DRAFT 081298
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 1998
Commission file number 000-22611
Compu-DAWN, Inc.
(Exact name of Small Business Issuer as Specified in Its Charter)
Delaware 11-3344575
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
77 Spruce Street, Cedarhurst, New York, 11516
(Address of principal executive offices)
Registrant's telephone number, including area code (516) 374-6700
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of August 7, 1998: 3,166,507
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
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Compu-DAWN, Inc.
- INDEX -
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Page
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PART I Financial Information
Condensed Balance Sheets - June 30, 1998 and December 31, 1997 3
Condensed Statements of Operations - Six and Three Months Ended
June 30, 1998 and 1997 4
Condensed Statements of Cash Flows - Six Months Ended June 30,
1998 and 1997 5
Notes to Condensed Financial Statements 7
Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
PART II Other Information
Item 2 - Changes in Securities and Use of Proceeds 14
Item 6 - Exhibits and Reports on Form 8-K 16
SIGNATURES 18
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PART I. Financial Information
ITEM 1. Financial Statements
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Compu-DAWN, Inc.
CONDENSED BALANCE SHEETS
- ASSETS -
June 30, December 31,
1998 1997
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash $ 6,825,637 $3,081,253
Accounts receivable, net of allowances for doubtful accounts of $13,635
for 1998 and 1997 114,141 72,454
Prepaid expenses 139,189 121,802
Income tax refund receivable 29,868 29,868
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TOTAL CURRENT ASSETS 7,108,835 3,305,377
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FIXED ASSETS - NET 253,350 278,737
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OTHER ASSETS:
Deferred compensation 16,574 98,270
Security deposits 21,525 21,525
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38,099 119,795
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$ 7,400,284 $3,703,909
============ ==========
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 133,059 $ 278,722
Deferred revenue 47,899 12,000
Current portion of note payable - officer 100,000 100,000
Capitalized lease payable - current 6,209 5,771
------------- ------------
TOTAL CURRENT LIABILITIES 287,167 396,493
------------- ------------
NON-CURRENT LIABILITIES:
Note payable - officer - 50,000
Capitalized lease payable 19,220 22,440
Deferred rent liability 29,564 29,402
------------- -----------
48,784 101,842
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (Notes 2 and 4):
Preferred stock, $.01 par value; 1,000,000 shares authorized, 3,250 issued
and outstanding for 1998 33 -
Common stock, $.01 par value, 20,000,000 shares authorized, 3,179,448
and 2,838,450 shares issued for 1998 and 1997, respectively 31,795 28,385
Additional paid-in capital 12,862,882 8,061,443
Retained earnings (deficit) (5,736,207) (4,837,169)
------------ -----------
7,158,503 3,252,659
Less: treasury stock, 12,941 shares at cost (94,170) (47,085)
------------- -----------
7,064,333 3,205,574
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$ 7,400,284 $3,703,909
============ ==========
</TABLE>
See notes to financial statements.
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<CAPTION>
Compu-DAWN, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
<S> <C> <C> <C> <C>
-----------------------------------------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- ----------
REVENUES:
Software sales $ 288,337 $ 42,605 $ 390,210 $ 141,089
Maintenance income 80,594 72,280 145,680 159,597
------------- ------------- ------------- -------------
368,931 114,885 535,890 300,686
------------ ------------ ------------- -------------
COSTS AND EXPENSES:
Programming costs and expenses 160,108 125,188 283,646 202,025
General and administrative expenses 530,366 732,506 955,762 1,247,454
Research and development 139,235 98,731 250,937 146,644
------------ ------------- ------------ -------------
829,709 956,425 1,490,345 1,596,123
------------ ------------ ----------- ------------
(LOSS) FROM OPERATIONS (460,778) (841,540) (954,455) (1,295,437)
------------ ------------ ------------ -----------
OTHER INCOME (EXPENSES):
Interest and other income 45,335 43,689 66,122 45,031
Interest expense (7,268) (11,670) (10,705) (72,171)
Non-recurring financing charge (Note 2) - (1,557,050) - (1,557,050)
-------------- ----------- -------------- -----------
38,067 (1,525,031) 55,417 (1,584,190)
------------- ----------- ------------- -----------
(LOSS) BEFORE PROVISION (CREDIT) FOR
INCOME TAXES (422,711) (2,366,571) (899,038) (2,879,627)
Provision (credit) for income taxes - - - -
-------------- ------------- -------------- -------------
NET (LOSS) $ (422,711) $(2,366,571) $ (899,038) $(2,879,627)
=========== =========== =========== ===========
BASIC (LOSS) PER COMMON SHARE $(.14) $(1.23) $(.31) $(1.61)
===== ====== ====== ======
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUT-
STANDING 2,936,312 1,920,671 2,888,445 1,792,973
========= ========= ========= =========
</TABLE>
See notes to financial statements.
4
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Compu-DAWN, Inc.
CONDENSED STATEMENTS OF CASH FLOWS Page 1 of 2
----------------------------------
(Unaudited)
<TABLE>
For the Six Months Ended
June 30,
----------------------------
1998 1997
--------------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Cash received from customers $ 530,102 $ 325,353
Cash paid to suppliers and employees (1,530,131) (1,409,395)
Interest paid (10,705) (3,411)
Interest and other income received 66,122 5,229
-------------- -------------
Net cash (utilized) by operating activities (944,612) (1,082,224)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments of officer's loan - 69,247
Purchase of fixed assets (16,019) (112,688)
Payment of security deposits - (581)
-------------- --------------
Net cash (utilized) by investing activities (16,019) (44,022)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan (repaid to) received from officer (50,000) 400,000
Repayment of promissory notes - (770,000)
Payments for common stock and options acquired - (34,710)
Payments of capital lease obligations (2,782) (3,783)
Net proceeds from offering of shares 4,743,462 5,625,874
Proceeds from exercise of stock options 14,335 69,900
------------ -------------
Net cash provided by financing activities 4,705,015 5,287,281
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,744,384 4,161,035
Cash and cash equivalents, at beginning of year 3,081,253 286,497
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,825,637 $ 4,447,532
=========== ===========
</TABLE>
See notes to these financial statements.
5
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<CAPTION>
Compu-DAWN, Inc.
CONDENSED STATEMENTS OF CASH FLOWS Page 2 of 2
----------------------------------
(Unaudited)
For the Six Months
Ended June 30,
----------------------
1998 1997
-------- -------
RECONCILIATION OF NET (LOSS) TO NET CASH (UTILIZED)
BY OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) $(899,038) $(2,879,627)
Adjustments to reconcile net (loss) to net cash (utilized) by operating activities:
Allowance for doubtful accounts - 9,000
Depreciation and amortization 41,406 61,583
Deferred rent liability 162 7,044
Compensatory stock 81,696 174,693
Financing charge - 1,557,050
Changes in assets and liabilities:
(Increase) in accounts receivable (41,687) (14,066)
(Increase) in prepaid expenses (17,386) (154,202)
(Decrease) increase in accounts payable and accrued expenses (145,664) 117,568
Increase in deferred revenue 35,899 38,733
----------- --------------
NET CASH (UTILIZED) BY OPERATING ACTIVITIES $(944,612) $(1,082,224)
========= ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
During 1997, the Company issued (i) 40,000 shares of common stock in lieu of
payment of a note for $200,000, and (ii) 23,000 shares of common stock in
payment of accrued compensation of $115,000.
</TABLE>
See notes to financial statements.
6
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Compu-DAWN, Inc.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - DESCRIPTION OF COMPANY:
Compu-DAWN, Inc., the Company, was incorporated under the name of Coastal
Computer Systems, Inc., in New York on March 31, 1983, and was reincorporated in
Delaware under its present name on October 18, 1996. The Company is engaged in
the business of designing, developing, licensing, installing and servicing
computer software products and systems predominantly for public safety and law
enforcement agencies. The Company's customers, to date, are primarily located in
New York State.
The accounting policies followed by the Company are set forth
in Note 2 to the Company's annual report filed on Form 10-KSB for the year ended
December 31, 1997. Specific reference is made to that report for a description
of certain of the Company's securities and the notes to the financial statements
included therein.
In the opinion of management, the accompanying unaudited
interim condensed financial statements of Compu-DAWN, Inc., contain all
adjustments necessary to present fairly the Company's financial position as of
June 30, 1998 and the results of its operations for the six and three month
periods ended June 30, 1998 and 1997 and its cash flows for the six month
periods ended June 30, 1998 and 1997.
The results of operations for the six and three month periods
ended June 30, 1998 are not necessarily indicative of the results to be expected
for the full year.
NOTE 2 - INITIAL PUBLIC OFFERING:
In June 1997, the Company, through its underwriter,
successfully completed an initial public offering of its common stock. The
Company sold 1,380,000 shares of common stock (including 180,000 shares in the
Underwriter's over allotment option) at a price of $5.00 per share for aggregate
net proceeds of $5,625,874. A portion of the proceeds realized from this
offering was used to repay promissory notes aggregating $770,000. In connection
with this repayment, the Company fully amortized deferred financing costs
originally capitalized in connection with the notes. This amount was reflected
as a non-recurring charge on the statement of operations for the year ended
December 31, 1997.
NOTE 3 - POTENTIAL TRANSACTION:
On April 22, 1998, the Company entered into an agreement to
acquire an indirect 50% beneficial interest in Press-Loto, a Russian company
which has the right to operate the first national on-line lottery in Russia
pursuant to a license from the Russian Ministry of Finance to the Union of
Journalists in Russia (the "Union"). The agreement provides that, at the
closing, 40% of Press-Loto is to be owned by the Union and its charity with a
private group holding a minority interest.
7
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Compu-DAWN, Inc.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - POTENTIAL TRANSACTION (Continued):
The agreement provides that, at the closing, the Company will
issue (i) 3,662,880 Common Shares, (ii) Convertible Redeemable Preferred Shares
(the "Preferred Shares"), (iii) warrants (the "Warrants") to purchase 1,331,956
Common Shares at an exercise price of $10.00 per share and (iv) the right to
receive 332,989 Common Shares (the "Performance Shares") based upon the
attainment of performance thresholds.
The Preferred Shares will be convertible into an aggregate
maximum of 6,659,780 Common Shares, provided that income from the lottery
business meets certain pre-tax levels of up to an aggregate of approximately $36
million over a period of not more than five years commencing on January 1, 1999
and ending on December 31, 2003. If such thresholds are not met within such
period, the Company may redeem the unconverted Preferred Shares at a redemption
price of $.01 per share.
The closing of the transaction is subject to, among other things,
(i) a fairness opinion from an investment banking firm that the transaction is
fair, from a financial viewpoint, to the Company's stockholders, (ii)
stockholder approval, (iii) Nasdaq approval, and (iv) completion of additional
due diligence satisfactory to the Company.
Contemporaneously with the signing of the agreement, the Company
agreed to make secured loans, aggregating up to $1,000,000, from time to time
for the continued development of the lottery operations. Advances under the loan
agreement were agreed to be made, subject to the terms and conditions of the
loan agreement, in accordance with budgets that are acceptable to the Company.
See Item 2 hereof ("Management's Discussion and Analysis of Financial Condition
and Results of Operations - Potential Transaction") for a discussion of the
status of the transaction described in this Note 3.
N0TE 4 - PRIVATE PLACEMENT:
On June 8, 1998, the Company completed a private offering of its
securities, whereby it sold to the purchasers the following:
(a) 3,250 shares of the Company's series A convertible
preferred stock, par value $.01 per share (the "Series A
Preferred Stock"), which shares are convertible into Common
Shares of the Company (maximum of 650,000 shares, subject
to adjustment under certain circumstances);
(b) 327,103 Common Shares of the Company; and
(c) warrants to acquire an aggregate of 90,207 Common Shares at
an exercise price of $8.025 per share, subject to
adjustment under certain circumstances.
The aggregate purchase price for the foregoing securities was
$50,000; net proceeds from this private placement aggregated approximately
$4,743,000.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION:
The Company was incorporated in the State of New York on June 30,
1983 under the name of Coastal Computer Systems, Inc. The Company was
reincorporated in the State of Delaware under its present name, Compu-DAWN,
Inc., on October 18, 1996. The Company is engaged in the business of designing,
developing, licensing, installing and servicing computer software products and
systems for the law enforcement and public safety industry.
Historically, the Company's products have been marketed and sold
predominantly in the State of New York.
The Company generates revenues from the granting of nonexclusive,
nontransferable and non- assignable licenses to use software it has developed,
through fixed price contracts. Revenues from such fixed price contracts are
recognized using the percentage of completion method of accounting. The Company
retains title to the software and warrants that it will provide technical
support and repair any defects in the software at no charge. The warranty period
for each contract is negotiated individually, with the periods ranging from 90
days to three years. To date, repair costs have been minimal and, therefore, the
Company has not had to establish a reserve for warranty costs.
The Company also provides post-contract, customer support to
licensees of its software. Revenues from such services are recognized ratably
over the period of performance. Fees billed and/or received prior to performance
of services are reflected as deferred revenues.
The Company's revenues, expenses and operating results have varied
considerably in the past and are likely to vary in the future. Fluctuations in
revenues depend on a number of factors, some of which are beyond the Company's
control. These factors include, among other things, the timing of contracts,
delays in customer acceptance of the Company's software products and
competition.
The Company has also entered into a contract to acquire an indirect
50% beneficial interest in Press-Loto, a Russian limited liability company which
has the right to operate the first national on-line lottery in Russia. The
lottery has not begun operations and the Company cannot predict the performance
of the lottery. See Item 2 hereof ("Management's Discussion and Analysis of
Financial Condition and Results of Operations - Potential Transaction") for a
further description and discussion of the status of this transaction.
The financial information presented herein includes: (i) condensed
balance sheets as of June 30, 1998 and December 31, 1997; (ii) condensed
statements of operations for the six and three month periods ended June 30, 1998
and 1997; and (iii) condensed statements of cash flows for the six month periods
ended June 30, 1998 and 1997.
9
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RESULTS OF OPERATIONS:
Revenues
Revenues for the six months ended June 30, 1998 were $535,890
compared to $300,686 for the six months ended June 30, 1997, an increase of
approximately 78%. Revenues for the three months ended June 30, 1998 were
$368,931 as compared to $114,885 for the comparable period of the prior year, an
increase of approximately 220%. These increases were primarily a result of
increases in sales of software which was offset by a decrease in maintenance
income when comparing the six month periods and which reflected only a slight
increase when comparing the three month periods.
Despite the aforementioned increases, to date the Company has not
generated significant revenues.
However, management believes that through the funds obtained in its
initial offering (see discussion below) for product enhancement, marketing and
the introduction of new products, the Company will be able to increase revenues
from software sales and maintenance over the long-term. Such projects include,
among other things, the revising of computer-aided dispatching (CAD) and visual
computer-aided dispatching (V-CAD) which provides for visual graphic interface
and wireless mobile technology. Backlog at June 30, 1998 aggregated
approximately $450,000.
As discussed above, the lottery has not commenced operations and
although the Company expects that the lottery will generate revenues after
operations are commenced and after the acquisition is closed, of which it can
give no assurance, it cannot predict the timing or amount of such revenues, if
any. See "Potential Transaction" included within this "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Costs and Expenses
Total costs and expenses for the six month period ended June 30,
1998 aggregated $1,490,345 as compared to $1,596,123 for the corresponding
period of the prior year, a decrease of approximately 6.6%. For the comparable
three month periods ended June 30, 1998 and 1997, total costs decreased to
$829,709 from $956,425, a decrease of approximately 13%. The costs, for both
periods, were primarily related to personnel, the costs related to enhancing
current products, rent expense for the Company's premises and research and
development costs incurred to establish new products.
For the six and three month periods ended June 30, 1998, total costs
and expenses included $130,196 and $74,229, respectively, which were related to
the potential lottery business described below and which were therefore
unrelated to the core software business.
INCOME (LOSS):
For the six months ended June 30, 1998, the Company had a net loss
of $899,038 ($.31 per share) as compared to a net loss of $2,879,627 ($1.61 per
share) for the six months ended June 30, 1997. For the three months ended June
30, 1998, the Company had a net loss of $422,711 ($.14 per share) as compared to
a net loss of $2,366,571 ($1.23 per share) for the corresponding period of the
prior year.
The losses for all periods are principally due to the fact that the
Company has yet to produce significant revenues as mentioned above. The losses
for the 1997 periods were also increased by the non-recurring financing charge
of $1,557,050 which is described in Note 2 of notes to the condensed financial
statements.
LIQUIDITY AND CAPITAL RESOURCES:
In June 1997, the Company completed an initial public offering of
its Common Shares. The Company sold 1,380,000 of its Common Shares at a price of
$5.00 per share and realized net proceeds of approximately $5,626,000.
In June 1998, the Company completed a private placement of
securities. The Company sold 3,250 Preferred Units (consisting, in the
aggregate, of 3,250 shares of Series A Preferred Stock and warrants to acquire
57,497 Common Shares) at a price of $1,000 per unit and 1,750 Common Units
(consisting, in the aggregate, of 327,103 Common Shares and warrants to acquire
32,710 Common Shares) also at a price of $1,000 per unit. From this private
placement, the Company realized net proceeds of approximately $4,743,000. See
Item 2 of Part II hereof ("Changes in Securities and Use of Proceeds Recent
Sales of Unregistered Securities.")
At June 30, 1998, the Company had working capital of $6,821,668, a
current ratio of 24.8:1 and a debt to net worth ratio of less than .1:1. At its
year ended December 31, 1997, the Company had working capital of $2,908,884, a
current ratio of 8.3:1 and a debt to net worth ratio of .1:1. The improvement in
the Company's liquidity and capital resources was primarily due to the
successful private placement of securities mentioned above.
CASH FLOWS:
For the six months ended June 30, 1998, the Company utilized cash
for operating activities of approximately $945,000 primarily to pay suppliers
and employees. For the corresponding period of the prior year, the Company used
cash for operating activities of approximately $1,082,000.
The Company utilized cash of approximately $16,000 during the six
months ended June 30, 1998 for investing activities primarily to acquire fixed
assets.
For the six months ended June 30, 1998, the Company's financing
activities provided cash of approximately $4,705,000 primarily due to the
aforementioned private placement. For the corresponding period of the prior
year, the Company generated cash from financing activities of approximately
$5,287,000 primarily due to its initial public offering.
POTENTIAL TRANSACTION:
On April 22, 1998, the Company entered into an agreement (the
"Merger Agreement") to acquire an indirect 50% beneficial interest in
Press-Loto, a Russian company which has the right to operate the first national
on-line lottery in Russia pursuant to a license (the "Lottery License") from the
Russian Ministry of Finance to the Union of Journalists in Russia (the "Union").
The Merger Agreement provides that, at the time of the closing, 40% of
Press-Loto is to be owned by the Union and its charity with a private group
holding a minority interest. The transaction is structured as a merger (the
"Merger"), pursuant to which Rugby Acquisition Corp. ("RAC"), a wholly-owned
subsidiary of the Company, is to merge into Rugby National Corp. ("Rugby") with
Rugby as the surviving entity and a wholly-owned subsidiary of the Company. At
the time of closing, Rugby is to directly own 50% of Press-Loto.
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The Merger Agreement provides that, at the closing, the Company will
issue (i) 3,662,880 Common Shares (ii) Convertible Redeemable Preferred Shares
(the "Preferred Shares"), (iii) warrants (the "Warrants") to purchase 1,331,956
Common Shares at an exercise price of $10.00 per share and (iv) the right to
receive 332,989 Common Shares (the "Performance Shares") based upon the
attainment of certain performance thresholds.
The Preferred Shares will be convertible into an aggregate maximum
of 6,659,780 Common Shares, provided that income from the lottery business meets
certain pre-tax levels of up to an aggregate of approximately $36 million over a
period of not more than five years commencing on January 1, 1999 and ending on
December 31, 2003. If such thresholds are not met within such period, the
Company may redeem the unconverted Preferred Shares at a redemption price of
$.01 per share.
Contemporaneously with the signing of the agreement, the Company
agreed to make secured loans to Rugby, aggregating up to $1,000,000, from time
to time for the continued development of the lottery operations. Advances under
the loan agreement were agreed to be made subject to the terms and conditions of
the loan agreement, in accordance with, budgets that are acceptable to the
Company. The loan agreement further provides that the Company is to advance up
to $100,000 provided certain conditions were met, and more than $100,000 if
additional conditions were met. Certain of those additional conditions have not
been met to date.
The respective parties' obligations to consummate the Merger is
subject to a number of conditions which must be met by August 31, 1998 or waived
by the particular party. The conditions to the Company's obligations to
consummate the transaction, include, among others: (i) the approval of the
Merger and the Merger Agreement by the stockholders of the Company; (ii) the
continuing accuracy of the representations and warranties, and compliance with
all covenants and obligations, of Rugby and Harvey Weinstein, the sole
shareholder of Rugby, as set forth in the Merger Agreement; (iii) the obtaining
of all consents, licenses and permits required from third parties, including
state regulatory agencies and Nasdaq; (iv) receipt by the Company of opinions of
counsel with respect to certain legal matters; (v) receipt by the Company of
satisfactory evidence that the lottery license is in full force and effect; (vi)
the receipt by the Company of certain financial statements of Rugby and
Press-Loto; (vii) receipt by the Company of an opinion from its tax counsel to
the effect that the Merger shall not result in the Company, Rugby or RAC being
required to recognize income for income tax purposes; (viii) receipt by the
Company of an opinion of an investment banker acceptable to it to the effect
that the transactions contemplated by the Merger Agreement are fair from a
financial viewpoint to the stockholders of the Company; (ix) receipt by the
Company's of a "cold comfort" letter from a certified public accountant and (x)
the completion of additional due diligence reasonably satisfactory to the
Company.
Based on a number of factors, the Company does not anticipate that
all of these conditions will be met by August 31, 1998. By that date, it does
not seem probable that, among other things, (i) the Company will receive the
required financial statements of Rugby and its predecessors and affiliates, (ii)
certain representations and warranties of Rugby and Harvey Weinstein will be
accurate, including, without limitation (a) that the capitalization of
Press-Loto will be structured so that the Union and its charity will own 40% and
Rugby will own 50% of Press-Loto and (b) the appropriate agreements between the
lottery terminal hardware and software provider and Rugby will be in place.
Moreover, because the Company has not received the required financial statements
and certain other information it has been unable to file and distribute the
necessary proxy materials in connection with obtaining stockholder approval of
the Merger and the Merger Agreement. Additionally, the Company believes that it
will be unable to obtain a fairness opinion from an investment banking firm
regarding the Merger as
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currently structured, due to, among other things, the timing of the issuance of
the consideration in the Merger compared to the currently perceived timing and
amount of the Company's return of investment from the lottery business. The
Company's estimate on its return on investment is based, in part, on the
Company's anticipation of the future performance of the lottery business
determined from facts currently known to the Company and information provided to
it by Rugby and its affiliates. The Company cannot give any assurance as to when
lottery operations will commence in Russia, how the lottery operations will
perform, or the amount of revenues, if any, the Company will receive from
Russian lottery operations. Furthermore, the Company's anticipation and belief
of future performance of the lottery operations may change based on factors
revealed by the Company's ongoing due diligence and political and economic
developments in Russia.
In addition to the foregoing, since the Merger Agreement was
executed, the Company, as a result of ongoing due diligence efforts, has become
aware of (i) what it perceives to be greater political instability and
uncertainty in Russia, (ii) proposed new legislation regarding lottery licenses,
the status of which is presently unclear to the Company, and (iii) the presence
of other licenses for national lotteries previously unknown to the Company,
among other things. The Company believes that these factors could negatively
impact the Company's return on investment, if any, from the lottery business. In
the Company's view, these circumstances, among other things, reflect
unsatisfactory due diligence investigation results to date. As mentioned above,
reasonably satisfactory results to the Company's due diligence investigation is
a condition to the Company's obligation to close.
Although the Company is ready, willing and able to fulfill its
obligations under the Merger Agreement, the Company does not currently intend to
close the Merger if all of the conditions to its obligations to close are not
satisfied on a timely basis. If the transaction does not close, the Company
intends to explore an alternative transaction with Rugby or its affiliates to
operate the Russian lottery business on terms and conditions which are in the
best interests of the Company and its stockholders. Currently, no alternative
structure has been proposed and neither the Company nor any other party to the
Merger is obligated to explore any alternative structure.
Based on the lack of progress to date in satisfying the Company's
conditions precedent to closing, it is not probable that the Merger will be
completed.
OTHER:
The Company believes that the net proceeds from the initial public
offering, the private placement and funds expected to be generated from
operations will be sufficient for at least the ensuing 12 month period.
FORWARD LOOKING STATEMENTS:
Except for historical information contained herein, the matters set
forth above may contain forward looking statements that involve certain risks
and uncertainties that could cause actual results to differ from those in the
forward looking statements. Potential risks and uncertainties include such
factors as the level of spending by law enforcement and public safety agencies
for computer application software and hardware, the competitive environment
within the industry, the ability of the Company to expand its operations, the
competency required, and experience, of management to effectuate the Company's
business plan, the level of costs incurred in connection with the Company's
planned expansion efforts, economic conditions in the industry and the financial
strength of the Company's customers and suppliers, and the closing of the Merger
to acquire an indirect 50% beneficial interest in Press-Loto and attendant
12
<PAGE>
risks such as political and economic uncertainty and instability in Russia, the
loss or nonrenewal of the lottery license, the issuance of competitive on-line
national lottery licenses in Russia, changes in legislation or rules regarding
lottery licenses and operations in Russia, currency value fluctuation,
restrictions in transferring money out of Russia and difficulties in enforcing
legal rights in Russia.
PART II. OTHER INFORMATION
ITEM 2 - Changes in Securities and Use of Proceeds.
Recent sales of unregistered Securities
The Company sold the following unregistered securities during the
period covered by this report.
Effective as of May 31, 1998, the Company sold, pursuant to a
Securities Purchase Agreement, (i) 3,250 Preferred Units, consisting of an
aggregate of 3,250 shares of Series A Preferred Stock and warrants to acquire an
aggregate of 54,497 Common Shares, to JNC Opportunity Fund, Ltd. and (ii) 1,750
Common Units, consisting of an aggregate of 327,103 Common Shares and warrants
to acquire an aggregate of 32,710 Common Shares, to JNC Strategic Fund, Ltd. The
Company received gross proceeds of $1,000 for each Preferred Unit and each
Common Unit, or an aggregate of $5,000,000, in cash. In connection with the
closing of the private placement, the Company agreed to pay HNY Associates, LLC
an agency fee of $200,000, or four percent of the gross proceeds.
The shares of Series A Preferred Stock are convertible into Common
Shares, on or after the earlier of (i) October 3, 1998 or (ii) the effective
date of a registration statement covering the resale of Common Shares issued in
the private placement or issuable upon conversion of the Series A Preferred
Stock and exercise of the warrants, at a conversion price equal to the lesser of
(x) 85% (subject to reduction under certain circumstances) of the average of the
five lowest closing bid prices for the Common Shares during the 25 consecutive
trading days preceding the date of conversion and (y) $8.025 per share, subject
to adjustment as provided for in the Securities Purchase Agreement; however, the
conversion price cannot be less than $5.00 per share, subject to adjustment as
provided for in the Securities Purchase Agreement. Notwithstanding the
foregoing, the shares of Series A Preferred Stock are not convertible into
Common Shares to the extent such conversion would violate the rules of the
National Association of Securities Dealers, Inc. (the "NASD") discussed below.
The Series A Preferred Stock ranks prior to the Company's Common Shares and any
class or series of capital stock of the Company hereafter created (unless agreed
otherwise by the holders of the Series A Preferred Stock in accordance with the
provisions of the Certificate of Designations, Preferences and Rights of the
Series A Preferred Stock). The holders of the Series A Preferred Stock are not
entitled to receive any dividends thereon; however, a 5% premium is payable in
connection with any conversion, redemption or liquidation.
The warrants to purchase, in the aggregate, 90,207 Common Shares
(the "Warrants") are exercisable at a price of $8.025 per share, subject to
adjustment as provided in the Warrants, for a period of five years expiring on
May 31, 2003.
Rule 4310(c)(25)(H) of the NASD (the "NASD Rule") requires
stockholder approval for the issuance of Common Shares in a transaction
involving the sale or issuance by the issuer of Common Shares (or securities
convertible into or exercisable for Common Shares) equal to 20% or more of the
Common Shares or 20% or more of the voting power outstanding before the issuance
for less than the
13
<PAGE>
greater of book or market value of the stock. Pursuant to the Securities
Purchase Agreement, the Company has agreed to seek such approval of its
stockholders as may be required to ratify the issuance of the Common Shares
issued in the private placement and to issue all of the Common Shares issuable
upon conversion of the Series A Preferred Stock (the "Conversion Shares") or
exercise of the Warrants without violating the NASD Rule.
In the event the Company does not receive approval by the
stockholders to issue Conversion Shares without violating the NASD Rule, any
holder of shares of Series A Preferred Stock who is prohibited from converting
shares of Series A Preferred Stock because the issuance of Conversion Shares
would exceed the permissible amount provided for under the NASD Rule may elect
(i) to require the Company to redeem from such holder those shares of Series A
Preferred Stock for which the Company is unable to issue Conversion Shares due
to the foregoing at a price per share of Series A Preferred Stock generally
equal to the number of Conversion Shares into which such shares of Series A
Preferred Stock would be convertible multiplied by a price based on the market
value of the Company's Common Shares (ii) to require, with the consent of
holders of at least 50% of the outstanding Series A Preferred Stock (including
any Series A Preferred Stock held by the requesting holder), the Company to
terminate the listing of its Common Shares on The Nasdaq Stock Market and to
cause its Common Shares to be eligible for trading on the over-the-counter
electronic bulletin board or (iii) to require the Company to issue Common Shares
in accordance with the holder's notice of conversion at a conversion price equal
to the greater of (x) the closing bid price of the Common Shares and (y) the
book value per Common Shares, each in effect as of the date of the holder's
written notice to the Company of its election to receive Common Shares.
The private placement was a private transaction not involving public
offering and was exempt from the registration provisions of the Securities Act
of 1933, as amended, (the "Securities Act"), pursuant to Section 4(2) thereof
and Regulation D, Rule 506 promulgated thereunder. The Company determined that
JNC Opportunity Fund, Ltd. and JNC Strategic Fund, Ltd. were "accredited
investors," as such term is defined in Regulation D." The certificates
evidencing the Common Shares, the shares of Series A Preferred Stock and the
warrants issued in the private placement bear restrictive legends permitting the
transfer thereof only upon registration of such securities or pursuant to an
exemption under the Securities Act.
Use of Proceeds from Initial Public Offering.
The Company's Registration Statement of Form SB-2 (Registration No.
333-18667), covering the issuance of 1,380,000 Common Shares, (including 180,000
Common Shares covering overallotments), at $5.00 per share, or an aggregate of
$6,900,000 (including overallotment proceeds), was declared effective on June
10, 1997. The offering, which was underwritten on a firm commitment basis, and
the overallotment, closed on June 16 and June 24, 1997, respectively. The
managing underwriter of the offering was E.C. Capital Ltd.
The following is a breakdown of the Company's use of the proceeds
from, and expenses incurred in connection with, the offering, through June 30,
1998:
<TABLE>
Offering:
<S> <C>
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
==========
</TABLE>
14
<PAGE>
<TABLE>
Use of Proceeds Through June 30, 1998:
<S> <C>
Product enhancement and development (1)(3) $ 1,585,000
Repayment of indebtedness (2) 770,000
Marketing and advertising (1)(3) 410,000
Hiring/training personnel (1)(3) 135,000
Equipment purchases (1)(3) 225,000
Working capital (3)(4) 704,000
Unused proceeds 1,796,874
-----------
$5,625,874
============
</TABLE>
----------
(1) Paid directly to persons other than directors or officers
of the Company or their associates, or persons owning 10
percent or more of any class of equity securities of the
Company, or affiliates of the Company.
(2) Represents the repayment of a bridge loan. $130,000 was
paid to affiliates of the Company who participated in the
bridge loan. $640,000 was paid directly to persons other
than directors or officers of the Company or their
associates, or persons owning 10 percent or more of any
class of equity securities of the Company, or affiliates of
the Company.
(3) Approximate.
(4) Used for general operating activities.
To date, the use of proceeds does not represent any material
changes from the use of proceeds described in the prospectus.
ITEM 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 3.1 - Articles of Incorporation of the Company*
Exhibit 3.2 - Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock, filed with the
Secretary of State of the State of Delaware on
June 5, 1998.
Exhibit 3.3 - By-Laws of the Company*
Exhibit 10.1 - Agreement and Plan of Merger dated as of April 22, 1998
among the Company, Rugby Acquisition Corp., Rugby
National Corp. and Harvey Weinstein
Exhibit 10.2 - Loan and Security Agreement dated as of April 22, 1998
between the Company and Rugby National Corp.
Exhibit 10.3- Stock Purchase Agreement dated as of May 31, 1998
between the Company, and JNC Opportunity Fund, Ltd. and
JNC Strategic Fund, Ltd.
Exhibit 10.4 - Registration Rights Agreement dated as of May 31, 1998
between the Company and JNC Opportunity Fund, Ltd.
and JNC Strategic Fund, Ltd.
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
15
<PAGE>
(a) Event dated April 22, 1998 - Items 5 and 7.
(b) Event dated April 23, 1998 - Item 5.
(c) Event dated June 8, 1998 - Items 5 and 7.
- ----------------
* Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2, Registration No. 333-18667.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Compu-DAWN, Inc.
Dated: August 14, 1998 By: /s/ Mark Honigsfeld
--------------------
Chairman of the Board,
Chief Executive Officer and
Chief Accounting Officer
17
<PAGE>
RESOLUTIONS
EXHIBIT B
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
of
SERIES A CONVERTIBLE PREFERRED STOCK
of
COMPU-DAWN, INC.
(Pursuant to Section 151 of the Delaware General Corporation Law)
Compu-DAWN, Inc., a corporation organized and existing under the laws
of the State of Delaware (the "Corporation"), hereby certifies that the
following resolutions were adopted by the Board of Directors of the Corporation
pursuant to authority of the Board of Directors as required by Section 151 of
the Delaware General Corporation Law.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Certificate of Incorporation and
Bylaws, each as amended and restated through the date hereof, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $.01 per share (the "Preferred Stock"), and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof as follows:
-1-
<PAGE>
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 3,250 shares of
Preferred Stock, is the Series A Convertible Preferred Stock (the "Series A
Preferred Stock") and the face amount shall be One Thousand U.S. Dollars
($1000.00) per share (the "Face Amount").
II. DIVIDENDS
The Series A Preferred Stock shall bear no dividends, and the holders
of the Series A Preferred Stock shall not be entitled to receive dividends on
the Series A Preferred Stock.
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
A. "Closing Bid Price" means, for any security as of any date, the
closing bid price of such security on the principal United States securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg Financial Markets or a comparable reporting service of national
reputation selected by the Corporation and reasonably acceptable to holders of a
majority of the then outstanding shares of Series A Preferred Stock if Bloomberg
Financial Markets is not then reporting closing bid prices of such security
(collectively, "Bloomberg"), or if the foregoing does not apply, the last
reported sale price of such security on the principal United States securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or if the foregoing does not apply, the last reported sale price
of such security in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg, or, if no sale price is reported for
such security by Bloomberg, the average of the bid prices of any market makers
for such security as reported in the "pink sheets" by the National Quotation
Bureau, Inc., in each case for such date or, if such date was not a trading date
for such security, on the next preceding date which was a trading date. If the
Closing Bid Price cannot be calculated for such security as of either of such
dates on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as reasonably determined by an
investment banking firm selected by the Corporation and reasonably acceptable to
the holders of a majority of the then outstanding shares of Series A Preferred
Stock, with the costs of such appraisal to be borne by the Corporation.
B. "Conversion Date" means, for any Conversion, the date specified in
the notice of conversion in the form attached hereto (the "Notice of
Conversion"), so long as the copy of the Notice of Conversion is faxed (or
delivered by other means resulting in notice) to the Corporation at or before
11:59 p.m., New York City time, on the Conversion Date indicated in the Notice
of
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<PAGE>
Conversion; provided, however, that if the Notice of Conversion is not so faxed
or otherwise delivered before such time, then the Conversion Date shall be the
date the holder or holder's agent faxes or otherwise delivers the Notice of
Conversion to the Corporation.
C. "Conversion Percentage" shall initially mean eighty-five percent
(85%). In the event the Corporation's Common Stock, par value $.01 per share
("Common Stock"), is no longer designated for quotation on the Nasdaq National
Market (the "NNM"), the Nasdaq SmallCap Market ("SmallCap"), the American Stock
Exchange (the "AMEX") or the New York Stock Exchange (the "NYSE"), the
Conversion Percentage shall be reduced by ten percent (10%) to seventy-five
percent (75%) for the period during which the Corporation's Common Stock is not
so designated. The Conversion Percentage also shall be subject to adjustment as
provided herein.
D. "Conversion Price" means, with respect to any Conversion Date, the
lower of the Variable Conversion Price and the Fixed Conversion Price, each in
effect as of such date and subject to adjustment as provided herein; provided,
however, that in no event shall the Conversion Price in effect on any Conversion
Date be less than the Floor Price in effect on such Conversion Date unless a
Reserved Amount Trigger Event (as defined in Article V hereof), a Conversion
Default (as defined in Article VI hereof), a Cap Amount Trigger Event (as
defined in Article VII hereof) or a Mandatory Redemption Event (as defined in
Article VIII.A hereof) shall have occurred and be then continuing; provided,
further, however, that the restriction contained in the immediately preceding
proviso shall not apply on any Conversion Date occurring after an Announcement
Date (as defined in Article XI.C hereof) and prior to the sixth (6th) trading
day following (i) the consummation of the proposed transaction or tender offer,
exchange offer or other transaction to which the Announcement Date relates or
(ii) the Abandonment Date (as defined in Article XI.C hereof).
E. "Fixed Conversion Price" means $8.025, and shall be subject to
adjustment as provided herein (including, without limitation, Articles V.D,
VI.B, VII.C and XI).
F. "Floor Price" means, with respect to any Conversion Date, the lower
of (i) $5.00 and (ii) the Fixed Conversion Price then in effect, and shall be
subject to adjustment as provided herein.
G. "Issuance Date" means the date of the closing under that certain
Securities Purchase Agreement by and between the Corporation and the purchaser
named therein with respect to the issuance of the Series A Preferred Stock (the
"Securities Purchase Agreement").
