
Financing costs, which represent costs incurred in connection
with this private offering, are to be charged to operations as
additional interest expense over the term of the bridge notes.
In September 1996, prior to the closing of this private
offering, the Company entered into a consulting agreement with
one of its founding shareholders which provided for a one-time
payment at closing of $25,290.
In April 1997, the holders of the bridge notes agreed to (i)
increase the exercise price of the five year warrants issued to
them from $.50 per warrant to $3.00 per warrant and (ii)
increase the holding period of these warrants from six months
to two years from the effective date of the IPO.
In June 1997, the Company successfully completed its IPO (see
Note 9) and repaid these promissory notes. In connection with
this repayment, the Company has fully amortized deferred
financing costs originally capitalized in connection with the
notes. This amount has been reflected as a non-recurring charge
in the statement of operations.
NOTE 8 - NOTE PAYABLE - OFFICER:
In April 1997, the Chairman of the Board of the Company agreed
to convert a $200,000 loan payable to him by the Company into
common shares at a conversion price of $5.00 per share (the IPO
price) upon the consummation of such IPO. In addition, this
officer agreed to provide a $500,000 credit line to the Company
for a period of two years, secured by all assets of the
Company. As of December 31, 1997, the balance outstanding under
this credit line was $150,000, which amount is payable in
quarterly installments of $25,000 plus interest at 10% per
annum. For the year ended December 31, 1997, the interest
expense relating to this loan aggregated $11,191.
F - 13
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 9 - CAPITAL STOCK AND EQUIVALENTS:
In October 1996, simultaneously with its reincorporation in the
State of Delaware, (see Note 1) the Company increased its
authorized capital to 20,000,000 shares of common stock, $.01
par value, and 1,000,000 shares of preferred stock, $.01 par
value. The Company also effected a stock split of its issued
and outstanding common stock on a 325 for 1 basis, resulting in
1,157,000 shares. This stock split has been reflected
retroactively in the accompanying financial statements and
accordingly, all references to the number of common shares
issued and outstanding have been restated. No preferred shares
are issued and outstanding.
During 1994 and 1995 the Company repurchased an aggregate of
685,750 shares of its common stock from certain shareholders at
an aggregate cost of $71,500. These shares were canceled in
1996.
In August 1996, the Company sold 480,300 shares of its common
stock at a price of $.30 per share, for cash proceeds of
$144,090 and issued 100,150 shares of its common stock in lieu
of payment of legal and consulting fees of $30,045, for an
aggregate amount of $174,135.
The Company had also granted, to certain former shareholders,
options to purchase an aggregate of 50,700 shares of common
stock (post-split) at an aggregate exercise price of $156. In
October 1996, following the successful completion of a debt
offering (see Note 7), the Company entered into agreements with
the former shareholders, canceling these unexercised options in
consider ation of payment of $.30 for each underlying share and
the issuance of warrants to purchase an aggregate of 31,200
shares of stock at an exercise price of $5.00 per share. The
payment for these options aggregating $15,210 has been charged
against additional paid-in capital.
The Company also purchased, in October 1996, 65,000 shares held
by these former shareholders at a per share price of $.30.
These shares were canceled upon the repurchase, and
accordingly, common stock and additional paid-in capital have
been reduced by $650 and $18,850, respectively.
During April 1997, options were exercised to purchase 408,750
shares of common stock for which the Company received $79,300
in cash proceeds and 8,561 shares of company common stock with
a fair market value of $47,085.
In April 1997, two officers (the President and the Chairman of
the Board) agreed to convert $115,000 of accrued compensation
into common shares at a conversion price of $5.00 per share
(the IPO price), such conversion to occur upon the consummation
of the IPO.
F - 14
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 9 - CAPITAL STOCK AND EQUIVALENTS (Continued):
In connection with an agreement reached with certain of the
bridge note holders, the Company canceled bridge warrants to
purchase 42,000 shares. The number of shares underlying the
bridge warrants has therefore been reduced from 431,200 to
389,200 common shares.
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.
NOTE 10 - STOCK OPTIONS:
In October 1996, the Company established a Stock Option Plan
under which options (including non-statutory options) to
purchase up to 2,000,000 shares may be granted to eligible
persons. As of December 31, 1996, the Company had granted
options to purchase an aggregate of 491,950 shares of common
stock at prices ranging from $.30 to $4.00, aggregating
$221,485. In connection therewith the Company recorded deferred
compensation (measured as the excess of the fair value of the
underlying stock over the exercise price of the option at date
of grant) of $37,000. During 1997, prior to the consummation of
the IPO, the Company granted additional options to purchase an
aggregate of 187,250 shares of common stock at an exercise
price of $3.00 aggregating $561,750, and recorded additional
deferred compensation costs of $374,500. Deferred compensation
costs are being amortized over the vesting period of the
related options. Amortization of such costs for the years ended
December 31, 1997 and 1996, aggregated $278,230 and $2,943,
respectively.