H. "N" means the number of days from, but excluding, the Issuance Date.
I. "Premium" means an amount equal to (.05)x(N/365)x(1,000).
J. "Variable Conversion Price" means, as of any date of determination,
the amount obtained by multiplying the Conversion Percentage then in effect by
the average of the five (5) lowest Closing Bid Prices for the Common Stock
during the twenty-five (25) consecutive trading days ending on the trading day
immediately preceding such date of determination (subject to
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<PAGE>
equitable adjustment for any stock splits, stock dividends, reclassifications or
similar events during such twenty-five (25) trading day period), and shall be
subject to adjustment as provided herein. For the avoidance of doubt, the
trading day immediately preceding any Conversion Date is the last calendar day
that is a trading day and which is immediately preceding the Conversion Date.
K. "business day" and "trading day" means any day on which the New York
Stock Exchange is open for trading.
IV. CONVERSION
A. Conversion at the Option of the Holder. (i) Subject to the
limitations on conversions contained in Paragraph C of this Article IV, each
holder of shares of Series A Preferred Stock may, at any time and from time to
time on or after the earlier of (x) the one-hundred-twentieth (120th) day
following the Issuance Date and (y) the date on which the registration statement
required to be filed by the Corporation pursuant to Section 2(a) of that certain
Registration Rights Agreement, dated as of May 31, 1998, by and among the
Corporation and the other signatories thereto (the "Registration Rights
Agreement") is declared effective by the United States Securities and Exchange
Commission, convert (an "Optional Conversion") each of its shares of Series A
Preferred Stock into a number of fully paid and nonassessable shares of Common
Stock determined in accordance with the following formula if the Corporation
timely redeems the Premium thereon in cash in accordance with subparagraph (ii)
below:
1,000
Conversion Price
or in accordance with the following formula if the Corporation does not timely
redeem the Premium thereon in accordance with subparagraph (ii) below:
1,000 + the Premium
Conversion Price
(ii) (a) The Corporation shall have the right, in its sole discretion,
upon receipt of a Notice of Conversion, to redeem the Premium subject to
such conversion for a sum of cash equal to the amount of the Premium being
so redeemed. All cash redemption payments hereunder shall be paid in lawful
money of the United States of America at such address for the holder as
appears on the record books of the Corporation (or at such other address as
such holder shall hereafter give to the Corporation by written notice). In
the event the Corporation so elects to redeem the Premium in cash and fails
to pay such holder the applicable redemption amount to which such holder is
entitled by depositing a check in the U.S. Mail to such holder within four
(4) business days of receipt by the Corporation of a Notice of Conversion
(in the case of a redemption in connection with an Optional Conversion),
the Corporation shall thereafter forfeit its right to redeem such
-4-
<PAGE>
Premium in cash and such Premium shall thereafter be converted into shares of
Common Stock in accordance with Article IV.A(i).
(b) Each holder of Series A Preferred Stock shall have the right to
require the Corporation to provide advance notice to such holder stating
whether the Corporation will elect to redeem the Premium in cash pursuant
to the Corporation's redemption rights discussed in subparagraph (a) of
this Article IV.A(ii). A holder may exercise such right from time to time
by sending notice (an "Election Notice") to the Corporation, by facsimile,
requesting that the Corporation disclose to such holder whether the
Corporation would elect to redeem the Premium for cash in lieu of issuing
shares of Common Stock therefor if such holder were to exercise its right
of conversion pursuant to this Article IV.A. The Corporation shall, no
later than the close of business on the next business day following receipt
of an Election Notice, disclose to such holder whether the Corporation
would elect to redeem the Premium in connection with a conversion pursuant
to a Notice of Conversion delivered over the subsequent five (5) business
day period. If the Corporation does not respond to such holder within such
one business day period via facsimile, the Corporation shall, with respect
to any conversion pursuant to a Conversion Notice delivered within the
subsequent five (5) business day period, forfeit its right to redeem such
Premium in accordance with subparagraph (a) of this Article IV.A(ii) and
shall be required to convert such Premium into shares of Common Stock.
B. Mechanics of Conversion. In order to effect an Optional Conversion,
a holder or such holder's agent shall: (x) fax (or otherwise deliver) a copy of
the fully executed Notice of Conversion to the Corporation or the transfer agent
for the Common Stock and (y) surrender or cause to be surrendered the original
certificates representing the Series A Preferred Stock being converted (the
"Preferred Stock Certificates"), duly endorsed, along with a copy of the Notice
of Conversion as soon as practicable thereafter to the Corporation or the
transfer agent. Upon receipt by the Corporation of a facsimile copy of a Notice
of Conversion from a holder, the Corporation shall promptly send, via facsimile,
a confirmation to such holder stating that the Notice of Conversion has been
received, the date upon which the Corporation expects to deliver the Common
Stock issuable upon such conversion and the name and telephone number of a
contact person at the Corporation regarding the conversion. The Corporation
shall not be obligated to issue shares of Common Stock upon a conversion unless
either the Preferred Stock Certificates are delivered to the Corporation or the
transfer agent as provided above, or the holder or holder's agent notifies the
Corporation or the transfer agent that such certificates have been lost, stolen
or destroyed and delivers the documentation to the Company required by Article
XIV.B hereof.
(i) Delivery of Common Stock Upon Conversion. Upon the
surrender of Preferred Stock Certificates from a holder of Series A Preferred
Stock or such holder's agent accompanied by a Notice of Conversion and provided
that such holder has complied with the provisions of Article IV.B(x) hereof, the
Corporation shall, no later than the later of (a) the second business day
following the Conversion Date and (b) the business day following the date of
such surrender (or, in the case of lost, stolen or destroyed certificates, after
provision of indemnity pursuant to Article XIV.B) (the "Delivery Period"), issue
and deliver to the holder or its nominee
-5-
<PAGE>
(x) that number of shares of Common Stock issuable upon conversion of such
shares of Series A Preferred Stock being converted and (y) a certificate
representing the number of shares of Series A Preferred Stock not being
converted, if any. If the Corporation's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer program, and
so long as the certificates therefor do not bear a legend and the holder thereof
is not obligated to return such certificate for the placement of a legend
thereon, the Corporation shall cause its transfer agent to electronically
transmit the Common Stock issuable upon conversion to the holder by crediting
the account of the holder or its nominee with DTC through its Deposit Withdrawal
Agent Commission system ("DTC Transfer"). If the aforementioned conditions to a
DTC Transfer are not satisfied, the Corporation shall deliver to the holder
physical certificates representing the Common Stock issuable upon conversion.
Further, a holder may instruct the Corporation to deliver to the holder physical
certificates representing the Common Stock issuable upon conversion in lieu of
delivering such shares by way of DTC Transfer.
(ii) Taxes. The Corporation shall pay any and all taxes which
may be imposed upon it with respect to the issuance and delivery of the shares
of Common Stock upon the conversion of the Series A Preferred Stock.
(iii) No Fractional Shares. If any conversion of Series A
Preferred Stock would result in the issuance of a fractional share of Common
Stock, such fractional share shall be disregarded and the number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock shall be
the next higher whole number of shares.
(iv) Conversion Disputes. In the case of any dispute with
respect to a conversion, the Corporation shall promptly issue such number of
shares of Common Stock as are not disputed in accordance with subparagraph (i)
above. If such dispute involves the calculation of the Conversion Price, the
Corporation shall submit the disputed calculations to an independent outside
accountant via facsimile within two (2) business days of receipt of the Notice
of Conversion. The accountant, at the Corporation's sole expense, shall review
the calculations and the Corporation shall request that the accountant notify
the Corporation and the holder of the results no later than two (2) business
days from the date it receives the disputed calculations. The accountant's
calculation shall be deemed conclusive, absent manifest error. The Corporation
shall then issue the appropriate number of shares of Common Stock in accordance
with subparagraph (i) above.
C. Limitations on Conversions. The conversion of shares of Series A
Preferred Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):
(i) Cap Amount. Unless permitted by the applicable rules and
regulations of the principal securities market on which the Common Stock is
listed or traded, in no event shall the total number of shares of Common Stock
issued upon conversion of the Series A Preferred Stock exceed the maximum number
of shares of Common Stock that the Corporation can so issue pursuant to any rule
of the principal United States securities market on which the Common Stock
trades (including
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<PAGE>
Rules 4310(c)(25)(H) and 4460(i) of the National Association of Securities
Dealers, Inc. ("NASD") or any successor rules) (the "Cap Amount") which, as of
the date of issuance of the Series A Preferred Stock, shall be 239,659 shares
(19.99% of total shares of Common Stock outstanding on the Issuance Date less
the number of shares of Common Stock issued on the Closing Date pursuant to the
Securities Purchase Agreement). The Cap Amount shall be allocated pro rata to
the holders of Series A Preferred Stock as provided in Article XIV.C. In the
event the Corporation is prohibited from issuing shares of Common Stock as a
result of the operation of this subparagraph (i), the Corporation shall comply
with Article VII.
(ii) No Five Percent Holders. Unless a holder of shares of
Series A Preferred Stock or such holder's agent delivers a waiver in accordance
with the last sentence of this subparagraph (ii), in no event shall a holder of
shares of Series A Preferred Stock be entitled to receive shares of Common Stock
upon a conversion to the extent that the sum of (x) the number of shares of
Common Stock beneficially owned by the holder and its affiliates (exclusive of
shares issuable upon conversion of the unconverted portion of the shares of
Series A Preferred Stock or the unexercised or unconverted portion of any other
securities of the Corporation (including, without limitation, the warrants (the
"Warrants") issued by the Corporation pursuant to the Securities Purchase
Agreement) subject to a limitation on conversion or exercise analogous to the
limitations contained herein) and (y) the number of shares of Common Stock
issuable upon the conversion of the shares of Series A Preferred Stock with
respect to which the determination of this subparagraph is being made, would
result in beneficial ownership by the holder and its affiliates of more than
4.99% of the outstanding shares of Common Stock. For purposes of this
subparagraph, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation
13 D-G thereunder, except as otherwise provided in clause (x) above. Except as
provided in the immediately succeeding sentence, the restriction contained in
this subparagraph (ii) shall not be altered, amended, deleted or changed in any
manner whatsoever unless the holders of a majority of the outstanding shares of
Common Stock and each holder of outstanding shares of Series A Preferred Stock
shall approve such alteration, amendment, deletion or change. Notwithstanding
the foregoing, a holder of shares of Series A Preferred Stock may waive the
restriction set forth in this subparagraph (ii) upon not less than 61 days prior
written notice to the Corporation (with such waiver taking effect only upon the
expiration of such 61-day period).
V. RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. Upon the initial issuance of shares of Series A
Preferred Stock, the Corporation shall reserve 1,149,934 shares (200% of the
maximum number of shares of Common Stock which would be issuable if all shares
of Series A Preferred Stock are converted in their entirety on the Issuance
Date) of the authorized but unissued shares of Common Stock for issuance upon
conversion of the Series A Preferred Stock and thereafter the number of
authorized but unissued shares of Common Stock so reserved (the "Reserved
Amount") shall not be decreased, except upon issuances of Common Stock pursuant
to conversions hereunder, and shall at all times be sufficient to provide for
the conversion of the shares of Series A Preferred Stock then outstanding at the
then
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<PAGE>
current Conversion Price. The Reserved Amount shall be allocated to the holders
of Series A Preferred Stock as provided in Article XIV.C.
B. Increases to Reserved Amount. If the Reserved Amount for any three
(3) consecutive trading days (the last of such three (3) trading days being the
"Authorization Trigger Date") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of the then outstanding shares of Series A
Preferred Stock, the Corporation shall immediately notify the holders of Series
A Preferred Stock of such occurrence and shall take immediate action (including,
if necessary, seeking stockholder approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion of the
outstanding Series A Preferred Stock. In the event the Corporation fails to so
increase the Reserved Amount within ninety (90) days after an Authorization
Trigger Date, each holder of Series A Preferred Stock shall thereafter have the
option, exercisable in whole or in part at any time and from time to time by
delivery of a Mandatory Redemption Notice (as defined in Article VIII.C) to the
Corporation, to require the Corporation to purchase for cash, at an amount per
share equal to the Mandatory Redemption Amount (as defined in Article VIII.B), a
portion of the holder's Series A Preferred Stock such that, after giving effect
to such purchase, such holder's allocated portion of the Reserved Amount exceeds
135% of the total number of shares of Common Stock issuable to such holder upon
conversion of the holder's Series A Preferred Stock. If the Corporation fails to
redeem any of such shares within seven (7) business days after its receipt of a
Mandatory Redemption Notice, then such holder shall be entitled to the remedies
provided in Article VIII.C.
C. Limitations on Redemption Right. Notwithstanding the provisions of
Paragraph B of this Article V, the holders of Series A Preferred Stock shall
have no right to require the Corporation to effect a redemption of their
outstanding shares of Series A Preferred Stock as provided in Paragraph B of
this Article V so long as (i) the Corporation has not, at any time, decreased
the Reserved Amount below 1,149,934 shares of Common Stock, except upon
issuances of Common Stock pursuant to conversions hereunder; (ii) the
Corporation shall have taken immediate action following the applicable
Authorization Trigger Date (including, if necessary, seeking stockholder
approval to authorize the issuance of additional shares of Common Stock) to
increase the Reserved Amount to 200% of the number of shares of Common Stock
then issuable upon conversion of the outstanding Series A Preferred Stock; and
(iii) the Corporation continues to use its good faith best efforts (including
the resolicitation of stockholder approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion of the
outstanding Series A Preferred Stock. The Corporation will be deemed to be using
"its good faith best efforts" to increase the Reserved Amount so long as it
solicits stockholder approval to authorize the issuance of additional shares of
Common Stock not less than three (3) times during each twelve month period
following the applicable Authorization Trigger Date during which any shares of
Series A Preferred Stock remain outstanding.
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D. Adjustment to Conversion Price. If the Corporation is prohibited, at
any time, from issuing shares of Common Stock upon conversion of Series A
Preferred Stock to any holder because the Corporation does not then have
available a sufficient number of authorized and reserved shares of Common Stock
(a "Reserved Amount Trigger Event"), then the Fixed Conversion Price in respect
of any shares of Series A Preferred Stock held by any holder (including shares
of Series A Preferred Stock submitted to the Corporation for conversion, but for
which shares of Common Stock have not been issued to any such holder) shall
thereafter be the lesser of (i) the Fixed Conversion Price on the date of the
Reserved Amount Trigger Event and (ii) the lowest Conversion Price in effect
during the period beginning on, and including the date of, the Reserved Amount
Trigger Event through and including the date on which the Corporation shall have
taken all action necessary to increase the number of authorized shares of Common
Stock and to increase the Reserved Amount to 200% of the number of shares of
Common Stock then issuable upon conversion of the then outstanding Series A
Preferred Stock. Upon the occurrence of each reset of the Fixed Conversion Price
pursuant to this Paragraph D, the Corporation, at its expense, shall promptly
compute the new Fixed Conversion Price and prepare and furnish to each holder of
Series A Preferred Stock a certificate setting forth such new Fixed Conversion
Price and showing in detail each Conversion Price in effect during such reset
period.
VI. FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) a holder of shares
of Series A Preferred Stock submits a Notice of Conversion and the Corporation
fails for any reason (other than because such issuance would exceed such
holder's allocated portion of the Reserved Amount or Cap Amount, for which
failures the holders shall have the remedies set forth in Articles V and VII,
respectively) to deliver, on or prior to the fourth (4th) business day following
the expiration of the Delivery Period for such conversion, such number of shares
of Common Stock in accordance with the Notice of Conversion to which such holder
is entitled upon such conversion, or (y) the Corporation provides notice to any
holder of shares of Series A Preferred Stock at any time of its intention not to
issue freely tradeable shares in accordance with the Notice of Conversion of
Common Stock upon exercise by any holder of its conversion rights in accordance
with the terms of this Certificate of Designation (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount or
Cap Amount) (each of (x) and (y) being a "Conversion Default"), then the
Corporation shall pay to the affected holder, in the case of a Conversion
Default described in clause (x) above, and to all holders, in the case of a
Conversion Default described in clause (y) above, an amount equal to:
(.24) x (D/365) x (Default Amount)
where:
"D" means the number of days after the expiration of the Delivery Period
through and including the Default Cure Date;
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"Default Amount" means (i) the total Face Amount of all shares of
Series A Preferred Stock held by such holder, plus (ii) the total accrued
Premium as of the first day of the Conversion Default on all shares of Series A
Preferred Stock included in clause (i) of this definition; and
"Default Cure Date" means (i) with respect to a Conversion Default
described in clause (x) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series A Preferred Stock and (ii)
with respect to a Conversion Default described in clause (y) of its definition,
the date the Corporation issues shares of Common Stock in accordance with the
Notice of Conversion in satisfaction of all conversions of Series A Preferred
Stock in accordance with Article IV.A, and (iii) with respect to either type of
a Conversion Default, the date on which the Corporation redeems shares of Series
A Preferred Stock held by such holder pursuant to Paragraph D of this Article
VI.
The payments to which a holder shall be entitled pursuant to this
Paragraph A are referred to herein as "Conversion Default Payments." A holder
may elect to receive accrued Conversion Default Payments in cash or to convert
all or any portion of such accrued Conversion Default Payments, at any time,
into Common Stock at the lowest Conversion Price in effect during the period
beginning on the date of the Conversion Default through the Conversion Date with
respect to such Conversion Default Payments. In the event a holder elects to
receive any Conversion Default Payments in cash, it shall so notify the
Corporation in writing. Such payment shall be made in accordance with and be
subject to the provisions of Article XIV.E. In the event a holder elects to
convert all or any portion of the Conversion Default Payments into Common Stock,
the holder shall indicate on a Notice of Conversion such portion of the
Conversion Default Payments which such holder elects to so convert and such
conversion shall otherwise be effected in accordance with the provisions of
Article IV.
B. Adjustment to Conversion Price. If a holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion of
Series A Preferred Stock for any reason (other than because such issuance would
exceed such holder's allocated portion of the Reserved Amount or Cap Amount, for
which failures the holders shall have the remedies set forth in Articles V and
VII), then the Fixed Conversion Price in respect of any shares of Series A
Preferred Stock held by such holder (including shares of Series A Preferred
Stock submitted to the Corporation for conversion, but for which shares of
Common Stock have not been issued to such holder) shall thereafter be the lesser
of (i) the Fixed Conversion Price on the Conversion Date specified in the Notice
of Conversion which resulted in the Conversion Default and (ii) the lowest
Conversion Price in effect during the period beginning on, and including, such
Conversion Date through and including the earlier of (x) the day such shares of
Common Stock are delivered to the holder and (y) the day on which the holder
regains its rights as a holder of Series A Preferred Stock with respect to such
unconverted shares of Series A Preferred Stock pursuant to the provisions of
Article XIV.F hereof. If there shall occur a Conversion Default of the type
described in clause (y) of Article VI.A, then the Fixed Conversion Price with
respect to any conversion thereafter shall be the lowest Conversion Price in
effect at any time during the period beginning on, and including, the date of
the occurrence of such Conversion Default through and
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including the Default Cure Date. The Fixed Conversion Price shall thereafter be
subject to further adjustment for any events described in Article XI.
C. Buy-In Cure. Unless the Corporation has notified the applicable
holder in writing prior to the delivery by such holder or such holder's agent of
a Notice of Conversion that the Corporation is unable to honor conversions, if
(i) (a) the Corporation fails for any reason to deliver during the Delivery
Period shares of Common Stock to a holder upon a conversion of shares of Series
A Preferred Stock or (b) there shall occur a Legend Removal Failure (as defined
in Article VIII.A(iii) below) and (ii) thereafter, such holder purchases (in an
open market transaction or otherwise in a bona fide arms-length transaction)
shares of Common Stock to make delivery in satisfaction of a sale by such holder
of the unlegended shares of Common Stock (the "Sold Shares") which such holder
anticipated receiving upon such conversion (a "Buy-In"), the Corporation shall
pay such holder (in addition to any other remedies available to the holder) the
amount by which (x) such holder's total purchase price (including brokerage
commissions, if any) for the unlegended shares of Common Stock so purchased
exceeds (y) the net proceeds received by such holder from the sale of the Sold
Shares. For example, if a holder purchases unlegended shares of Common Stock
having a total purchase price of $11,000 to cover a Buy-In with respect to
shares of Common Stock it sold for $10,000, the Corporation will be required to
pay the holder $1,000. A holder shall provide the Corporation written
notification and supporting documentation indicating any amounts payable to such
holder pursuant to this Paragraph C. The Corporation shall make any payments
required pursuant to this Paragraph C in accordance with and subject to the
provisions of Article XIV.E.
D. Redemption Right. If the Corporation fails, and such failure
continues uncured for five (5) business days after the Corporation has been
notified thereof in writing by the holder, for any reason (other than because
such issuance would exceed such holder's allocated portion of the Reserved
Amount or Cap Amount, for which failures the holders shall have the remedies set
forth in Articles V and VII) to issue shares of Common Stock within ten (10)
business days after the expiration of the Delivery Period with respect to any
conversion of Series A Preferred Stock, then the holder may elect at any time
and from time to time prior to the Default Cure Date for such Conversion
Default, by delivery of a Mandatory Redemption Notice to the Corporation, to
have all or any portion of such holder's outstanding shares of Series A
Preferred Stock purchased by the Corporation for cash, at an amount per share
equal to the Mandatory Redemption Amount (as defined in Article VIII.B). If the
Corporation fails to redeem any of such shares within five (5) business days
after its receipt of such Mandatory Redemption Notice, then such holder shall be
entitled to the remedies provided in Article VIII.C.
VII. INABILITY TO CONVERT DUE TO CAP AMOUNT
A. Obligation to Cure. If at any time the then unissued portion of any
holder's Cap Amount is less than 135% of the number of shares of Common Stock
then issuable upon conversion of such holder's shares of Series A Preferred
Stock (a "Trading Market Trigger Event"), the Corporation shall immediately
notify the holders of Series A Preferred Stock of such occurrence and shall take
immediate action (including, if necessary, seeking the approval of its
stockholders to
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authorize the issuance of the full number of shares of Common Stock which would
be issuable upon the conversion of the then outstanding shares of Series A
Preferred Stock but for the Cap Amount) to eliminate any prohibitions under
applicable law or the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Corporation or any of its securities on the Corporation's ability to issue
shares of Common Stock in excess of the Cap Amount (collectively, the "Trading
Market Prohibitions").
B. Remedies. In the event the Corporation fails to eliminate all such
prohibitions on its ability to issue shares of Common Stock in excess of the Cap
Amount within ninety (90) days after the Trading Market Trigger Event and
thereafter the Corporation is prohibited, at any time following the initial date
that conversion can occur hereunder, from issuing shares of Common Stock upon
conversion of Series A Preferred Stock to any holder because such issuance would
exceed the then unissued portion of such holder's Cap Amount because of
applicable law or the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Corporation or its securities, any holder who is so prohibited from
converting its Series A Preferred Stock may elect either or both of the
following remedies:
(i) to require the Corporation to redeem from such holder
those shares of Series A Preferred Stock for which the Corporation is unable to
issue Common Stock due to the Trading Market Prohibitions at a price per share
of Series A Preferred Stock equal to the Mandatory Redemption Amount (as
hereinafter defined):
(ii) to require, with the consent of holders of at least fifty
percent (50%) of the outstanding shares of Series A Preferred Stock (including
any shares of Series A Preferred Stock held by the requesting holder), the
Corporation to terminate the listing of its Common Stock on the SmallCap (or any
other stock exchange, interdealer quotation system or trading market) and to
cause its Common Stock to be eligible for trading on the over-the-counter
electronic bulletin board; or
(iii) to require the Corporation to issue shares of Common
Stock in accordance with such holder's Notice of Conversion at a conversion
price equal to the greater of (x) the Closing Bid Price of the Common Stock and
(y) the book value per share of Common Stock, each in effect as of the date of
the holder's written notice to the Corporation of its election to receive shares
of Common Stock pursuant to this subparagraph (ii).
C. Adjustment to Conversion Price. If the Corporation is prohibited, at
any time following the initial date that conversion can occur hereunder, from
issuing shares of Common Stock upon conversion of Series A Preferred Stock to
any holder because such issuance would exceed the then unissued portion of such
holder's Cap Amount because of applicable law or the rules or regulations of any
stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Corporation or its securities (a "Cap
Amount Trigger Event"), then the Fixed Conversion Price in respect of any shares
of Series A Preferred Stock held by any holder (including shares of Series A
Preferred Stock submitted to the Corporation for conversion, but for which
shares of Common Stock have not been issued to any such holder) shall thereafter
be the
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lesser of (i) the Fixed Conversion Price in effect on the date of the Cap Amount
Trigger Event and (ii) the lowest Conversion Price in effect during the period
beginning on, and including, the date of the Cap Amount Trigger Event through
and including the date on which the Corporation shall have eliminated all of the
Trading Market Prohibitions. Upon the occurrence of each reset of the Fixed
Conversion Price pursuant to this Paragraph C, the Corporation, at its expense,
shall promptly compute the new Fixed Conversion Price and prepare and furnish to
each holder of Series A Preferred Stock a certificate setting forth such new
Fixed Conversion Price and showing in detail each Conversion Price in effect
during each reset period.
VIII. EVENTS OF DEFAULT
A. Events of Default. In the event (each of the events described in
clauses (i) - (vi) below after expiration of the applicable cure period (if any)
being a "Mandatory Redemption Event"):
(i) the Common Stock (including any of the shares of Common
Stock issuable upon conversion of the Series A Preferred Stock) is suspended
from trading on any of, or is not listed (and authorized) for trading on at
least one of, the New York Stock Exchange (the "NYSE"), the American Stock
Exchange (the "AMEX"), the Nasdaq National Market (the "NNM") or the SmallCap
for an aggregate of ten (10) trading days in any nine (9) month period;
(ii) the Registration Statement required to be filed by the
Corporation pursuant to Section 2(a) of the Registration Rights Agreement has
not been declared effective by the 180th day following the Issuance Date or such
Registration Statement, after being declared effective, cannot be utilized by
the holders of Series A Preferred Stock for the resale of all of their
Registrable Securities (as defined in the Registration Rights Agreement) for an
aggregate of more than forty-five (45) days;
(iii) the Corporation fails to remove any restrictive legend
on any certificate or any shares of Common Stock issued to the holders of Series
A Preferred Stock upon conversion of the Series A Preferred Stock as and when
required by this Certificate of Designation, the Securities Purchase Agreement
or the Registration Rights Agreement (a "Legend Removal Failure"), and any such
failure continues uncured for five (5) business days after the Corporation has
been notified thereof in writing by the holder;
(iv) the Corporation provides notice to any holder of Series A
Preferred Stock, including by way of public announcement, at any time, of its
intention not to issue shares of Common Stock to any holder of Series A
Preferred Stock upon conversion in accordance with the terms of this Certificate
of Designation (other than due to the circumstances contemplated by Articles V
or VII for which the holders shall have the remedies set forth in such
Articles);
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<PAGE>
(v) the Corporation shall, excluding the proposed transaction
(the "Merger") pursuant to that certain Agreement and Plan of Merger, dated as
of April 22, 1998, among the Company, Rugby Acquisition Corp., Rugby National
Corp. and Harvey Weinstein (the "Merger Agreement"), and any amendments thereto
(including the substitution of another entity for Rugby National Corp.), if the
terms of such amendment are more favorable to the Company than those presently
provided for in the Merger Agreement:
(a) sell, convey or dispose of all or substantially
all of its assets (the presentation of any such transaction for stockholder
approval being conclusive evidence that such transaction involves the sale of
all or substantially all of the assets of the Corporation); or
(b) merge, consolidate or engage in any other
business combination with any other entity (other than pursuant to a migratory
merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Corporation and other than pursuant to a merger in which
the Corporation is the surviving or continuing entity and its capital stock is
unchanged); or
(c) have approved, recommended or consented to any
transaction or series of related transactions which result in fifty percent
(50%) or more of the voting power of its capital stock being owned beneficially
by one person, entity or "group" (as such term is used under Section 13(d) of
the Securities Exchange Act of 1934, as amended); or
(vi) the Corporation breaches any material covenant or other
material term hereunder (other than as specifically provided in subparagraphs
(i)-(v) of this Paragraph A), or under the Securities Purchase Agreement or the
Registration Rights Agreement and such breach continues uncured for fifteen (15)
business days after the Corporation has been notified thereof in writing by the
holder; then, upon the occurrence of any such Mandatory Redemption Event, each
holder of shares of Series A Preferred Stock shall thereafter have the option,
exercisable in whole or in part at any time and from time to time by delivery of
a Mandatory Redemption Notice (as defined in Paragraph C below) to the
Corporation while such Mandatory Redemption Event continues, to require the
Corporation to purchase for cash any or all of the then outstanding shares of
Series A Preferred Stock held by such holder for an amount per share equal to
the Mandatory Redemption Amount (as defined in Paragraph B below) in effect at
the time of the redemption hereunder. For the avoidance of doubt, the occurrence
of any event described in clauses (i), (ii), (iv) or (v) above shall immediately
constitute a Mandatory Redemption Event and there shall be no cure period.
Upon the Corporation's receipt of any Mandatory Redemption Notice
hereunder (other than during the three (3) trading day period following the
Corporation's delivery of a Mandatory Redemption Announcement (as defined below)
to all of the holders in response to the Corporation's initial receipt of a
Mandatory Redemption Notice from a holder of Series A Preferred Stock), the
Corporation shall immediately (and in any event within one (1) business day
following such receipt) deliver a written notice (a "Mandatory Redemption
Announcement") to all holders of Series A Preferred Stock stating the date upon
which the Corporation received such Mandatory Redemption Notice and the amount
of Series A Preferred Stock covered thereby. The Corporation shall not
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redeem any shares of Series A Preferred Stock during the three (3) trading day
period following the delivery of a required Mandatory Redemption Announcement
hereunder. At any time and from time to time during such three (3) trading day
period, each holder of Series A Preferred Stock may request (either orally or in
writing) information from the Corporation with respect to the instant redemption
(including, but not limited to, the aggregate number of shares of Series A
Preferred Stock covered by Mandatory Redemption Notices received by the
Corporation) and the Corporation shall furnish (either orally or in writing) as
soon as practicable such requested information to such requesting holder.
B. Definition of Mandatory Redemption Amount. The "Mandatory Redemption
Amount" with respect to a share of Series A Preferred Stock means an amount
equal to the greater of:
(i) V
___ x M
C P
and
(ii) The sum of (x) the product of (I) one hundred percent
(100%) divided by the Conversion Percentage in effect on the date on which the
Corporation receives the Mandatory Redemption Notice, times (II) the Face Amount
thereof, plus (y) the accrued Premium thereon and all unpaid Conversion Default
Payments owing (if any) with respect thereto through the date of payment of the
Mandatory Redemption Amount.
where:
"V" means the Face Amount thereof plus the accrued Premium thereon and all
unpaid Conversion Default Payments owing (if any) with respect thereto through
the date of payment of the Mandatory Redemption Amount;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Mandatory Redemption Notice; and
"M" means (i) with respect to all redemptions other than redemptions
pursuant to Article VIII.A(v) hereof, the highest Closing Bid Price of the
Corporation's Common Stock during the period beginning on the date on which the
Corporation receives the Mandatory Redemption Notice and ending on the date
immediately preceding the date of payment of the Mandatory Redemption Amount and
(ii) with respect to redemptions pursuant to Article VIII.A(v) hereof, the
greater of (a) the amount determined pursuant to clause (i) of this definition
or (b) the fair market value, as of the date on which the Corporation receives
the Mandatory Redemption Notice, of the consideration payable to the holder of a
share of Common Stock pursuant to the transaction which triggers the redemption.
For purposes of this definition, "fair market value" shall be determined by the
mutual agreement of the Corporation and holders of a majority-in-interest of the
shares of Series A Preferred Stock then outstanding, or if such agreement cannot
be reached within five (5) business days prior
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to the date of redemption, by an investment banking firm selected by the
Corporation and reasonably acceptable to holders of a majority-in-interest of
the then outstanding shares of Series A Preferred Stock, with the costs of such
appraisal to be borne by the Corporation.
C. Redemption Defaults. If the Corporation fails to pay any holder the
Mandatory Redemption Amount with respect to any share of Series A Preferred
Stock within five (5) business days after its receipt of a notice requiring such
redemption (a "Mandatory Redemption Notice"), then the holder of Series A
Preferred Stock delivering such Mandatory Redemption Notice (i) shall be
entitled to interest on the Mandatory Redemption Amount at a per annum rate
equal to the lower of twenty-four percent (24%) and the highest interest rate
permitted by applicable law from the date on which the Corporation receives the
Mandatory Redemption Notice until the date of payment of the Mandatory
Redemption Amount hereunder, and (ii) shall have the right, at any time and from
time to time prior to payment thereof in cash, to require the Corporation, upon
written notice, to immediately convert (in accordance with the terms of
Paragraph A of Article IV) all or any portion of the Mandatory Redemption
Amount, plus interest as aforesaid, into shares of Common Stock at the lowest
Conversion Price in effect during the period beginning on the date on which the
Corporation receives the Mandatory Redemption Notice and ending on the
Conversion Date with respect to the conversion of such Mandatory Redemption
Amount. In the event the Corporation is not able to redeem all of the shares of
Series A Preferred Stock subject to Mandatory Redemption Notices delivered prior
to the date upon which such redemption is to be effected, the Corporation shall
redeem shares of Series A Preferred Stock from each holder pro rata, based on
the total number of shares of Series A Preferred Stock outstanding at the time
of redemption included by such holder or such holder's agent in all Mandatory
Redemption Notices delivered prior to the date upon which such redemption is to
be effected relative to the total number of shares of Series A Preferred Stock
outstanding at the time of redemption included in all of the Mandatory
Redemption Notices delivered prior to the date upon which such redemption is to
be effected. Upon receipt of cash or shares of Common Stock in connection with
any redemption pursuant to this Article VIII.C, the holder shall immediately
thereafter surrender the shares of Series A Preferred Stock so redeemed.
D. Redemption at the Corporation's Option.
(i) The Corporation shall have the right, at any time and from
time to time, so long as no Conversion Default or Mandatory Redemption Event
shall have occurred and be continuing, to redeem (an "Optional Redemption") all
or any portion of the then outstanding shares of Series A Preferred Stock
(excluding shares of Series A Preferred Stock subject to a Notice of Conversion
delivered to the Corporation prior to the date of the Optional Redemption Notice
(as defined in subparagraph (iii) below)) for cash, at an amount per share equal
to the Optional Redemption Amount (as defined below), by delivering an Optional
Redemption Notice to the holders of Series A Preferred Stock. Subject to the
provisions of Article IV.C hereof, holders of Series A Preferred Stock may
convert all or any part of their shares of Series A Preferred Stock selected for
redemption hereunder into Common Stock by delivering a Notice of Conversion to
the Corporation at any time prior to the Effective Date of Redemption. For
purposes hereof, the
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"Optional Redemption Amount" with respect to a share of Series A Preferred Stock
means an amount equal to the greater of:
(a) V
____ x M
C P
and
(b) The sum of (x) the product of (I) one hundred percent (100%) divided by
the Conversion Percentage in effect on the date of the Optional Redemption
Notice, times (II) the Face Amount thereof, plus (y) the accrued Premium thereon
and all unpaid Conversion Default Payments owing (if any) with respect thereto
through the Effective Date of Redemption (as defined in subparagraph (iii)
below.
where:
"V" means the Face Amount thereof plus the accrued Premium thereon and all
unpaid Conversion Default Payments owing (if any) with respect thereto through
the Effective Date of Redemption;
"CP" means the Conversion Price in effect on the date of the Optional
Redemption Notice; and
"M" means the Closing Bid Price of the Corporation's Common Stock on the
date of the Optional Redemption Notice.
(ii) The Corporation may not deliver an Optional Redemption
Notice to the holders of Series A Preferred Stock unless on or prior to the date
of delivery of such Optional Redemption Notice, the Corporation shall have
deposited with an escrow agent reasonably acceptable to holders of a majority of
the then outstanding shares of Series A Preferred Stock (the holders shall
promptly notify the Company of the acceptability of such escrow agent), as a
trust fund, cash sufficient in amount to pay all amounts to which the holders of
Series A Preferred Stock are entitled upon such redemption pursuant to
subparagraph (i) of this Paragraph D, with irrevocable instructions and
authority to such escrow agent to complete the redemption thereof in accordance
with this Paragraph D. Any Optional Redemption Notice delivered in accordance
with the immediately preceding sentence shall be accompanied by a statement
executed by a duly authorized officer of its escrow agent, certifying the amount
of funds which have been deposited with such escrow agent and that the escrow
agent has been instructed and agrees to act as redemption agent hereunder.
(iii) The Corporation shall effect an Optional Redemption
under this Section VIII.D by giving at least twenty (20) days prior written
notice (the "Optional Redemption Notice") of the date on which such redemption
is to become effective (the "Effective Date of Redemption")
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and the Optional Redemption Amount to (i) the holders of Series A Preferred
Stock at the address and facsimile number of each holder appearing in the
Corporation's register for the Series A Preferred Stock and (ii) the transfer
agent for the Common Stock, which Optional Redemption Notice shall be deemed to
have been delivered on the business day after the Corporation's fax (with a copy
sent by overnight courier to the holders of Series A Preferred Stock) of such
notice to the holders of Series A Preferred Stock.
(iv) The Optional Redemption Amount shall be paid to the
holder of the Series A Preferred Stock being redeemed within three (3) business
days of the Effective Date of Redemption; provided, however, that the
Corporation shall not be obligated to deliver any portion of the Optional
Redemption Amount until either the certificates evidencing the Series A
Preferred Stock being redeemed are delivered to the office of the Corporation or
the escrow agent or the holder notifies the Corporation or the escrow agent that
such certificates have been lost, stolen or destroyed and delivers the
documentation in accordance with Article XIV.B hereof. Notwithstanding anything
herein to the contrary, in the event that the certificates evidencing the Series
A Preferred Stock being redeemed are not delivered to the Corporation or the
escrow agent prior to the third business day following the Effective Date of
Redemption, the redemption of the Series A Preferred Stock pursuant to this
Article VIII.D shall still be deemed effective as of the Effective Date of
Redemption and the Optional Redemption Amount shall be paid to the holder of
Series A Preferred Stock being redeemed within five (5) business days of the
date the certificates evidencing the Series A Preferred Stock being redeemed are
actually delivered to the Corporation or the escrow agent.