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" requires use of
option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, if the exercise
price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per
share is required by Statement 123, and has been determined as
if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions for 1997 and 1996, respectively:
risk-free interest rates of 6.1% and 6.8%; dividend yields of
2.6% and 1.8%; volatility factors of the expected market price
of the Company's common stock of 65% and 69%; and a
weighted-average expected life of the options of seven years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
F - 15
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 10 - STOCK OPTIONS (Continued):
Because the Company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options vesting
period. The Company's pro forma information follows:
1997 1996
----------- ----------
Net loss:
As reported $(4,436,745) $(570,769)
Pro forma (4,883,470) (570,769)
Basic loss per share:
As reported (1.95) (.34)
Pro forma (2.15) (.34)
A summary of stock option activity, and related information for
the years ended December 31, 1997 and 1996 follows:
Weighted
Average
Exercise
Options Price
------- -----
Granted 491,950 $ .45
Exercised - -
Canceled - -
------- ----
Outstanding, December 31, 1996 491,950 .45
------
Granted 278,311 4.04
Exercised 410,417) .32
Canceled (55,000) 1.69
------- -----
Outstanding, December 31, 1997 304,844 3.69
======= ====
Weighted average fair value of
options granted during the
year ended:
December 31, 1996 $8.62
December 31, 1997 $7.67
Options exercisable:
December 31, 1996 389,950
December 31, 1997 49,533
F - 16
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 10 - STOCK OPTIONS (Continued):
Exercise prices for options outstanding as of December 31, 1997
ranged from $.50 to $6.75 per share. The weighted-average
remaining contractual life of these options is seven years.
In 1997, the Company established the 1997 Qualified Employee
Stock Purchase Plan which provides for the grant of up to a
total of 250,000 options intended to qualify as employee
incentive stock options. The exercise price of options granted
under this plan shall be the lesser of 85% of fair market value
of the Company's common shares at date of grant or 85% of the
fair market value on the exercise date. In December 1997, this
plan was amended to commence on January 1, 1999.
NOTE 11 - ECONOMIC DEPENDENCY:
To date, the Company's revenues have been materially dependent
on a limited number of customers. The nature of the Company's
business (see Note 1) is such that during any individual
accounting period it will license its software products to a
limited number of significant customers. In addition, revenues
from the Company's products are primarily from the public
safety and law enforcement markets.
Also, the Company currently relies on a limited number of (two
or three) software licensors of its main computer operating
system. The Company cannot assure that if any of these licenses
are terminated, it will be able to replace those licenses on a
timely basis.
NOTE 12 - INCOME TAXES:
The income tax expense (benefit) is comprised of the following:
For the Year Ended
December 31,
--------------------
1997 1996
---- ----
Current:
Federal $ - $(50,709)
State - (18,622)
Deferred:
Federal - (4,165)
State - (2,035)
------------ ----------
$ - $(75,531)
============ ========
The Company has net operating loss carryforwards as of December
31, 1997, of approximately $3,200,000, ($400,000 at December
31, 1996) which may be applied against future taxable income,
and which expire in various years beginning after 2011. Since
there is no assurance that the Company will generate future
taxable income to utilize the deferred tax asset resulting from
its net operating loss carryforwards, the Company has not
recognized this asset.
F - 17
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 12 - INCOME TAXES (Continued):
Due to the carryback of the 1996 loss to previous years, the
Company will recoup the maximum amount refundable for taxes it
paid. The following is a reconciliation of the maximum statutory
federal tax rate to the Company's effective tax rate:
For the Year Ended
December 31,
--------------------
1997 1996
---- ----
Federal statutory rate - (34.0%)
State income taxes - (7.0)
Other - benefit from tax
loss carryback - 29.3
-------- -------
- (11.7%)
======== =======
NOTE 13 - COMMITMENTS:
(a) In October 1996, the Company entered into a lease, for its
current executive offices, which provides for base annual rental
of $85,000. This lease, which is for an initial term of five
years, has scheduled annual increases, and can be renewed for an
additional five year period. The total amount of the base rent
payments is being charged to expenses using the straight-line
method over the term of the lease. The Company has recorded a
deferred credit to reflect the excess of rent expense over cash
payments since the inception of this lease. Previously, the
Company was occupying space pursuant to a lease which expired in
March 1997. The Company elected to write- off the remaining
balance of unamortized leasehold improvements on this old space
of $5,378 during 1996. Rent expense for the years ended December
31, 1997 and 1996 aggregated $99,770 and $48,677, respectively.
At December 31, 1997, future minimum rentals are as follows:
1998 $ 87,616
1999 87,975
2000 93,075
2001 72,675
----------
Total $341,341
========
(b) The Company also leases certain types of equipment under
operating leases which expire at various dates through 1999.
Lease payments, which are charged to operations, aggregate
approximately $1,100 per month.
F - 18
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 13 - COMMITMENTS (Continued):
(c) Effective October 1, 1996, the Company entered into a
three-year employment agreement with the Chairman of its Board
of Directors, whereby he will also serve as Chief Executive
Officer of the Company. This agreement provides for annual
compensation of $250,000 and a performance bonus based on a
fixed formula.
Effective October 1, 1996, the Company entered into a
three-year employment agreement with its President and Chief
Operating Officer. This agreement provides for annual
compensation of $125,000 and a signing bonus of $15,000. In
December 1997, the Company entered into negotiations with this
officer with regards to a proposed termination of his
employment agreement. Under the proposed termination agreement,
this officer would receive severance pay of approximately
$216,000 and would sell a substantial portion of his equity
share holdings in the Company pursuant to the Company's
Registration Statement on Form S-8 and Rule 144 promulgated
under the Securities Act of 1933, as amended and/or to the
current Chairman and Chief Executive Officer and/or his
designee (see Note 5). This termination agreement was executed
on March 17, 1998.