IX. RANK
All shares of the Series A Preferred Stock shall rank (i) prior to the
Corporation's Common Stock; (ii) prior to any class or series of capital stock
of the Corporation hereafter created (unless, with the consent of the holders of
Series A Preferred Stock obtained in accordance with Article XIII hereof, such
class or series of capital stock specifically, by its terms, ranks senior to or
pari passu with the Series A Preferred Stock) (collectively with the Common
Stock, "Junior Securities"); (iii) pari passu with any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of Series A Preferred Stock obtained in accordance with Article XIII
hereof) specifically ranking, by its terms, on parity with the Series A
Preferred Stock (the "Pari Passu Securities"); and (iv) junior to any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series A Preferred Stock obtained in accordance with Article
XIII hereof) specifically ranking, by its terms, senior to the Series A
Preferred Stock (collectively, the "Senior Securities"), in each case as to
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary.
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X. LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of 60 consecutive days and,
on account of any such event, the Corporation shall liquidate, dissolve or wind
up, or if the Corporation shall otherwise liquidate, dissolve or wind up,
including, but not limited to, the sale or transfer of all or substantially all
of the Corporation's assets in one transaction or in a series of related
transactions (a "Liquidation Event"), no distribution shall be made to the
holders of any shares of capital stock of the Corporation (other than Senior
Securities) upon liquidation, dissolution or winding up unless prior thereto the
holders of shares of Series A Preferred Stock shall have received the
Liquidation Preference with respect to each share. If, upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series A Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series A Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation Preference payable on each such share bears to
the aggregate Liquidation Preference payable on all such shares.
B. The purchase or redemption by the Corporation of stock of any class,
in any manner permitted by law, shall not, for the purposes hereof, be regarded
as a liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other entity nor the
sale or transfer by the Corporation of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Corporation.
C. The "Liquidation Preference" with respect to a share of Series A
Preferred Stock means an amount equal to the Face Amount thereof plus the
accrued Premium thereon through the date of final distribution. The Liquidation
Preference with respect to any Pari Passu Securities shall be as set forth in
the Certificate of Designation filed in respect thereof.
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XI. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price and the Floor Price shall be subject to adjustment
from time to time as follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or after the
Issuance Date, the number of outstanding shares of Common Stock is increased by
a stock split, stock dividend, combination, reclassification or other similar
event, the Fixed Conversion Price and the Floor Price shall be proportionately
reduced, or if the number of outstanding shares of Common Stock is decreased by
a reverse stock split, combination or reclassification of shares, or other
similar event, the Fixed Conversion Price and the Floor Price shall be
proportionately increased. In such event, the Corporation shall notify the
Corporation's transfer agent of such change on or before the effective date
thereof.
B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after
the Issuance Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged and
other than the Merger if the Merger is consummated on the terms set forth in the
Merger Agreement or any amendment thereto (including the substitution of another
entity for Rugby National Corp.) if the terms of such amendment are more
favorable to the Company than those presently provided for in the Merger
Agreement), (iii) any sale or transfer of all or substantially all of the assets
of the Corporation or (iv) any share exchange pursuant to which all of the
outstanding shares of Common Stock are converted into other securities or
property (each of (i) - (iv) above being a "Corporate Change"), then the holders
of Series A Preferred Stock shall thereafter have the right to receive upon
conversion, in lieu of the shares of Common Stock otherwise issuable, such
shares of stock, securities and/or other property as would have been issued or
payable in such Corporate Change with respect to or in exchange for the number
of shares of Common Stock which would have been issuable upon conversion
(without giving effect to the limitations contained in Article IV.C) had such
Corporate Change not taken place, or, at the holder's option, shares of
preferred stock of the surviving entity having the same rights and benefits as
provided in this Certificate of Designation (subject to such adjustments as may
be necessary to reflect the terms of such merger or consolidation), and in any
such case, appropriate provisions shall be made with respect to the rights and
interests of the holders of the Series A Preferred Stock to the end that the
provisions hereof (including, without limitation, provisions for adjustment of
the Conversion Price and the Floor Price and of the number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock) shall thereafter
be applicable, as nearly as may be practicable in relation to any shares of
stock or securities thereafter deliverable upon the conversion thereof. The
Corporation shall not effect any Corporate Change unless (i) each holder of
Series A Preferred Stock has received written notice of such transaction at
least seventy-five (75) days prior thereto, but in no event later than twenty
(20) days prior to the record date for the determination of stockholders
entitled to vote with respect thereto (whichever date is earlier, but in no
event earlier
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than the public announcement of such proposed transaction), and (ii) the
resulting successor or acquiring entity (if not the Corporation) assumes by
written instrument the obligations of this Certificate of Designation. The above
provisions shall apply regardless of whether or not there would have been a
sufficient number of shares of Common Stock authorized and available for
issuance upon conversion of the shares of Series A Preferred Stock outstanding
as of the date of such transaction, and shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share exchanges.
C. Adjustment Due to Major Announcement. In the event the Corporation
at any time after the Issuance Date (i) makes a public announcement that it
intends to consolidate or merge with any other entity (other than a merger in
which the Corporation is the surviving or continuing entity and its capital
stock is unchanged and other than the Merger if the Merger is consummated on the
terms set forth in the Merger Agreement or any amendment thereto (including the
substitution of another entity for Rugby National Corp.) if the terms of such
amendment are more favorable to the Company than those presently provided for in
the Merger Agreement) or to sell or transfer all or substantially all of the
assets of the Corporation or (ii) any person, group or entity (including the
Corporation) publicly announces a tender offer, exchange offer or another
transaction to purchase 50% or more of the Corporation's Common Stock or
otherwise publicly announces an intention to replace a majority of the
Corporation's Board of Directors by waging a proxy battle or otherwise (the date
of the announcement referred to in clause (i) or (ii) of this Paragraph C is
hereinafter referred to as the "Announcement Date"), then the Conversion Price
shall, effective upon the Announcement Date and continuing through the sixth
(6th) trading day following the earlier of the consummation of the proposed
transaction or tender offer, exchange offer or another transaction or the
Abandonment Date (as defined below), be equal to the lower of (x) the Conversion
Price which would have been applicable for an Optional Conversion occurring on
the Announcement Date and (y) the Conversion Price determined in accordance with
Article III.D on the Conversion Date set forth in the Notice of Conversion for
the Optional Conversion. From and after the sixth (6th) trading day following
the Abandonment Date, the Conversion Price shall be determined as set forth in
Article III.D. "Abandonment Date" means with respect to any proposed transaction
or tender offer, exchange offer or another transaction for which a public
announcement as contemplated by this Paragraph C has been made, the date upon
which the Corporation (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer or
another transaction which caused this Paragraph C to become operative.
D. Adjustment Due to Distribution. If, at any time after the Issuance
Date, the Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including any
dividend or distribution to the Corporation's stockholders in cash or shares (or
rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"Distribution"), then the holders of Series A Preferred Stock shall be entitled,
upon any conversion of shares of Series A Preferred Stock after the date of
record for determining stockholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the holder with
respect to
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the shares of Common Stock issuable upon such conversion (without giving effect
to the limitations contained in Article IV.C) had such holder been the holder of
such shares of Common Stock on the record date for the determination of
stockholders entitled to such Distribution.
E. Issuance of Other Securities With Variable Conversion Price. If, at
any time after the Issuance Date, the Corporation shall issue any securities
which are convertible into or exchangeable for Common Stock ("Convertible
Securities") at a conversion or exchange rate based on a discount to the market
price of the Common Stock at the time of conversion or exercise, then the
Conversion Percentage in respect of any conversion of Series A Preferred Stock
after such issuance shall be calculated utilizing the higher of the greatest
discount applicable to any such Convertible Securities and the difference
between one hundred percent (100%) and the Conversion Percentage then in effect
hereunder.
F. Purchase Rights. If, at any time after the Issuance Date, the
Corporation issues any Convertible Securities or rights to purchase stock,
warrants, securities or other property (the "Purchase Rights") pro rata to the
record holders of any class of Common Stock, then the holders of Series A
Preferred Stock will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock acquirable
upon complete conversion of the Series A Preferred Stock (without giving effect
to the limitations contained in Article IV.C) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
G. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price and/or Floor Price pursuant to this Article
XI, the Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each holder of Series A Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
A Preferred Stock, furnish to such holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price and/or Floor Price at
the time in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would be
received upon conversion of a share of Series A Preferred Stock.
XII. VOTING RIGHTS
The holders of the Series A Preferred Stock shall have no voting rights
whatsoever, except as otherwise provided by the Delaware General Corporation Law
(the "Business Corporation Law"), in this Article XII and in Article XIII below.
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Notwithstanding the above, the Corporation shall provide each holder of
Series A Preferred Stock with prior notification of any meeting of the
stockholders (and copies of proxy materials and other information sent to
stockholders). If the Corporation takes a record of its stockholders for the
purpose of determining stockholders entitled to (a) receive payment of any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (b) to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the
Corporation, or any proposed merger, consolidation, liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least twenty (20) days prior to the record date specified therein (or
seventy-five (75) days prior to the consummation of the transaction or event,
whichever is earlier, but in no event earlier than public announcement of such
proposed transaction), of the date on which any such record is to be taken for
the purpose of such vote, dividend, distribution, right or other event, and a
brief statement regarding the amount and character of such vote, dividend,
distribution, right or other event to the extent known at such time.
To the extent that under the Business Corporation Law the vote of the
holders of the Series A Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of the Series A Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Series A Preferred Stock
(except as otherwise may be required under the Business Corporation Law) shall
constitute the approval of such action by the class. To the extent that under
the Business Corporation Law holders of the Series A Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series A Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible (subject to the limitations contained in Article IV.C(ii)) using the
record date for the taking of such vote of stockholders as the date as of which
the Conversion Price is calculated.
XIII. PROTECTION PROVISIONS
So long as any shares of Series A Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Law) of the holders of all of
the then outstanding shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock;
(b) alter or change the rights, preferences or privileges of any
capital stock of the Corporation so as to affect adversely the Series A
Preferred Stock;
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(c) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets
upon liquidation, dissolution or winding up of the Corporation (as
previously defined in Article IX hereof, "Senior Securities");
(d) create any new class or series of capital stock ranking pari passu
with the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously
defined in Article IX hereof, "Pari Passu Securities");
(e) increase the authorized number of shares of Series A Preferred
Stock;
(f) issue any shares of Senior Securities or Pari Passu Securities;
(g) issue any shares of Series A Preferred Stock other than pursuant
to the Securities Purchase Agreement;
(h) redeem, or declare or pay any cash dividend or distribution on,
any Junior Securities (except for the payment of a $.01 per share dividend
and a $.01 per share redemption right on any preferred stock of the Company
presently authorized and issued in connection with the Merger if the Merger
is consummated on the terms set forth in the Merger Agreement or any
amendment thereto (including the substitution of another entity for Rugby
National Corp.) if the terms of such amendment and such preferred stock are
more favorable to the Company than those presently provided for in the
Merger Agreement); or
(i) increase the par value of the Common Stock.
Notwithstanding the foregoing, no change pursuant to this Article XIII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series A Preferred Stock then outstanding.
XIV. MISCELLANEOUS
A. Cancellation of Series A Preferred Stock. If any shares of Series A
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series A Preferred Stock.
B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to the Corporation, or (z) in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Corporation shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date. However, the
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<PAGE>
Corporation shall not be obligated to reissue such lost or stolen Preferred
Stock Certificate(s) if the holder contemporaneously requests the Corporation to
convert such Series A Preferred Stock.
C. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount
and Reserved Amount shall be allocated pro rata among the holders of Series A
Preferred Stock based on the number of shares of Series A Preferred Stock issued
to each holder. Each increase to the Cap Amount and the Reserved Amount shall be
allocated pro rata among the holders of Series A Preferred Stock based on the
number of shares of Series A Preferred Stock held by each holder at the time of
the increase in the Cap Amount or Reserved Amount. In the event a holder shall
sell or otherwise transfer any of such holder's shares of Series A Preferred
Stock, each transferee shall be allocated a pro rata portion of such
transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or
Reserved Amount which remains allocated to any person or entity which does not
hold any Series A Preferred Stock shall be allocated to the remaining holders of
shares of Series A Preferred Stock, pro rata based on the number of shares of
Series A Preferred Stock then held by such holders.
D. Quarterly Statements of Available Shares. For each calendar quarter
beginning in the quarter in which the registration statement required to be
filed pursuant to Section 2(a) of the Registration Rights Agreement is declared
effective and thereafter so long as any shares of Series A Preferred Stock are
outstanding, the Corporation shall deliver (or cause its transfer agent to
deliver) to each holder a written report notifying the holders of any occurrence
which prohibits the Corporation from issuing Common Stock upon any such
conversion. The report shall also specify (i) the total number of shares of
Series A Preferred Stock outstanding as of the end of such quarter, (ii) the
total number of shares of Common Stock issued upon all conversions of Series A
Preferred Stock prior to the end of such quarter, (iii) the total number of
shares of Common Stock which are reserved for issuance upon conversion of the
Series A Preferred Stock as of the end of such quarter and (iv) the total number
of shares of Common Stock which may thereafter be issued by the Corporation upon
conversion of the Series A Preferred Stock before the Corporation would exceed
the Cap Amount and the Reserved Amount. The Corporation (or its transfer agent)
shall deliver the report for each quarter to each holder prior to the tenth day
of the calendar month following the quarter to which such report relates. In
addition, the Corporation (or its transfer agent) shall provide, within fifteen
(15) days after delivery to the Corporation of a written request by any holder,
any of the information enumerated in clauses (i) - (iv) of this Paragraph D as
of the date of such request.
E. Payment of Cash; Defaults. Whenever the Corporation is required to
make any cash payment to a holder under this Certificate of Designation (as a
Conversion Default Payment, upon redemption or otherwise), such cash payment
shall be made to the holder within five (5) business days after delivery by such
holder or such holder's agent of a notice specifying that the holder elects to
receive such payment in cash and the method (e.g., by check, wire transfer) in
which such payment should be made. If such payment is not delivered within such
five (5) business day period, such holder shall thereafter be entitled to
interest on the unpaid amount at a per annum rate equal to the lower of
twenty-four percent (24%) and the highest interest rate permitted by applicable
law until such amount is paid in full to the holder.
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F. Status as Stockholder. Upon submission of a Notice of Conversion by
a holder of Series A Preferred Stock, and provided that the certificate
representing such shares are surrendered to the transfer agent as soon as
practicable thereafter, (i) the shares covered thereby (other than the shares,
if any, which cannot be issued because their issuance would exceed such holder's
allocated portion of the Reserved Amount or Cap Amount) shall be deemed
converted into shares of Common Stock and (ii) the holder's rights as a holder
of such converted shares of Series A Preferred Stock shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to such holder because of a failure by the Corporation to comply with the terms
of this Certificate of Designation. In situations where Article VI.B is
applicable, the number of shares of Common Stock referred to in clauses (i) and
(ii) of the immediately preceding sentence shall be determined on the date on
which such shares of Common Stock are delivered to the holder. Notwithstanding
the foregoing, if a holder has not received certificates for all shares of
Common Stock prior to the tenth (10th) business day after the expiration of the
Delivery Period with respect to a conversion of Series A Preferred Stock for any
reason, then (unless the holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Corporation within five business days
after the expiration of such ten (10) business day period after expiration of
the Delivery Period) the holder shall regain the rights of a holder of Series A
Preferred Stock with respect to such unconverted shares of Series A Preferred
Stock and the Corporation shall, as soon as practicable, return such unconverted
shares and share certificates to the holder. In all cases, the holder shall
retain all of its rights and remedies (including, without limitation, (i) the
right to receive Conversion Default Payments pursuant to Article VI.A to the
extent required thereby for such Conversion Default and any subsequent
Conversion Default and (ii) the right to have the Conversion Price with respect
to subsequent conversions determined in accordance with Article VI.B) for the
Corporation's failure to convert Series A Preferred Stock.
G. Remedies Cumulative. The remedies provided in this Certificate of
Designation shall be cumulative and in addition to all other remedies available
under this Certificate of Designation, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Certificate of Designation. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series A Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, that the holders
of Series A Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation this 31st day of May, 1998.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
Name: Mark Honigsfeld
Title: Chairman and Chief Executive Officer
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NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series A Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series A Preferred Stock (the "Conversion"), represented by stock certificate
Nos(s). ___________ (the "Preferred Stock Certificates"), into shares of Class A
Common Stock ("Common Stock") of COMPU-DAWN, INC. (the "Corporation") according
to the conditions of the Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock (the "Certificate of Designation"), as of
the date written below. If securities are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto. No fee will be charged to the holder for any conversion,
except for transfer taxes, if any. A copy of each Preferred Stock Certificate is
attached hereto (or evidence of loss, theft or destruction thereof). The
certificates are to be delivered as follows:
o WITHOUT RESTRICTIVE LEGEND. The undersigned intends to sell
the Common Stock within five (5) business days of the receipt
of certificates representing such Common Stock and hereby
agrees to return the certificates (which presently bear no
restrictive legend) representing the Common Stock to the
Corporation's transfer agent for placement of a legend upon
such certificates if such Common Stock is not sold within five
(5) business days of the receipt of such certificates by the
undersigned.
o WITH RESTRICTIVE LEGEND.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series A Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "Act"), or pursuant to
an exemption from registration under the Act.
The Corporation shall electronically transmit the Common Stock issuable pursuant
to this Notice of Conversion to the account of the undersigned or its nominee
(which is _________________) with DTC through its Deposit Withdrawal Agent
Commission System ("DTC Transfer").
o In lieu of receiving the shares of Common Stock issuable pursuant to
this Notice of Conversion by way of DTC Transfer, the undersigned
hereby requests that the Corporation issue and deliver to the
undersigned physical certificates representing such shares of Common
Stock.
Date of Conversion:___________________________________
Applicable Conversion Price:__________________________
Amount of Conversion Default
Payments to be Converted, if any:_____________________
Number of Shares of
Common Stock to be Issued:____________________________
Signature:____________________________________________
Name:_________________________________________________
Address:______________________________________________
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AGREEMENT AND PLAN OF MERGER
AMONG
COMPU-DAWN, INC.
RUGBY ACQUISITION CORP.
RUGBY NATIONAL CORP.
AND
HARVEY WEINSTEIN
As of April 22, 1998
<PAGE>
<TABLE>
TABLE OF CONTENTS
Page
<S> <C>
RECITALS:..........................................................................................................
ARTICLE I
DEFINED TERMS; SCHEDULES..................................................................................
1.1 Defined Terms....................................................................................
1.2 Schedules........................................................................................
ARTICLE II
MERGER.............................................................................................................
2.1 Merger and Surviving Corporations .......................................................................
2.2 Effectiveness of Merger...................................................................................
2.3 Shares of the Constituent and Surviving Corporation.......................................................
2.4 Effect of Merger..........................................................................................
2.5 Further Assurances...............................................................................
2.6 Directors of Surviving Corporation ..............................................................
2.7 Officers of Surviving Corporation ........................................................................
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF RUGBY AND
THE RUGBY SHAREHOLDER..............................................................................................
3.1 Valid Existence; Qualification; Lottery Business..........................................................
3.2 Capitalization; Subsidiaries; Affiliated Entities.........................................................
3.3 Consents .................................................................................................
3.4 Authority; Binding Nature of Agreement...........................................................
3.5 Financial Statements.............................................................................
3.6 Liabilities......................................................................................
3.7 Actions Since the Balance Sheet Date.............................................................
3.8 Adverse Developments.............................................................................
3.9 Taxes............................................................................................
3.10 Ownership of Assets; Interest in Assets..........................................................
3.11 Insurance........................................................................................
3.12 Litigation; Compliance with Law..................................................................
3.13 Real Property....................................................................................
3.14 Agreements and Obligations; Performance..........................................................
3.15 Condition of Assets..............................................................................
3.16 Permits and Licenses.............................................................................
3.17 Occupational Heath and Safety and Environmental Matters..........................................
3.18 Intellectual Property............................................................................
3.19 Compensation Information.........................................................................
3.20 Employee Benefit Plans...........................................................................
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3.21 No Breach........................................................................................
3.22 Brokers..........................................................................................
3.23 Employment Relations.............................................................................
3.24 Prior Names and Addresses........................................................................
3.25 Payments.........................................................................................
3.26 Books and Records................................................................................
3.27 Recitals.........................................................................................
3.28 Proxy Statement..................................................................................
3.29 [Intentionally Omitted]..........................................................................
3.30 Projections......................................................................................
3.31 Untrue or Omitted Facts..........................................................................
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPU-DAWN AND RAC...............................................................
4.1 Valid Existence; Qualification...................................................................
4.2 Capitalization...................................................................................
4.3 Consents.........................................................................................
4.4 Corporate Authority; Binding Nature of Agreement.................................................
4.5 SEC Reports......................................................................................
4.6 Financial Statements............................................................................
4.7 Liabilities.....................................................................................
4.8 Actions Since the Balance Sheet Date............................................................
4.9 Adverse Developments............................................................................
4.10 Taxes ......................................................................................
4.11 Ownership of Assets.............................................................................
4.12 Insurance.......................................................................................
4.13 Litigation; Compliance with Law.................................................................
4.14 Real Property...................................................................................
4.15 Agreements and Obligations; Performance.........................................................
4.16 Occupational Health and Safety and Environmental Matters........................................
4.17 Intellectual Property...........................................................................
4.18 Compensation Information........................................................................
4.19 Employee Benefit Plans...........................................................................
4.20 No Breach........................................................................................
4.21 Brokers..........................................................................................
4.22 Employment Relations............................................................................
4.23 Prior Names and Addresses.......................................................................
4.24 Payments........................................................................................
4.25 Books and Records...............................................................................
4.26 Untrue of Omitted Facts.........................................................................
<PAGE>
ARTICLE V
PRE-CLOSING COVENANTS..............................................................................................
5.1 Rugby and Rugby Shareholder Covenants............................................................
5.2 Compu-DAWN Covenants.............................................................................
ARTICLE VI
ACQUISITION OF SHARES.............................................................................................
6.1 Investment Intent; Qualification as Purchaser....................................................
6.2 Restrictive Legend...............................................................................
6.3 Certain Risk Factors.............................................................................
ARTICLE VII
CONDITIONS PRECEDENT TO THE
OBLIGATION OF COMPU-DAWN AND RAC TO CLOSE..........................................................................
7.1 Representations and Warranties...................................................................
7.2 Covenants........................................................................................
7.3 Certificate......................................................................................
7.4 Stockholder Approval.............................................................................
7.5 Rugby and Press-Loto Financial Statements........................................................
7.6 Employment Agreement.............................................................................
7.7 Restrictive Covenant Agreement...................................................................
7.8 Fairness Opinion.................................................................................
7.9 "Cold Comfort" Letter............................................................................
7.10 Opinion..........................................................................................
7.11 Escrow Agreement................................................................................
7.12 Loan Agreement...................................................................................
7.13 Satisfactory Due Diligence.......................................................................
7.14 Lottery License .................................................................................
7.15 Press-Loto.......................................................................................
7.16 Material Contracts ..............................................................................
7.17 Election of Mark Honigsfeld as Director and Officer of Rugby.....................................
7.18 Section 4(2) and Regulation D Compliance ........................................................
7.19 No Actions.......................................................................................
7.20 Consent; Permits.................................................................................
7.21 Corporate Actions................................................................................
7.22 Additional Documents.............................................................................
<PAGE>
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATION OF RUGBY AND
THE RUGBY SHAREHOLDER TO CLOSE.....................................................................................
8.1 Representations and Warranties...................................................................
8.2 Covenants........................................................................................
8.3 Certificate......................................................................................
8.4 Employment Agreement.............................................................................
8.5 Size of Board; Election of Directors.............................................................
8.6 Resignation of Directors; Divestment of Dong W. Lew..............................................
8.7 No Actions.......................................................................................
8.8 Consents; Permits................................................................................
8.9 Corporate Actions................................................................................
8.10 Additional Documents.............................................................................
ARTICLE IX
TERMINATION AND WAIVER; LIQUIDATED DAMAGES.........................................................................
9.1 Termination......................................................................................
9.2 Waiver...........................................................................................
9.3 Liquidated Damages..............................................................................
ARTICLE X
CLOSING............................................................................................................
10.1 Location; Date...................................................................................
10.2 Items to be Delivered to Compu-DAWN..............................................................
10.3 Items to be Delivered to Rugby and the Rugby Shareholder.........................................
ARTICLE XI
POST-CLOSING MATTERS...............................................................................................
11.1 Further Assurances...............................................................................
11.2 Agreement as to Voting...........................................................................
11.3 Corporate Opportunities..........................................................................
11.4 Chief Executive Officer.........................................................................
11.5 Transfer Restriction............................................................................
ARTICLE XII
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION.......................................................................
12.1 Survival.........................................................................................
12.2 Indemnification..................................................................................
12.3 Arbitration......................................................................................
12.4 Other Rights and Remedies Not Affected...........................................................
<PAGE>
ARTICLE XIII
MISCELLANEOUS PROVISIONS...........................................................................................
13.1 Expenses.........................................................................................
13.2 Confidential Information.........................................................................
13.3 Equitable Relief.................................................................................
13.4 Publicity........................................................................................
13.5 Entire Agreement.................................................................................
13.6 Notices..........................................................................................
13.7 Choice of Law; Severability......................................................................
13.8 Successors and Assigns; No Assignment............................................................
13.9 Counterparts.....................................................................................
13.10 Facsimile Signatures.............................................................................
13.11 Representation by Counsel; Interpretation........................................................
13.12 Headings; Gender.................................................................................
13.13 Effectiveness....................................................................................
ARTICLE XIV
DEFINITIONS........................................................................................................
14.1 Defined Terms....................................................................................
</TABLE>
SCHEDULES
3.2(a) Press-Loto Equity Ownership
3.2(b) Press-Loto Investments and Subsidiaries
3.2(c) Rugby Shareholder Investments
3.3 Consents
3.7 Actions Since Rugby Balance Sheet Date
3.10(a) Lottery Contracts
3.10(b) Necessary Assets
3.10(c) Transfer Restrictions on Rugby or Press-Loto Assets
3.11 Insurance
3.13 Real Property
3.14 Rugby / Press-Loto Listed Agreements
3.16 Permits and Licenses
3.18(a) Intellectual Property
3.19 Compensation Arrangements
3.22 Brokers
3.24 Prior Names and Addresses
3.30 Projections
4.2(a) Compu-DAWN Derivative Securities
<PAGE>
4.3 Consents
4.8 Actions Since the Compu-DAWN Balance Sheet Date
4.10 Taxes
4.12 Insurance
4.14 Real Property
4.15 Compu-DAWN Listed Agreements
4.17 Intellectual Property
4.18 Compensation Information
4.20 No Breach
4.21 Brokers
4.23 Prior Names and Addresses
5.2 Conduct of Business
8.5 Board Nominees
11.4 Investment Banking Firms
EXHIBITS
R1 Government Decree
R2 Lottery Terms
R3 Lottery License
2.3(a) Preferred Stock
2.3(b) Warrant
7.6 Employment Agreement
7.7 Restrictive Covenant Agreement
7.10 Opinion
7.11 Escrow Agreement
<PAGE>
AGREEMENT AND PLAN OF MERGER dated as of April 22, 1998 (the
"Agreement") by and among COMPU-DAWN, INC., a Delaware corporation
("Compu-DAWN"), RUGBY ACQUISITION CORP., a New York corporation and a
wholly-owned subsidiary of Compu-DAWN ("RAC"), RUGBY NATIONAL CORP., a New York
corporation ("Rugby"), and HARVEY WEINSTEIN (the "Rugby Shareholder").
Compu-DAWN, RAC, Rugby and the Rugby Shareholder are sometimes collectively
referred to as the "Parties" and individually as a "Party".
RECITALS:
1. The Rugby Shareholder is the sole shareholder of Rugby.
Rugby owns fifty percent (50% ) of the equity, i.e. shares of capital, of
Press-Loto, a company with limited liability organized and existing under, and
pursuant to, the laws of the Russian Federation ("Press-Loto").
2. Pursuant to a decree of the government (the "Government
Decree") of the Russian Federation, dated as of September 13, 1995, a copy of
which is attached hereto as Exhibit R1, the Ministry of Finance of the Russian
Federation (the "Ministry of Finance") was directed to issue a license to the
Union of Journalists of Russia (the "Journalist Union") to organize and hold an
electronic journalist lottery on the territory of Russia (the "Lottery")
starting from 1996.
3. The Terms of Operating the Journalists' Computerized
Lottery (the "Lottery Terms"), a copy of which is attached hereto as Exhibit R2,
was approved by S.A. Korolev, Deputy Minister of Finance of the Russian
Federation, and Vsevolod L. Bogdanov, Chairman of the Journalist Union, and
provides, among other things, that (i) the exclusive organizer and holder of the
Lottery is the Journalist Union, (ii) the term of the Lottery is 1996-2000,
(iii) the Lottery is a computerized and digital one, (iv) the prize fund of the
Lottery is fifty percent (50%) of the total revenues and (v) the Journalist
Union has authorized Press-Loto to act as the exclusive organizer and holder of
the Lottery.
4. Pursuant to a communication dated December 12, 1997 from
the Ministry of Finance to the Journalist Union, a copy of which is attached
hereto as Exhibit R3, the Journalist Union was granted a license (the "Lottery
License") to operate the Lottery until December 31, 1999 (the "License
Expiration Date").
5. Press-Loto has authorized Rugby, on an exclusive basis, to
take all actions and enter into all contracts and agreements necessary to
organize, implement and operate the Lottery.
6. The Parties contemplate that, following the date hereof,
Rugby will take all actions and enter into all contracts and agreements
necessary to, and will, organize, implement and operate the Lottery in the
Russian Federation pursuant to and under the Lottery License (the "Lottery
Business").
7. Subject to the terms and conditions hereof, the respective
Boards of Directors of Compu-DAWN, RAC and Rugby deem it desirable and in the
best interests of their respective corporations and shareholders that RAC merge
with and into Rugby (the "Merger") in a statutory
<PAGE>
merger in accordance with the laws of the State of New York (the "New York
Statute").
NOW, THEREFORE, in consideration of the mutual benefits to be
derived hereby and the representations, warranties, covenants and agreements
herein contained, the Parties agree as follows:
ARTICLE I
DEFINED TERMS; SCHEDULES
1.1 Defined Terms. Capitalized terms used in this Agreement will have the
meanings given such terms in Article XIV hereof or elsewhere in the text of this
Agreement, and variants and derivatives of such terms shall have correlative
meanings.
1.2 Schedules. References to a Schedule will include any applicable disclosure
expressly set forth on the face of any other Schedule if specifically
cross-referenced to such other Schedule. Each Schedule and the information,
agreements and documents expressly listed in each Schedule will be considered a
part of this Agreement as if set forth herein in full and will be deemed to
constitute representations and warranties under this Agreement, limited as set
forth in the applicable provision of this Agreement under which such Schedule is
delivered; provided, however, that the representations and warranties set forth
in this Agreement shall not be affected or deemed qualified, modified or limited
in any respect by the information provided in the Schedules except to the extent
that any qualification, modification or limitation to any representation and
warranty is expressly and conspicuously set forth on the face of such particular
Schedule.
ARTICLE II
MERGER
2.1 Merger and Surviving Corporation.
(a) Pursuant to the New York Statute, RAC shall merge with and into
Rugby, and Rugby shall be the surviving corporation after the Merger (the
"Surviving Corporation") and shall continue to exist as a corporation created
and governed by the laws of the State of New York.
(b) The Certificate of Incorporation of the Surviving Corporation, from
and after the Effective Time (as hereinafter defined), shall be the Certificate
of Incorporation of Rugby.
(c) The By-Laws of the Surviving Corporation, from and after the
Effective Time, shall be the By-Laws of Rugby.
2.2 Effectiveness of Merger. If all of the conditions precedent to the
obligation of each of the Parties hereto as hereinafter set forth shall have
been satisfied or shall have been waived, a
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Certificate of Merger shall be delivered as soon as practicable after the
Closing to the Secretary of State of New York for filing in accordance with the
New York Statute. The Merger shall become effective upon the acceptance of such
filing by the Secretary of State of New York or at such later time as is
specified in the Certificate of Merger, which effective time shall be the
"Effective Time" of the Merger.
2.3 Shares of the Constituent and Surviving Corporations. The manner and basis
of converting and exchanging the shares of Rugby and the status of RAC's shares
shall be as follows:
(a) Subject to the provisions of this Agreement, each common share, no
par value, of Rugby (the "Rugby Common Stock") issued and outstanding
immediately prior to the Effective Time (other than Rugby Common Stock to be
canceled pursuant to Section 2.3(d) hereof) shall, by virtue of the Merger and
without any action on the part of the holder thereof, be canceled and
extinguished and converted into the right to receive, in accordance with Section
2.3(b) hereof, (i) common shares, par value $.01 per share, of Compu-DAWN (the
"Compu-DAWN Common Stock"), (ii) Series A preferred shares, par value $.01 per
share of Compu-DAWN, the rights, preference and designations of which are set
forth in Exhibit 2.3(a) attached hereto (the "Compu- DAWN Preferred Stock"), and
(iii) warrants to purchase Compu-DAWN Common Stock, such warrants to be in or
substantially in the form set forth in Exhibit 2.3(b) attached hereto (the
"Warrants"). The Compu-DAWN Common Stock, the Compu-DAWN Preferred Stock and the
Warrants are collectively referred to as the "Compu-DAWN Securities".
(b) The number of Compu-DAWN Securities to be issued pursuant to
Section 2.3(a) hereof for each share of Rugby Common Stock issued and
outstanding immediately prior to the Effective Time (other than Rugby Common
Stock to be canceled pursuant to Section 2.3(d) hereof) (the "Merger
Consideration") shall be equal to (on the basis of there being 200 shares of
Rugby Common Stock so issued and outstanding) the following: (i) (A) subject to
the provisions of the Escrow Agreement (as hereinafter defined), Eighteen
Thousand Three Hundred Fourteen and Four- Tenths (18,314.4) shares of Compu-DAWN
Common Stock (an aggregate of 3,662,880 shares of Compu-DAWN Common Stock), (B)
Three Thousand Three Hundred Twenty Nine and Eighty Nine One-Hundredths
(3,329.89) shares of Compu-DAWN Preferred Stock (an aggregate of 665,978 shares
of Compu-DAWN Preferred Stock) and (C) Warrants to purchase Six Thousand Six
Hundred Fifty Nine and Seventy Eight One-Hundredths (6,659.78) shares of
Compu-DAWN Common Stock (an aggregate of 1,331,956 shares of Compu-DAWN Common
Stock), and (ii) an additional One Thousand Six Hundred Sixty Four and Nine
Hundred Forty Five One-Thousandths (1,664.945) shares of Compu-DAWN Common Stock
(an aggregate of 332,989 shares of Compu-DAWN Common Stock) (the "Compu-DAWN
Performance Stock") on such date (the "Entitlement Date") that there are at
least five hundred (500) on-line Lottery ticket sale computer terminals being
operated in Russia by Rugby in connection with the Lottery and generating
Lottery revenues; provided, however, that in no event shall any Compu-DAWN
Performance Stock be issuable prior to the Closing Date and no Compu-DAWN
Performance Stock shall be issued in the event the Entitlement Date is on or
after the six month anniversary of the date hereof.
3
<PAGE>
(c) If any holder of Rugby Common Stock is entitled to receive
fractional shares of Compu-DAWN Common Stock and/or Compu-DAWN Preferred Stock,
and/or Warrants to purchase fractions of shares of Compu-DAWN Common Stock, such
holder instead will be entitled to receive (i) one whole share of Compu-DAWN
Common Stock, and/or Compu-DAWN Preferred Stock and/or a Warrant to purchase one
whole share of Compu-DAWN Common Stock in lieu of such fractional share and/or
Warrant to purchase such fractional share of Compu-DAWN Common Stock if such
holder would have otherwise been entitled to receive or purchase one-half or
more and (ii) otherwise shall not be entitled to receive or purchase any
additional shares or fractional shares.
(d) Any share of Rugby Common Stock held in the treasury of Rugby at
the Effective Time shall be canceled and retired, and no shares or other
securities of Compu-DAWN or RAC shall be issuable with respect thereto.
(e) Each share of Common Stock, par value $.01 per share, of RAC (the
"RAC Common Stock") shall be converted into and become one (1) validly issued,
fully paid and non-assessable share of Rugby Common Stock.
(f) Subject to the provisions hereof, each holder of an outstanding
certificate or certifi cates theretofore representing shares of Rugby Common
Stock, and theretofore surrendered by such holder to Compu-DAWN or its transfer
agent for cancellation, shall be entitled to receive in exchange therefor (i) as
promptly as practicable after the Effective Time, but subject to the provisions
of the Escrow Agreement, certificates representing that holder's proportionate
number of Compu-DAWN Securities, other than the Compu-DAWN Performance Common
Stock, for each share of Rugby Common Stock surrendered, as is specified in
Section 2.3(b) hereof and (ii) as promptly as practicable after the Entitlement
Date, a certificate or certificates representing that holder's proportionate
number of shares of Compu-DAWN Performance Stock for each share of Rugby Common
Stock surrendered, as is specified in Section 2.3(b) hereof. If the Compu-DAWN
Securities (or any portion thereof) are to be delivered to any person other than
the person in whose name the certificate or certificates representing the Rugby
Common Stock surrendered in exchange therefor are registered, in addition to any
other requirements of applicable law, it shall be a condition to such exchange
that the certificate or certificates so surrendered shall be properly endorsed
or otherwise be in proper form for transfer and that the person requesting such
exchange shall pay to Compu-DAWN or its transfer agent any transfer or other
taxes required by reason of the delivery of the Compu-DAWN Securities to a
person other than the registered holder of the certificate or certificates
surrendered, or shall establish to the satisfaction of Compu-DAWN or its
transfer agent that such tax has been paid or is not applicable.
(g) Neither the Compu-DAWN Common Stock nor the Compu-DAWN Preferred
Stock nor the Warrants to be issued pursuant to the Merger, nor the Compu-DAWN
Common Stock issuable upon the exercise of the Warrants, may be sold or
otherwise transferred or disposed of by the holders thereof unless they are
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or unless an exemption from such registration is available. Accordingly, a
restrictive legend will be placed on any instruments, certificates or other
documents evidencing such
4
<PAGE>
shares of Compu-DAWN Common Stock, Compu-DAWN Preferred Stock or Warrants in, or
substantially in, the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933. These securities
have been acquired for investment and not for distribution or
resale. They may not be sold, assigned, mortgaged, pledged,
hypothecated or otherwise trans ferred or disposed of without
an effective registration statement for such securities under
the Securities Act of 1933 or an opinion of counsel to the
Company that registration is not required under such Act."
(h) Unless and until outstanding certificates representing shares of
Rugby Common Stock prior to the Effective Time shall be surrendered as provided
in Section 2.3(f) hereof, dividends and other distributions, if any (including,
without limitation, any shares issuable in connection with stock split-ups or
other recapitalizations), payable as of any date subsequent to the Effective
Time or the Entitlement Date, as the case may be, to the holders of record of
shares of Compu-DAWN Common Stock or Compu-DAWN Preferred Stock shall not be
paid to the holders of such certificates, but in the case of each such
certificate which shall be so surrendered, subject to the provisions of the
Escrow Agreement: (i) there shall be paid, upon such surrender, to the record
holder of the certificate for shares of Compu-DAWN Common Stock or Compu-DAWN
Preferred Stock, as the case may be, issued in exchange therefor, the full
amount, without any interest thereon, of the dividends and any other
distributions (including, without limitation, any shares issued in connection
with stock split-ups or other recapitalizations) referred to above which
theretofore became payable with respect to the number of shares of Compu-DAWN
Common Stock or Compu-DAWN Preferred Stock, as the case may be, represented by
such certificate; and (ii) there shall be paid to such record holder, on the
payment date therefor, the amount of any such dividend or other distribution
with respect to such number of shares, if the record date for the determination
of the stockholders entitled to such dividend or other distribution shall be
prior to the surrender of such certificate but the payment date of such dividend
shall be subsequent to such surrender.
(i) Promptly after the Effective Time, Compu-DAWN's transfer agent
shall mail to each holder of certificates that immediately prior to the
Effective Time represented Rugby Common Stock a form of letter of transmittal
and instructions for use in surrendering such certificates and receiving the
applicable Compu-DAWN Securities in exchange therefor.
(j) No holder of the Rugby Common Stock shall have any of the rights of
a stockholder of Compu-DAWN (i) with respect to the Compu-DAWN Securities, other
than the shares of Compu- DAWN Performance Stock, to be issued in the Merger,
until the Effective Time, or (ii) with respect to the shares of Compu-DAWN
Performance Stock, until the Entitlement Date, subject to the terms hereof.
5
<PAGE>
2.4 Effect of Merger.
(a) Except as herein otherwise specifically set forth, the identity,
existence, purposes, powers, franchises, rights and immunities of Rugby shall
continue unaffected and unimpaired by the Merger, and the corporate identity,
existence, purposes, powers, franchises and immunities of RAC shall be merged
into Rugby, and Rugby, as the Surviving Corporation and a wholly-owned
subsidiary of Compu-DAWN, shall be fully vested therewith. The separate
existence and corporate organization of RAC (except insofar as they may be
continued by statute) shall cease as of the Effective Time.
(b) At the Effective Time:
(i) All rights, privileges, goodwill, franchises and property,
real, personal and mixed, and all debts due on whatever account and all
other things in action, belonging to RAC shall be, and they hereby are,
bargained, conveyed, granted, confirmed, transferred, assigned and set
over to and vested in Rugby as the Surviving Corporation by operation
of law and without further act or deed, and all property and rights,
and all and every other interest of RAC shall be the property, rights
and interests of Rugby as the Surviving Corporation as they were of
RAC;
(ii) No action or proceeding, whether civil or criminal,
pending at the Effective Time by or against either RAC or Rugby, or any
shareholder, officer or director thereof, shall abate or be
discontinued by the Merger, but may be enforced, prosecuted, settled or
compromised as if the Merger had not occurred, or the Surviving
Corporation may be substituted in such action or proceeding in place of
RAC; and
(iii) All rights of employees and creditors and all liens upon
the property of RAC shall be preserved unimpaired, limited to the
property affected by such liens at the Effective Time, and all the
debts, liabilities and duties of RAC shall attach to Rugby as the
Surviving Corporation and shall be enforceable against the Surviving
Corporation to the same extent as if all such debts, liabilities and
duties had been incurred or contracted by it.
2.5 Further Assurances. RAC agrees that, from time to time, as and when
requested by the Surviving Corporation or by its successors and assigns, the
last acting officers of RAC or the cor responding officers of the Surviving
Corporation shall, in the name of RAC, execute and deliver, or cause to be
executed and delivered, at the sole expense of the Surviving Corporation, all
deeds, assignments and other instruments and shall take or cause to be taken all
such other and further actions as the Surviving Corporation may deem necessary
or appropriate in order more fully to vest in and confirm to the Surviving
Corporation title to and possession of all the property, rights, privileges,
immunities, powers, purposes, franchises and all and every other interest of RAC
referred to in Section 2.4 hereof and otherwise to carry out the intent and
purposes of this Agreement.
6
<PAGE>
2.6 Directors of Surviving Corporation. The persons comprising the Board of
Directors of the Surviving Corporation, who shall hold office from the Effective
Time in accordance with its ByLaws until the next annual meeting of shareholders
and until their respective successors shall have been elected and shall have
qualified, shall be the directors of Rugby immediately prior to the Effective
Time, subject to the terms hereof.
2.7 Officers of Surviving Corporation. The officers of the Surviving
Corporation, who shall hold office from the Effective Time in accordance with
its By-Laws until the next annual meeting of directors and until their
respective successors shall have been elected or appointed and shall have
qualified, shall be the officers of Rugby immediately prior to the Effective
Time, subject to the terms hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF RUGBY AND
THE RUGBY SHAREHOLDER
Rugby and the Rugby Shareholder, jointly and severally, make the
following representations and warranties to Compu-DAWN and RAC, each of which
shall be deemed material, and Compu- DAWN and RAC, in executing, delivering and
consummating this Agreement, have relied upon the correctness and completeness
of each of such representations and warranties:
3.1 Valid Existence; Qualification; Lottery Business.
(a) Rugby is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York. Rugby has the power to carry
on the Lottery Business and to own its assets. Rugby is not required to qualify
to conduct business as a foreign corporation in any jurisdiction in order to own
its assets or to carry on the Lottery Business, and there has not been any claim
by any jurisdiction to the effect that Rugby is required to qualify or otherwise
be authorized to do business as a foreign corporation therein. The copies of
Rugby's Certificate of Incorporation, as amended to date (certified by the
Secretary of State of the State of New York), and Rugby's ByLaws, as amended to
date (certified by the Secretary of Rugby), which have been delivered to
Compu-DAWN, are true and complete copies of those documents as in effect on the
date hereof. The minute books of Rugby contain accurate records of all meetings
of its Board of Directors, any committees thereof and stockholders since its
incorporation, and accurately reflect all transactions referred to therein.
(b) Neither Rugby nor Press-Loto has engaged in any business activities
other than in connection with the Lottery Business.
3.2 Capitalization; Subsidiaries; Affiliated Entities.
(a) The authorized capital stock of Rugby consists of Two Hundred (200)
shares of
7
<PAGE>
Rugby Common Stock, no par value, all shares of which are presently issued and
outstanding. All of such issued and outstanding shares of Rugby Common Stock are
duly authorized, validly issued, fully paid and nonassessable and are held of
record by the Rugby Shareholder, free and clear of all Liens. Rugby is not
authorized to issue any capital stock other than the Rugby Common Stock, there
are no outstanding securities or evidences of indebtedness ("Derivative
Securities") of Rugby that are convertible into or exchangeable for any shares
of Rugby Common Stock and there are no outstanding subscriptions, options,
warrants, rights, calls or other commitments or agreements to which Rugby or the
Rugby Shareholder is a party or by which it or he is bound calling for the
issuance, transfer, sale or disposition of any shares of Rugby Common Stock or
Derivative Securities of Rugby. At the Closing, Compu-DAWN will acquire good and
marketable title to the Rugby Common Stock, free and clear of all Liens.
(b) Rugby has not made any investments in, and does not own, any of the
capital stock of, or any other equity or proprietary interest in, any other
Person, except that Rugby owns fifty percent (50%) of the equity (i.e., shares
of capital) of Press-Loto, free and clear of all Liens. Press- Loto is a company
with limited liability duly organized and in good standing under the laws of the
Russian Federation and has the power to carry on the Lottery Business and to own
its assets. Press- Loto is not required to qualify to do business as a foreign
business organization in any foreign jurisdiction in order to carry on the
Lottery Business or own its assets, and there has not been any claim by any
jurisdiction to the effect that Press-Loto is required to qualify or otherwise
be authorized to do business as a foreign business organization therein. All of
the outstanding shares of capital of Press-Loto are validly issued, fully paid
and nonassessable and owned by the Persons set forth on Schedule 3.2(a) attached
hereto in the number and percentage amounts set forth next to their respective
names and such shares of capital are free and clear of all Liens. There are no
outstanding securities or evidences of indebtedness convertible into or
exchangeable for shares of capital and there are no subscriptions, options,
warrants, rights, calls, or other commitments or agreements to which Press-Loto,
Rugby, the Rugby Shareholder or any of his affiliates is a party or by which he,
it or any of them is bound, calling for the issuance, transfer, sale or
disposition of any of the shares of capital or other securities of Press-Loto.
The copies of the Charter of the Company with Limited Liability (certified by
the State Registration Chamber, Ministry of Economics of the Russian
Federation), as amended to date, of Press-Loto along with a notarized accurate
English translation thereof, copies of which have heretofore been delivered to
Compu-DAWN, are true and complete copies of those documents as in effect on the
date hereof. The minute books of the founders and the board of directors of
Press-Loto contain accurate records of all meetings of its Members' Meeting,
shareholders and directors, respectively, since its date of establishment, and
accurately reflect all transactions referred to therein. A board of directors of
Press-Loto has been elected and the directors of Press-Loto continue to serve as
such. Except as set forth in Schedule 3.2(b) attached hereto, Press-Loto has not
made any investments in, and does not own, any of the capital stock of, or any
other equity or proprietary interest in, any other Person.
(c) Except as set forth on Schedule 3.2(c) attached hereto, and except
for Rugby, the Rugby Shareholder has not made any investments in, and does not
own, any of the capital stock of, or any other equity or proprietary interest
in, any other Person engaged in any business which is
8
<PAGE>
competitive with the Lottery Business.
3.3 Consents. Except as set forth on Schedule 3.3 attached hereto, no consent of
any Body or other Person is required to be received by or on the part of Rugby,
the Rugby Shareholder or Press- Loto to enable either Rugby or the Rugby
Shareholder to enter into and carry out this Agreement and the transactions
contemplated hereby, including, without limitation, the transfer to Compu-DAWN
of all of the right, title and interest in and to the Rugby Common Stock.
3.4 Authority; Binding Nature of Agreement.
(a) Rugby has the corporate power and authority to enter into this
Agreement and carry out its obligations hereunder. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by the Board of Directors of Rugby and by the Rugby
Shareholder as the sole shareholder of Rugby, and no other corporate proceedings
on the part of Rugby are necessary to authorize the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby.
(b) The Rugby Shareholder has the power and authority to enter into
this Agreement and to carry out his obligations hereunder.
(c) This Agreement constitutes the valid and binding obligation of each
of Rugby and the Rugby Shareholder and is enforceable against each of them in
accordance with its terms.
3.5 Financial Statements. The Rugby Financial Statements and Press-Loto
Financial Statements to be delivered to Compu-DAWN pursuant to Section 5.1(h)(i)
shall be true and com plete, (ii) shall be in accordance with the Books and
Records of Rugby and Press-Loto, respectively, and (iii) shall fairly present
the financial position of Rugby and Press-Loto as of the Rugby Balance Sheet
Date and Press-Loto Balance Sheet Date, respectively, and the results of their
respective operations for the year ended December 31, 1997. The Press-Loto
Financial Statements shall have been audited (as such term is used in Russia) by
ZAO Marillon Auditors (Ministry of Finance License No. 012980 issued on February
17, 1998), whose report thereon shall be included therein; provided, however,
that, in the event such audited Press-Loto Financial Statements shall not comply
with the requirements set forth in Section 7.5 hereof, the Press-Loto Financial
Statements shall be audited by a "Big Six" accounting firm or other firm
acceptable to Compu-DAWN. In such event, Compu-DAWN shall agree to pay the fees
of such second accounting firm (provided that it shall have approved the
selection of such firm in writing, such approval not to be unreasonably
withheld).
3.6 Liabilities.
(a) As at the Rugby Balance Sheet Date, Rugby had no Liabilities, other
than those Liabilities reflected or reserved against in the Rugby Balance Sheet,
and there was no basis for the assertion against Rugby of any Liability not so
reflected or reserved against therein.
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(b) As at the Press-Loto Balance Sheet Date, Press-Loto had no
Liabilities, other than those Liabilities reflected or reserved against in the
Press-Loto Balance Sheet, and there was no basis for the assertion against
Press-Loto of any Liability not so reflected or reserved against therein.
3.7 Actions Since the Balance Sheet Date. Except as otherwise expressly provided
or set forth in, or required by, this Agreement, or as set forth in Schedule 3.7
attached hereto, since the Rugby Balance Sheet Date and the Press-Loto Balance
Sheet Date, neither Rugby nor Press-Loto, respectively, has (i) incurred any
material Liability or other Liability not in the ordinary and usual course of
business and consistent with past practice, (ii) made any wage or salary
increases or granted any bonuses; (iii) mortgaged, pledged or subjected to any
Lien any of its assets, or permitted any of its assets to be subjected to any
Lien; (iv) sold, assigned or transferred any of its assets, except in the
ordinary and usual course of business consistent with past practice; (v) changed
its accounting methods, principles or practices; (vi) revalued any of its
assets, including, without limitation, writing down the value of inventory or
writing off notes or accounts receivable; (vii) incurred any damage, destruction
or loss (whether or not covered by insurance) adversely affecting its assets or
business which has had or could be reasonably expected to have a Material
Adverse Effect; (viii) canceled any indebtedness or waived or released any right
or claim; (ix) incurred any material adverse change in employee relations; (x)
amended, canceled or terminated any Contract or Permit or entered into any
Contract or Permit which was not in the ordinary and usual course of business
consistent with past practice; (xi) increased or changed its assumptions
underlying, or methods of calculating, any doubtful account contingency or other
reserves; (xii) paid, discharged or satisfied any Liabilities other than the
payment, discharge or satisfaction in the ordinary and usual course of business
of Liabilities set forth or reserved for on the Rugby Balance Sheet or
Press-Loto Balance Sheet, as the case may be, or thereafter incurred in the
ordinary and usual course of business consistent with past practice; (xiii) made
any capital expenditure, entered into any lease or incurred any obligation to
make any capital expenditure; (xiv) failed to pay or satisfy when due any
Liability; (xv) failed to carry on its business in the ordinary and usual
course, consistent with the past practice, so as to reasonably keep available
the services of its employees, and to preserve its assets and business and the
goodwill of its suppliers, customers, distributors and others having business
relations with it; (xvi) disposed of or allowed the lapse of any Proprietary
Rights or disclosed to any Person any Proprietary Rights not theretofore a
matter of public knowledge; (xvii) issued or sold, or agreed to issue or sell,
any of its capital stock or shares of capital, as the case may be, options,
warrants, rights or calls to purchase such stock or shares, any securities
convertible into or exchangeable for such capital stock, shares of capital or
other corporate securities, or effected any subdivision or other
recapitalization affecting its capital stock or shares of capital, as the case
may be; (xviii) declared, paid or set aside any dividends or other distributions
or payments on its capital stock or shares of capital, as the case may be, or
redeemed or repurchased, or agreed to redeem or repurchase, any shares of its
capital stock or shares of capital, as the case may be; (xix) made any loans or
advances to any Person, or assumed, guaranteed, endorsed or otherwise became
responsible for the obligations of any Person; (xx) incurred any indebtedness
for borrowed money (except as a result of its endorsement, for collection or
deposit, of negotiable instruments received in the ordinary and usual course of
business); or (xxi) other than this Agreement or the transactions contemplated
hereby, entered into any transaction or course of conduct not in the ordinary
and usual course of business and consistent with past practice.
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3.8 Adverse Developments. Since the Rugby Balance Sheet Date and Press-Loto
Balance Sheet Date, there has been no material adverse change in the assets,
business, operations (financial or otherwise), or prospects of Rugby or
Press-Loto, respectively, there has been no act or omission on the part of
Rugby, Press-Loto or others which would form the basis for the assertion against
Rugby or Press-Loto, respectively, of any material Liability, no other event has
occurred which could be reasonably expected to have a Material Adverse Effect
and neither Rugby nor the Rugby Shareholder knows of any development or
threatened development of a nature which could be reasonably expected to have a
Material Adverse Effect.
3.9 Taxes. All taxes, including, without limitation, income, property, sales,
use, utility, franchise, capital stock, excise, value added, employees'
withholding, social security and unemployment taxes imposed by the United
States, any state, locality or any foreign country including, without
limitation, the Russian Federation, and any and all political subdivisions
thereof and localities therein, or by any other taxing authority, which have or
may become due or payable by Rugby or Press-Loto and all interest and penalties
thereon, whether disputed or not, have been paid in full or adequately provided
for by reserves shown in the Books and Records; all deposits required by law to
be made by Rugby or Press-Loto with respect to estimated income, franchise and
employees' withholding taxes have been duly made; and all tax returns, including
estimated tax returns, required to be filed have been duly and timely filed. No
extension of time for the assessment of deficiencies for any year is in effect.
No deficiency notice is proposed, or, to the knowledge of either Rugby or the
Rugby Shareholder, threatened against Rugby or Press-Loto. The tax returns of
Rugby and Press-Loto have never been audited. No sales or use taxes are required
to be collected in connection with the operation of the Lottery Business or by
Rugby or Press-Loto.
3.10 Ownership of Assets; Interest in Assets.
3.10.1 Assets Generally. Each of Rugby and Press-Loto owns outright,
and has good and marketable title to, all of its assets (including all assets
reflected in the Rugby Balance Sheet and the Press-Loto Balance Sheet,
respectively, except as the same may have been disposed of in the ordinary and
usual course of business consistent with past practice since the Rugby Balance
Sheet Date and the Press-Loto Balance Sheet Date, respectively), free and clear
of all Liens. Without limiting the generality of the foregoing, Rugby is, or
prior to the Closing Date and any loans made pursuant to the Loan Agreement will
be, a party to the Contracts relating to the Lottery and briefly described in
Schedule 3.10.(a) attached hereto (the "Lottery Contracts"). Except for the
Lottery Contracts, no Contracts are required by Rugby or Press-Loto to organize,
implement, and operate the Lottery or otherwise conduct the Lottery Business.
Upon consummation of the transactions contemplated by this Agreement, each of
Rugby and Press-Loto will own its assets, free and clear of all Liens. Except as
set forth on Schedule 3.10 (b) attached hereto, the assets of Rugby and Press-
Loto are sufficient to permit them to organize, implement and operate the
Lottery or otherwise conduct the Lottery Business. Except as set forth on
Schedule 3.10(c) attached hereto, none of the assets of Rugby or Press-Loto are
subject to any restriction with regard to transferability. There are no
Contracts with any Person with respect to the acquisition of any of the assets
of Rugby or Press- Loto or any rights or interests therein.
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3.10.2 Interest in Assets. The Rugby Shareholder, directly or
indirectly, does not own or have any property or rights, tangible or intangible,
used in or related, directly or indirectly, to the Lottery Business, Rugby or
Press-Loto.
3.11 Insurance. Schedule 3.11 attached hereto sets forth a true and complete
list and brief description of all policies of fire, liability, political and
other forms of insurance held by Rugby and Press-Loto. Except as set forth in
Schedule 3.11, such policies are valid, outstanding and enforceable policies, as
to which premiums have been paid currently, are with reputable insurers believed
by each of Rugby and the Rugby Shareholder to be financially sound and are
consistent with the practices of similar concerns engaged in substantially
similar operations as those currently conducted, and currently contemplated by
the Parties to be conducted, by Rugby and Press-Loto. Except as set forth in
Schedule 3.11, there exists no state of facts, and no event has occurred, which
might reasonably (i) form the basis for any claim against Rugby or Press-Loto
not fully covered by insurance for liability on account of any express or
implied warranty or tortious omission or commission, or (ii) result in any
material increase in insurance premiums.
3.12 Litigation; Compliance with Law. There are no Actions relating to Rugby or
Press-Loto or any of their respective assets or business or the Lottery, the
Lottery License or the Lottery Business pending or, to the knowledge of each of
Rugby and the Rugby Shareholder, threatened, or any order, injunction, award or
decree outstanding, against Rugby or Press-Loto or against or relating to any of
their respective assets or business or the Lottery or the Lottery License; and
there exists no basis for any such Action. Neither Rugby nor Press-Loto is in
violation of any law, regulation, ordinance, order, injunction, decree, award,
or other requirement of any governmental or other regulatory Body, court or
arbitrator relating to its assets, the Lottery, the Lottery License or the
Lottery Business.
3.13 Real Property. Except as set forth on Schedule 3.13 attached hereto,
neither Rugby nor Press-Loto owns or leases, or uses under license or the like,
any real property.
3.14 Agreements and Obligations; Performance. Except for the Lottery Contracts
or as listed and briefly described in Schedule 3.14 attached hereto
(collectively with the Lottery Contracts, the "Rugby/Press-Loto Listed
Agreements"), neither Rugby nor Press-Loto is a party to, or bound by, any: (i)
Contract which involves aggregate payments or receipts in excess of $5,000 that
cannot be terminated at will without penalty or premium or any continuing
Liability; (ii) Contract of any kind with the Rugby Shareholder, any officer,
director, or employee of Rugby or any shareholder, officer, director or employee
of Press-Loto; (iii) Contract which is violation of applicable law; (iv)
Contract for the purchase, sale or lease of any materials, products, supplies or
services which contains, or which commits or will commit it for, a fixed term;
(v) Contract of employment not terminable at will without penalty or premium or
any continuing Liability; (vi) deferred compensation, bonus or incentive plan or
Contract not cancelable at will without penalty or premium or any continuing
obligation or Liability; (vii) management or consulting Contract not terminable
at will without penalty or premium or any continuing Liability; (viii) license
or royalty Contract; (ix) Contract relating to indebtedness for borrowed money;
(x) union or other collective bargaining Contract; (xi)
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Contract which, by its terms, requires the consent of any party thereto to the
consummation of the transactions contemplated hereby; (xii) Contract containing
covenants limiting the freedom of Rugby or Press-Loto, or any officer or
employee thereof, or the Rugby Shareholder, to engage or compete in any line of
business, or with any Person, in any geographical area; (xiii) Contract or
option relating to the acquisition or sale of any business; (xiv) voting
agreement or similar Contract; (xv) option for the purchase of any asset,
tangible or intangible; (xvi) franchise, license or advertising Contract; (xvii)
Contract with the United States government, any state, local or foreign
government, including, without limitation, the Russian Federation, or any
political subdivision, agency or department thereof; or (xviii) other Contract
which materially affects any of their assets or the Lottery, the Lottery License
or the Lottery Business, whether directly or indirectly, or which was entered
into other than in the ordinary and usual course of business consistent with
past practice. A true and correct copy of each of the written Rugby/Press-Loto
Listed Agreements has been delivered, or made available, to Compu-DAWN. The
Rugby/Press-Loto Listed Agreements are valid, in full force and effect and are
enforceable by Rugby or Press-Loto, as the case may be, in accordance with the
terms thereof. Rugby and Press-Loto have in all material respects each performed
all obligations required to be performed by it to date under all of the
Rugby/Press-Loto Listed Agreements, is not in Default under any of the
Rugby/Press-Loto Listed Agreements and has received no notice of any dispute,
Default or alleged Default thereunder which has not heretofore been cured or
which notice has not heretofore been withdrawn. Neither Rugby nor the Rugby
Shareholder knows of any Default under any of the Rugby/Press-Loto Listed
Agreements by any other party thereto or by any other Person bound thereunder.
3.15 Condition of Assets. All machinery, equipment, vehicles and other assets
used by Rugby or Press-Loto in the conduct of the Lottery Business are in good
operating condition, ordinary wear and tear excepted.
3.16 Permits and Licenses. Schedule 3.16 attached hereto sets forth a true and
complete list of all Permits from all Bodies held by Rugby and/or Press-Loto.
Each of Rugby and Press-Loto has all Permits of all Bodies required to carry on
the Lottery Business; all such Permits are in full force and effect, and, to the
knowledge of each of Rugby and the Rugby Shareholder, no suspension or
cancellation of any of such Permits is threatened; each of Rugby and Press-Loto
is in compliance in all material respects with all requirements, standards and
procedures of the Bodies which have issued such Permits. The Lottery License is
effective until the License Expiration Date; and each of Rugby and the Rugby
Shareholder reasonably believes that the Government Decree will remain in full
force and effect and the Lottery License will be extended for successive periods
of at least two (2) years each commencing from the License Expiration Date
unless the Lottery has been improperly operated. Neither Rugby nor the Rugby
Shareholder has any reason to believe that the Government Decree will be
canceled, repealed, superseded, modified, amended or changed in any way which
would have a Material Adverse Effect on Press-Loto or Rugby. Except as set forth
on Schedule 3.16, no notice to, declaration, filing or registration with, or
Permit from, any Body or any other Person is required to be made or obtained by
Rugby or the Rugby Shareholder in connection with the execution, delivery or
performance of this Agreement and the consummation of the transactions
contemplated hereby.
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3.17 Occupational Heath and Safety and Environmental Matters. The operations of
the Lottery Business do not, and will not, require, and neither Rugby nor
Press-Loto has any Permits from any Bodies relating to occupational health and
safety or environmental matters to lawfully conduct the Lottery Business. There
is no litigation, investigation or other proceeding pending or, to the knowledge
of each of Rugby and the Rugby Shareholder, threatened or known to be
contemplated by any Body in respect of or relating to the Lottery Business or
the assets of Rugby or Press-Loto with respect to occupational health and safety
or environmental matters. All operations of the Lottery Business have been
conducted in compliance with all, and neither Rugby nor Press-Loto is liable in
any respect for any violation of any, applicable United States federal, state,
local or foreign laws or regulations, including, without limitation, those of
the Russian Federation and its political subdivisions, pertaining to
occupational health and safety and environmental matters, including, without
limitation, those relating to the emission, discharge, storage, release or
disposal of Materials of Environmental Concern into ambient air, surface water,
ground water or land surface or sub-surface strata or otherwise relating to the
manufacture, processing, distribution, use, handling, disposal or transport of
Materials of Environmental Concern. Neither Rugby nor the Rugby Shareholder has
received any notice of a possible claim or citation against or in respect of any
real property owned or leased by Rugby or Press-Loto, or with regard to their
respective assets or the Lottery Business, relating to occupational health and
safety or environmental matters and neither Rugby nor the Rugby Shareholder is
aware of any basis for any such Action.
3.18 Intellectual Property. Schedule 3.18(a) sets forth a true and complete list
and brief description of all Proprietary Rights which are owned by each of Rugby
and Press-Loto or in which, or with regard to which, it has any right or
interest (including, without limitation, the identity of Rugby or Press-Loto,
each application number, serial number or registration number, the class of
goods or services covered and the expiration date for each country in which
Proprietary Right has been registered). Except as set forth in Schedule 3.18(b),
no other Person has any proprietary or other interest in any such Proprietary
Rights and neither Rugby nor Press-Loto is a party to or bound by any Contract
requiring the payment to any Person of any royalty. Neither Rugby nor Press-Loto
is infringing upon any Proprietary Rights or otherwise is violating the rights
of any third party with respect thereto, and no proceedings have been
instituted, and no claim has been received by Rugby, and neither Rugby nor the
Rugby Shareholder is aware of any claim, alleging any such violation. There are
no pending applications with regard to any Proprietary Right. Rugby and
Press-Loto have each taken all reasonable and prudent steps to protect the
Proprietary Rights from infringement by any other Person. No other Person (i)
has the right to use any Trademark of Rugby or Press-Loto either in identical
form or in such near resemblance thereto as to be likely, when applied to the
goods or services of any such Person, to cause confusion with such Trademarks or
to cause a mistake or to deceive, (ii) has notified Rugby or Press-Loto that it
is claiming any ownership of or right to use any Proprietary Rights, or (iii) to
the best of knowledge of each of Rugby and the Rugby Shareholder, is infringing
upon any Proprietary Rights in any way.
3.19 Compensation Information. Schedule 3.19 attached hereto contains a true and
complete list of the names and current salary rates of, bonus commitments to,
and other compensatory
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arrangements with, all officers and other persons employed and/or retained by
each of Rugby and Press-Loto.
3.20 Employee Benefit Plans.
(a) Rugby does not maintain and has never maintained, nor does Rugby
make or has ever made employer contributions with respect to its employees to,
any "pension" or "welfare" benefit plans (within the respective meanings of
sections 3(2) and 3(1) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and Rugby has no Liability in connection therewith or with
regard thereto.
(b) Press-Loto does not maintain and has never maintained, nor does
Press-Loto make or has ever made employer contributions with respect to its
employees to any pension or welfare benefit plans, and Press-Loto has no
Liability in connection therewith or with regard thereto, which would have a
Material Adverse Effect on Press-Loto or Rugby.
3.21 No Breach. Neither the execution and delivery of this Agreement nor
compliance by Rugby or the Rugby Shareholder with any of the provisions hereof
nor the consummation of the transactions contemplated hereby, will:
(a) violate or conflict with any provision of the Certificate of
Incorporation, By-Laws or other organizational document of Rugby or Press-Loto;
(b) violate or conflict with or, alone or with notice or the passage
of time, or both, result in the breach or termination of, or otherwise give any
party the right to terminate, or declare a Default under, the terms of any
Contract to which Rugby, the Rugby Shareholder or Press-Loto is a party or by
which any of them may be bound, or otherwise violate or conflict with any Permit
of any Body, including, without limitation, the Lottery License;
(c) result in the creation of any Lien upon any of the assets of
Rugby or Press-Loto;
(d) violate any judgment, order, injunction, decree or award against,
or binding upon, Rugby, the Rugby Shareholder or Press-Loto or upon any of the
assets of Rugby or Press-Loto; or
(e) violate any law or regulation of any jurisdiction relating to
Rugby, the Rugby Shareholder, Press-Loto or the Lottery Business.
3.22 Brokers. Except as set forth on Schedule 3.22 attached hereto, neither
Rugby nor the Rugby Shareholder has engaged, consented to, or authorized any
broker, finder, investment banker or other third party to act on its or his
behalf, directly or indirectly, as a broker or finder in connection with the
transactions contemplated by this Agreement. Schedule 3.22 describes the terms
of the agreement with any such broker or finder.
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3.23 Employment Relations. (a) Each of Rugby and Press-Loto is in compliance
with all United States federal, state, local, foreign, and other applicable
laws, rules and regulations respecting employment and employment practices,
terms and conditions of employment and wages and hours, including, without
limitation, laws, rules and regulations of the Russian Federation and its
political subdivisions, and has not engaged in any unfair labor practice which,
in any of the foregoing cases, could have a Material Adverse Effect; (b) there
is not pending, or, to the knowledge of each of Rugby and the Rugby Shareholder,
threatened, any unfair labor practice charge or complaint against Rugby or
Press-Loto by or before the United States federal National Labor Relations Board
or any comparable state, local or foreign agency or authority; (c) there is no
labor strike, dispute, slowdown or stoppage pending or, to the knowledge of each
of Rugby and the Rugby Shareholder, threatened against or involving Rugby or
Press-Loto; (d) neither Rugby nor the Rugby Shareholder is aware of any union
organization effort respecting the employees of Rugby or Press-Loto; (e) no
grievance which might have an adverse effect on Rugby or Press-Loto or the
conduct of the Lottery Business, nor any arbitration proceeding arising out of
or under any collective bargaining agreement, is pending and no claim therefor
has been asserted; (f) no litigation, arbitration, administrative proceeding or
governmental investigation is now pending, and, to the knowledge of each of
Rugby and the Rugby Shareholder, no Person has made any claim or has threatened
litigation, arbitration, administrative proceeding or governmental investigation
against, arising out of any law relating to discrimination against employees or
employment practices; (g) no collective bargaining agreement is currently being
negotiated by Rugby or Press-Loto; and (h) neither Rugby nor Press-Loto has
experienced any material labor difficulties during the last three (3) years.
There has not been, and neither Rugby nor the Rugby Shareholder anticipates, any
material adverse change in relations with employees of Rugby or Press-Loto as a
result of the announcement of the transactions contemplated by this Agreement.
Without limiting the foregoing, Rugby is in compliance with the Immigration
Reform and Control Act of 1986, as amended, and maintain a current Form I-9 as
required by such Act in the personnel file of each employee.
3.24 Prior Names and Addresses. Since inception, neither Rugby nor Press-Loto
has used any business name or had any business address other than its current
name and the business address or as set forth in Schedule 3.24.
3.25 Payments. Neither Rugby, the Rugby Shareholder nor Press-Loto has, directly
or indirectly, paid or delivered any fee, commission or other sum of money or
item or property, however characterized, to any finder, agent, client, customer,
supplier, government official or other Person, in the United States or any other
country in which the Lottery Business is or is contemplated to be conducted,
which is illegal under any federal, state or local laws of the United States
(including, without limitation, the U.S. Foreign Corrupt Practices Act) or such
other country.
3.26 Books and Records. Rugby and Press-Loto have made and kept (and given
Compu-DAWN access to) Books and Records and accounts, which, in reasonable
detail, accurately and fairly reflect the activities of Rugby, Press-Loto and
the Lottery Business. Neither Rugby nor Press-Loto has engaged in any material
transaction, maintained any bank account or used any corporate or company funds
in connection with its business and the Lottery Business except for
transactions, bank accounts and funds which have been and are reflected in the
normally maintained Books and Records of Rugby or Press-Loto.
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3.27 Recitals. The Recitals numbered 2 through 6 of this Agreement are true
and complete in all respects.
3.28 Proxy Statement. The information to be furnished by Rugby or the Rugby
Shareholder or its representatives for inclusion in Compu-DAWN's proxy
solicitation materials to be utilized in connection with the meeting to obtain
Stockholder Approval (the "Proxy Statement"),when furnished, and at all times to
and including the time of the stockholders' meeting convened to obtain
Stockholder Approval and adjournments thereof, if any, will not contain any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein contained not misleading.
3.29 [Intentionally Omitted]
3.30 Projections. Based upon other national lotteries, there is a reasonable
basis for the assumptions made in connection with, and as a basis for, the
financial projections which are attached hereto as Schedule 3.30.
3.31 Untrue or Omitted Facts. No representation, warranty or statement by Rugby
or the Rugby Shareholder in this Agreement contains any untrue statement of a
material fact, or omits to state a fact necessary in order to make such
representations, warranties or statements not materially misleading. Without
limiting the generality of the foregoing, there is no fact known to Rugby or the
Rugby Shareholder that has had, or which may be reasonably expected to have, a
Material Adverse Effect that has not been disclosed in this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPU-DAWN AND RAC
Compu-DAWN and RAC, jointly and severally, make the following
representations and warranties to Rugby and the Rugby Shareholder, each of which
shall be deemed material, and Rugby and the Rugby Shareholder, in executing,
delivering and consummating this Agreement, have relied upon the correctness and
completeness of each of such representations and warranties:
4.1 Valid Existence; Qualification. Compu-DAWN is a corporation validly existing
and in good standing under the laws of the State of Delaware. RAC is a
corporation validly existing and in good standing under the laws of the State of
New York. Each of Compu-DAWN and RAC has the power to carry on its business as
now conducted and to own its assets. Compu-DAWN is qualified to do business in
the State of New York, is not required to qualify in any other jurisdiction in
order to own its assets or carry on its business as now conducted, and there has
not been any claim by any other jurisdiction to the effect that Compu-DAWN is
required to qualify or otherwise be authorized to do business as a foreign
corporation therein. The copies of each of Compu-DAWN's and RAC's Certificate of
Incorporation, as amended to date (certified by the Secretaries of State of the
State of Delaware and New York, respectively) and By-Laws, as amended to date
(certified by
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the Secretaries of Compu-DAWN and RAC, respectively), which have been delivered
to Rugby and the Rugby Shareholder, are true and complete copies of those
documents as in effect on the date hereof.
4.2 Capitalization.
(a) The authorized capital stock of Compu-DAWN consists of twenty
million (20,000,000) shares of Common Stock, $.01 par value per share, of which
two million eight hundred thirty-four thousand two hundred twenty-nine
(2,834,229) shares are issued and outstanding, and one million (1,000,000)
shares of Preferred Stock, $.01 par value per share, none of which are issued
and outstanding. All of such issued and outstanding shares of Common Stock are
duly authorized, validly issued, fully paid and nonassessable. The shares of
Compu-DAWN Common Stock to be issued and delivered as contemplated by Article II
hereof will be duly and validly authorized and, when so issued and delivered,
will be duly and validly issued, fully paid and nonassessable. Except as set
forth on Schedule 4.2(a), there are no outstanding Derivative Securities of
Compu-DAWN that are convertible into or exchangeable for any shares of
Compu-DAWN Common Stock and there are no outstanding subscriptions, options,
warrants, rights, calls or other commitments or agreements to which Compu-DAWN
is a party or by which it is bound calling for the issuance, transfer, sale or
disposition of any shares of Compu-DAWN Common Stock or Derivative Securities.
(b) The authorized capital stock of RAC consist of 200 shares of
Common Stock, par value $.01 per share, all of which are issued and outstanding,
and duly authorized, validly issued, fully paid and nonassessable.
(c) Compu-DAWN has not made any investments in, and does not own, any
of the capital stock of, or any other equity interest in, any other Person.
4.3 Consents. Except for Stockholder Approval or as set forth on Schedule 4.3
attached hereto, no consent of any Body or other Person is required to be
received by or on the part of Compu- DAWN to enable it to enter into and carry
out this Agreement and the transactions contemplated hereby.
4.4 Corporate Authority; Binding Nature of Agreement. Each of Compu-DAWN and RAC
has the corporate power and authority to enter into this Agreement and carry out
their respective obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the Boards of Directors of Compu- DAWN and RAC and, except
for Stockholder Approval, and no other corporate proceedings on the part of
Compu-DAWN or RAC are necessary to authorize the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby. This
Agreement constitutes the valid and binding obligation of each of Compu-DAWN and
RAC and is enforceable in accordance with its terms.
4.5 SEC Reports. Compu-DAWN has previously delivered to Rugby and the Rugby
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Shareholder true and complete copies, including exhibits and, as applicable,
amendments thereto, of Compu-DAWN's Annual Report on Form 10-KSB for the year
ended December 31, 1997 (the "SEC Report"). The SEC Report, as of the date
thereof, did not contain any untrue statement of a material fact, or fail to
state any material fact required to be stated therein or necessary to make the
statements made therein not materially misleading.