The agreements with both of these officers provide for
continuing automatic one year extensions, increases as
determined by the Board of Directors, annual bonuses based on
sales and pretax income and include provisions for termination
and covenants not to compete. In addition, the agreements
provide for common stock option grants based upon levels of
Company earnings.
In January 1997, the Company entered into a three-year
employment agreement with an employee to serve as the Company's
Chief Technology Officer. Such agreement provides for an annual
base salary of $200,000, $225,000 and $250,000 in the first,
second and third years, respectively. Other terms of this
employment agreement conform in structure to the material
provisions of the employment agreements described above.
F - 19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
COMPU-DAWN, INC.
By:/s/ Mark Honigsfeld
Mark Honigsfeld, Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant in the capacities and on the
dates indicated.
Signature Capacity Date
/s/ Mark Honigsfeld Chairman of the Board March 31, 1998
- ----------------------
Mark Honigsfeld (Principal Executive,
Financial and Accounting
Officer)
/s/ Dong W. Lew President and Director March 30, 1998
- ----------------------
Dong W. Lew
/s/ Louis Libin Director March 30, 1998
- ----------------------
Louis Libin
/s/ William D. Rizzardi Director March 31, 1998
- ----------------------
William D. Rizzardi
/s/ Harold Lazarus Director March 28, 1998
- ----------------------
Harold Lazarus, Ph.D
<PAGE>
Promissory Note
$_________ Date:___________
Due: ___________
On the sooner to occur of the initial public offering of the common stock
of Compu-Dawn, Inc. or thirty (30) months after the date hereof the undersigned,
for value received, promises to pay to the order of Mark Honigsfeld at 969 East
End, Woodmere, New York, the sum of $__________, payable in eight (8) quarterly
installments of $________, the first installment due _________, with interest at
the rate of 10% per annum from the date hereof, payable quarterly commencing on
___________, on the principal remaining unpaid.
This note evidences an indebtedness incurred under a loan commitment
agreement dated January 21, 1997 between the undersigned, therein called the
Borrower, and the payee, therein called the Lender, to which reference is made
for a statement of the terms and conditions under which installments of this
note may be paid prior to the due date and under which the due date of
installments may be accelerated.
Presentation and demand for payment, notice of dishonor, protest, and
notice of protest are hereby waived.
COMPU-DAWN, INC.
By:___________________________
<PAGE>
DEVELOPMENT LICENSE AGREEMENT
1. Computer Associates International, Inc., a Delaware corporation having
offices at One Computer Associates Plaza, Islandia, NY 11788-7000 ("CA")
grants to CompuDawn, Inc., a Delaware corporation having offices at 77
Spruce Street, Cedarhurst, NY 11516 ("Company"), and Company accepts from
CA, a non-exclusive, non-transferable, limited-use license to use and
operate the CA software products ("Licensed Program(s)"), ordered by
Company in Appendix A, solely on the computers of Company located at the
Development Site set forth in Appendix A (the "Development Site") solely
to:
(a) Implement the Development Project as described in Exhibit C; and
(b) Provide to potential customers supervised demonstration of the use of
the Licensed Program(s) with the Company's products ("Company
Product') as listed in Appendix A involved in the Development Project.
CA will provide authorization keys for a maximum of ten (10)
demonstration copies (subject to certification as set forth below upon
receipt of written notification of the location, make, model, serial
number and IP address and any other information necessary for CA to
issue the authorization key) of each computer system on which such
demonstration copies of the Licensed Program(s) are installed.
2. CA grants to Company and Company accepts from CA a non-exclusive,
non-transferable, personal right to use the CA trademarks, servicemarks,
tradenames and logos depicted on Appendix B attached (the "Marks") solely
in conjunction with the Company Product in the manner set forth in the
guidelines attached as Appendix B and subject to the terms and conditions
of this Agreement, including the certification by CA of the compatibility
of the Company Product with the Licensed Program(s) as set forth below.
All Marks remain the exclusive property of CA. Company will take no action
which jeopardizes CA's proprietary rights in the Marks. Company shall
follow CA's instructions relating to the Marks and use the Marks in
unaltered form. CA shall require Company to submit all advertising and
marketing material referencing CA or the Marks to CA for advance review and
approval, and CA may require Company to discontinue use of any advertising
or marketing materials relating to CA, the Marks or the Licensed
Program(s).
3. CA agrees to Provide Company with the opportunity, to participate in its
marketing and sales promotions, subject to the conditions and requirements
of each individual promotion and CA's exclusive approval.
4. (a) Upon signing this Development License Agreement, Company shall be
appointed as a nonexclusive Premier Development Partner.
(b) In a twelve-month period, CA agrees at its option to match every
$5,000.00 spent by Company on each Licensed Program, up to a limit set
within CA's sole discretion, to advertise and market the compatibility
of each Licensed Program and the Company Product. Company must provide
CA with verified advertising and marketing expenses within forty-five
(45) days of the end of each fiscal quarter (June 30, September 30,
December 31, and March 31) in which such expenses were made in order
for such funds to be matched by CA. CA shall be entitled to withdraw
this offer at anytime in its sole discretion or in the event Company
fails to comply with the terms of this Agreement or any related
Addendum.