4.6 Financial Statements. The Compu-DAWN Financial Statements contained in the
SEC Report (i) are true and complete, (ii) are in accordance with the Books and
Records of Compu- DAWN, (iii) fairly present the financial position of
Compu-DAWN as of the Compu-DAWN Balance Sheet Date, and the results of its
operations for the year ended December 31, 1997, (iv) were prepared in
conformity with United States generally accepted accounting principles
consistently applied throughout the periods covered thereby and (v) are in
conformity with Regulation S-B, promulgated by the SEC. The Compu-DAWN Financial
Statements contained in the SEC Report have been audited by Lazar Levine & Felix
LLP certified public accountants, whose report thereon is included therein.
4.7 Liabilities. As at the Compu-DAWN Balance Sheet Date, except as set forth in
the SEC Report, Compu-DAWN had no Liabilities, other than those Liabilities
reflected or reserved against in the Compu-DAWN Balance Sheet, and there was no
basis for the assertion against Compu- DAWN of any Liability not so reflected or
reserved against therein.
4.8 Actions Since the Balance Sheet Date. Except as otherwise expressly provided
or set forth in, or required by, this Agreement, or as set forth in Schedule 4.8
attached hereto, or as set forth in the SEC Report, since the Compu-DAWN Balance
Sheet Date, Compu-DAWN has not (i) incurred any material Liability or other
Liability not in the ordinary and usual course of business and consistent with
past practice, (ii) made any wage or salary increases or granted any bonuses;
(iii) mortgaged, pledged or subjected to any Lien any of its assets, or
permitted any of its assets to be subjected to any Lien; (iv) sold, assigned or
transferred any of its assets, except in the ordinary and usual course of
business consistent with past practice; (v) changed its accounting methods,
principles or practices; (vi) revalued any of its assets, including, without
limitation, writing down the value of inventory or writing off notes or accounts
receivable; (vii) incurred any damage, destruction or loss (whether or not
covered by insurance) adversely affecting its assets or business which has had
or could be reasonably expected to have a Material Adverse Effect; (viii)
canceled any indebtedness or waived or released any right or claim; (ix)
incurred any material adverse change in employee relations; (x) amended,
canceled or terminated any Contract or Permit or entered into any Contract or
Permit which was not in the ordinary and usual course of business consistent
with past practice; (xi) increased or changed its assumptions underlying, or
methods of calculating, any doubtful account contingency or other reserves;
(xii) paid, discharged or satisfied any Liabilities other than the payment,
discharge or satisfaction in the ordinary and usual course of business of
Liabilities set forth or reserved for on the Compu-DAWN Balance Sheet, as the
case may be, or thereafter incurred in the ordinary and usual course of business
consistent with past practice; (xiii) made any capital expenditure, entered into
any lease or incurred any obligation to make any capital expenditure; (xiv)
failed to pay or satisfy when due any Liability; (xv) failed to carry on its
business in the ordinary and
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usual course, consistent with the past practice, so as to reasonably keep
available the services of its employees, and to preserve its assets and business
and the goodwill of its suppliers, customers, distributors and others having
business relations with it; (xvi) disposed of or allowed the lapse of any
Proprietary Rights or disclosed to any Person any Proprietary Rights not
theretofore a matter of public knowledge; (xvii) issued or sold, or agreed to
issue or sell, any of its capital stock, options, warrants, rights or calls to
purchase such stock, any securities convertible into or exchangeable for such
capital stock or other corporate securities, or effected any subdivision or
other recapitalization affecting its capital stock; (xviii) declared, paid or
set aside any dividends or other distributions or payments on its capital stock,
or redeemed or repurchased, or agreed to redeem or repurchase, any shares of its
capital stock; (xix) made any loans or advances to any Person, or assumed,
guaranteed, endorsed or otherwise became responsible for the obligations of any
Person; (xx) incurred any indebtedness for borrowed money (except as a result of
its endorsement, for collection or deposit, of negotiable instruments received
in the ordinary and usual course of business); or (xxi) other than this
Agreement or the transactions contemplated hereby, entered into any transaction
or course of conduct not in the ordinary and usual course of business and
consistent with past practice.
4.9 Adverse Developments. Except as set forth in the SEC Report, since the
Compu-DAWN Balance Sheet Date, there has been no material adverse change in the
assets, business, operations (financial or otherwise), or prospects of
Compu-DAWN, there has been no act or omission on the part of Compu-DAWN or
others which would form the basis for the assertion against Compu- DAWN, of any
material Liability, no other event has occurred which could be reasonably
expected to have a Material Adverse Effect and Compu-DAWN does not know of any
development or threatened development of a nature which could be reasonably
expected to have a Material Adverse Effect.
4.10 Taxes. All taxes, including, without limitation, income, property, sales,
use, utility, franchise, capital stock, excise, value added, employees'
withholding, social security and unemployment taxes imposed by the United
States, any state, locality or any foreign country, or by any other taxing
authority, which have or may become due or payable by Compu-DAWN and all
interest and penalties thereon, whether disputed or not, have been paid in full
or adequately provided for by reserves shown in the Books and Records; all
deposits required by law to be made by Compu- DAWN with respect to estimated
income, franchise and employees' withholding taxes have been duly made; and all
tax returns, including estimated tax returns, required to be filed have been
duly and timely filed. No extension of time for the assessment of deficiencies
for any year is in effect. No deficiency notice is proposed, or, to the
knowledge of Compu-DAWN, threatened against Compu-DAWN. Except as set forth on
Schedule 4.10, the tax returns of Compu-DAWN have never been audited.
4.11 Ownership of Assets Compu-DAWN owns outright, and has good and marketable
title to, all of its assets (including all assets reflected in the Compu-DAWN
Balance Sheet, except as the same may have been disposed of in the ordinary and
usual course of business consistent with past practice since the Compu-DAWN
Balance Sheet Date), free and clear of all Liens. Except as set forth in the SEC
Report, none of the assets of Compu-DAWN are subject to any restriction with
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regard to transferability. There are no Contracts with any Person with respect
to the acquisition of any of the assets of Compu-DAWN or any rights or interests
therein.
4.12 Insurance. Schedule 4.12 attached hereto sets forth a true and complete
list and brief description of all policies of fire, liability, political and
other forms of insurance held by Compu- DAWN. Except as set forth in Schedule
4.12, such policies are valid, outstanding and enforceable policies, as to which
premiums have been paid currently, are with reputable insurers believed by
Compu-DAWN to be financially sound and are consistent with the practices of
similar concerns engaged in substantially similar operations as those currently
conducted, and currently contemplated by the Parties to be conducted, by
Compu-DAWN. Except as set forth in Schedule 4.12, there exists no state of
facts, and no event has occurred, which might reasonably (i) form the basis for
any claim against Compu-DAWN not fully covered by insurance for liability on
account of any express or implied warranty or tortious omission or commission,
or (ii) result in any material increase in insurance premiums.
4.13 Litigation; Compliance with Law. There are no Actions relating to
Compu-DAWN or any of its assets or business, pending or, to the knowledge of
each of Compu-DAWN, threatened, or any order, injunction, award or decree
outstanding, against Compu-DAWN or against or relating to any of its assets or
business; and there exists no basis for any such Action. Compu-DAWN is not in
violation of any law, regulation, ordinance, order, injunction, decree, award,
or other requirement of any governmental or other regulatory Body, court or
arbitrator relating to its assets.
4.14 Real Property. Except as set forth on Schedule 4.14 attached hereto,
Compu-DAWN does not own or lease, or use under license or the like, any real
property.
4.15 Agreements and Obligations; Performance. Except for Contracts disclosed by
Compu- DAWN in the SEC Report and/or as exhibits thereto, or as listed and
briefly described in Schedule 4.15 attached hereto (the "Compu-DAWN Listed
Agreements"), Compu-DAWN is not a party to, or is not bound by, any: (i)
Contract which involves aggregate payments or receipts in excess of $5,000 that
cannot be terminated at will without penalty or premium or any continuing
Liability; (ii) Contract of any kind with the Compu-DAWN, any officer, director,
or employee of Rugby or any shareholder, officer, director or employee of
Compu-DAWN; (iii) Contract which is violation of applicable law; (iv) Contract
for the purchase, sale or lease of any materials, products, supplies or services
which contains, or which commits or will commit it for, a fixed term; (v)
Contract of employment not terminable at will without penalty or premium or any
continuing Liability; (vi) deferred compensation, bonus or incentive plan or
Contract not cancelable at will without penalty or premium or any continuing
obligation or Liability; (vii) management or consulting Contract not terminable
at will without penalty or premium or any continuing Liability; (viii) license
or royalty Contract; (ix) Contract relating to indebtedness for borrowed money;
(x) union or other collective bargaining Contract; (xi) Contract which, by its
terms, requires the consent of any party thereto to the consummation of the
transactions contemplated hereby; (xii) Contract containing covenants limiting
the freedom of Compu-DAWN, or any officer or employee thereof, to engage or
compete in any line of business, or with any Person, in any geographical area;
(xiii) Contract or option
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relating to the acquisition or sale of any business; (xiv) voting agreement or
similar Contract; (xv) option for the purchase of any asset, tangible or
intangible; (xvi) franchise, license or advertising Contract; (xvii) Contract
with the United States government, any state, local or foreign government, or
(xviii) other Contract which materially affects any of its assets, whether
directly or indirectly, or which was entered into other than in the ordinary and
usual course of business consistent with past practice. A true and correct copy
of each of the written Compu-DAWN Listed Agreements has been delivered, or made
available, to Rugby and the Rugby Shareholder. The Listed Agreements are valid,
in full force and effect and are enforceable by Compu-DAWN, as the case may be,
in accordance with the terms thereof. Compu-DAWN has in all material respects
each performed all obligations required to be performed by it to date under all
of the Listed Agreements, is not in Default under any of the Compu-DAWN Listed
Agreements and has received no notice of any dispute, Default or alleged Default
thereunder which has not heretofore been cured or which notice has not
heretofore been withdrawn. Compu-DAWN knows of no Default under any of the
Compu- DAWN Listed Agreements by any other party thereto or by any other Person
bound thereunder.
4.16 Occupational Heath and Safety and Environmental Matters. The current
operations of Compu-DAWN (the "Compu-DAWN Business") do not, and will not,
require, and Compu-DAWN has no, Permits from any Bodies relating to occupational
health and safety or environmental matters to lawfully conduct the Compu-DAWN
Business. There is no litigation, investigation or other proceeding pending or,
to the knowledge of Compu-DAWN, threatened or known to be contemplated by any
Body in respect of or relating to the Compu-DAWN Business or the assets of
Compu-DAWN with respect to occupational health and safety or environmental
matters. All operations of the Compu-DAWN Business have been conducted in
compliance with all, and Compu- DAWN is not liable in any respect for any
violation of any, applicable United States federal, state, local or foreign laws
or regulations, pertaining to occupational health and safety and environmental
matters, including, without limitation, those relating to the emission,
discharge, storage, release or disposal of Materials of Environmental Concern
into ambient air, surface water, ground water or land surface or sub-surface
strata or otherwise relating to the manufacture, processing, distribution, use,
handling, disposal or transport of Materials of Environmental Concern.
Compu-DAWN has not received any notice of a possible claim or citation against
or in respect of any real property leased by Compu-DAWN, or with regard to
assets or the Compu-DAWN Business, relating to occupational health and safety or
environmental matters and Compu-DAWN is not aware of any basis for any such
Action.
4.17 Intellectual Property. Schedule 4.17 attached hereto sets forth a true and
complete list and brief description of all Proprietary Rights which are owned by
Compu-DAWN or in which, or with regard to which, it has any right or interest
(including, without limitation, each application number, serial number or
registration number, the class of goods or services covered and the expiration
date for each country in which Proprietary Right has been registered). Except as
set forth in Schedule 4.17, no other Person has any proprietary or other
interest in any such Proprietary Rights and Compu-DAWN is not a party to or is
not bound by any Contract requiring the payment to any Person of any royalty.
Compu-DAWN is not infringing upon any Proprietary Rights or otherwise is
violating the rights of any third party with respect thereto, and no proceedings
have been instituted,
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and no claim has been received by Compu-DAWN, and Compu-DAWN is not aware of any
claim, alleging any such violation. There are no pending applications with
regard to any Proprietary Right. Compu-DAWN has taken all reasonable and prudent
steps to protect the Proprietary Rights from infringement by any other Person.
4.18 Compensation Information. Schedule 4.18 attached hereto contains a true and
complete list of the names and current salary rates of, bonus commitments to,
and other compensatory arrangements with, all persons who are currently named
executive officers in the Compu-DAWN's SEC Report.
4.19 Employee Benefit Plans. Compu-DAWN does not maintain and has never
maintained, nor does Compu-DAWN make or has ever made employer contributions
with respect to its employees to, any "pension" or "welfare" benefit plans
(within the respective meanings of sections 3(2) and 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and Rugby has no
Liability in connection therewith or with regard thereto.
4.20 No Breach. Except as set forth on Schedule 4.20 attached hereto, neither
the execution and delivery of this Agreement nor compliance by Compu-DAWN or RAC
with any of the provisions hereof nor the consummation of the transactions
contemplated hereby, will:
(a) violate or conflict with any provision of the Certifi-
cate of Incorporation or By-Laws of Compu-DAWN or RAC;
(b) violate or conflict with, or alone or with notice or
the passage of time, or both, result in the breach or termination of, or other-
wise give any party the right to terminate, or declare a Default under, the
terms of any Contract to which Compu-DAWN or RAC is a party or by which it may
be bound;
(c) result in the creation of any Lien upon any of the
assets of Compu-DAWN or
RAC;
(d) violate any judgment, order, injunction, decree or
award against, or binding upon, Compu-DAWN or RAC or upon any of their respec-
tive assets; or
(e) subject to the accuracy of the representations made by
the Rugby Shareholder in Article VI hereof, violate any law or regulation of any
jurisdiction relating to Compu-DAWN.
4.21 Brokers. Except as set forth on Schedule 4.21 attached hereto, neither
Compu-DAWN nor RAC has engaged, consented to, or authorized any broker, finder,
investment banker or other third party to act on its behalf, directly or
indirectly, as a broker or finder in connection with the transactions
contemplated by this Agreement. Schedule 4.21 describes the terms of the
agreement with any such broker or finder.
4.22 Employment Relations. (a) Compu-DAWN is in compliance with all United
States federal,
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state, local, foreign, and other applicable laws, rules and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours, and has not engaged in any unfair labor practice
which, in any of the foregoing cases, could have a Material Adverse Effect; (b)
there is not pending, or, to the knowledge of Compu-DAWN, threatened, any unfair
labor practice charge or complaint against Compu-DAWN by or before the United
States federal National Labor Relations Board or any comparable state, local or
foreign agency or authority; (c) thee is no labor strike, dispute, slowdown or
stoppage pending or, to the knowledge of Compu- DAWN, threatened against or
involving Compu-DAWN; (d) Compu-DAWN is not aware of any union organization
effort respecting the employees of Compu-DAWN; (e) no grievance which might have
an adverse effect on Compu-DAWN or the conduct of the Lottery Business, nor any
arbitration proceeding arising out of or under any collective bargaining
agreement, is pending and no claim therefor has been asserted; (f) no
litigation, arbitration, administrative proceeding or governmental investigation
is now pending, and, to the knowledge of Compu-DAWN, no Person has made any
claim or has threatened litigation, arbitration, administrative proceeding or
governmental investigation against, arising out of any law relating to
discrimination against employees or employment practices; (g) no collective
bargaining agreement is currently being negotiated by Compu-DAWN; and (h)
Compu-DAWN has not experienced any material labor difficulties during the last
three (3) years. There has not been, and Compu-DAWN does not anticipate any
material adverse change in relations with employees of Compu-DAWN as a result of
the announcement of the transactions contemplated by this Agreement. Without
limiting the foregoing, Compu-DAWN is in compliance with the Immigration Reform
and Control Act of 1986, as amended, and maintain a current Form I-9 as required
by such Act in the personnel file of each employee.
4.23 Prior Names and Addresses. Since inception, Compu-DAWN has not used any
business name or had any business address other than its current name and the
business address except as set forth on Schedule 4.23 attached hereto.
4.24 Payments. Compu-DAWN has not directly or indirectly, paid or delivered any
fee, commission or other sum of money or item or property, however
characterized, to any finder, agent, client, customer, supplier, government
official or other Person, in the United States or any other country, which is
illegal under any federal, state or local laws of the United States (including,
without limitation, the U.S. Foreign Corrupt Practices Act) or such other
country.
4.25 Books and Records. Compu-DAWN has made and kept (and given Rugby and the
Rugby Shareholder access to) Books and Records and accounts, which, in
reasonable detail, accurately and fairly reflect the activities of Compu-DAWN.
Compu-DAWN has not engaged in any material transaction, maintained any bank
account or used any corporate or company funds in connection with its business
except for transactions, bank accounts and funds which have been and are
reflected in the normally maintained Books and Records of Compu-DAWN.
4.26 Untrue or Omitted Facts. No representation, warranty or statement by
Compu-DAWN in this Agreement contains any untrue statement of a material fact,
or omits to state a fact necessary in order to make such representations,
warranties or statements not materially misleading. Without
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limiting the generality of the foregoing, there is no fact known to Compu-DAWN
that has had, or which may be reasonably expected to have, a Material Adverse
Effect that has not been disclosed in this Agreement.
ARTICLE V
PRE-CLOSING COVENANTS
5.1 Rugby and Rugby Shareholder Covenants. Rugby and the Rugby Shareholder,
jointly and severally, hereby covenant that, from and after the date hereof and
until the Closing or earlier termination of this Agreement:
(a) Access. Rugby shall, the Rugby Shareholder shall cause Rugby
to, and Rugby and the Rugby Shareholder shall cause Press-Loto to,
afford to the officers, attorneys, accountants and other authorized
representatives of Compu-DAWN free and full access, during regular
business hours and upon reasonable notice, to all of their Books and
Records, personnel and properties so that Compu-DAWN, at its own
expense, may have full opportunity to make such review, examination
and investigation as Compu-DAWN may desire of Rugby, Press-Loto and
the Lottery Business. Rugby and the Rugby Shareholder shall cause the
employees, accountants, attorneys and other agents and representatives
of Rugby and Press-Loto to cooperate fully with said review,
examination and investigation and to make full disclosure to
Compu-DAWN and its representatives of all material facts affecting
Rugby, Press-Loto and the Lottery Business. Rugby and the Rugby
Shareholder acknowledge and agree that no review, examination or
investigation heretofore or hereafter undertaken by Compu-DAWN or its
representatives shall limit or affect any representation or warranty
made by Rugby or the Rugby Shareholder in, or otherwise relieve Rugby
or the Rugby Shareholder from any liability under, this Agreement.
(b) Conduct of Business. Rugby shall, the Rugby Shareholder shall
cause Rugby to, and Rugby and the Rugby Shareholder shall cause
Press-Loto to, conduct the Lottery Business only in the ordinary and
usual course (and not engage in any business other than the Lottery
Business) and shall make no change in any of its business practices
and policies without the prior written consent of Compu-DAWN. Without
limiting the generality of the foregoing, and except as otherwise
expressly provided in this Agreement, prior to the Closing, Rugby
shall not, the Rugby Shareholder shall not cause or permit Rugby to,
and Rugby and the Rugby Shareholder shall not cause or permit
Press-Loto to, without the prior written consent of Compu-DAWN:
(i) amend its Certificate of Incorporation, By- Laws,
Charter of the Company with Limited Liability or other
organizational document, as applicable;
(ii) enter into, adopt or amend any bonus, profit sharing,
compensation, severance, termination, stock option, stock
appreciation right, restricted stock, performance unit, stock
equivalent, stock purchase, pension, retirement, deferred
compensation, employment,
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severance or other employee benefit Contract, trust, plan, fund
or other arrangement for the benefit or welfare of any director,
officer, manager or employee, or (except for normal increases in
the ordinary and usual course of business consistent with past
practice that, in the aggregate, do not result in a material
increase in benefits or compensation expense to Rugby) increase
in any manner the compensation or fringe benefits of any
director, officer, manager or employee or pay any benefit not
required by any plan and arrangement as in effect as of the date
hereof;
(iii) acquire, sell, lease or dispose of any assets outside
the ordinary course of business consistent with past practice or
any assets which in the aggregate are material to the Lottery
Business (except that Rugby may acquire or lease assets in
accordance with the Budget);
(iv) acquire (by merger, consolidation, or acquisition of
stock or assets) any corporation, partnership or other business
organization or division thereof;
(v) issue any securities or Derivative Securities or
options, warrants or other rights providing for the issuance of
any securities of Rugby or Press-Loto;
(vi) take any other action outside the ordinary and usual
course of business consistent with past practice; or
(vii) adopt any resolution, or enter into or amend any
Contract, with respect to any of the foregoing.
(c) Insurance. Rugby shall, the Rugby Shareholder shall cause
Rugby to, and Rugby and the Rugby Shareholder shall cause Press-Loto
to, obtain, and maintain in force, political risk insurance in the
amount of at least $1,000,000, from a reputable insurance company
reasonably satisfactory to Compu-DAWN, and maintain in force the
insurance policies listed in Schedule 3.11, except to the extent that
they may be replaced with equivalent policies at the same or lower
rates approved by Compu-DAWN. If, in Compu-DAWN's opinion, additional
coverage is necessary to keep adequately insured the properties of
Rugby and/or Press-Loto, Rugby shall, the Rugby Shareholder shall
cause Rugby to, and Rugby and the Rugby Shareholder shall cause
Press-Loto to, obtain (to the extent available) such additional
insurance, at Compu-DAWN's expense, from financially sound and
reputable insurers for a period ending no sooner than the close of
business on the Closing Date; provided that, if the Closing shall fail
to occur, Rugby shall, the Rugby Shareholder shall cause Rugby to, and
Rugby and the Rugby Shareholder shall cause Press-Loto to, promptly
cancel such policies for additional insurance and return to Compu-DAWN
any refunds of premiums paid by Compu-DAWN on account thereof.
(d) Liabilities. Rugby shall not, the Rugby Shareholder shall not
cause or permit Rugby to, and Rugby and the Rugby Shareholder shall
not cause or permit Press-Loto to, incur any Liability, except for
those incurred in the ordinary and usual course of business consistent
with past practice, without the prior written consent of Compu-DAWN;
and Rugby shall not, the Rugby Shareholder shall not cause or permit
Rugby to, and Rugby and the Rugby Shareholder shall not
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cause or permit Press-Loto to, pay any Liability other than: (i) the
foregoing Liabilities; (ii) Liabilities set forth in the Rugby Balance
Sheet or Press-Loto Balance Sheet, as the case may be; (iii)
Liabilities arising after the Rugby Balance Sheet Date or Press-Loto
Balance Sheet Date in the ordinary and usual course of business
consistent with past practice; and (iv) Liabilities with respect to
which Rugby shall have received the prior written consent of
Compu-DAWN.
(e) Preservation of Business. Rugby shall, the Rugby Shareholder
shall cause Rugby to, and Rugby and the Rugby Shareholder shall cause
Press-Loto to, use its best efforts to preserve intact its business
organization and keep available the services of its present officers,
managers, employees and consultants, maintain good relationships with
customers and suppliers and preserve its goodwill.
(f) No Breach.
(i) Rugby and the Rugby Shareholder will each (A) use its or
his best efforts to assure that all of its or his representations
and warranties contained herein are true and correct as of the
Closing as if repeated at and as of such time, that no Default
shall occur with respect to any of its or his covenants,
representations or warranties contained herein that has not been
cured by the Closing and that all conditions to the obligation of
Compu-DAWN and RAC to enter into and complete the Closing are
satisfied in a timely manner; (B) not voluntarily take any action
or do anything which will cause a Default respecting such
covenants, representations or warranties or would impede the
satisfaction of such conditions; and (C) promptly notify
Compu-DAWN of any event or fact which represents or is likely to
cause such a Default or result in such an impediment.
(ii) Without limiting the generality of the foregoing, each
of Rugby and the Rugby Shareholder agrees to use its or his best
efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things reasonably necessary, proper or
advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement.
(g) Consents. Promptly following the execution of this Agreement,
each of Rugby and the Rugby Shareholder will use its or his best
efforts to, the Rugby Shareholder will cause Rugby to use its best
efforts to, and Rugby and the Rugby Shareholder will cause Press-Loto
to use its best efforts to, obtain consents of all Bodies and other
Persons necessary for the consummation of the transactions
contemplated by this Agreement.
(h) Financial Statements. (i) Rugby will, and the Rugby
Shareholder will cause Rugby to, provide to Compu-DAWN the Rugby
Financial Statements, and Rugby and the Rugby Shareholder will cause
Press-Loto to provide to Compu-DAWN the Press-Loto Financial
Statements; (ii) Rugby will, the Rugby Shareholder will cause Rugby
to, and Rugby and the Rugby Shareholder will cause Press-Loto to,
provide Compu-DAWN with such unaudited financial statements of, and
other financial information with respect to, Rugby and Press-Loto up
to and including the Closing Date as Compu-DAWN may reasonably
request.
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(i) No Negotiations. For so long as this Agreement shall remain
in effect, neither Rugby nor the Rugby Shareholder will, nor will the
Rugby Shareholder cause or permit Rugby to, nor will Rugby or the
Rugby Shareholder cause or permit Press-Loto to, directly or
indirectly, (a) solicit or initiate discussions or engage in
negotiations with any Person ("Potential Offeror") (whether such
negotiations are initiated by them or otherwise), other than
Compu-DAWN, with respect to the possible acquisition, financing or
change of control of Rugby or Press-Loto, whether by way of merger,
acquisition of stock, acquisition of assets, or otherwise (a
"Potential Transaction"); (b) provide any information with respect to
Rugby, Press-Loto or the Lottery Business to any Person, other than
Compu-DAWN, in connection with a Potential Transaction; (c) enter into
any Contract with any Person, other than Compu-DAWN, concerning or
relating to a Potential Transaction; or (d) act in any way in response
to a Potential Transaction. If Rugby or the Rugby Shareholder
receives, or has knowledge that Press-Loto has received, any
unsolicited offer or proposal to enter into negotiations relating to a
Potential Transaction, it or he shall immediately notify Compu-DAWN of
such fact and shall return, or cause to be returned, any such written
offer to such Potential Offeror.
(j) No Consent as Press-Loto Shareholder. Rugby shall not, and
the Rugby Shareholder will not cause or permit Rugby to, consent to
the issuance by Press-Loto of shares of capital or any other equity or
proprietary interest, pursuant to the Press-Loto Shareholders'
Agreement described in Section 7.15(a) hereof or otherwise, without
the prior written consent of Compu-DAWN.
(k) Lottery Contracts. To the extent Rugby has not entered into
any of the Lottery Contracts as of the date hereof, Rugby shall, and
the Rugby Shareholder shall cause Rugby to, enter into the Lottery
Contracts within the time provided in Section 3.10.1 hereof.
5.2 Compu-DAWN Covenants. Compu-DAWN hereby covenants that, from and after the
date hereof and until the Closing or earlier termination of this Agreement:
(a) Access. Compu-DAWN shall afford to the officers, attorneys,
accountants and other authorized representatives of Rugby free and
full access, during regular business hours and upon reasonable notice,
to all of its Books and Records, personnel and properties so that
Rugby, at its own expense, may have full opportunity to make such
review, examination and investigation as it may desire of Compu-DAWN
and its business. Compu-DAWN will cause its employees, accountants,
attorneys and other agents and representatives to cooperate fully with
said review, examination and investigation and to make full disclosure
to Rugby and its representatives of all material facts affecting its
business. Compu-DAWN acknowledges and agrees that no review,
examination or investigation heretofore or hereafter undertaken by
Rugby or its representatives shall limit or affect any representation
or warranty made by Compu-DAWN in, or otherwise relieve Compu-DAWN
from any liability under, this Agreement.
(b) Conduct of Business. Compu-DAWN will conduct its business
only in the ordinary and usual course and make no change in any of its
business practices and policies without
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the prior written consent of Rugby, except with respect to the Loan
Agreement, operations relating to the Lottery Business and as
otherwise provided in this Agreement. Without limiting the generality
of the foregoing, and except as otherwise expressly provided in this
Agreement or in Schedule 5.2 attached hereto, prior to the Closing,
Compu-DAWN will not, without the prior written consent of Rugby:
(i) amend its Certificate of Incorporation and/or By-Laws;
(ii) enter into, adopt or amend any bonus, profit sharing,
compensation, severance, termination, stock option, stock
appreciation right, restricted stock, performance unit, stock
equivalent, stock purchase, pension, retirement, deferred
compensation, employment, severance or other employee benefit
Contract, trust, plan, fund or other arrangement for the benefit
or welfare of any director, officer or employee, or (except for
normal increases in the ordinary and usual course of business
consistent with past practice that, in the aggregate, do not
result in a material increase in benefits or compensation expense
to Compu-DAWN) increase in any manner the compensation or fringe
benefits of any director, officer or employee or pay any benefit
not required by any plan and arrangement as in effect as of the
date hereof;
(iii) acquire, sell, lease or dispose of any assets outside
the ordinary and usual course of business consistent with past
practice or any assets which in the aggregate are material to
Compu-DAWN;
(iv) acquire (by merger, consolidation, or acquisition of
stock or assets) any corporation, partnership or other business
organization or division thereof;
(v) issue any securities or Derivative Securities or
options, warrants or other rights providing for the issuance of
any securities of Compu-DAWN except that Compu-DAWN may (I) issue
shares of Common Stock pursuant to outstanding options and
warrants, (II) grant options and/or warrants for the purchase of
up to 100,000 shares of Compu-DAWN Common Stock (provided that
the exercise price thereof is at least equal to fair market
value, as such term is defined in Compu-DAWN's 1996 Stock Option
Plan, at the time of grant) and (III) issue shares of Compu- DAWN
Common Stock pursuant to such options and warrants;
(vi) take any other action outside the ordinary and usual
course of business consistent with past practice; or
(vii) adopt any resolution, or enter into or amend any
Contract, with respect to any of the foregoing.
(c) Preservation of Business. Except as contemplated by this
Agreement, Compu-DAWN will use its best efforts to preserve intact its
business organization and keep available the services of its present
officers, employees and consultants, maintain good relationships with
customers and suppliers and preserve its goodwill.
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(d) No Breach.
(i) Compu-DAWN will (A) use its best efforts to assure that
all of its represen tations and warranties contained herein are
true and correct as of the Closing as if repeated at and as of
such time, that no Default shall occur with respect to any of its
covenants, representations or warranties contained herein that
has not been cured by the Closing and that all conditions to the
obligation of Rugby and the Rugby Shareholder to enter into and
complete the Closing are satisfied in a timely manner; (B) not
voluntarily take any action or do anything which will cause a
Default respecting such covenants, representations or warranties
or would impede the satisfaction of such conditions; and (C)
promptly notify Rugby and the Rugby Shareholders of any event or
fact which represents or is likely to cause such a Default or
result in such an impediment.
(ii) Without limiting the generality of the foregoing,
Compu-DAWN agrees to use its best efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, all things
reasonably necessary, proper or advisable under applicable laws
and regulations to consummate and make effective the transactions
contemplated by this Agreement by Compu-DAWN and RAC.
(e) Consents. Promptly following the execution of this Agreement,
Compu- DAWN will use its best efforts to obtain consents of all Bodies
and other Persons necessary for the consummation of the transactions
contemplated by this Agreement.
ARTICLE VI
ACQUISITION OF SHARES
6.1 Investment Intent; Qualification as Purchaser
(a) The Rugby Shareholder represents and warrants that the
Compu-DAWN Securities to be acquired pursuant to the terms hereof are
being acquired for his own account, for investment purposes and not
with a view to the distribution thereof. The Rugby Shareholder agrees
that he will not sell, assign, transfer, encumber or otherwise dispose
of any of the Compu-DAWN Securities unless (i) a registration
statement under the Securities Act with respect thereto is in effect
and the prospectus included therein meets the requirements of Section
10 of the Securities Act, or (ii) Compu-DAWN has received a written
opinion of its counsel that, after an investigation of the relevant
facts, such counsel is of the opinion that such proposed sale,
assignment, transfer, encumbrance or disposition does not require
registration under the Securities Act.
(b) The Rugby Shareholder understands that the Compu-DAWN
Securities are not being registered under the Securities Act and must
be held indefinitely unless they are subsequently registered
thereunder or an exemption from such registration is available.
(c) The Rugby Shareholder represents and warrants that he and his
purchaser
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representative, if any, have reviewed the SEC Report, have been
furnished with all other materials relating to Compu-DAWN that they
have requested and have been afforded the opportunity to ask questions
of Compu-DAWN management with regard to the foregoing. The Rugby
Shareholder acknowledges and agrees that the materials furnished and
answers provided shall not be deemed to modify any representation or
warranty made by Compu-DAWN in this Agreement.
(d) The Rugby Shareholder represents and warrants further that
(i) he is either an "accredited investor," as such term is defined in
Rule 501(a) promulgated by the SEC under the Securities Act, or that
he, alone or with his purchaser representative, if any, has such
knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of the acquisition of the
Compu-DAWN Securities contemplated hereby; (ii) he is able to bear the
economic risk of an investment in the Compu-DAWN Securities,
including, without limitation, the risk of the loss of part or all of
his investment and the inability to sell or transfer the Compu-DAWN
Securities for an indefinite period of time; (iii) he has adequate
means of providing for current needs and contingencies and has no need
for liquidity in his investment in the Compu-DAWN Securities; and (iv)
he does not have an overall commitment to investments not readily
marketable that is excessive in proportion to his net worth and an
investment in the Compu-DAWN Securities will not cause such overall
commitment to become excessive. The Rugby Shareholder will execute and
deliver to Compu-DAWN such documents as Compu-DAWN may reasonably
request in order to confirm the accuracy of the foregoing.
(e) The Rugby Shareholder understands that (i) the Compu-DAWN
Securities are not being registered under the Securities Act on the
ground that the issuance thereof is exempt under Section 4(2) of the
Securities Act as a transaction by an issuer not involving any public
offering and (ii) Compu-DAWN's reliance on such exemption is
predicated in part on the foregoing representations and warranties of
the Rugby Shareholder.
6.2 Restrictive Legend. The Compu-DAWN Securities to be issued pursuant to the
Merger may not be sold, assigned, transferred, encumbered or disposed of unless
they are registered under the Securities Act or unless an exemption from such
registration is available. Accordingly, a restrictive legend in, or
substantially in, the following form will be placed on any instrument,
certificate or other document evidencing the Compu-DAWN Securities:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. These
securities have been acquired for investment and not for distribution
or resale. They may not be sold, assigned, mortgaged, pledged,
hypothecated or otherwise transferred or disposed of without an
effective registration statement for such securities under the
Securities Act of 1933, as amended, or an opinion of counsel for the
Company that registration is not required under such Act."
6.3 Certain Risk Factors. The Rugby Shareholder acknowledges that there are
significant risks relating to the acquisition of the Compu-DAWN Securities
including, without limitation, the risks described in the SEC Report.
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ARTICLE VII
CONDITIONS PRECEDENT TO THE
OBLIGATION OF COMPU-DAWN AND RAC TO CLOSE
The obligation of Compu-DAWN and RAC to consummate the transactions
contemplated hereby is subject to the fulfillment, prior to or at the Closing,
of each of the following conditions, any one or more of which may be waived by
Compu-DAWN (except when the fulfillment of such condition is a requirement of
law):
7.1 Representations and Warranties. All representations and warranties of Rugby
and the Rugby Shareholder contained in this Agreement and in any written
statement (including financial statements), exhibit, certificate, schedule or
other document delivered pursuant hereto shall be true and correct in all
material respects (except to the extent that any such representation and
warranty is already qualified as to materiality, in which case such
representation and warranty shall be true and correct without further
qualification) as at the Closing Date, as if made at the Closing and as of the
Closing Date, except if the Rugby Shareholder transfers any shares of Rugby
Common Stock to third persons, the certificate delivered by Rugby and the Rugby
Shareholders pursuant to Section 7.3 hereof shall also reaffirm the
representations in Section 3.2, qualified as to such transfers, and shall set
forth the names, addresses and number of shares of Rugby Common Stock held by
such persons as of the Closing Date.
7.2 Covenants. Each of Rugby and the Rugby Shareholder shall have performed and
complied in all material respects with all covenants and agreements required by
this Agreement to be performed or complied with by it or him prior to or at the
Closing.
7.3 Certificate. Compu-DAWN shall have received a certificate, dated the Closing
Date, signed by the Secretary of Rugby and the Rugby Shareholder, as to the
satisfaction of the conditions contained in Sections 7.1 and 7.2 hereof.
7.4 Stockholder Approval. Stockholder Approval shall have occurred.
7.5 Rugby and Press-Loto Financial Statements. Compu-DAWN shall have received
such historical audited and unaudited financial statements of Rugby and
Press-Loto (including, without limitation, the Rugby Financial Statements and
the Press-Loto Financial Statements) which shall have been prepared in
conformity with United States generally accepted accounting principals
consistently applied throughout the period covered thereby, shall be in
conformity with Regulation S-X promulgated by the SEC and shall be as required
by the rules and regulations of the SEC to be included by Compu-DAWN in a
Current Report on Form 8-K with regard to the transactions contemplated hereby,
including, without limitation, with respect to the audited Rugby Financial
Statements and audited Press-Loto Financial Statements, an unqualified report
thereon by certified public accountants and/or Russian equivalents who are
"independent" within the meaning ascribed to such term in Regulation S-X,
promulgated by the SEC and acceptable to thereunder. The Rugby
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Financial Statements and Press-Loto Financial Statements shall reflect, in the
aggregate, tangible assets of not less than One Thousand United States Dollars
(USD $1,000) and liabilities of not more than Fifty Thousand United States
Dollars (USD $50,000).
7.6 Employment Agreement. The Rugby Shareholder shall have executed and tendered
to Compu-DAWN an employment agreement in, or substantially in, the form attached
hereto as Exhibit 7.6 (the "Employment Agreement"), pursuant to which, among
other things, the Rugby Shareholder shall serve as the Chairman of the Board and
President of Compu-DAWN and the President of Rugby.
7.7 Restrictive Covenant Agreement. The Rugby Shareholder shall have executed
and tendered to Compu-DAWN a restrictive covenant agreement in, or substantially
in, the form attached hereto as Exhibit 7.7.
7.8 Fairness Opinion. Compu-DAWN shall have received an opinion (the "Fairness
Opinion") from an investment banking firm reasonably satisfactory to it (the
"Investment Banker") to the effect that the transactions contemplated hereby are
fair, from a financial viewpoint, to the stockholders of Compu-DAWN.