(c) Company shall retain for a period of three (3) years after the date of
payment records evidencing its advertising and marketing activities
regarding the Company Product and the Licensed Program(s) and its
entitlement to matching fees, the billings therefore, the calculation
of its eligibility for matching fees, and any other accounting records
relevant for such services. During this three-year period, CA or its
designated representative shall have the right to examine and audit,
at its own expense, such records during normal business hours, upon
ten (10) business days notice to Company. CA shall bear the expenses
of such audit; however, in the event any such audit reveals that
Company has overstated the amount of matching fees that it is eligible
to receive under this Agreement by more than five (5%) of the amount
reported during the period audited, Company shall repay CA such
overstated amount, in addition to any other fees contractually due,
and pay all reasonable costs associated with the audit.
5. Without the prior written consent of CA, Company shall not:
(a) copy in whole or in part the Licensed Program(s), except for normal
back-up and archive purposes;
(b) modify, reverse compile, reverse engineer or reverse assemble all or
any portion of the Licensed Program(s);
(c) distribute, market, rent, lease, transfer, assign, or sublicense the
Licensed Program(s) to third parties or use the Licensed Program(s)
for the benefit of third parties:
(d) export the Licensed Program(s) in violation of United States laws and
regulations or other applicable laws or regulations;
(e) perform, publish or release benchmarks or other comparisons without
CA's prior written consent;
(f) use the Licensed Program(s) for any development activities or for any
purpose other than as agreed to in this Agreement; or
(g) use the Licensed Program(s) to develop nor shall Company market any
conversion utility or aid specific to the Licensed Program(s) enabling
users to convert from the Licensed Program(s) to an alternative
product.
6. Company's right to use the Marks is contingent on the testing and
verification by CA that the Company Product is compatible with the Licensed
Program(s) (referred to herein as "Certification") and Company's continued
compliance with the following:
(a) that Company has tested the Company Product and has verified the
successful completion of the Development Project described in Appendix
C. Upon receipt of any subsequent releases (excluding bug fixes, patch
tapes or other such maintenance releases) of the Licensed Program(s)
from CA, Company shall validate that the Company Product remains
compatible with the Licensed Program(s). Company shall indemnify CA
and defend and hold CA harmless from and against any claims from users
of the Company Product alleging that the Company Product is not
compatible with the Licensed Program(s).
(b) that CA be entitled to test each release of the Company Product to
confirm that it is compatible with the Licensed Program(s). CA shall
be entitled to withdraw Certification and Company's right to use the
Marks immediately on notice to Company in the event that the Company
Product fails Certification at any time or Company fads to comply with
the terms of this Agreement.
Company and CA shall each be responsible for bearing its own respective
costs and expenses in connection with the testing and Certification of the
Company Product.
7. CA will provide upgrades, enhancements, and new releases to the Licensed
Program(s) as they become generally available and maintenance for the
Licensed Program(s), including but not limited to, hot line telephone
support services under CA's current support policies.
8. CA shall retain all title, copyright, patent, trademark, trade secret and
other intellectual property rights in or relating to the Licensed
Program(s) and Marks, and any related copies, partial copies, compilations,
modifications or translations. Company and its employees shall keep the
Licensed Program(s) strictly confidential and will not disclose, permit
access or otherwise distribute the Licensed Program(s) to anyone except its
authorized employees. All rights not expressly granted in this Agreement
are reserved by CA.
9. This Agreement shall remain in effect for thirty (30) days from the date
hereof and shall be renewed automatically, thereafter for a term of thirty
(30) days until terminated by either party upon written notice given not
less than ten (10) days prior to the end of the original or any renewed
term hereof. Upon termination or expiration, Company shall cease use of all
copies of the Licenses Program(s) and the Marks, return the original and
all copies of the Licensed Program(s) and documentation to CA, and certify
to CA in writing that all copies thereof have been destroyed and deleted
from any computer libraries or storage devices and are no longer in use by
Company.
Sections 2, 4, 5, 11, 12, and 13 shall survive termination of this
Agreement.
10. (a) Company provides CA with its consent and authorization and grants
CA the right to include a hyperlink to Company's URL address on CA's
web page, as determined within its sole discretion, and in CA's
Development Partner cd.
(b) Company grants CA, and CA accepts, a worldwide, nonexclusive right and
license to distribute, merge, combine, copy, use, and duplicate its
trademark, tradename, logo or marketing materials provided for such
hyperlink, for use on CA's web page, as determined within in its sole
discretion, CA's Development Partner cd or Development Partner
brochure solely in accordance with this Agreement or related Addendum.
11. Company acknowledges and agrees that CA does not support and has not
reviewed the contents of Company's World Wide Web Site. Company agrees that
it is fully responsible for the content posted at its URL address on its
World Wide Web Site.
12. Company will indemnify and hold harmless and defend CA against any loss or
liability (including any expense or cost incurred in defending any third
party claim, demand, action, suit or proceeding), which arises out of or
relates to
(a) The hyperlink described in this Agreement, including but not limited
to, claims of trademark infringement; trademark dilution, copyright
infringement, or misappropriation; (b) Company's advertisements or
marketing consented to and for which CA paid matching fees, including
Company's negligence or other failure under this Agreement: (i) In
obtaining consent of any nature, other than with respect to materials
furnished by CA, whatsoever; or (ii) In protecting CA against claims
for the unauthorized use of name or likeness of any person, libel,
slander, defamation, disparagement, piracy, plagiarism, unfair
competition, idea misappropriation, infringement of copyright, title,
slogan, or other property rights, and any invasion of the right of
privacy.
13. THE LICENSED PROGRAM(S) IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND.
CA DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED
TO, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
IN NO EVENT WILL CA BE LIABLE TO COMPANY OR ANY OTHER PARTY FOR ANY
INDIRECT, INCIDENTAL, OR CONSEQUENTIAL LOSS OR DAMAGE WHICH MAY ARISE FROM
THE USE, OPERATION, OR MODIFICATION OF THE LICENSED PROGRAM(S) OR MARKS.
14. Company may not assign or transfer its rights or delegate its duties under
this Agreement. Any change of control of 51% of the ownership or interest
or transfer to a successor corporation of Company shall terminate this
Agreement. Any prohibited assignment shall be null and void.
15. This Agreement represents the entire Agreement between the parties,
supersedes all prior understandings of the parties, both written or oral
and may be amended only by a written agreement signed by authorized
representatives of CA and Company.
COMPUTER ASSOC INTERNATIONAL, INC.
By: /s/ Tommy Bennett
Name: Tommy Bennett
Title: SVP Business Development
Date: 1/2/98
COMPANY: CompuDawn, Inc.
By: /s/ Louis Libin
Name: Louis Libin
` Title: Chief Technology Officer
Date: September 8, 1997
<PAGE>
ADDENDUM TO DEVELOPMENT LICENSE AGREEMENT
BETWEEN
COMPUTER ASSOCIATES INTERNATIONAL, INC.
AND
COMPU-DAWN, INC. ("COMPANY")
The Development License Agreement is hereby amended to add the following
provisions with respect to Company's licensing of Company Product, as defined
below, to CA. In the event of any conflict between the terms and conditions of
this Addendum and those of the Development License Agreement, the terms of this
Addendum shall prevail.
1. Company grants to CA and CA accepts from Company, a non-exclusive,
royalty-free, non-transferable, limited-use license to use and operate the ALECS
2000 Suite of Software (the "Company Product") solely on the Computers of CA
located at the Development Site set forth below (the "Development Site") solely,
to:
(a) Implement the Development Project as described in Appendix C of the
Development License Agreement.
(b) Use ten (10) object code copies of the Company Product solely for the
purpose of providing supervised demonstration of the use of the
Licensed Program(s) with the Company Product to potential customers.
CA will notify Company of the location, make, model, and serial number
of each computer system on which such demonstration copies are
installed.
CA Devolepment Site: One Computer Associates Plaza, lslandia, NY
11788-7000
2. Company grants to CA and CA accepts from Company a non-exclusive,
non-transferable, personal right to use the Company trademarks, tradenames and
logos depicted on Appendix A attached (the "Company Marks") solely in
Conjunction with the Licensed Program(s) in the manner set forth in the
guidelines attiched as Appendix A and subject to the terms and conditions of
this Agreement.
All Company Marks remain the exclusive property of Company. CA will not
register the Company Marks or take any action that jeopardizes Company's
proprietary rights in the Company Marks. CA shall follow Company's instructions
and adhere to Company's quality control procedures relating to the Company Marks
and shall only use the Company Marks in unaltered form. Company may require CA
to submit all advertising and marketing material referencing Company or the
Company Marks to Company for advance review and approval, and discontinue use of
any advertising or marketing materials relating to Company, the Company Marks or
the Company Product.
3. Without the prior written consent of Company, CA shall not:
(a) copy in whole or in part the Company Product, except for normal
back-up and archive purposes.
(b) modify, reverse compile, reverse engineer or reverse assemble all or
any portion of the Company Product;
(c) distribute, market, rent, lease, transfer, assign, or sublicense the
Company Product to third parties;
(d) export the Company Product in violation of United States Department of
Commerce regulations;
(e) perform, publish or release benchmarks or other comparisons without
Company's prior written consent; or
(f) use the Company Product for any development activities or for any
other purpose other than as agreed in this Agreement.
4. Company will provide upgrades, enhancements, and new releases to the Company
Product as they become generally available and maintenance for the Company
Product, including but not limited to, hot line telephone support services under
Company's current technical support policies.
5. Company shall retain all title, copyright, patent, trademark, trade secret
and other intellectual property rights in or relating to the Company Product and
Marks, and any related copies, partial copies, compilations, modifications or
translations. CA and its employees shall keep the Company Product strictly
confidential and will not disclose, permit access or otherwise distribute the
Company Product to anyone, except its authorized employees.
6. THE COMPANY PRODUCT IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND. COMPANY
DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED INCLUDING BUT NOT LIMITED TO, THE
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
7. Upon termination of this Agreement, CA shall cease to use all copies of the
Company Product and Company Marks, return the original and all copies of the
Company Product to Company and certify to Company in writing that all copies
thereof have been destroyed and deleted from any computer libraries or storage
devices and are no longer in use by CA.
COMPANY: CompuDawn, Inc.
By: /s/ Louis Libin
Name: Louis Libin
Title: Chief Technology Officer
Date: September 8, 1997
COMPUTER ASSOCIATES INTERNATIONAL, INC.