7.9 Cold Comfort Letter. Compu-DAWN shall have received a "cold comfort" letter
from a certified public accountant or a Russian equivalent, reasonably
satisfactory to Compu-DAWN, dated the Closing Date, in form and substance
reasonably satisfactory to Compu-DAWN in its good faith sole discretion.
7.10 Opinion.
(a) Compu-DAWN shall have received opinions from counsel reasonably
satisfactory to it (it being understood that Boris S. Gusev is satisfactory
to it), dated the date hereof and the Closing Date, to, or substantially
to, the effect set forth in Exhibit 7.10 attached hereto.
(b) Compu-DAWN shall have received an opinion of counsel reasonably
satisfactory to it to the effect that, for federal, state, local and
foreign income tax purposes, neither Rugby nor RAC nor Compu-DAWN shall be
required to recognize any income as a result of, or in connection with, the
Merger.
7.11 Escrow Agreement.
(a) Rugby and the Rugby Shareholder shall have executed and tendered
to Compu- DAWN an escrow agreement (the "Escrow Agreement") in, or
substantially in, the form attached hereto as Exhibit 7.11, providing for,
among other things, the following: (i) a certain portion of the shares of
Compu-DAWN Common Stock issuable to the Rugby Shareholder pursuant to the
Merger, as provided for below (the "Escrowed Shares"), will be placed in
escrow with an escrow agent satisfactory to Compu-DAWN and held in
accordance with the terms set forth below and (ii)
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2,000,000 of the Escrowed Shares shall be held as security for the
indemnification obligations of the Rugby Shareholder pursuant to Section
12.2.1 hereof for a period of one (1) year from the Closing Date.
(b) The number of Escrowed Shares shall equal the Three Million Six
Hundred Sixty Two Thousand Eight Hundred Eighty (3,662,880) shares of
Compu-DAWN Common Shares provided for in Section 2.3(b) hereof multiplied
by a fraction, the numerator of which (the "Numerator") shall be the
difference between (i) sixty (60) and (ii) the number of whole months from
the Closing Date to December 31, 1999, and the denominator of which shall
be sixty (60).
(c) Notwithstanding the foregoing, in the event, at or prior to the
Closing, Compu- DAWN shall have received an opinion of counsel, from
counsel reasonably satisfactory to it, stating that either (i) the term of
the Lottery License has been renewed or extended to a particular date and
that, as renewed or extended, the Lottery License is in full force and
effect, valid and enforceable in all respects against all Persons or (ii)
upon the filing of a proper application by Press-Loto for a renewal or
extension of the Lottery License and provided that Press-Loto has not
materially violated applicable law in connection therewith, the Lottery
License will be renewed or extended to the particular date set forth in the
opinion and, provided that Press-Loto does not materially violate
applicable law in connection therewith, the Lottery License will remain in
full force and effect, valid and enforceable in all respects against all
Persons until such indicated date (the "License Opinion") then (x) if the
particular date stated in the opinion (the "Extended License Expiration
Date") is prior to the Fifth Anniversary Date of the Closing (the "Fifth
Anniversary Date"), the term "Extended License Expiration Date" shall be
substituted for "December 31, 1999" in paragraph (b) hereof (provided,
however, that if, as a result of such change and the application of
paragraph (b) hereof the number of Escrowed Shares would be reduced to less
than 2,000,000, the number of Escrowed Shares shall be 2,000,000) and (y)
if the Extended License Expiration Date is on or after the Fifth
Anniversary Date, the provisions of the Escrow Agreement relating to clause
(i) of paragraph (a) hereof shall be deleted therefrom and the number of
Escrowed Shares shall be 2,000,000.
7.12 Loan Agreement. No Event of Default (as that term is defined in the Loan
Agreement) shall have occurred under the Loan Agreement.
7.13 Satisfactory Due Diligence. Compu-DAWN shall have completed a due diligence
investigation of Rugby, Press-Loto and the Lottery Business, the results of
which shall be reasonably satisfactory to Compu-DAWN in its good faith sole
reasonable discretion.
7.14 Lottery License. The Lottery License shall be in full force and effect,
valid, and enforceable in all respects against all Persons; Press-Loto shall
have the sole and absolute right to operate and administer the Lottery pursuant
to, and under, the Lottery License; and Rugby or the Rugby Shareholder shall
have delivered evidence reasonably satisfactory to Compu-DAWN that demonstrates
that Press-Loto will have the sole and absolute right to operate and administer
the Lottery pursuant to, and under, the Lottery License for at least two (2)
years following the License Expiration Date. In furtherance of same, Press-Loto
has entered into the Lottery Contracts or may in the future enter into one or
more agreements authorizing others to operate and administer the Lottery on its
behalf.
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7.15 Press-Loto.
(a)(i) Press-Loto, and the shareholders of Press-Loto (including,
without limitation, Rugby) shall have entered into an agreement in the form
and substance reasonably satisfactory to Compu-DAWN or (ii) Compu-DAWN
shall have received evidence, satisfactory to it, in either case its good
faith sole discretion, to the effect that Press-Loto shall not issue any
shares of capital or any other equity or proprietary interest without the
prior written consent of Rugby.
(b) Harvey Weinstein shall have been appointed to, and shall be
serving on, the members' meeting and the board of directors of Press-Loto.
7.16 Material Contracts. Each of Press-Loto and Rugby shall have all necessary
Contracts and relationships in place and in full force and effect necessary to
implement, administer and operate the Lottery Business, including, without
limitation, the Lottery Contracts and the other Listed Agreements.
7.17 Election of Mark Honigsfeld as Director and Officer of Rugby.
(a) The size of the Board of Directors of Rugby shall have been fixed
at two (2), and Mark Honigsfeld ("Honigsfeld") shall have been elected as a
director thereof.
(b) Honigsfeld shall have been elected as an executive officer of
Rugby.
7.18 Section 4(2) and Regulation D Compliance. The Rugby Shareholder shall have
delivered to Compu-DAWN evidence reasonably satisfactory to Compu-DAWN that his
representations set forth in Article VI hereof are true and complete and that
the issuance by Compu-DAWN of the Compu-DAWN Securities pursuant to the Merger
will be in conformity with the requirements of Section 4(2) of the Securities
Act and Rule 506 promulgated hereunder.
7.19 No Actions. No Action shall have been instituted by a Person other than a
Party, directly or indirectly, and be continuing before a court or before or by
any Body, or shall have been threatened and be unresolved, to restrain or
prevent, or obtain any material amount of damages in respect of, the carrying
out of the transactions contemplated hereby, or which might materially affect
the right of Compu-DAWN to own the Rugby Common Stock after the Closing Date, or
which might have a Material Adverse Effect thereon.
7.20 Consents; Permits. Rugby, the Rugby Shareholder, Press-Loto and Compu-DAWN
shall have obtained all consents, licenses and other Permits of Bodies and other
Persons necessary for the performance by each of them of all of their respective
obligations under this Agreement, including, without limitation, the Merger as
contemplated hereby, and such other consents, if any, to prevent the occurrence
of a Default under any Contract to which Rugby, the Rugby Shareholder or Press-
Loto is a party or is otherwise bound, and further including, without
limitation, the approval by Nasdaq to the issuance of the Compu-DAWN Securities
pursuant to the Merger.
7.21 Corporate Actions. All actions necessary to authorize the execution,
delivery and
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performance of this Agreement by Rugby and the Rugby Shareholder and the
consummation of the transactions contemplated hereby shall have been duly and
validly taken and each of Rugby and the Rugby Shareholder shall have full power
and right to consummate the transactions contemplated by this Agreement.
7.22 Additional Documents. Rugby and the Rugby Shareholder shall have delivered
all such certified resolutions, certificates and documents with respect to Rugby
and Press-Loto and the transactions contemplated hereby as Compu-DAWN or its
counsel may have reasonably requested.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATION OF RUGBY AND
THE RUGBY SHAREHOLDER TO CLOSE
The obligation of Rugby and the Rugby Shareholder to consummate the
transactions contemplated hereby is subject to the fulfillment, prior to or at
the Closing, of each of the following conditions, any one or more of which may
be waived by Rugby and the Rugby Shareholder (except when the fulfillment of
such condition is a requirement of law):
8.1 Representations and Warranties. All representations and warranties of
Compu-DAWN contained in this Agreement and in any written statement (including
financial statements), exhibit, certificate, schedule or other document
delivered pursuant hereto shall be true and correct in all material respects
(except to the extent that any such representation and warranty is already
qualified as to materiality, in which case such representation and warranty
shall be true and correct without further qualification) as at the Closing Date,
as if made at the Closing and as of the Closing Date.
8.2 Covenants. Compu-DAWN shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by it prior to or at the Closing.
8.3 Certificate. Rugby and the Rugby Shareholder shall have received a
certificate, dated the Closing Date, signed by the Chairman of the Board or
Chief Executive Officer of Compu-DAWN, as to the satisfaction of the conditions
contained in Sections 8.1 and 8.2 hereof.
8.4 Employment Agreement. Compu-DAWN shall have executed and tendered to the
Rugby Shareholder the Employment Agreement in, or substantially in, the form
attached hereto as Exhibit 7.6.
8.5 Size of Board; Election as Directors. The size of the Board of Directors of
Compu-DAWN shall have been fixed at seven (7) and the Rugby Shareholder and
those persons set forth on Schedule 8.5 attached hereto, subject to their
qualification and consent to so serve, shall have been elected as members
thereof.
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8.6 Resignation of Directors; Divestment of Dong W. Lew.
(a) Dong W. Lew ("Lew"), shall have resigned as a director and an
officer of Compu- DAWN.
(b) Louis Libin, Harold Lazarus and William Rizzardi shall have
resigned as directors and officers of Compu-DAWN, unless no individual has
been nominated to fill the vacancy arising from their respective
resignations.
(c) Lew shall have divested himself all of the shares of Compu-DAWN
Common Stock owned by him as of the date hereof, except for up to 100,000
shares of Compu-DAWN Common Stock.
8.7 Tax Opinion. The Rugby Shareholder shall have received an opinion of counsel
reasonably satisfactory to him to the effect that, for federal, state and local
income tax purposes, he shall not be required to recognize any income as a
result of, or in connection with, the Merger (other than as a result of, or in
connection with, his Employment Agreement).
8.8 No Actions. No Action shall have been instituted by a Person other than a
Party, directly or indirectly, and be continuing before a court or before or by
a Body, or shall have been threatened and be unresolved, to restrain or prevent,
or obtain any material amount of damages in respect of, the carrying out of the
transactions contemplated hereby, or which might materially affect the right of
the holders of the Rugby Common Stock to own the Compu-DAWN Securities after the
Closing Date, or which might have a materially adverse effect thereon.
8.9 Consents; Permits. Compu-DAWN and RAC shall have obtained all consents,
licenses and other Permits of Bodies and other Persons necessary for the
performance by them of all of their respective obligations under this Agreement,
including, without limitation, the issuance of the Compu-DAWN Securities as
contemplated by the Merger, and such other consents, if any, to prevent the
occurrence of a Default under any Contract to which Compu-DAWN is a party or
otherwise bound and further including, without limitation, the approval by
Nasdaq to the issuance of the Compu-DAWN Securities pursuant to the Merger.
8.10 Corporate Actions. All actions necessary to authorize the execution,
delivery and performance of this Agreement by Compu-DAWN and RAC and the
consummation of the transactions contemplated hereby shall have been duly and
validly taken, and Compu-DAWN and RAC shall have full power and right to
consummate the transactions contemplated by this Agreement.
8.11 Additional Documents. Compu-DAWN and RAC shall have delivered all such
certified resolutions, certificates and documents with respect to Compu-DAWN and
RAC and the transactions contemplated hereby as Rugby, the Rugby Shareholder or
their counsel may have reasonably requested.
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ARTICLE IX
TERMINATION AND WAIVER; LIQUIDATED DAMAGES
9.1 Termination. Anything herein or elsewhere to the contrary notwithstanding,
this Agreement may be terminated and the transactions provided for herein
abandoned at any time prior to the filing of the Certificate of Merger with the
Secretary of State of New York, whether before or after Stockholder Approval:
(a) By mutual consent of the Boards of Directors of Compu-DAWN, RAC
and Rugby;
(b) By Compu-DAWN and RAC if any of the conditions set forth in
Article VII hereof shall not have been fulfilled on or prior to August 31,
1998, or shall become incapable of fulfillment, in each case except as such
shall have been the result, directly or indirectly, of any action or
inaction by Compu-DAWN or RAC, and shall not have been waived (provided,
however, that, with respect to the condition set forth in Section 7.13
hereof, Compu-DAWN shall have notified Rugby on or prior to the date of the
definitive Proxy Statement that the results of its due diligence
investigation are not satisfactory to it in its good faith sole reasonable
discretion); or
(c) By Rugby and the Rugby Shareholder if any of the conditions set
forth in Article VIII hereof shall not have been fulfilled on or prior to
August 31, 1998, or shall have become incapable of fulfillment, in each
case except as such shall have been the result, directly or indirectly, of
any action or inaction by Rugby or the Rugby Shareholder, whether in his
capacity as a shareholder or otherwise, and shall not have been waived.
If this Agreement is terminated as described above, this
Agreement shall be of no further force and effect, without any liability or
obligation on the part of any of the parties except for any liability which may
arise pursuant to Sections 13.1 and 13.2 hereof or as a result of a Party's
willful failure to consummate the transactions contemplated hereby or for any
breach of any representation, warranty or covenant herein.
9.2 Waiver. Any condition to the performance of the Parties which legally may be
waived on or prior to the Closing Date may be waived at any time by the Party
entitled to the benefit thereof by action taken or authorized by an instrument
in writing executed by the relevant Party or Parties. The failure of any Party
at any time or times to require performance of any provision hereof shall in no
manner affect the right of such Party at a later time to enforce the same. No
waiver by any Party of the breach of any term, covenant, representation or
warranty contained in this Agreement as a condition to such Party's obligations
hereunder shall release or affect any liability resulting from such breach, and
no waiver of any nature, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or continuing waiver
of any such condition or of any breach of any other term, covenant,
representation or warranty of this Agreement.
9.3 Liquidated Damages. The parties agree that, in the event Compu-DAWN shall
fail to
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consummate the transactions contemplated hereby notwithstanding the timely
satisfaction of each and every condition to its obligation to close, then, as
liquidated damages and as the sole and exclusive remedy of the Rugby Shareholder
for such default and for any and all other liabilities of Compu-DAWN and RAC
arising under or in connection with this Agreement, Compu-DAWN shall forgive all
amounts due to it under the Loan Agreement (not to exceed $1,000,000) and, to
the extent that less than $1,000,000 has been loaned to Rugby pursuant to the
Loan Agreement, shall pay such difference to Rugby promptly.
ARTICLE X
CLOSING
10.1 Location; Date. The closing (the "Closing") provided for herein shall take
place at the offices of Certilman Balin Adler & Hyman, LLP, 90 Merrick Avenue,
East Meadow, New York 11554 at 10:00 a.m. on the third business day after
Stockholder Approval or, if, as of such date, either or both Parties shall not
be obligated to close and shall not have waived such closing condition(s),
subject to the provisions of Article IX hereof, on the third business day after
such later date as such Parties shall be obligated to close or shall have waived
such closing condition(s), or at such time and place as may be mutually agreed
to by the Parties. Such date is referred to in this Agreement as the "Closing
Date."
10.2 Items to be Delivered to Compu-DAWN. At the Closing, Rugby or the Rugby
Shareholder, as the case may be, will deliver or cause to be delivered to
Compu-DAWN:
(a) the Certificate of Merger required by Section 2.2 hereof;
(b) the certificate required by Section 7.3 hereof;
(c) the Employment Agreement required by Section 7.6 hereof;
(d) the Restrictive Covenant Agreement required by Section 7.7 hereof;
(e) the "cold comfort" letter required by Section 7.9 hereof;
(f) the Escrow Agreement required by Section 7.11 hereof;
(g) certified copies of all corporate actions required by Section 7.21
hereof; and
(h) such other certified resolutions, documents and certificates as
are required to be delivered to Compu-DAWN pursuant to the provisions of
this Agreement or which otherwise confirm that all of the conditions
precedent to the obligation of Compu- DAWN and RAC to close have been
satisfied.
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10.3 Items to be Delivered to Rugby and the Rugby Shareholder. At the Closing,
Compu- DAWN or RAC, as the case may be, will deliver or cause to be delivered to
Rugby or the Rugby Shareholder, as the case may be:
(a) the Certificate of Merger required by Section 2.2 hereof;
(b) the certificate required by Section 8.3 hereof;
(c) the Employment Agreement required by Section 8.4 hereof;
(d) certified copies of all corporate action required by Section 8.10
hereof; and
(e) such other certified resolutions, documents and certificates as
are required to be delivered by Compu-DAWN or RAC pursuant to the
provisions of this Agreement or otherwise confirm that all of the
conditions precedent to the obligations of Rugby and the Rugby Shareholder
to close have been satisfied.
ARTICLE XI
POST-CLOSING MATTERS
11.1 Further Assurances. On and after the Closing Date, the Parties shall take
all such further actions and execute and deliver all such further instruments
and documents as may be necessary or appropriate to carry out the transactions
contemplated by this Agreement.
11.2 Agreement as to Voting. During the five (5) year period following the
Closing, the Rugby Shareholder agrees to vote his voting shares of stock of
Compu-DAWN in favor of Honigsfeld as a director of Compu-DAWN provided that
Honigsfeld remains in the employ of Compu-DAWN.
11.3 Corporate Opportunities. Following the Closing Date and for so long as the
Rugby Shareholder is an officer or director of Compu-DAWN or Rugby or any other
affiliate thereof engaged in the Lottery business, or he or any of his
affiliates, directly or indirectly, beneficially owns any securities of
Compu-DAWN, all business opportunities relating to the lottery industry anywhere
in the world presented to the Rugby Shareholder or any affiliate thereof
("Lottery Opportunities") will be deemed to be a corporate opportunity of Rugby
and such opportunity will be presented to Rugby to either act upon or decline to
act upon within a reasonable period of time. The Rugby Shareholder acknowledges
and agrees further that, following the Closing, any and all Lottery
Opportunities presented to the Rugby Shareholder or any affiliate thereof prior
to the date hereof or during the period prior to the Closing will be offered to
Rugby upon the same terms and conditions as offered to the Rugby Shareholder or
his affiliate.
11.4 Chief Executive Officer. Honigsfeld agrees that, in the event that,
following the Closing and prior to the third anniversary of the Closing Date,
Compu-DAWN desires to terminate Honigsfeld as Chief Executive Officer of
Compu-DAWN other than for cause (as defined in the Restated and
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Amended Employment Agreement, dated as of October 1, 1996, between Compu-DAWN
and Honigsfeld) (the "Honigsfeld Employment Agreement"), Honigsfeld will not
contest such termination if in the reasonable written judgment of an investment
banking firm listed on Schedule 11.4 attached hereto, his replacement is
qualified with respect to securities markets, corporate finance and investor
relations. The foregoing is not intended to modify any of the rights and
obligations of Compu-DAWN and Honigsfeld under the Honigsfeld Employment
Agreement, except that Honigsfeld agrees that, if the notice of termination of
his employment is given at least six (6) months after the Closing Date and, at
the end of the calendar month immediately preceding the date of notice of his
termination of employment, the number of operating lottery terminals (combined
for V2000 and V3000) is less than one-half (1/2) of the number indicated on
Schedule 3.30 attached hereto (with "Month 1" meaning the first full calendar
month following the Closing Date, and so forth), then, provided that the notice
of termination is given during the thirty (30) day period following the end of
(a) such six (6) month period or (b) any subsequent six (6) month period, and
the effective date of termination is at least ninety (90) days following the
date of notice, only one-half (1/2) of the base salary and other benefits
otherwise due to him under the termination provisions of his Employment
Agreement (exclusive of bonuses based upon future performance) shall be payable
to him and such amount shall be payable in equal monthly installments over the
three (3) year period following termination of employment. Compu-DAWN and
Honigsfeld agree further that Honigsfeld shall be under no duty to mitigate
damages payable to him pursuant to his Employment Agreement in connection with a
termination other than for cause and Compu-DAWN shall not have any right to
offset any amounts payable to, or otherwise receivable by, Honigsfeld against
amounts due him pursuant to his Employment Agreement.
11.5 Transfer Restriction. The Rugby Shareholder agrees that none of the
Compu-DAWN Securities owned by the Rugby Shareholder may be sold, disposed of,
or otherwise transferred publicly, and no option for the public sale of such
Compu-DAWN Securities may be granted, directly or indirectly, at any time
(either pursuant to Rule 144 promulgated under the Securities Act, or
otherwise), for a period of at least one (1) year, commencing on the date
hereof, but not ending before July 31, 1999, without the written consent of
Compu-DAWN, which consent shall be subject to any necessary approval of The
Nasdaq Stock Market, Inc. Private sales and gifts of such Compu- DAWN Securities
may be made upon the condition that the transferees and donees thereof agree in
writing to be bound by the foregoing restriction with respect to the Compu-DAWN
Securities covered by such sales and gifts in like manner as it applies to the
Rugby Shareholder.
ARTICLE XII
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
12.1 Survival. The parties agree that their respective representations and
warranties contained in this Agreement shall survive the Closing for a period of
one (1) year, except that the representations and warranties set forth in
Sections 3.1 through 3.4, 3.10, 3.16, 3.21, 4.1 through 4.4 and 4.6 shall
continue for an indefinite duration and the representations and warranties set
forth in Sections 3.9, 3.12 and 3.17 shall survive until the expiration of the
applicable statute of limitations period.
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12.2 Indemnification.
12.2.1 General Indemnification Obligation of the Rugby Shareholder.
From and after the Closing, the Rugby Shareholder will reimburse, indemnify and
hold harmless Compu-DAWN and Rugby (in each case, an "Indemnified Compu-DAWN
Party") against and in respect of:
(a) any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by any Indemnified Compu-DAWN Party that
result from, relate to or arise out of:
(i) any misrepresentation, breach of warranty or nonfulfillment
of any agreement or covenant on the part of Rugby and/or the Rugby
Shareholder under this Agreement, or from any misrepresentation in or
omission from any certificate, schedule, statement, document or
instrument furnished to Compu-DAWN pursuant hereto; provided however,
the Rugby Shareholder's indemnification obligation hereunder for
breach of warranty shall be limited to Two Million (2,000,000) of the
Escrowed Shares; and
(ii) any untrue statement or omission of a material fact in the
Proxy Statement which was based upon information furnished by either
Rugby, the Rugby Shareholder or Press-Loto, which was knowingly false
to the Rugby Shareholder.
(b) any and all Actions, assessments, audits, fines, judgments, costs
and other expenses (including, without limitation, reasonable legal fees)
incident to any of the foregoing or to the enforcement of this Section
12.2.1, except with respect to a breach of warranty for which the Rugby
Shareholder's indemnification obligation hereunder shall be limited to Two
Million (2,000,000) of the Escrowed Shares.
12.2.2 General Indemnification Obligation of Compu-DAWN. From and after
the Closing, Compu-DAWN will reimburse, indemnify and hold harmless the Rugby
Shareholder against and in respect of:
(a) any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by the Rugby Shareholder that result from,
relate to or arise out of any misrepresentation, breach of warranty or
non-fulfillment of any agreement or covenant on the part of Compu-DAWN
under this Agreement, or from any misrepresentation in or omission from any
certificate, schedule, statement, document or instrument furnished to Rugby
or the Rugby Shareholder pursuant hereto; and
(b) any and all Actions, assessments, audits, fines, judgments, costs
and other expenses (including, without limitation, reasonable legal fees)
incident to any of the foregoing or to the enforcement of this Section
12.2.2.
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Any indemnification obligation of Compu-DAWN under this
Agreement shall be satisfied solely through the issuance of additional shares of
Compu-DAWN Common Stock to the holders of Rugby Common Stock having a Fair
Market Value equal to such indemnification amount. For purposes hereof, Fair
Market Value shall mean the closing selling price for Compu-DAWN's Common Stock
on the day immediately preceding the Closing Date.
12.2.3 Method of Asserting Claims, Etc.
(a) In the event that any claim or demand for which the Rugby
Shareholder would be liable to an Indemnified Compu-DAWN Party hereunder is
asserted against or sought to be collected from an Indemnified Compu-DAWN
Party by a third party, Compu-DAWN shall notify the Rugby Shareholder of
such claim or demand, specifying the nature of such claim or demand and the
amount or the estimated amount thereof to the extent then feasible (which
estimate shall not be conclusive of the final amount of such claim and
demand) (the "Claim Notice"). The Rugby Shareholder shall thereupon, at his
sole cost and expense, defend the Indemnified Compu-DAWN Party against such
claim or demand with counsel reasonably satisfactory to Compu-DAWN.
(b) The Rugby Shareholder shall not, without the prior written consent
of the Indemnified Compu-DAWN Party, consent to the entry of any judgment
against the Indemnified Compu-DAWN Party or enter into any settlement or
compromise which does not include, as an unconditional term thereof (i.e.,
there being no requirement that the Indemnified Compu-DAWN Party pay any
amount of money or give any other consideration), the giving by the
claimant or plaintiff to the Indemnified Compu-DAWN Party of a release, in
form and substance reasonably satisfactory to the Indemnified Compu-DAWN
Party, as the case may be, from all liability in respect of such claim or
litigation. If any Indemnified Compu-DAWN Party desires to participate in,
but not control, any such defense or settlement, it may do so at its sole
cost and expense. If, in the reasonable opinion of the Indemnified
Compu-DAWN Party, any such claim or demand or the litigation or resolution
of any such claim or demand involves an issue or matter which could have a
materially adverse effect on the business, operations, assets, properties
or prospects of the Indemnified Compu-DAWN Party or its affiliates, then
the Indemnified Compu-DAWN Party shall have the right to control the
defense or settlement of any such claim or demand and its costs and
expenses shall be included as part of the indemnification obligation of the
Rugby Shareholder hereunder; provided, however, that the Indemnified
Compu-DAWN Party shall not settle any such claim or demand without the
prior written consent of the Rugby Shareholder, which consent shall not be
unreasonably withheld or delayed. If the Indemnified Compu-DAWN Party
should elect to exercise such right, the Rugby Shareholder shall have the
right to participate in, but not control, the defense or settlement of such
claim or demand at his sole cost and expense.
(c) Notwithstanding anything hereinabove to the contrary, the
Indemnified Compu-DAWN Party shall have the right to employ separate
counsel (including local counsel), and the Rugby Shareholder shall bear the
reasonable fees, costs and expenses of such separate counsel (and local
counsel) if (i) the use of counsel chosen by the Rugby Shareholder to
represent the Indemnified Compu-DAWN Party would present such counsel with
a conflict of interest, (ii) the
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actual or potential defendants in, or targets of, any such action include
both the Indemnified Compu- DAWN Party and the Rugby Shareholder and the
Indemnified Compu-DAWN Party shall have reasonably concluded that there may
be legal defenses available to it which are different from or additional to
those available to the Rugby Shareholder, (iii) the Rugby Shareholder shall
not have employed counsel reasonably satisfactory to the Indemnified
Compu-DAWN Party to represent the Indemnified Compu-DAWN Party within a
reasonable time after notice of the institution of such Action or (iv) the
Rugby Shareholder shall authorize the Indemnified Compu-DAWN Party to
employ separate counsel at the expense of the Rugby Shareholder.
(d) In the event Compu-DAWN should have a claim against the Rugby
Shareholder hereunder that does not involve a claim or demand being
asserted against or sought to be collected from it by a third party,
Compu-DAWN shall send a Claim Notice with respect to such claim to the
Rugby Shareholder. If the Rugby Shareholder disputes his liability with
respect to such claim or demand, such dispute shall be resolved in
accordance with Section 12.3 hereof; if the Rugby Shareholder does not
notify Compu-DAWN, within twenty (20) days from receipt of notice of a
claim, that he disputes such claim, the amount of such claim shall be
conclusively deemed a liability of the Rugby Shareholder hereunder.
(e) All claims for indemnification by the Rugby Shareholder under this
Agreement shall be asserted and resolved under the procedures set forth
hereinabove by substituting in the appropriate place "the Rugby
Shareholder" for "the Indemnified Compu-DAWN Party" or "Compu-DAWN", as the
case may be.
12.2.4 Compu-DAWN Performance Stock. In order to provide security for
the indemnification rights of any Indemnified Compu-DAWN Party under this
Article XII and to provide for an adjustment in the Merger Consideration, the
parties agree that the number of shares of Compu-DAWN Performance Stock to be
issued and delivered following the Entitlement Date to the holders of Rugby
Common Stock immediately prior to the Effective time, as contemplated by Section
2.3(b) hereof, shall be subject to the indemnification obligation of the Rugby
Shareholders under this Article XII. Compu-DAWN, in its discretion, may
determine whether to be paid cash or to withhold shares of Compu-DAWN
Performance Stock, or both, in fulfillment of any of the indemnification
obligations of the Rugby Shareholders. In the event Compu-DAWN determines to
withhold shares of Compu-DAWN Performance Stock, the number of shares of
Compu-DAWN Performance Stock to be withheld shall be such as shall have a Fair
Market Value equal to an amount up to such indemnification amount. The foregoing
is not intended to be a limitation of any and all other rights Compu-DAWN may
have for indemnification hereunder.
12.2.5 Escrow Agreement. In order to provide further security for the
indemnification rights of any Indemnified Compu-DAWN Party under this Article
XII, 2,000,000 of the Escrowed Shares shall be held in escrow and disposed of as
provided in the Escrow Agreement as described in Section 7.11 hereof.
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12.3 Arbitration.
(a) All disputes under this Article XII, as well as with respect to
Section 7.13 hereof, shall be settled by binding arbitration pursuant to
the rules of the American Arbitration Association. Arbitration may be
commenced at any time by any party hereto giving written notice to each
other party to a dispute of its demand for arbitration, which demand shall
set forth the name and address of its arbitrator. Within twenty (20) days
of such notice, the other party shall select its arbitrator and so notify
the demanding party. Within twenty (20) days thereafter, the two
arbitrators so selected shall select the third arbitrator. In default of
either side naming its arbitrator as aforesaid or in default of the
selection of the third arbitrator as aforesaid, the American Arbitration
Association shall designate such arbitrator upon the application of either
party. The arbitration proceeding shall take place at a mutually agreeable
location in Nassau County, New York or such other location as agreed to by
the parties. The dispute shall be heard by the arbitrators within thirty
(30) days after selection of the third arbitrator. The decision of the
arbitrators shall be rendered within thirty (30) days after the hearing.
Each party shall pay its own expenses of arbitration and the expenses of
the arbitrators shall be equally shared; provided, however, that if, in the
opinion of the majority of the arbitrators, any claim for indemnification
or any defense or objection thereto was unreasonable, the arbitrators may
assess, as part of their award, all or any part of the arbitration expenses
of the other party (including reasonable attorneys' fees) and of the
arbitrators against the party raising such unreasonable claim, defense or
objection.
(b) To the extent that arbitration may not be legally permitted
hereunder and the parties to any dispute hereunder may not at the time of
such dispute mutually agree to submit such dispute to arbitration, any
party may commence a civil Action in a court of appropriate jurisdiction to
resolve disputes hereunder.
(c) The decision of a majority of the arbitrators shall be final,
binding and conclusive, shall be specifically enforceable, and judgment may
be entered upon it in accordance with applicable law in the appropriate
court in the State of New York with no right of appeal therefrom.
12.4 Other Rights and Remedies Not Affected. The indemnification rights of the
parties under this Article XII are independent of, and in addition to, such
rights and remedies as the parties may have at law or in equity or otherwise for
any misrepresentation, breach of warranty or failure to fulfill any agreement or
covenant hereunder on the part of any party hereto, including without limitation
the right to seek specific performance, rescission or restitution, none of which
rights or remedies shall be affected or diminished hereby.
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.1 Expenses. Each of the Parties shall bear its own expenses in connection
herewith; provided,
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however, that the Parties acknowledge and agree that, if any Party (the
"Breaching Party") fails to consummate the transactions set forth in the
Agreement notwithstanding that all conditions to such Party's obligation to
close are fulfilled or otherwise breaches this Agreement prior to Closing, and
the Closing does not occur, each Breaching Party, jointly and severally, shall
reimburse each other Party for all out-of-pocket expenses incurred in connection
with the preparation, negotiation, execution and performance of this Agreement
and the contemplated Merger and the consummation of the transactions
contemplated hereby, including, without limitation, the preparation, filing and
distribution of the Proxy Statement and undertaking the proxy solicitation
process in connection with seeking Stockholder Approval, and all fees and
expenses incurred in connection with the obtaining of, or seeking to obtain, the
Fairness Opinion, including, without limitation, fees and expenses payable to
attorneys, accountants, consultants, advisors and investment bankers.
13.2 Confidential Information. All information that a disclosing party furnishes
in connection with the transactions contemplated hereby (the "Information") will
be kept confidential, will be used solely in connection with the contemplated
transactions and will not, without prior written consent of the disclosing
party, be used or disclosed, directly or indirectly, in any manner whatsoever,
in whole or in part.
Notwithstanding anything hereinabove to the contrary, the obligations
imposed upon the parties herein shall not apply to Information:
(a) which is publicly available prior to the date hereof; or
(b) which hereafter becomes available to the public through no
wrongful act of the receiving party; or
(c) which was in the possession of the receiving party prior to the
commencement of negotiations between the parties with regard to the
transactions contemplated hereby and not subject to an existing agreement
of confidence between the parties; or
(d) which is received from a third party without restriction, not in
violation of an agreement of confidence and without breach of this
Agreement;
(e) which is independently developed by the receiving party; or
(f) which is disclosed pursuant to a requirement or request of a
government agency, arbitrator or court.
Upon the request of a disclosing party, which made at any time
following any termination of this Agreement in accordance with the terms hereof,
the receiving party will redeliver to the disclosing party any and all written
Information furnished to the receiving party and will not retain any copies
thereof.
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13.3 Equitable Relief. The parties agree that the remedy at law for any breach
or threatened breach of the provisions of Section 13.2 will be inadequate and
the aggrieved party shall be entitled to injunctive relief to compel the
breaching party to perform or refrain from action required or prohibited
thereunder.
13.4 Publicity. Neither Compu-DAWN, on the one hand, nor Rugby and the Rugby
Shareholder, on the other hand, will issue any report, statement, release or
other public announcement pertaining to the matters contemplated by this
Agreement or otherwise disclose the terms hereof without the prior written
consent of the other. Notwithstanding the foregoing, Compu-DAWN is permitted to
make any disclosures or public announcements of the transactions contemplated
hereby and/or the terms thereof without the prior written consent and approval
of Rugby or the Rugby Shareholder if it shall determine that such disclosure is
required in order for Compu-DAWN to comply with applicable securities laws and
regulations.
13.5 Entire Agreement. This Agreement, including the schedules and exhibits
attached hereto, which are a part hereof, constitutes the entire agreement of
the parties with respect to the subject matter hereof. The representations,
warranties, covenants and agreements set forth in this Agreement and in the
financial statements, schedules or exhibits delivered pursuant hereto constitute
all the representations, warranties, covenants and agreements of the parties and
upon which the parties have relied, shall not be deemed waived or otherwise
affected by any investigation made by any party hereto 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.
13.6 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
in writing and hand delivered or sent by certified or registered mail, return
receipt requested and postage prepaid, overnight mail, nationally recognized
overnight courier or telecopier as follows:
If to Compu-DAWN or RAC, at:
77 Spruce Street
Cedarhurst, New York
Attention: Chief Executive Officer
Telecopier Number: (516) 374-9410
With a copy to:
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York 11554
Attention: Fred Skolnik, Esq. and Gavin C. Grusd, Esq.
Telecopier Number: (516) 296-7111
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If to Rugby or the Rugby Shareholder, at:
Harvey Weinstein
203 Commack Road
Suite 42
Commack, New York 11725
Telecopier Number: (516) 499-0717
With a copy to:
Joel L. Jacobson, Esq.
400 Jericho Turnpike
Jericho, New York 11753
Telecopier Number: (516) 953-0747
and
Vann & Slavin
24 West 40th Street
New York, New York 10018
Attention: Avrom R. Vann, Esq.
Telecopier Number: (212) 382-1944
or at such other address as any party may specify by notice given to the other
party in accordance with this Section 13.6.
13.7 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.
13.8 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 Rugby nor the Rugby Shareholder nor
Compu-DAWN may assign any of its rights or delegate any of its duties under this
Agreement without the prior written consent of the other; provided further,
however, that RAC may assign all of its rights and delegate any of its duties to
a corporation which is a wholly-owned subsidiary of Compu-DAWN, and the Rugby
Shareholder may transfer a number of shares of Rugby Common Shares not to exceed
a number which is one (1) less than the number of shares of Rugby Common Stock
which constitutes the requisite majority of shares to take any action of the
Rugby shareholders pursuant to the New York Business Corporation law, the
Certificate of Incorporation or By-Laws of Rugby, and/or any agreement among
Rugby's shareholders.
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13.9 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
13.10 Facsimile Signatures. Signatures hereon which are transmitted via
facsimile shall be deemed original signatures.
13.11 Representation by Counsel; Interpretation. Rugby and the Rugby Shareholder
acknowledge that it and he have been represented by counsel in connection with
this Agreement and the transactions contemplated hereby. Accordingly, any rule
or law or any legal decision that would require the interpretation of any
claimed ambiguities in this Agreement against the party that drafted it has no
application and is expressly waived by Rugby and the Rugby Shareholder. The
provisions of this Agreement shall be interpreted in a reasonable manner to give
effect to the intent of the parties hereto.
13.12 Headings; Gender. The headings, captions and/or use of a particular gender
under sections of this Agreement are for convenience of 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.
13.13 Effectiveness. This Agreement shall take effect as of the date hereof;
provided it has been fully executed and delivered by all parties.
ARTICLE XIV
DEFINITIONS
14.1 Defined Terms. As used herein, the terms below shall have the following
meanings. Any of such terms, unless the context otherwise requires, may be used
in the singular or plural, depending upon the reference.
"Action" shall mean any action, claim, suit, demand,
litigation, governmental or other proceeding, labor dispute, arbitral action,
governmental audit, inquiry, investigation, criminal prosecution, investigation
or unfair labor practice charge or complaint.
"Agreement" shall have the meaning ascribed to it in the
heading of this Agreement.
"Body" shall mean a federal, state, local, and foreign
governmental, political subdivision of such foreign governmental body, or other
regulatory body.