By: /s/ Tommy Bennett
Name: Tommy Bennett
Title: SVP
Date: 12/29/97
<PAGE>
TERMINATION AGREEMENT
TERMINATION AGREEMENT dated as of March 17, 1998 between DONG LEW
(hereinafter "Lew"), residing at 1350 Grand Summit Drive, Apt. 234, Reno, Nevada
89523, and COMPU-DAWN, INC., a Delaware corporation (hereinafter the "Company"),
having its principal place of business at 77 Spruce Street, Cedarhurst, New
York.
BACKGROUND
A. Lew is employed by the Company as its President and Chief Operating
Officer in accordance with a Restated and Amended Employment Agreement dated as
of October 28, 1996 (hereinafter called the "Employment Agreement"). Mr. Lew is
also the Treasurer and a Director of the Company.
B. Lew wishes to retire and has made Reno, Nevada his primary residence.
Therefore, Lew and the Company desire to terminate the Employment Agreement on
the basis herein provided.
NOW, THEREFORE, the parties hereto agree as follows:
1. Effective on the closing date (the "Termination Date") of that certain
Stock Purchase Agreement dated March 17, 1998 between Mark Honigsfeld and/or his
designee, as Purchaser, and Dong Lew, as Seller, the Company shall pay to Lew
the sum of $216,000.00 (the "Termination Payment"). The Employment Agreement
shall be in all respects terminated effective on the Termination Date. Except as
specifically set forth to the contrary herein, Lew's right to participate in any
1
<PAGE>
present or future bonus, pension, profit-sharing or insurance program or any
other fringe benefit program of the Company shall be in all respects terminated
as of the Termination Date, except that the protective covenants set forth in
Section 1.8 of the Employment Agreement shall remain in full force and effect in
accordance with the terms thereof. Notwithstanding the foregoing, Lew's salary
and reimbursement of expenses provided for by the Employment Agreement shall be
paid to Lew by the Company until the Termination Date.
2. On the Termination Date, Lew hereby resigns as a Director of the Board
of Directors of the Company and resigns from his positions as President,
Treasurer and Chief Operating Officer of the Company.
3. The Termination Payment shall be reported by the Company to the Internal
Revenue Service on Form W-2 for 1998.
4. Lew presently has an option to acquire 8,561 shares of common stock of
the Company at an option exercise price of $5.50 per share. On the Termination
Date, if directed to do so by Mark Honigsfeld, Mr. Lew will execute an Option
Exercise Form and make full payment for such option shares by the surrender of
the appropriate number of shares of Company common stock owned by Mr. Lew (the
"Surrendered Shares"), based upon the current market value per share for the
Company's common stock on the date thereof. The Company hereby acknowledges and
consents to the exercise of the aforementioned option by Mr. Lew. Mr. Lew shall
not be granted a reload option for the Surrendered Shares.
5. The parties hereto recognize and agree that, except as expressly
provided in, or contemplated by, this Termination Agreement, and except for any
rights of indemnification to which Lew, as a former employee, officer, and
2
<PAGE>
director of the Company may be entitled by law, or by corporate resolutions or
under the by-laws or articles of incorporation of the Company, there are no
outstanding unfulfilled contracts, commitments, or other obligations of
whatsoever nature as between Lew and the Company or any outstanding indebtedness
owed by either party to the other; and the parties hereto hereby further agree
that any and all disputes, claims, open accounts and other unresolved matters
with respect to any of the foregoing which may exist on the date hereof, shall
be, and hereby are, in all respects resolved, satisfied and settled as between
the parties, without any other or further liability of either party to the
other. The parties shall deliver to each other on the Termination Date a
certificate reaffirming the agreement set forth in this paragraph 5 as of the
Termination Date.
6. The obligations of Lew and the Company hereunder, are contingent upon
the simultaneous closing of the transactions provided for in a Stock Purchase
Agreement between Lew and Mark Honigsfeld, Chairman of the Board of Directors
and Chief Executive Officer of the Company, or his assignee or designee,
pursuant to which Mark Honigsfeld or his assignee or designee shall acquire on
the Termination Date certain shares of Company common stock from Lew, as fully
enumerated therein.
7. This Termination Agreement has been approved by the Board of Directors
of the Company and shall be binding and effective upon the Company and its
successors and assigns, and upon Lew, his heirs and representatives.
8. If any provision contained in this Termination Agreement is determined
to be void, illegal or unenforceable, in whole or in part, then the other
provisions contained herein shall remain in full force and effect as if the
provision which was determined to be void, illegal, or unenforceable had not
been contained herein.
3
<PAGE>
9. The parties agree that this Termination Agreement is made and entered
into in Nassau County, New York and shall be governed by and construed in
accordance with the laws of the State of New York, and that any litigation,
special proceeding or other proceeding as between the parties that may be
brought, or arise out of, in connection with or by reason of this Termination
Agreement, shall be brought in the applicable state court in and for Nassau
County, New York, which Courts shall be the exclusive courts of jurisdiction and
venue.
10. This instrument contains the entire agreement of the parties concerning
termination of Lew's employment with the Company and supersedes all prior and
contemporaneous representations, understandings and agreements, either oral or
in writing, between the parties hereto with respect to the termination of Lew's
employment by the Company and all such prior or contemporaneous representations,
understandings and agreements, both oral and written, are hereby terminated. The
terms of this Termination Agreement may not be modified, altered or amended
except by written agreement of Lew and the Company, subject to the prior
approval of the Board of Directors of the Company.
11. The Company has been represented by the firm of Certilman Balin Adler &
Hyman, LLP. Lew has been represented by the firm of Bart and Schwartz. Each has
made its own determination with respect to counsel without coercion from the
other. Each has thoroughly reviewed the provisions of this Termination Agreement
and all matters concerning such provisions with the benefit of independent
counsel.
12. Any controversy or claim arising out of or relating to this Termination
Agreement shall be settled by binding arbitration in Nassau County, New York
under the rules of the American Arbitration Association. Judgment upon the award
4
<PAGE>
may be entered in any court having jurisdiction and the arbitrator(s) are
specifically authorized to award the prevailing party in such arbitration all
reasonable attorneys fees, expenses and costs of arbitration.
13. Any notice, request, instruction, consent or other communication to be
given to either party hereunder shall be in writing and shall be deemed to have
been delivered on the date personally delivered or on the date deposited in a
receptacle maintained by the United States Postal Service for such purposes,
postage prepaid, by certified mail, return receipt requested, addressed to the
respective parties as follow:
If to the Company: Compu-Dawn, Inc.
77 Spruce Street
Cedarhurst, NY 11526
Attention: Mark Honigsfeld, Chairman
With a copy to: Certilman Balin Adler & Hyman, LLP
The Financial Center at Mitchel Field
90 Merrick Avenue
East Meadow, NY 11554
Attention: Gavin C. Grusd, Esq.
If to Lew: Mr. Dong Lew
1350 Grand Summit Drive, Apt 234
Reno, Nevada 89523
With a copy to: Bart and Schwartz
One Huntington Quadrangle
Suite 2S12
Melville, NY 11747
Attention: Lawrence J. Schwartz, Esq.
14. This Termination Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute but one and the same instrument.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Termination Agreement as
of the day and year first above written.
COMPU-DAWN, INC.
Attest:
By: /s/ Mark Honigsfeld
/s/ Louis Libin MARK HONIGSFELD, Chairman of
Assistant Secretary the Board and Chief Executive Officer
/s/ Dong Lew
DONG LEW
6
<PAGE>
BUSINESS ALLIANCE AGREEMENT
Business Alliance Agreement dated as of March 25, 1998, by and between
Compu-DAWN, Inc., a Delaware corporation, with its executive office at 77 Spruce
Street, Cedarhurst, New York 11516 ("Compu-DAWN") and Alpine Software
Incorporated, a Virginia corporation, with its executive office at 83 South
Street, Pittsford, New York 14534 ("Alpine").
WHEREAS, Compu-DAWN has developed certain law enforcement management
software (the "Law Enforcement Management Software").
WHEREAS, Alpine has developed certain fire management software (the "Fire
Management Software", and together with the Law Enforcement Management Software
sometimes referred to as the "Combined System").
WHEREAS, Compu-DAWN and Alpine desire to undertake a business alliance to
market and sell the Combined System pursuant to the terms and conditions hereof.
NOW, THEREFORE, for the consideration, the sufficiency of which is hereby
acknowledged, the covenants, conditions and agreements set forth herein, the
parties hereby agree as follows:
1. Marketing.
(a) Subject to the provisions of paragraph 1(b), during the term of this
Agreement, the parties will market a Combined System. Compu-DAWN shall manage
and direct, and be responsible for, marketing and sales during the Exclusive
Period (as defined in Section 3(b) of the term hereof.
(b) If either party desires to sell its product to a potential customer
which has an existing system which competes with the other party's product, and
which existing system was installed at least one year prior to the first party's
contact with such potential customer, the first party will inform the other
party of its intention to market and sell its product to such potential customer
and such other party shall have a reasonable period to object or, with the full
cooperation of the first party, explore a business opportunity with such
potential client.
2. Term.
(a) The term (the "Term") of this Agreement shall be three (3) years. The
relationship between Compu-DAWN and Alpine shall be exclusive, subject to
Section 2(b).
(b) If no sales of the Combined System have occurred in the first year of
the Term, the parties' relationship shall be non-exclusive commencing with the
third year of the Term.
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3. Exclusive Period Covenants.
(a) During the Term, Compu-DAWN shall not develop and/or market its own
Fire Management Software and Alpine shall not develop and/or market its own Law
Enforcement Management Software, except as set forth in Section 1(b).
(b) During the exclusive period of the Term (the "Exclusive Period") Compu-
DAWN and Alpine respectively shall not market and sell its own or a third
party's (other than the other party hereto) Fire Management Software and Law
Enforcement Management Software, respectively.
(c) During the Exclusive Period, each party agrees that it will not enter
into any contract to sell its Law Enforcement Management Software or Fire
Management Software, as the case may be, unless the potential client, if such
client is purchasing both a Law Enforcement Management Software System and Fire
Management Software System, agrees to purchase a Combined System.
4. Installation. Compu-DAWN shall be responsible, and shall have the sole
right, to install the Law Enforcement Management Software and Fire Management
Software for all customers who have purchased a Combined System at all such
customers' locations.
5. Training.
(a) Alpine shall provide training to Compu-DAWN's technical personnel with
respect to the installation, maintenance and operation of the Fire Management
Software.
(b) Compu-DAWN shall organize training programs for the customers and
Alpine shall provide technicians to train the requisite personnel of such
customers with respect to the operation of the Fire Management Software.