"Books and Records" shall mean all books, ledgers, files,
reports, plans, drawings, records and lists, including, without limitation, all
computer programs and other software, of every kind relating to an entity's
business, operations, assets, liabilities, personnel, customers and suppliers.
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"Breaching Party" shall have the meaning ascribed to it in
Section 13.1 hereof.
"Claim Notice" shall have the meaning ascribed to it in Section
12.2.3(a) hereof.
"Closing" shall have the meaning ascribed to it in Section 10.1
hereof.
"Closing Date" shall have the meaning ascribed to it in Section
10.1 hereof.
"Compu-DAWN" shall have the meaning ascribed to in the heading of
this Agreement.
"Compu-DAWN Balance Sheet" shall mean the balance sheet of
Compu-DAWN as of the Balance Sheet Date which is included as part of the
Compu-DAWN Financial Statements.
"Compu-DAWN Balance Sheet Date" shall mean December 31, 1997.
"Compu-DAWN Business" shall have the meaning as ascribed to it
in Section 4.16 hereof.
"Compu-DAWN Common Stock" shall have the meaning ascribed to
it in Section 2.3(a) hereof.
"Compu-DAWN Financial Statements" shall mean the financial
statements of Compu-DAWN as of the Compu-DAWN Balance Sheet Date and for the
year ended December 31, 1997, contained in the SEC Reports.
"Compu-DAWN Listed Agreements" shall have the meaning ascribed
to it in Section 4.15 hereof.
"Compu-DAWN Performance Stock" shall have the meaning ascribed
to it in Section 2.3(b) hereof.
"Compu-DAWN Preferred Stock" shall have the meaning ascribed
to it in Section 2.3(a) hereof.
"Compu-DAWN Securities" shall have the meaning ascribed to it in
Section 2.3(a) hereof.
"Contract" shall mean any agreement, contract, note, lease,
evidence of indebtedness, purchase order, letter of credit, indenture, security
or pledge agreement, franchise agreement, undertaking, covenant not to compete,
employment agreement, license, instrument, obligation, commitment, course of
dealing or practice, understanding or arrangement, whether written or oral, to
which a particular Person is a party or is otherwise bound.
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"Copyrights" shall mean registered copyrights, copyright
applications and unregistered copyrights.
"Default" shall mean any breach, default and/or other
violation, and/or the occurrence of any event that with or without the passage
of time or the giving of notice or both would constitute a breach, default or
other violation, under, or give any Person the right to accelerate, terminate or
renegotiate, any Contract.
"Derivative Securities" shall have the meaning ascribed to it in
Section 3.2(a) hereof.
"Employment Agreement" shall have the meaning ascribed to it in
Section 7.6 hereof.
"Entitlement Date" shall have the meaning ascribed to it in
Section 2.3(b) hereof.
"ERISA" shall have the meaning ascribed to it in Section 3.20
hereof.
"Escrow Agreement" shall have the meaning ascribed to it in
Section 7.11 hereof.
"Escrowed Shares" shall have the meaning ascribed to it in
Section 7.11 hereof.
"Extended License Expiration Date" shall have the meaning
ascribed to it in Section 7.11(c) hereof.
"Fair Market Value" shall have the meaning ascribed to it in
Section 12.2.2 hereof.
"Fairness Opinion" shall have the meaning ascribed to it in
Section 7.8 hereof.
"Fifth Anniversary Date" shall have the meaning ascribed to it in
Section 7.11(c) hereof.
"Government Decree" shall have the meaning ascribed to it in the
Recitals hereof.
"Honigsfeld" shall have the meaning ascribed to it in Section
7.17 hereof.
"Honigsfeld Employment Agreement" shall have the meaning ascribed
to it in Section 11.4 hereof.
"Indemnified Compu-DAWN Party" shall have the meaning ascribed to
it in Section 12.2.1 hereof.
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"Information" shall have the meaning ascribed to it in Section
13.2 hereof.
"Investment Banker" shall have the meaning ascribed to it in
Section 7.8 hereof.
"Journalist Union" shall have the meaning ascribed to it in the
Recitals hereof.
"Lew" shall have the meaning ascribed to it in Section 8.6
hereof.
"Liability" shall mean any direct or indirect liability,
obligation, indebtedness, obligation, commitment, expense, claim, deficiency,
guaranty or endorsement of or by any Person of any type, whether accrued,
absolute, contingent, matured, unmatured or otherwise.
"License Expiration Date" shall have the meaning ascribed to it
in the Recitals hereof.
"License Opinion" shall have the meaning ascribed to it in
Section 7.11(c) hereof.
"Lien" shall mean any claim, lien, pledge, option, charge,
restriction, easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes, without limitation, any agreement to
give any of the foregoing in the future, and any contingent sale or other title
retention agreement or lease in the nature thereof.
"Loan Agreement" shall mean that certain Loan and Security
Agreement of even date herewith between Compu-DAWN and Rugby.
"Lottery" shall have the meaning ascribed to it in the Recitals
hereof.
"Lottery Business" shall have the meaning ascribed to it in the
Recitals hereof.
"Lottery Contracts" shall have the meaning ascribed to it in
Section 3.10.1 hereof.
"Lottery License" shall have the meaning ascribed to it in the
Recitals hereof.
"Lottery Opportunities" shall have the meaning ascribed to it
in Section 11.3 hereof.
"Lottery Terms" shall have the meaning ascribed to it in the
Recitals hereof.
"Material Adverse Effect" shall mean any material adverse
effect on the business, properties, operations, assets, liabilities, condition
(financial or otherwise), or prospects of Compu- DAWN, on the one hand, or Rugby
and Press-Loto, on the other hand.
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"Materials of Environmental Concern" shall mean pollutants,
contaminants, hazardous or noxious or toxic materials or wastes.
"Merger" shall have the meaning ascribed to it in the Recitals
hereof.
"Merger Consideration" shall have the meaning ascribed to it
in Section 2.3(b) hereof.
"Ministry of Finance" shall have the meaning ascribed to it in
the Recitals hereof.
"New York Statute" shall have the meaning ascribed to it in
the Recitals hereof.
"Numerator" shall have the meaning ascribed to it in Section
7.11(b) hereof.
"Party" shall have the meaning ascribed to in the heading of
this Agreement.
"Patents" shall mean all patents, patent applications,
registered designs and registered design applications.
"Permits" shall mean all licenses, permits, franchises,
approvals, authorizations, consents, decrees or orders of, or filings with, any
and all Bodies.
"Person" shall mean and include an individual, a partnership,
a joint venture, a corporation, a limited liability company, a limited liability
partnership, a trust, an unincorporated organization, any other business
organization and a government or other department or agency thereof.
"Potential Offeror" shall have the meaning ascribed to it in
Section 5.1(i) hereof.
"Potential Transaction" shall have the meaning ascribed to it
in Section 5.1(i) hereof.
"Press-Loto" shall have the meaning ascribed to it in the
Recitals hereof.
"Press-Loto Balance Sheet" shall mean the balance sheet of
Press-Loto as of the Press-Loto Balance Sheet Date which is included as part of
the Press-Loto Financial Statements.
"Press-Loto Balance Sheet Date" shall mean December 31, 1997.
"Press-Loto Financial Statements" shall mean the Financial
Statements of Press- Loto as of the Press-Loto Balance Sheet Date and for the
year ended December 31, 1997.
"Proprietary Rights" shall mean Copyrights, Patents, Trade-
marks, other technology
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rights and licenses, computer software (including, without limitation, any
source or object codes thereof or documentation relating thereto), trade
secrets, franchises, inventions, designs, specifications, plans, drawings, data
bases, know-how, domain names, world wide web addresses and other intellectual
property rights used or under development.
"Proxy Statement" shall mean the proxy statement prepared by
Compu-DAWN in connection with its seeking to obtain Stockholder Approval.
"RAC" shall have the meaning ascribed to in the heading of
this Agreement.
"Restrictive Covenant Agreement" shall have the meaning
ascribed to it in Section 7.7 hereof.
"Rugby" shall have the meaning ascribed to in the heading of
this Agreement.
"Rugby Balance Sheet" shall mean the balance sheet of Rugby as
of the Rugby Balance Sheet Date which is included as part of the Rugby Financial
Statements.
"Rugby Balance Sheet Date" shall mean December 31, 1997.
"Rugby Common Stock" shall have the meaning ascribed to it in
Section 2.3(a) hereof.
"Rugby/Press-Loto Listed Agreements" shall have the meaning
ascribed to it in Section 3.14 hereof.
"Rugby Shareholder" shall have the meaning ascribed to in the
heading of this Agreement.
"Rugby Financial Statements" shall mean the Financial
Statements of Rugby as of the Rugby Balance Sheet Date and for the year ended
December 31, 1997.
"SEC" shall mean the United States Securities and Exchange
Commission.
"SEC Report" shall have the meaning ascribed to it in Section
4.5 hereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Stockholder Approval" shall mean approval by the stockholders
of Compu- DAWN (or, if determined by the Board of Directors of Compu-DAWN in
good faith that the approval of the noncontrolling stockholders of Compu-DAWN is
required in order for the Board of Directors to fulfill its duties,
responsibilities and obligations to the Compu-DAWN stockholders under the
Delaware General Corporation Law and the rules of the Nasdaq Stock Market, then,
by
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the noncontrolling stockholders of Compu-DAWN) of (i) this Agreement and the
transactions contemplated hereby; (ii) an amendment to the Certificate of
Incorporation of Compu-DAWN pursuant to which the staggered nature of the Board
of Directors is eliminated and the number of authorized shares of (a) Common
Stock of Compu-DAWN is increased to 60,000,000 and (b) Preferred Stock of
Compu-DAWN is increased to 2,000,0000; and (iii) an amendment to Compu- DAWN's
1996 Stock Option Plan pursuant to which the number of shares of Common Stock
authorized to be issued thereunder is increased to 6,000,000.
"Surviving Corporation" shall have the meaning ascribed to it
in Section 2.1 hereof.
"Trademarks" shall mean registered trademarks, registered
service marks, trademark and service mark applications and unregistered
trademarks and service marks.
"Warrants" shall have the meaning ascribed to it in Section
2.3(a) hereof.
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WITNESS the execution of this Agreement as of the date first above
written.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
______________________________
Mark Honigsfeld, President
RUGBY ACQUISITION CORP.
By: /s/ Mark Honigsfeld
______________________________
Mark Honigsfeld, Chairman of the Board
RUGBY NATIONAL CORP.
By: /s/ Harvey Weinstein
______________________________
Harvey Weinstein, President
/s/ Harvey Weinstein
-------------------------------
HARVEY WEINSTEIN, individually
Agreed as to Section 11.4
/s/ Mark Honigsfeld
- -------------------------------
MARK HONIGSFELD, individually
56
<PAGE>
<PAGE>
LOAN AND SECURITY AGREEMENT
AGREEMENT, made as of the 22nd day of April, 1998, by and
between COMPU- DAWN, INC., a Delaware corporation ("Lender"), and RUGBY NATIONAL
CORP., a New York corporation ("Borrower").
1. Definitions.
(a) The term "Obligations" shall mean any and all indebtedness,
obligations, liabilities, pledges and guarantees of any kind of
Borrower to Lender, now existing or hereafter arising, and whether
direct or indirect, acquired outright, conditionally, absolute or
contingent, joint or several, secured or unsecured, due or not due,
contractual or tortious, liquidated or unliquidated, arising by
operation of law or otherwise, whether or not of a nature presently
contemplated by the parties or subsequently agreed to by them.
(b) The term "Collateral" shall mean any and all tangible and
intangible assets in which Borrower has or shall have an interest, now
or hereafter existing or acquired, and wherever located, together with
all additions and accessions thereto and replacements and
substitutions thereof and all proceeds and products of the foregoing.
(c) All other terms used herein which are not otherwise defined
herein and are defined in the Uniform Commercial Code of the State of
New York ("UCC") or in that certain Agreement and Plan of Merger of
even date by and among Lender, Rugby Acquisition Corp., Borrower and
Harvey Weinstein ("Weinstein") (the "Merger Agreement") shall have the
meanings therein stated.
2. The Loan.
(a) Upon the terms and subject to the conditions set forth in
this Agreement and in reliance upon the representations, warranties
and covenants of Borrower herein set forth, Lender hereby agrees to
lend to Borrower and Borrower may borrow (each such amount hereinafter
referred to as an "Advance") from time to time during the period
commencing on the date hereof and terminating twelve (12) months from
the date hereof (the "Loan Termination Date") up to One Million
Dollars ($1,000,000).
(b) Borrower may request an Advance under this paragraph 2(b)
only by written notice which must be received by Lender (a "Notice to
Borrow") at least three (3) days prior to the date of the proposed
Advance. Each Notice to Borrow shall specify the date and the
aggregate principal amount of the proposed Advance, the bank and
account number to which the funds should be transferred, a list of
intended uses of such Advance, and any other information relating to
such intended uses as Lender may reasonably require. Subject to the
conditions set forth herein, Lender will make available to Borrower
such Advance in same day funds by wire transfer to Borrower's account
as specified in the Notice to Borrow. The Advances and Borrower's
obligation to pay interest thereon shall be evidenced by a promissory
note (the "Note") in, or substantially in, the form attached hereto as
Exhibit 2(b).
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(c) Lender's obligation to make the initial Advance hereunder and
the first Advance hereunder in excess of One Hundred Thousand Dollars
($100,000) (collectively, the "Initial Advance") is subject to the
fulfillment of each of the following conditions prior to or
contemporaneously with the making of such Advance:
(i) Lender shall have received each of the following, in
form and substance satisfactory to Lender:
(A) certified copies of all corporate (including stockholder, if required)
action taken by (i) Borrower to authorize (I) the borrowings hereunder and (II)
the execution, delivery and performance in accordance with their respective
terms of this Agreement, the Loan Documents (as hereinafter defined) and any
other documents executed in connection with this Agreement, including, without
limitation, the Borrower Pledge Agreement, the Weinstein Pledge Agreement and
the Collateral Assignment Agreement (each as hereinafter defined) (the "Other
Financing Documents") and (ii) Credomarka to authorize the execution, delivery
and performance of the Credomarka Pledge Agreement (as hereinafter defined) in
accordance with its terms;
(B) a certificate of incumbency with respect to the officers of Borrower
authorized to execute and deliver this Agreement, the Loan Documents and the
Other Financing Documents;
(C) copies of the Certificate of Incorporation and By-Laws of Borrower and
Credomarka and Charter of Company with Limited Liability of Press-Loto, all as
restated or amended to the date of the making of the Initial Advance, certified
(prior to any Advance in excess of $100,000), with respect to the Certificate of
Incorporation of Borrower and Credomarka and Charter of Company with Limited
Liability of Press-Loto, by the appropriate authority in the jurisdiction of
incorporation and formation, respectively (subject to the provisions below),
and, with respect to the By-Laws, by an appropriate officer of Borrower or
Credomarka, as the case may be; provided however, to the extent such Charter of
Company with Limited Liability is not immediately obtainable for Press-Loto, the
Secretary of Press-Loto shall certify the Press-Loto Charter of Company with
Limited Liability, as restated or amended and that a certified the Charter of
Company with Limited Liability of Press-Loto is true and correct and has been
requested from the appropriate authority in Press-Loto's jurisdiction of
formation.
(D) certificates of good standing for Borrower, Credomarka and Press-Loto
(subject to the provisions below) from the appropriate authority in the
jurisdiction of incorporation or formation, and in each other jurisdiction in
which the entity is qualified to do business; provided, however, to the extent
such a certificate is not immediately obtainable for Press- Loto, the Secretary
of Press-Loto shall certify that Press-Loto is in good standing in its
jurisdiction of formation and that such a certificate of good standing has been
requested from the appropriate authority in Press-Loto's jurisdiction of
formation.
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<PAGE>
(E) duly executed copies of the Note and the other Loan Documents and Other
Financing Documents;
(F) with respect to Advances in excess of One Hundred Thousand Dollars
($100,000), a signed copy of the opinion of counsel for Borrower reasonably
satisfactory to Lender, dated the date of the Initial Advance, in form and
substance reasonably satisfactory to Lender and its counsel;
(G) with respect to Advances up to One Hundred Thousand Dollars ($100,000),
evidence reasonably satisfactory to Lender that the shares of capital of
Press-Loto owned by Credomarka Corp., a New Jersey corporation ("Credomarka")
are duly authorized, validly issued, fully paid and non-assessable, free and
clear of all liens, preemptive rights and rights of first refusal, including
without limitation, in connection with the pledge of such shares of capital by
Credomarka to Lender pursuant to the Credomarka Pledge Agreement and any
transfer of such shares of capital to Lender as a result of a foreclosure
thereon under the Credomarka Pledge Agreement (as hereinafter defined);
(H) with respect to Advances in excess of One Hundred Thousand Dollars,
evidence reasonably satisfactory to Lender that Credomarka has assigned all of
its right, title and interest in, and to, that certain number of Press-Loto
shares of capital representing fifty percent (50%) of the issued and outstanding
Press-Loto shares of capital to Rugby, and that such shares of capital of
Press-Loto owned by Rugby are duly authorized, validly issued, fully paid and
non-assessable, free and clear of all Liens, preemptive rights and rights of
first refusal, including, without limitation, in connection with the transfer of
such shares of capital by Credomarka to Rugby and the pledge of such shares of
capital by Rugby to Lender pursuant to the Borrower Pledge Agreement and any
transfer of such shares of capital to Lender as a result of a foreclosure
thereon under the Borrower Pledge Agreement (as hereinafter defined); and
(I) with respect to Advances in excess of One Hundred Thousand Dollars
($100,000), evidence satisfactory to Lender that the Lottery Contracts listed on
Schedule 3.10(a) to the Merger Agreement have been entered into and are in full
force and effect.
(ii) The following agreements shall have been entered into:
(A) a pledge agreement between Weinstein and Lender (the "Weinstein Pledge
Agreement"), in form and substance reasonably satisfactory to Lender, providing,
among other things, that Weinstein is pledging all of the outstanding shares of
capital stock of Borrower as security for the payment, performance and
observance by Borrower of the Obligations;
(B) with respect to an Advance up to One Hundred Thousand Dollars
($100,000), a pledge agreement between Credomarka (the "Credomarka Pledge
Agreement"), in form and substance reasonably satisfactory to Lender, providing,
among other
3
<PAGE>
things, that Credomarka shall pledge that certain number of the Press-Loto
shares of capital that Credomarka owns or hereafter shall acquire, which equals
fifty percent (50%) of the issued outstanding shares of capital of Press-Loto
(which number is currently 12,000 shares of capital);
(C) with respect to Advances in excess of One Hundred Thousand Dollars, a
pledge agreement between Borrower and Lender (the "Borrower Pledge Agreement"),
in form and substance reasonably satisfactory to Lender, providing, among other
things, that Borrower shall pledge all of the Press-Loto shares of capital that
Borrower owns or hereafter shall acquire as security for the payment,
performance and observance by Borrower of the Obligations; and
(D) With respect to advances in excess of One Hundred Thousand Dollars
($100,000) a collateral assignment agreement (the "Collateral Assignment
Agreement") between Borrower and Lender, in form and substance reasonably
satisfactory to Lender, providing, among other things, that Borrower shall make
a collateral assignment of the Lottery Contracts to Lender as security for the
payment, performance and observance by Borrower of the Obligations.
(iii) The intended uses of the Advance shall be in strict
conformity with a budget to be agreed upon between Lender and Borrower
(the "Budget").
(iv) the form of the Press-Loto shareholders' agreement referred
to in Section 7.15 of the Merger Agreement shall have been agreed upon
in writing by the Lender and the Borrower, unless Lender shall have
received evidence, satisfactory to it, in its good faith sole
discretion, to the effect that Press-Loto shall not issue any shares
of capital or any other equity or proprietary interest without the
prior written consent of Rugby.
(d) Lender's obligation to make each Advance (including the Initial
Advance) is subject to the fulfillment of each of the following conditions
immediately prior to or contemporaneously with such Advance:
(i) All of the representations and warranties of Borrower made
under this Agreement and each other Loan Document and Other Financing
Document shall be true and correct in all material respects at the
time of the disbursement of such Advance as if made as of such date,
Borrower shall have performed and complied in all material respects
with all covenants and agreements required by this Agreement and each
other Loan Document and Other Financing Document to be performed or
complied with by Borrower, and Lender shall have received a
certificate, dated the date of the Advance, signed by the President of
Borrower as to the satisfaction of the foregoing conditions. Lender
may, in its sole discretion, without waiving this condition, consider
it fulfilled, and a representation by Borrower to such effect made, if
no written notice to the contrary is received from Borrower prior to
the making of such Advance.
(ii) The corporate actions of Borrower referred to in paragraph
(c) hereof shall remain in full force and effect, the incumbency of
officers shall be as stated in the certificates of incumbency
delivered pursuant to paragraph (c) hereof or as subsequently modified
and reflected
4
<PAGE>
in a certificate of incumbency delivered to Lender, the Certificates
of Incorporation and By-Laws of Borrower and Charter for Company with
Limited Liability of Press-Loto delivered pursuant to paragraph (c)
hereof shall remain unmodified, Borrower and Press-Loto shall remain
in good standing in each jurisdiction of incorporation and formation
respectively and in each other jurisdiction in which the entity is
qualified to do business and Lender shall have received a certificate,
dated the date of the Advance, signed by the President of Borrower as
to the satisfaction of the foregoing conditions. Lender may, in its
sole discretion, without waiving this condition, consider it
fulfilled, and a representation by Lender to such effect made, if no
written notice to the contrary is received from Borrower prior to the
making of such Advance.
(iii) No Event of Default (as hereinafter defined) shall have
occurred and be continuing and Lender shall have received a
certificate, dated the date of the Advance, signed by the President of
Borrower as to the satisfaction of the foregoing conditions.
(iv) There shall not be any litigation, investigation or
proceeding of or before any court, arbitrator or authority pending or
threatened against Lender, Borrower or Press- Loto seeking, nor any
injunction, writ, temporary restraining order or any order or judgment
of any nature issued by any court, arbitrator or authority directing,
that the transactions provided for herein not be consummated as herein
provided.
(v) Borrower shall have delivered to Lender a purchase order,
executed on behalf of Borrower, with respect to the intended use of
the Advance (the "Purchase Order").
(e) In addition to the provisions of Sections 2(c) and (d), Lender's
obligation to make each Advance after the Initial Advance is subject to the
fulfillment of each of the following conditions immediately private or
contemporaneously with such Advance:
(A) Lender shall have received such historical audited and unaudited
financial statements of Rugby and Press-Loto (including, without limitation, the
Rugby Financial Statements and the Press-Loto Financial Statements) which (i)
shall have been prepared in conformity with generally accepted accounting
principals ("GAAP") consistently applied throughout the period covered thereby,
including, without limitation, with respect to the audited Rugby Financial
Statements and audited Press-Loto Financial Statements, an unqualified report
thereon by certified public accountants and/or Russian equivalents who are
"independent" within the meaning ascribed to such term in Regulation S-X,
promulgated by the SEC, to the effect that the financial statements have been
prepared in accordance with GAAP, that such financial statements present fairly
the consolidated financial condition of Borrower and Press-Loto as of the date
thereof and for the fiscal year covered thereby and that the examination of such
accountants in connection with such audited Rugby Financial Statements and
Press-Loto Financial Statements have been made in accordance with generally
accepted auditing standards, and accordingly, includes such tests of the
accounting records and such other auditing procedures as were considered
necessary in the circum stances, and (ii) shall reflect, in the aggregate,
tangible assets of not less than One Thousand United
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<PAGE>
States Dollars (USD $1,000) and liabilities of not more than Fifty Thousand
United States Dollars (USD $50,000).
(B) Lender shall have received an opinion from an investment banker
acceptable to it to the effect that the transactions contemplated by the Merger
Agreement are fair, from a financial viewpoint, to the shareholders of the
Lender.
(f) Lender is authorized to make any and all Advances directly to the
vendor indicated on the Purchase Order and all such payments shall be
considered Advances hereunder.
(g) All Advances shall constitute one loan and all Obligations shall
constitute one general obligation secured by Lender's security interest in
all of the Collateral and by all other liens heretofore, now, or at any
time or times hereafter granted by Borrower to Lender in connection with
this Agreement. Borrower agrees that all of the rights of Lender set forth
in this Agreement or the Note shall apply to any modification of or
supplement to this Agreement.
3. Grant of Security Interest; Covenant to Grant Security Interests. In
consideration of Lender's agreement to make Advances hereunder to Borrower
subject to the terms and conditions hereof, and of one or more loans, Advances,
or other financial accommodations at any time made or extended by Lender to
Borrower, or to any person, firm, or corporation whose obligations or
liabilities are guaranteed at any time by Borrower to Lender (collectively, the
"Loan"):
(a) Borrower hereby grants to Lender a valid and binding first
security interest in the Collateral;
(b) with respect to Advances up to One Hundred Thousand Dollars,
Credomarka shall pledge a number of Press-Loto shares of capital Credomarka
owns equal to fifty percent (50%) of the issued and outstanding Press-Loto
shares of capital pursuant to the Credomarka Pledge Agreement;
(c) with respect to Advances in excess of One Hundred Thousand
Dollars, Borrower shall pledge all of the Press-Loto shares of capital
Borrower owns pursuant to the Borrower Pledge Agreement;
(d) Weinstein shall pledge all of the Borrower's outstanding Common
Shares pursuant to the Weinstein Pledge Agreement; and
(e) with respect to Advances in excess of One Hundred Thousand
Dollars, Borrower shall make a collateral assignment of the Lottery
Contracts pursuant to the Collateral Assignment Agreement, as security for
the payment, performance, and observance by Borrower of the Obligations.
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<PAGE>
4. Representations and Warranties. In addition to the representations
and warranties made by Borrower to Lender in the Merger Agreement, which
representations and warranties are incorporated herein by reference and made a
part hereof as if expressly stated herein and made as of the date hereof,
Borrower further represents and warrants to Lender as follows:
(a) Authority. The execution and delivery by Borrower of this
Agreement, the Note and each of the other documents relating to the Loan,
including, without limitation, the Collateral Assignments and the Pledge
Agreement (collectively with the Note, the "Loan Documents") and the Other
Financing Documents and the performance of Borrower's obligations hereunder
and thereunder: (i) are within Borrower's corporate powers; (ii) are duly
authorized by Borrower's Board of Directors and stockholders, if required;
(iii) are not in contravention of the terms of Borrower's Certificate of
Incorporation or By-laws, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower or any of its assets or
property is bound or affected; (iv) do not, as of the date of execution
hereof, require the consent, approval or authorization of or declaration,
registration or filing with any governmental body or any nongovern mental
person or entity (except for the filing of the UCC-1 and other financing
statements contemplated hereby); (v) do not contravene any contractual or
governmental restriction binding upon Borrower; and (vi) will not, except
as contemplated herein, result in the imposition of any liens, security
interests or encumbrances of any nature whatsoever (collectively, "Liens")
upon any assets or property of Borrower under any existing indenture,
mortgage, deed of trust, loan or credit agreement or other agreement or
instrument to which Borrower is a party or by which it or any of its assets
or property may be bound or affected.
(b) Binding Effect. This Agreement, the Loan Documents and the Other
Financing Documents have been duly executed and delivered on behalf of
Borrower and constitute the legal, valid and binding obligations of
Borrower enforceable against Borrower in accordance with their terms.
(c) Full Disclosure. No representation or warranty in this Agreement,
the Note or in any other Loan Document or Other Financing Document
contains, or will contain, any untrue statement of any material fact as of
the date when made or omits, or will omit, to state any material fact as of
the date when made or omits, or will omit, to state any material fact
necessary to make the statements herein or therein not misleading as of the
date when made; there is no fact known to Borrower that has not been
disclosed to Lender in writing which materially and adversely affects or
would materially and adversely affect the business, financial condition or
operations of Borrower or Press-Loto.
(d) Liens and Encumbrances. Except as set forth on Schedule 4(d) and
other than the security interests granted or to be granted to Lender
hereunder and under the Loan Documents, Borrower owns its property and
assets free and clear of all Liens. No financing statement covering any of
the Collateral is on file in any public office.
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<PAGE>
(e) Solvency. Except as set forth in Schedule 4(e) attached hereto,
after giving effect to the transactions contemplated hereby and by the
other Loan Documents and the Other Financing Documents, Borrower and
Press-Loto taken as a whole currently have sufficient capital to carry on
the business in which they are now engaged, are solvent and are able to pay
their current debts as they mature.
5. Affirmative Covenants. From and after the date hereof and continuing
so long as any of the Obligations shall remain unpaid, unless Lender shall
otherwise consent in writing:
(a) Punctual Payment. Borrower will duly and punctually pay any and
all amounts payable under the Note and the other Loan Documents, all in
accordance with the terms thereof. Borrower will comply with all of the
covenants, agreements and other conditions contained in this Agreement, the
Note and the other Loan Documents.
(b) Corporate / Company Existence. Borrower will maintain its
corporate existence and the limited liability company existence of
Press-Loto and the qualification and good standing of Borrower and
Press-Loto in all jurisdictions in which such qualification and good
standing are necessary in order for Borrower and Press-Loto to conduct
their businesses and own their properties.
(c) Principal Office. Borrower will at all times maintain its
principal offices at the address set forth herein below subject to the
provisions of Section 6(e) hereof.
(d) Compliance with Laws and Regulations. Borrower will comply, and
cause Press-Loto to comply, in all material respects with all laws,
statutes, rules, regulations, ordinances, judgments, writs, decrees, and
orders of any governmental body applicable to Borrower or Press- Loto and
Borrower will not fail to obtain (and will not allow to lapse) or permit
Press-Loto to fail to obtain (or allow to lapse) any license, permit or
other authorization which may be or become necessary in order for Borrower
and Press-Loto to conduct their businesses, own their properties, and
perform their Obligations under this Agreement, the Note or the other Loan
Documents.
(e) Tax Obligations.
(i) Borrower shall, and shall cause Press-Loto to, file all tax
and information returns and reports required by all taxing authorities
(all prepared in accordance with applicable law), pay or cause to be
paid all license fees, bonding premiums and related taxes and charges,
and pay or cause to be paid all income, employment, real and personal
property taxes and other governmental taxes and charges assessed
against Borrower or Press-Loto, or payable by Borrower or Press-Loto,
at such times and in such manner as to prevent any penalty or interest
from accruing or any Lien or charge from attaching to any assets or
property of Borrower or Press-Loto; provided that Borrower or
Press-Loto shall have the right to contest any such fees, premiums,
taxes and charges prior to the payment thereof for so long as such
contest is pursued diligently and in good faith by appropriate
proceedings.
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(ii) Borrower shall notify Lender promptly (and in no event later
than fifteen (15) days) after becoming aware of the intent of the
Internal Revenue Service or other taxing authority (the "Taxing
Authority") to assert a deficiency with respect to it or Press-Loto,
and shall promptly (and in no event later than fifteen (15) days
following receipt of any notice of deficiency) inform Lender of such
proposed deficiency and deliver to Lender a copy of any notices of
deficiency received from the Taxing Authority. If Lender so requests
and if there is a reasonable legal basis therefor, Borrower shall, or
shall cause Press-Loto to, take all reasonable actions necessary to
contest such claimed deficiency and shall appoint outside tax counsel
reasonably acceptable to Lender to contest such claims of deficiency
and shall direct such counsel to consult with and to provide Lender
with periodic status reports and assessments of the legal merits of
the contest. At Lender's request, such contest shall continue through
the appropriate administrative and court procedures including appeals
therefrom until such outside tax counsel informs Lender that further
contest would be inadvisable taking into account all factors
(including any settlement or compromise proposed by the Taxing
Authority).
(f) Maintenance of Properties. Borrower will keep, and cause
Press-Loto to keep, their respective properties which are materially useful
or necessary in its business in good working order and condition and
maintain the insurance thereon required by this Agreement.
(g) Maintenance of Records. Borrower will keep, and will cause
Press-Loto to keep, at all times proper books of record and account in
which true, correct and complete (in all material respects) entries will be
made of all dealings or transactions of or in relation to the business and
affairs of Borrower or Press-Loto, in accordance with generally accepted
accounting principles consistently applied throughout the period involved
(except for such changes as are disclosed in such financial statements or
in the notes thereto and concurred in by the independent certified public
accountants), and Borrower will, and will cause Press-Loto to, provide
reasonable protection against loss or damage to such books of record and
account.
(h) Litigation and Other Proceedings. Borrower will notify Lender
promptly after Borrower knows of (i) the institution or threat of any
action, suit, proceeding, governmental investigation or arbitration against
or affecting Borrower or Press-Loto or any of the material assets or
property of any of them, or (ii) any material development in any such
action, suit, proceeding, governmental investigation or arbitration.
(i) Labor Relations. Borrower will notify Lender promptly upon
learning of any labor dispute to which Borrower or Press-Loto may be a
party and which involves any group of employees of Borrower or Press-Loto.
(j) Insurance. Borrower will, and will cause Press-Loto (to the extent
available in the Russian Federation) to, carry and maintain in full force
and effect at all times with financially sound and reputable insurers (or,
as to workers' compensation or similar insurance, in an insurance fund or
by self-insurance authorized by the jurisdiction in which its operations
are carried on):
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(i) all worker's compensation or similar insurance as may be
required under the laws of any jurisdiction;
(ii) public liability insurance against claims for personal
injury, death or property damage suffered upon, in or about any
premises owned or occupied by it or occurring as a result of the
ownership, maintenance or operation by it of any automobile, truck or
other vehicle or as a result of any services rendered by it;
(iii) insurance against loss or damage by fire, theft, pilferage,
explosion, spoilage or other casualty, with a replacement value and
agreed amount endorsement; and
(iv) insurance against such other risks as are usually insured
against by persons of established reputation engaged in the same or
similar businesses and similarly situated or as may be reasonably
required by Lender, including, without limitation, political risk
insurance.
The insurance specified in the foregoing clauses (ii), (iii) and (iv)
shall be maintained with respect to Borrower and the Collateral in
such form and in such amounts as Lender may from time to time
reasonably require, including provisions (A) requiring that coverage
evidenced thereby shall not be terminated or materially modified
without thirty (30) days' prior written notice to Lender, and (B)
requiring that no claims shall be paid thereunder without ten (10)
days' advance written notice to Lender. Additionally, all such
insurance shall be in the name of and with loss or damage payable to
Borrower and to Lender, as their interests may appear. Borrower shall
deliver to Lender the original or duplicate policies, or certificates
or other evidence reasonably satisfactory to Lender, of compliance
with the foregoing insurance provisions. Borrower assumes all
responsibility and liability arising from the use of the Collateral,
either for negligence or otherwise, by whomsoever used, employed or
operated, other than Lender and will defend, indemnify and hold Lender
harmless from and against any and all claim, loss or damage to persons
or property caused by the Collateral or by its use and operation,
except any such claim, loss or damage directly caused by the gross
negligence or willful misconduct of Lender or its agents, servants or
employees.
(k) Perfection of Security Interest.
(i) Borrower will, from time to time, do whatever Lender may
reasonably request by way of obtaining, executing, delivering and/or
filing financing statements, and other notices and amendments and
renewals thereof, and will take any and all steps and observe such
formalities as Lender may request, in order to create, perfect and
maintain valid continuing Liens upon the Collateral as contemplated by
this Agreement (the "Security Interest"). All charges, expenses and
fees that may be incurred by Lender in connection with any of the
foregoing (including, without limitation, reasonable attorneys' fees
and disbursements), and any local taxes relating thereto, shall be
added to the Obligations or, at Lender's option, shall be paid to
Lender immediately upon demand therefor.
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(ii) Borrower hereby irrevocably appoints Lender as its lawful
attorney and agent, with full power of substitution, to execute and
deliver, on behalf of and in the name of Borrower, such financing
statements, assignments, notices, pledges and other documents and
agreements, and to take such other actions as Lender may deem
necessary for the purpose of the creation, perfection, maintenance or
continuation of the Security Interest, under any applicable law, and
Lender is hereby authorized to file on behalf of and in the name of
Borrower, at Borrower's expense, such financing statements,
assignments, notices, pledges and other documents and agreements in
any appropriate governmental office. The right is expressly granted to
Lender, in its discretion, in those jurisdictions where the same is
permitted, to file one or more financing statements (including
amendments and renewals thereof) under the UCC or similar law signed
only by the Lender, naming Borrower as debtor and naming Lender as
secured party and indicating therein the types, or describing the
items, of the Collateral.
(l) Use of Loan Proceeds. Except with written consent of Lender,
Borrower shall use the proceeds of the Loan, as drawn down from time to
time, strictly in accordance with the Budget.
(m) Further Assurances. Borrower shall at any time or from time to
time execute and deliver such further instruments and documents and take
such further action as may reasonably be requested by Lender to carry out
to Lender's reasonable satisfaction the transactions contemplated by this
Agreement, the Note, any of the other Loan Documents and the Other
Financing Documents.
(n) Indemnification. Borrower shall indemnify, defend and hold
harmless Lender and each holder of the Note and in each case its officers,
directors, agents and employees from and against all losses, costs, fines,
liabilities, judgments, actions, penalties, damages, injuries, claims,
demands, disbursements and expenses, including reasonable attorneys' fees
and costs, arising out of (i) claims by or on behalf of any brokers,
finders or investment bankers made with respect to the transactions
contemplated by this Agreement; (ii) the execution or consummation of this
Agreement, the Note, the other Loan Documents or the Other Financing
Documents; (iii) the operation or maintenance of any of the Collateral; or
(iv) any aspect of, or any transaction contemplated by or referred to in,
or any matter related to, this Agreement, in each case whether or not
Lender or such holder is a party thereto, except to the extent such losses,
cost, fines, liabilities, judgments, actions, penalties, damages, injuries,
claims, demands, disbursements and expenses are directly caused by the
gross negligence or willful misconduct of Lender or such holder or their
respective agents, servants or employees. Borrower shall assume the
settlement and defense of any suit or other legal proceeding brought to
enforce any of the foregoing (with counsel reasonably satisfactory to
Lender), and shall pay all judgments entered in any such suit or legal
proceeding. Borrower shall not compromise or settle any such suit or other
legal proceeding without the prior written consent of Lender, which consent
shall not be unreasonably withheld or unduly delayed. The indemnities and
assumptions of liabilities and obligations herein provided for shall
continue in full force and effect notwithstanding the termination of this
Agreement.