6. Customer Service. Compu-DAWN shall be the primary contact for customer
service, and Compu-DAWN will, at its discretion, refer service calls to Alpine
as Compu-DAWN deems necessary. It is acknowledged that Compu-DAWN provides
customer service to its customers 24 hours a day, 7 days a week. However, Alpine
shall be required to have necessary personnel available for customer services
during regular business hours, except in the case of emergencies as designated
by Compu-DAWN.
7. Fire Management Software System Package. Compu-DAWN and Alpine will agree
on a standard Fire Management Software system package consisting of, among other
things, incident, personnel, inventory and training records, in a format that
will be marketable in all state and local markets throughout the United States,
which format will be readily adaptable to meet each customer's procedures and
forms requirements.
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8. Software Integration. Compu-DAWN and Alpine will use commercially
reasonable efforts to integrate their respective software for easy data transfer
and access with respect to the operation the Combined System.
9. Licenses.
(a) Compu-DAWN hereby grants Alpine a license and right to its Law
Enforcement Management Software for the specific purposes set forth in Section 8
above.
(b) Alpine shall grant Compu-DAWN a license and right to (i) market and
sell and maintain the Fire Management Software and provide training and customer
service to customers with respect to the Fire Management Software in the manner
set forth herein and to effectuate the terms and provisions of this Agreement,
and (i) use Alpine's name and red alert logo in its marketing, advertising and
product material and literature.
10. Payment. Compu-DAWN shall pay Alpine a mutually agreed to amount per
customer, based upon the each particular application or situation, in connection
with the sale and maintenance of the Combined System. (Exhibit A illustrates by
example, sample Compu-DAWN/ Alpine Sales / Maintenance Terms (the "Sales and
Maintenance Terms"))
11. Entire Agreement. This Agreement, including the exhibit attached hereto,
which is a part hereof, and the Sales / Maintenance Terms agreed to by the
parties from time to time hereafter with respect to the particular customers,
constitutes the entire agreement of the parties with respect to the subject
matter hereof, and, except as may be specifically provided herein, no change,
modification, amendment, addition or termination of this Agreement or any part
thereof shall be valid unless in writing and signed by or on behalf of the party
to be charged therewith.
12. Notices. Any and all notices or other communications or deliveries required
or permitted to be given or made pursuant to any of the provisions of this
Agreement shall be deemed to have been duly given or made for all purposes when
hand delivered or sent by certified or registered mail, return receipt requested
and postage prepaid, overnight mail, or telecopier and each party's respective
address set forth above. (For telecopier notice, Compu-DAWN's telecopier number
is (516) 374-9410 and Alpine's telecopier number is (716) 264-9844) or at such
other address or telecopier number as any party may specify by notice given to
the other party in accordance with this Section 12.
13. Choice of Law; Severability. This Agreement shall be governed by, and
interpreted and construed in accordance with, the laws of the State of New York,
excluding choice of law principles thereof. In the event any clause, section or
part of this Agreement shall be held or declared to be void, illegal or invalid
for any reason, all other clauses, sections or parts of this Agreement which can
be effected without such void, illegal or invalid clause, section or part shall
nevertheless continue in full force and effect.
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14. Successors and Assigns; No Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns; provided, however, that neither party may assign any of its rights or
delegate any of its duties under this Agreement without the prior written
consent of the other party, except to a wholly owned subsidiary.
15. Headings and Counterparts. The headings or captions under sections of this
Agreement are for convenience and reference only and do not in any way modify,
interpret or construe the intent of the parties or affect any of the provisions
of this Agreement. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original as against any party whose
signature appears thereon, and all of which shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the date first above written.
Compu-DAWN, Inc.
By: /s/ Louis Libin
Louis Libin , Chief Technology Officer
Alpine Software Incorporated
By: /s/ Richard Schenkel
Richard Schenkel, President
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Compu-DAWN, Inc.
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Year Ended
December 31,
1997 1996
----------- ---------
NET (LOSS) $(4,436,745) $(570,769)
========== ========
WEIGHTED AVERAGE SHARES:
Common shares outstanding 1,556,587 1,219,700
Assumed conversion of cheap options and warrants 713,460 459,213
---------- ---------
2,270,047 1,678,913
========= =========
BASIC EARNINGS (LOSS) PER COMMON SHARE $(1.95) $(.34)
====== =====
- Exhibit 11 -
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Compu-DAWN, Inc.
We hereby consent to the use in the Registration Statement on Form S-8 of our
report dated March 5, 1998 (except as to Note 13c which is dated March 17, 1998,
relating to the financial statements of Compu-DAWN, Inc. and to the reference to
our firm under the caption "Experts" in this registration statement.
/s/ Lazar Levine & Feliz LLP
LAZAR LEVINE & FELIX LLP
New York, New York
March 30, 1998
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,081,253
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<RECEIVABLES> 86,089
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<PP&E> 460,293
<DEPRECIATION> 181,556
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<CURRENT-LIABILITIES> 396,493
<BONDS> 101,842
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<COMMON> 28,385
<OTHER-SE> 3,177,189
<TOTAL-LIABILITY-AND-EQUITY> 3,703,909
<SALES> 591,375
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<TOTAL-COSTS> 3,537,773
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<LOSS-PROVISION> 19,000
<INTEREST-EXPENSE> 1,610,505
<INCOME-PRETAX> (4,436,745)
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