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(o) Press-Loto Good Standing and Charter of Company with Limited
Liability. To the extent Borrower has not provided Lender with a
certificate of good standing for, or certified Charter of Company with
Limited Liability of, Press-Loto prior to or contemporaneously with the
Initial Advance as provided in Section 2(c)(1), Borrower shall deliver
Lender a certificate of good standing for, and certified Charter of Company
with Limited Liability of, Press-Loto, from the appropriate authority in
the jurisdiction of its formation, within fifteen (15) days following the
date of the Initial Advance.
(p) Assignment of Press-Loto Shares of Capital. Credomarka shall
assign to Rugby all of its right, title and interest in, and to, that
number of shares of capital of Press-Loto it owns, equal to fifty (50%)
percent of the issued and outstanding shares of capital of Press-Loto,
prior to Lender making an Advance to Borrower in excess of One Hundred
Thousand Dollars ($100,000).
6. Negative Covenants. From and after the date hereof and continuing so
long as any of the Obligations shall remain unpaid, unless Lender shall
otherwise consent in writing:
(a) Conduct of Business. Borrower will not cease to continuously
engage in its business as currently operated. Borrower will not engage in,
directly or indirectly, or permit Press- Loto to engage, directly or
indirectly, in any other line of business without the prior written consent
of Lender. Borrower shall not change its name, identity or structure or use
or permit Press-Loto to operate its business under any other name without
the prior written consent of Lender.
(b) Transaction with Affiliates; Fees. Except for the transactions
contemplated hereby and by the other Loan Documents and the Other Financing
Documents, Borrower will not enter into, directly or indirectly, or permit
Press-Loto to enter into, directly or indirectly, any transaction with any
officer, director, employee, shareholder or affiliate of Borrower, except
transactions (including without limitation payment of salaries to employees
who are also shareholders) with officers, directors or employees made in
the ordinary course of business and upon fair and reasonable terms which
are fully disclosed to Lender in advance; or pay, or permit Press- Loto to
pay, fees (including, without limitation, management fees) to any officer,
director, employee, partner, shareholder or affiliate, other than in the
ordinary course of business.
(c) Liens. Borrower will not create or suffer to exist, or permit
Press-Loto to, create or suffer to exist any Lien upon or with respect to
their respective assets or properties, whether now owned or hereafter
acquired, or assign any right to receive income, in each case to secure any
indebtedness of any person, except Liens in favor of Lender.
(d) Dividends and Stock Redemptions. Borrower will not declare or pay,
directly or indirectly, or permit Press-Loto directly or indirectly, to
declare or pay, any dividends (other than dividends payable from Press-Loto
to Borrower as its parent), or purchase or otherwise acquire for value any
of its capital stock now or hereafter outstanding; or make any distribution
of assets to its stockholders or permit Press-Loto to purchase or otherwise
acquire for value any of Press-Loto capital stock now or hereafter
outstanding.
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(e) Change of Location. Borrower will not at any time (i) change the
location of its chief executive offices, or (ii) change the locations where
its records, books of account or inventory are kept without, in each case,
giving at least ten (10) days' prior written notice to Lender specifying
the new location of such office or location.
(f) Amendments. Borrower will not request, permit or consent to any
amendment to its or Press-Loto's Certificate of Incorporation, By-Laws or
other organizational documents, which amendment could have an adverse
effect on Lender in its capacity as lender or secured party under this
Agreement.
(g) Environmental Matters. Neither Borrower nor Press-Loto shall for
itself, nor shall it knowingly permit any other party to, discharge any
toxic or hazardous waste or material in or on the property used in any of
its business, other than in compliance with applicable environmental laws
and regulations, or otherwise violate or permit a violation of any
applicable law or regulation with respect to environmental matters. If and
to the extent required by applicable environmental laws or regulations,
Borrower and Press-Loto shall remove and otherwise mitigate the effects of
any such waste, material or violation and shall protect the value of the
Collateral. In the event Borrower or Press-Loto fails to do so in
accordance with applicable environmental laws or regulations, upon not less
than thirty (30) days (or lesser period if determined reasonably necessary
by Lender) written notice to Borrower or Press-Loto, Lender may remove or
mitigate the effects of such waste, material or violation and any amounts
paid by Lender to remove or mitigate the effects of such waste material or
violation shall be part of the Obligations. Nothing contained in the
immediately preceding sentence shall be construed to imply that Lender has
any responsibility for any obligation to remove or otherwise mitigate the
effects of such waste, material or violations.
(h) Other Actions. During the Term of this Agreement, Borrower will
not, and will not cause or permit Press-Loto to, take any action outside
the usual and ordinary course of business and consistent with past
practice, except in strict conformity with the Budget. Without limiting the
generality of the foregoing, Borrower will not, and will not cause or
permit Press-Loto to, make any investments in or loans to, or otherwise
acquire any of the capital stock of, or any equity or proprietary interest
in, any other Person.
7. Financial Reporting. From and after the date hereof and continuing
so long as any of the Obligations shall remain unpaid, Borrower will furnish to
Lender:
(a) Quarterly Statements. As soon as available and in any event within
forty-five (45) days after the end of each fiscal quarter, a copy of the
consolidated balance sheet and statements of income, stockholders equity
and cash flow for such quarter for Borrower and Press- Loto, in such form
as may be reasonably acceptable to Lender (the "Quarterly Financials"). The
foregoing shall be accompanied by a certificate signed by Borrower's chief
financial officer stating that no Event of Default has occurred or then
exists. By its delivery of the Quarterly Financials to Lender, Borrower
shall be deemed to represent and warrant that the information set forth
therein
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fairly present the liabilities and financial condition of Borrower and
Press-Loto as of the date thereof and the results of their operations for
the particular fiscal quarter, subject to opinion and normal year and
adjustments consistent with past practice.
(b) Annual Statements. As soon as available and in any event within
One Hundred and Twenty (120) days after the end of each fiscal year of
Borrower, a copy of the annual audited consolidated balance sheet and
statements of income, stockholders equity and cash flow for such year for
Borrower and Press-Loto (the "Annual Financials"), containing financial
statements for such year certified in a manner reasonably acceptable to
Lender by an independent certified public accountant reasonably acceptable
to Lender and accompanied by an opinion thereon of such independent
certified public accountant or Russian equivalent to the effect that the
financial statements have been prepared in accordance with GAAP, that such
financial statements present fairly the consolidated financial condition of
Borrower and Press-Loto as of the date of the Annual Financials and for the
fiscal year covered thereby and that the examination of such accountants in
connection with such Annual Financials has been made in accordance with
generally accepted auditing standards, and accordingly, includes such tests
of the accounting records and such other auditing procedures as were
considered necessary in the circumstances and accompanied by a certificate
signed by Borrower's chief financial officer stating that no Event of
Default has occurred or then exists. By its delivery of the Annual
Financials to Lender, Borrower shall be deemed to represent and warrant
that the Annual Financials fairly present the assets, liabilities and
financial condition of Borrower and Press-Loto as of the date thereof and
the results of their operations for the particular fiscal year and that
there are no omissions from the Annual Financials or other facts or
circumstances not reflected in the Annual Financials which are material in
accordance with GAAP. The Annual Financials shall be accompanied by a
statement from the independent certified public accountants or Russian
equivalent that, in making the examination necessary for their report on
the Annual Financials for that fiscal year of Borrower they have obtained
no knowledge of the occurrence or existence of any Event of Default.
(c) Notice of Default. Promptly after becoming aware of (i) the
existence of (A) any Event of Default hereunder on the part of Borrower,
(B) any default by Borrower in the fulfill ment of any of the terms,
covenants, provisions or conditions of the Merger Agreement, this Agreement
or any of the Loan Documents or (C) any default under any material note,
indenture, loan agreement, mortgage, lease, deed or similar agreement or
material contract to which Borrower or Press-Loto is a party or by which it
or its assets or property may be bound or affected; or (ii) any
indebtedness of Borrower or Press-Loto being declared due and payable
before its express maturity, or any holder of such indebtedness having the
right to declare such indebtedness due and payable before its express
maturity, because of the occurrence of any default (or any event which,
with notice and/or lapse of time, shall constitute any such default) under
such indebtedness; or (iii) any litigation, suit or administrative
proceeding affecting Borrower or Press-Loto whether or not the claim is
considered by Borrower to be covered by insurance, which litigation, suit
or administrative proceeding has an amount in controversy in excess of
$50,000 in each instance or $250,000 in the aggregate, then in each case a
certificate of an authorized financial officer of Borrower describing
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<PAGE>
the nature and status of such matters and what action Borrower is taking or
proposes to take with respect thereto.
(d) Notice of Material Adverse Change. Promptly after becoming aware
of any material adverse change in the business, assets, operations or
conditions, financial or otherwise, of Borrower or Press-Loto, a
certificate of the chief financial officer of Borrower setting forth the
details of such material adverse change and stating what action Borrower or
Press-Loto has taken or proposes to take with respect thereto.
(e) Other Information. Such other information respecting the condition
or operations, financial or otherwise, of Borrower or Press-Loto, insurance
coverage and other matters as Lender may from time to time reasonably
request; provided that from and after the occurrence of an Event of
Default, all reports required to be provided to Lender may, at Lender's
discretion, be required to be provided with more frequency and within
shorter time periods than otherwise provided.
8. Inspection. From and after the date hereof and continuing so long as
any of the Obligations shall remain unpaid, Borrower will permit Lender, or any
person designated by Lender in writing, from time to time hereafter, to call at
Borrower's or Press-Loto's place or places of business (or any other place where
the Collateral or any information relating thereto is kept or located) during
all business hours upon not less than three (3) business days' prior notice,
and, without hindrance or delay (provided that Lender or such designees shall
not unreasonably disrupt the day-to-day operations of Borrower or Press-Loto),
(i) to inspect, audit, check and make copies of and extracts from Borrower's or
Press-Loto's books, records, journals, orders, receipts and any correspondence
and other data relating to Borrower's business or to any transaction between the
parties hereto, (ii) to make such verification concerning the Collateral as
Lender may consider reasonable under the circumstances, and (iii) to discuss the
affairs, finances and business of Borrower or Press-Loto with any of their
respective officers, directors or outside auditors.
9. Defaults. The occurrence of any one or more of the following events
shall constitute an event of default ("Event of Default") by Borrower under this
Agreement:
(a) if Borrower shall default in the timely payment of any sum payable
by it with respect to, or in the performance of any of the terms and
conditions of, any of the Obligations (or of any instruments evidencing the
same, including, without limitation, the Note) or of any terms or
conditions of the Merger Agreement or this Agreement and, with regard to a
default other than relating to the timely payment of any sum, such default
shall continue for a period of thirty (30) days after notice thereof;
(b) if any warranty, representation or statement of fact made herein
or furnished to Lender at any time by or on behalf of Borrower, Credomarka,
or Weinstein (collectively, the "Obligors") proves to have been false or
misleading in any material respect when made or furnished;
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<PAGE>
(c) if either of the Obligors fails to perform or observe any
covenant, term, condition and/or obligation contained in, or breaches any
provision of, the Merger Agreement, this Agreement or any instrument,
document or agreement delivered by such Obligor to Lender, including,
without limitation, the Loan Documents and the Other Financing Documents,
and, with regard to a default other than relating to the timely payment of
any sum, such default shall continue unremedied for a period of thirty (30)
days following receipt of notice thereof;
(d) if there shall be a material default under any instrument,
document or agreement delivered by either of the Obligors, to Lender,
including, without limitation, the Loan Documents and Other Financing
Documents;
(e) in the event of loss, theft, substantial damage to or destruction
of any material part of the Collateral, or the making of any levy on,
seizure or attachment of, any material part of the Collateral which is not
covered by insurance and/or replaced within thirty (30) days with
substitute Collateral (with a value equal to or greater than the Collateral
being replaced) satisfactory to secure Lender, in its reasonable
discretion, as to the Obligations;
(f) if either of the Obligors shall execute or file a certificate or
other instrument evidencing the legal change of name of such Obligor
without furnishing Lender at least ten (10) days' prior written notice
thereof;
(g) in the event any of the Obligors shall be dissolved or shall die;
(h) if Borrower or Credomarka shall fail to maintain its corporate
existence in good standing;
(i) if there shall be filed by or against any of the Obligors any
petition for any relief under the bankruptcy laws of the United States as
now or hereafter in effect or under any insolvency, readjustment of debt,
dissolution or liquidation law or statute now or hereafter in effect (and
whether any such action or proceeding shall be at law, in equity or under
any bankruptcy, reorganization, arrangement, insolvency, readjustment of
debt, receivership, liquidation or dissolution law or statute) provided,
however, with respect to an involuntary petition, that such petition is not
dismissed within ninety (90) days;
(j) if any of the Obligors shall admit in writing its inability to pay
its debts as they mature or make a general assignment for the benefit of
creditors;
(k) if any of the Obligors shall become insolvent or make or send
notice of an intended bulk transfer, or fail, after demand, to furnish any
financial information or permit the inspection of books or records of
account;
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(l) if any of the Obligors shall voluntarily or otherwise suspend or
interrupt the transaction of its usual business for ten (10) business days
other than by reason of strikes or force majeure; or
(m) if any petition or application to any court or tribunal, at law or
in equity, be filed by or against any of the Obligors for the appointment
of any receiver or any trustee for any of the Obligors.
11. Remedies on Default. Upon the occurrence of any one or more of the
aforemen tioned Events of Default or at any time thereafter, Lender may, without
notice to or demand upon Borrower, declare any or all of the Obligations
immediately due and payable and Lender shall have the following rights and
remedies in addition to all rights and remedies of a secured party under the
Uniform Commercial Code or other applicable statute or rule, in any jurisdiction
in which enforcement is sought, all such rights and remedies being cumulative
and not exclusive:
(a) Collateral.
(i) Lender may at any time and from time to time, with or (if and
to the extent permitted by applicable law) without process of law and
with or (if and to the extent permitted by applicable law) without the
aid and assistance of others, enter upon any premises in which the
Collateral or any part thereof may be located and, without resistance
or interference by Borrower, take possession of the Collateral; and/or
dispose of all or any part of the Collateral located on any premises
of Borrower; and/or require Borrower to assemble and make available to
Lender all or any part of the Collateral at any place and time
designated by Lender; and/or remove all or any part of the Collateral
from any premises on which any part thereof may be located for the
purpose of effecting preservation or sale or other disposition
thereof; and/or sell, resell, lease, assign and deliver, or otherwise
dispose of, the Collateral or any part thereof in its existing
condition on commercially reasonable terms or following any
commercially reasonable preparation or processing, at public or
private proceedings, in one or more parcels at the same or different
times with or without having the Collateral at the place of sale or
other disposition, for cash, upon credit or for future delivery, and
in connection therewith Lender may grant options, at such place or
places and time or times and to such persons, firms or corporations on
commercially reasonable terms as Lender deems best, and without demand
for performance, and/or liquidate or dispose of the Collateral or any
part thereof in any other commercially reasonable manner. Provided
notice has been given in accordance herewith, failure of Borrower to
contest on the grounds of commercial reasonability shall be deemed a
waiver of said defense.
(ii) If any of the Collateral is sold by Lender upon credit or
for future delivery, Lender shall not be liable for the failure of the
purchaser to purchase or pay for the same and, in the event of any
such failure, Lender may resell such Collateral. Borrower hereby
waives all equity and right of redemption. Lender may buy any part or
all of the Collateral at any public sale and if any part of the
Collateral is of a type which is the subject of widely distributed
standard price quotations, Lender may buy at a private sale, all free
from any equity or right of redemption which is hereby waived and
released by Borrower, and Lender may make payment therefor (by
endorsement without
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<PAGE>
recourse) in notes of Borrower to the order of Lender in lieu of cash
to the amount then due thereon which Borrower hereby agrees to accept.
(iii) Lender may apply the cash proceeds actually received from
any sale or other disposition to the reasonable expenses of retaking,
holding, preparing for sale, selling, leasing and the like, to all
reasonable legal fees and expenses, court costs, collection charges,
travel and other expenses which may be incurred by Lender in
attempting to collect the Obligations or to enforce this Agreement and
realize upon the Collateral, or in the prosecution or defense of any
action or proceeding related to the subject matter of this Agreement;
and then to the Obligations in such order and as to principal and/or
interest due under the Note as Lender may in its sole reasonable
discretion determine; and Borrower shall at all times be and remain
liable and, after crediting the net proceeds of sale or other
disposition as aforesaid, will pay Lender on demand any deficiency
remaining, including interest thereon and the balance of any expenses
at any time unpaid, with any surplus to be paid to Borrower, subject
to any duty of Lender to the holder of any subordinate security
interest in the Collateral known to Lender but only to the extent
required by law.
(b) Proceeds. Any of the proceeds of the Collateral received by
Borrower shall not be commingled with other property of Borrower, but shall
be segregated, held by Borrower in trust for Lender as the exclusive
property of Lender, and Borrower will immediately deliver to Lender the
identical checks, moneys or other proceeds of Collateral received, and
Lender shall have the right to endorse the name of Borrower on any and all
checks, or other forms of remittance received, where such endorsement is
required to effect collection. Borrower hereby designates, constitutes and
appoints Lender and any designee or agent of Lender as attorney-in-fact of
Borrower, irrevocably and with power of substitution, to endorse the name
of Borrower on any notes, acceptances, checks, drafts, money orders or
other evidences of payment or proceeds of the Collateral that may come into
Lender's possession; to sign the name of Borrower on any invoices,
documents, drafts against account debtors of Borrower, assignments,
requests for verification of accounts and notices to debtors of Borrower;
to execute any endorsements, assignments, or other instruments of
conveyance or transfer; and to do all other acts and things necessary and
advisable in the sole discretion of Lender to carry out and enforce this
Agreement. Said attorney or designee shall not be liable for any acts or
commission or omission nor for any error of judgment or mistake of fact or
law. This power of attorney is coupled with an interest and irrevocable
while any of the Obligations shall remain unpaid.
12. Liability Disclaimer. Except for reasonable care of Collateral in
its possession, under no circumstances whatsoever shall Lender be deemed to
assume any responsibility for, or obligation or duty with respect to, any part
or all of the Collateral, of any nature or kind whatsoever, or any matter or
proceeding arising out of or relating thereto. Lender shall not be required to
take any action of any kind to collect or protect any interest in the
Collateral, including, but not limited to, any action necessary to preserve its
or Borrower's rights against prior parties to any of the Collateral. Lender
shall not be liable or responsible in any way for the safekeeping, care or
custody of any of the Collateral (except for reasonable care of Collateral in
its possession), or for any loss or damage thereto, or for any diminution in the
value thereof, or for any act or default of any agent
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<PAGE>
or bailee of Lender or Borrower, or of any carrier, forwarding agency or other
person whomsoever, or for the collection of any proceeds, but the same shall be
at Borrower's sole risk at all times. Borrower hereby releases Lender from any
claims, causes of action and demands at any time arising out of or with respect
to this Agreement or the Obligations, and any actions taken or omitted to be
taken by Lender with respect thereto, except for such claims, causes of action,
demands and/or actions directly caused by Lender's gross negligence or willful
misconduct, and Borrower agrees to defend and hold Lender harmless from and with
respect to any and all such claims, causes of action and demands, except for
such claims, causes of action, demands and/or actions directly caused by
Lender's gross negligence or willful misconduct. Lender's prior recourse to any
part or all of the Collateral shall not constitute a condition of any demand for
payment of the Obligations or of any suit or other proceeding for the collection
of the Obligations.
13. Nonwaiver. No failure or delay on the part of Lender in exercising
any of its rights and remedies hereunder or otherwise shall constitute a waiver
thereof, and no single or partial waiver by Lender of any default or other right
or remedy which it may have shall operate as a waiver of any other default,
right or remedy or of the same default, right or remedy on a future occasion.
14. Waivers. Borrower hereby waives presentment, notice of dishonor and
protest of all instruments included in or evidencing any of the Obligations or
the Collateral and any and all other notices and demands whatsoever (except as
expressly provided herein) whether or not relating to such instruments. In the
event of any litigation at any time arising with respect to any matter connected
with this Agreement or the Obligations, Borrower hereby waives the right to a
trial by jury and Borrower hereby waives any and all rights of setoff and rights
to interpose counterclaims of any nature except for counterclaims which are
compulsory or which would be lost for failure to be raised.
15. Binding Effect. This Agreement and all Obligations of Borrower
hereunder shall be binding upon the successors or assigns of Borrower, and
shall, together with the rights and remedies of Lender hereunder, inure to the
benefit of Lender and its successors, endorsees and assigns.
16. Application of Payments. In addition to its other rights herein,
Lender shall have the continuing and exclusive right to apply or reverse and
reapply any and all payments to any portion of the Obligations. To the extent
that Borrower makes a payment or payments to Lender or Lender receives any
payment or proceeds of any security for such Obligations for Borrower's benefit,
which payment(s) or proceeds or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside and/or required to be
repaid to a trustee, receiver or any other party under any bankruptcy law, state
or federal law, common law or equitable cause, then, to the extent of such
payment or proceeds received, the Obligations or part thereof intended to be
satisfied shall be revived and continue in full force and effect, as if such
payment or proceeds had not been received by Lender.
17. Consent to Jurisdiction. As a further inducement to Lender to enter
into this Agreement and to make the Advances and in consideration thereof,
Borrower covenants and agrees
19
<PAGE>
that (i) any state or federal court within the State of New York shall have
personal jurisdiction over Borrower, and (ii) service of any summons and
complaint or other process in any such action or proceeding may be made by
registered or certified mail directed to Borrower at Borrower's address set
forth below, and service so made shall be deemed to be completed upon the
earlier of actual receipt or three (3) days after the same shall have been
posted as aforesaid, Borrower hereby waiving personal service thereof. Nothing
in this paragraph shall affect the right of Lender to serve legal process in any
other manner permitted by law or affect the right of Lender to bring any action
or proceeding against Borrower or its property in the courts of any other
jurisdiction. Borrower and Lender agree that any claim or suit between or among
the parties hereto involving this Agreement, any of the other Loan Documents or
any transactions contemplated hereby or thereby shall be brought in and decided
by the state or federal courts located in Nassau County, New York.
18. Entire Agreement. This Agreement, including the schedules attached
hereto, which are a part hereof, constitutes the entire agreement of the parties
with respect to the subject matter hereof and there are no representations,
warranties or commitments except as set forth herein. This Agreement supersedes
all prior agreements, understandings, negotiations and discussions, whether
written or oral, of the parties hereto relating to the matters set forth in this
Agreement. The representations, warranties, covenants and agreements set forth
in this Agreement and in the financial statements and schedules delivered
pursuant hereto constitute all the representations, warranties, covenants and
agreements of the parties and upon which the parties have relied, shall not be
deemed waived or otherwise affected by any investigation made by any party
hereto 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.
19. 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 in writing and 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 courier,
or telecopier as follows:
If to Lender at:
77 Spruce Street
Cedarhurst, New York 11516
Attention: Chief Executive Officer
Telecopier Number: (516) 374-6700
With a copy to:
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York 11554
Attention: Fred S. Skolnik, Esq.
20
<PAGE>
Telecopier Number: (516) 296-7111
If to Borrower at:
Harvey Weinstein
203 Commack Road
Suite 42
Commack, New York 11725
Telecopier Number: (516) 499-0717
With a copy to:
Joel L. Jacobson, Esq.
400 Jericho Turnpike
Jericho, New York 11753
Telecopier Number: (516) 953-0747
and
Vann & Slavin
24 West 40th Street
New York, NY 10018
Attention: Avrom R. Vann, Esq.
Telecopier Number: (212) 382-1944
or at such other address as any party may specify by notice given to the other
party in accordance with this paragraph 19.
20. 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 applicable to agreements performed wholly within such state. 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.
21. Headings. The section headings 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.
22. No Third Party Beneficiaries. No person or entity not a party to
this Agreement shall be entitled to the benefits of, or may rely on, or enforce,
this Agreement, the other Loan Documents or the Other Financing Documents.
21
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
--------------------------------------
Mark Honigsfeld, Chairman of the Board
RUGBY NATIONAL CORP.
By: /s/ Harvey Weinstein
-------------------------------
Harvey Weinstein, President
WITH RESPECT TO SECTION
3(c) ONLY
CREDOMARKA CORP.
By: /s/ Harvey Weinstein
------------------------------
Name: Harvey Weinstein
Title: President
WITH RESPECT TO SECTION
3(d) ONLY:
/s/ Harvey Weinstein
-----------------------------------
HARVEY WEINSTEIN
<PAGE>
SCHEDULE 4(e)
SOLVENCY
Additional capital of approximately $10,000,000 is estimated to be required in
order for Borrower and Press-Loto to implement their business plan.
<PAGE>
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of May 31,
1998, by and among COMPU-DAWN, INC., a corporation organized under the laws of
the State of Delaware (the "Company"), and each of the purchasers (the
"Purchasers") set forth on the execution pages hereto (the "Execution Pages").
WHEREAS:
A. The Company and each Purchaser are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("Regulation D"), as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "Securities Act").
B. The Company desires to sell, and the Purchasers collectively desire
to purchase, upon the terms and conditions stated in this Agreement, (x) 3,250
units (the "Preferred Units"), each Preferred Unit consisting of (i) one share
of the Company's Series A Convertible Preferred Stock, par value $.01 per share
(the "Preferred Shares"), convertible into shares of the Company's Common Stock,
par value $.01 per share (the "Common Stock"), and (ii) warrants (the
"Warrants"), in the form attached hereto as Exhibit B, to acquire 57,497 shares
of Common Stock; and (y) 1,750 units (the "Common Units"), each Common Unit
consisting of (i) 187 shares of Common Stock (the "Common Shares"), and (ii)
Warrants to acquire 32,710 shares of Common Stock. The rights, preferences and
privileges of the Preferred Shares, including the terms upon which such
Preferred Shares are convertible into shares of Common Stock, are set forth in
the form of Certificate of Designations, Preferences and Rights attached hereto
as Exhibit A (the "Certificate of Designation"). The shares of Common Stock
issuable upon conversion of the Preferred Shares or otherwise pursuant to the
Certificate of Designation are referred to herein as the "Conversion Shares" and
the shares of Common Stock issuable upon exercise of or otherwise pursuant to
the Warrants are referred to herein as the "Warrant Shares." The Preferred Units
and the Common Units are hereinafter collectively referred to as the "Units."
The Units, the Preferred Shares, the Common Shares, the Warrants, the Conversion
Shares and the Warrant Shares are collectively referred to herein as the
"Securities" and each of them may individually be referred to herein as a
"Security."
C. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as Exhibit C (the "Registration Rights Agreement"),
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws.
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<PAGE>
NOW, THEREFORE, the Company and the Purchasers hereby agree as follows:
1. PURCHASE AND SALE OF SECURITIES.
a. Purchase of Units. On the Closing Date (as defined below), subject
to the satisfaction (or waiver) of the conditions set forth in Section 6 and
Section 7 below, the Company shall issue and sell to each Purchaser, and each
Purchaser severally agrees to purchase from the Company, such number and type of
Units as is set forth on such Purchaser's Execution Page as being purchasable by
such Purchaser at the Closing. The purchase price (the "Purchase Price") per
Preferred Unit and Common Unit shall be equal to One Thousand Dollars
($1,000.00). Each Purchaser's obligation to purchase Units hereunder is distinct
and separate from each other Purchaser's obligation to purchase Units and no
Purchaser shall be required to purchase hereunder more than the number and type
of Units set forth on such Purchaser's Execution Page hereto notwithstanding any
failure by any other Purchaser to purchase Units hereunder.
b. Form of Payment. On the Closing Date, each Purchaser shall pay the
aggregate Purchase Price for the Units being purchased by such Purchaser at the
Closing hereunder by wire transfer to the Company, in accordance with the
Company's written wiring instructions, against delivery of duly executed
certificates representing the Preferred Shares and/or the Common Shares, as
applicable, and duly executed Warrants being purchased by such Purchaser at the
Closing and the Company shall deliver such duly executed certificates and
Warrants against delivery of such aggregate Purchase Price.
c. Closing Date. The date and time of the issuance and sale of the
Units pursuant to this Agreement (the "Closing") shall be as soon as practicable
after the satisfaction (or waiver) of the conditions thereto set forth in
Section 6 and Section 7 below, or such other time as may be mutually agreed upon
by the Company and the Purchasers (the "Closing Date"). The Closing shall occur
at the offices of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP, 1401 Walnut
Street, Philadelphia, Pennsylvania 19102.
2. PURCHASERS' REPRESENTATIONS AND WARRANTIES
Each Purchaser severally represents and warrants to the Company as
follows:
a. Investment Purpose. The Purchaser is purchasing the Units for the
Purchaser's own account for investment purposes and not with a present view
towards the public sale or distribution thereof, except pursuant to sales that
are exempt from the registration requirements of the Securities Act and/or sales
registered under the Securities Act. The Purchaser understands that the
Purchaser must bear the economic risk of this investment indefinitely, unless
the Securities are registered pursuant to the Securities Act and any applicable
state securities or blue sky laws or an exemption from such registration is
available, and that the Company has no present intention of registering the
resale of any such Securities other than as contemplated by the Registration
Rights Agreement. Notwithstanding anything in this Section 2(a) to the contrary,
by making the representations herein,
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<PAGE>
the Purchaser does not agree to hold the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption from the
registration requirements under the Securities Act.
b. Accredited Investor Status. The Purchaser is an "Accredited
Investor" as that term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. The Purchaser understands that the Units are
being offered and sold to the Purchaser in reliance upon specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of, and the
Purchaser's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Purchaser set forth herein in order to
determine the availability of such exemptions and the eligibility of the
Purchaser to acquire the Units.
d. Information. The Purchaser and its counsel, if any, have been
furnished all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities which
have been specifically requested by the Purchaser or its counsel. The Purchaser
and its counsel have been afforded the opportunity to ask questions of the
Company and have received what the Purchaser believes to be satisfactory answers
to any such inquiries. Neither such inquiries nor any other investigation
conducted by the Purchaser or its counsel or any of its representatives shall
modify, amend or affect the Purchaser's right to rely on the Company's
representations and warranties contained in Section 3 below. The Purchaser
understands that the Purchaser's investment in the Securities involves a high
degree of risk.
e. Governmental Review. The Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
f. Transfer or Resale. The Purchaser understands that (i) except as
provided in the Registration Rights Agreement, the sale or resale of the
Securities have not been and are not being registered under the Securities Act
or any state securities laws, and the Securities may not be transferred unless
(a) the resale of the Securities has been registered thereunder; or (b) the
Purchaser shall have delivered to the Company an opinion of counsel (which
opinion shall be in form, substance and scope customary for opinions of counsel
in comparable transactions) to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration; or (c) the Securities are sold under Rule 144 promulgated under
the Securities Act (or a successor rule) ("Rule 144"); or (d) the Securities are
sold or transferred to an affiliate of the Purchaser who agrees to sell or
otherwise transfer the Securities only in accordance with the provisions of this
Section 2(f) and who is an Accredited Investor; and (ii) neither the Company nor
any other person is under any obligation to register such Securities under the
Securities Act or any state securities laws (other than pursuant to the
Registration Rights Agreement). Notwithstanding the foregoing or anything else
contained herein to the contrary, the Securities may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement.
-3-
<PAGE>
g. Legends. The Purchaser understands that the Preferred Shares and the
Warrants and, until such time as the Common Shares, the Conversion Shares and
the Warrant Shares have been registered under the Securities Act (including
registration pursuant to Rule 416 thereunder) as contemplated by the
Registration Rights Agreement or otherwise may be sold by the Purchaser under
Rule 144, the certificates for the Common Shares, the Conversion Shares and the
Warrant Shares may bear a restrictive legend in substantially the following
form:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or the securities laws of
any state of the United States. The securities represented hereby may
not be offered, sold, transferred or assigned in the absence of an
effective registration statement for the securities under applicable
securities laws unless offered, sold, transferred or assigned under an
available exemption from the registration requirements of those laws.
The legend set forth above shall be removed and the Company shall issue
a certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by state securities laws, (a) the sale of
such Security is registered under the Securities Act (including registration
pursuant to Rule 416 thereunder) as contemplated by the Registration Rights
Agreement; (b) such holder or such holder's agent provides the Company with an
opinion of counsel, in form, substance and scope customary for opinions of
counsel in comparable transactions, to the effect that a public sale or transfer
of such Security may be made without registration under the Securities Act; or
(c) such holder or such holder's agent provides the Company with reasonable
assurances that such Security can be sold under Rule 144. The Purchaser agrees
to sell all Securities, including those represented by a certificate(s) from
which the legend has been removed, pursuant to an effective registration
statement or under an exemption from the registration requirements of the
Securities Act. In the event the above legend is removed from any Security and
thereafter the effectiveness of a registration statement covering such Security
is suspended or the Company determines that a supplement or amendment thereto is
required by applicable securities laws, then upon reasonable advance notice to
the Purchaser the Company may require that the above legend be placed on any
such Security that cannot then be sold pursuant to an effective registration
statement or under Rule 144 and the Purchaser shall cooperate in the replacement
of such legend. Such legend shall thereafter be removed when such Security may
again be sold pursuant to an effective registration statement or under Rule 144.
h. Authorization; Enforcement. This Agreement and the Registration
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of Purchaser and are valid and binding agreements of Purchaser
enforceable in accordance with their terms.
i. Residency. The Purchaser is a resident of the jurisdiction set forth
under such Purchaser's name on the Execution Page hereto executed by such
Purchaser.
j. Organization and Qualification. The Purchaser is duly organized and
existing in good standing under the laws of the jurisdiction in which it was
formed, and has the requisite power to
-4-
<PAGE>
own its properties and to carry on its business as now being conducted. The
Purchaser is duly qualified to do business and is in good standing in every
jurisdiction in which the nature of the business conducted by it makes such
qualification necessary, except where the failure to so qualify would have a
material adverse effect on the ability of the Purchaser to perform its
obligations hereunder or under the Registration Rights Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Purchaser as follows:
a. Organization and Qualification. The Company and each of its
subsidiaries is a corporation duly organized and existing in good standing under
the laws of the jurisdiction in which it is incorporated, and has the requisite
corporate power to own its properties and to carry on its business as now being
conducted. The Company and each of its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary and where the failure so to qualify would have a Material Adverse
Effect. "Material Adverse Effect" means any material adverse effect on (i) the
Securities, (ii) the ability of the Company to perform its obligations hereunder
or under the Certificate of Designation, the Warrants or the Registration Rights
Agreement or (iii) the business, operations, properties, prospects or financial
condition of the Company and its subsidiaries, taken as a whole.
b. Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Warrants and the Registration Rights Agreement, to issue and
sell the Common Shares, the Preferred Shares and the Warrants in accordance with
the terms hereof, and to issue the Conversion Shares upon conversion of the
Preferred Shares in accordance with the terms of the Certificate of Designation
and to issue the Warrant Shares upon exercise of the Warrants in accordance with
the terms of such Warrants; (ii) the execution, delivery and performance of this
Agreement, the Warrants and the Registration Rights Agreement by the Company and
the consummation by it of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Common Shares, the Preferred
Shares and the Warrants and the issuance and reservation for issuance of the
Conversion Shares and the Warrant Shares) have been duly authorized by the
Company's Board of Directors and no further consent or authorization of the
Company, its Board of Directors or any committee of the Board of Directors is
required; (iii) this Agreement has been duly executed and delivered by the
Company; and (iv) this Agreement constitutes, and, upon execution and delivery
by the Company of the Warrants and the Registration Rights Agreement, such
agreements will constitute, valid and binding obligations of the Company
enforceable against the Company in accordance with their terms.
c. Capitalization. The capitalization of the Company as of the date
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares issuable and reserved for issuance pursuant to
the Company's stock option plans, the number of shares issuable and reserved for
issuance pursuant to securities (other than the Preferred Shares and
-5-
<PAGE>
the Warrants) exercisable or exchangeable for, or convertible into, any shares
of capital stock and the number of shares to be reserved for issuance upon
conversion of the Preferred Shares and exercise of the Warrants is set forth on
Schedule 3(c). All of such outstanding shares of capital stock have been, or
upon issuance in accordance with the terms of any such warrants (upon full
payment therefor), options (upon full payment therefore) or preferred stock,
will be, validly issued, fully paid and non-assessable. None of the authorized
but unissued shares of capital stock of the Company (including the Common
Shares, the Preferred Shares, the Conversion Shares and the Warrant Shares) are
subject to preemptive rights or any other similar rights of the stockholders of
the Company or any liens or encumbrances created by the Company. Except for the
Securities and as set forth on Schedule 3(c), as of the date of this Agreement,
(i) there are no outstanding options, warrants, scrip, rights to subscribe to,
calls or commitments of any character whatsoever relating to, or securities or
rights convertible into or exercisable or exchangeable for, any shares of
capital stock of the Company or any of its subsidiaries, or arrangements by
which the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries,
and (ii) there are no agreements or arrangements under which the Company or any
of its subsidiaries is obligated to register the sale of any of its or their
securities under the Securities Act (except the Registration Rights Agreement).
Except as set forth on Schedule 3(c), there are no securities or instruments
containing antidilution or similar provisions that will be triggered by the
issuance of the Securities in accordance with the terms of this Agreement, the
Certificate of Designation or the Warrants. The Company has furnished to the
Purchaser true and correct copies of the Company's Certificate of Incorporation
as in effect on the date hereof ("Certificate of Incorporation"), the Company's
By-laws as in effect on the date hereof (the "By-laws"), and all other
instruments and agreements governing securities convertible into or exercisable
or exchangeable for capital stock of the Company. The Certificate of
Designation, in the form attached hereto, will be duly filed prior to Closing
with the Secretary of State of the State of Delaware and, upon issuance of the
Preferred Shares in accordance with the terms hereof, the Purchaser shall be
entitled to the rights set forth therein.
d. Issuance of Shares. The Common Shares and the Preferred Shares are
duly authorized and, upon issuance in accordance with the terms of this
Agreement, will be validly issued, fully paid and non-assessable, and free from
all taxes, liens, claims and encumbrances and will not be subject to any
preemptive or other similar rights of stockholders of the Company and will not
impose personal liability on the holders thereof. The Conversion Shares and
Warrant Shares are duly authorized and reserved for issuance, and, upon
conversion of the Preferred Shares and exercise of the Warrants (and full
payment of the exercise price), as applicable, in accordance with the terms
thereof, will be validly issued, fully paid and non-assessable, and free from
all taxes, liens, claims and encumbrances and will not be subject to any
preemptive or other similar rights of stockholders of the Company and will not
impose personal liability upon the holder thereof.
e. No Conflicts. Except as set forth on Schedule 3(e), the execution,
delivery and performance of this Agreement, the Warrants and the Registration
Rights Agreement by the Company, the performance by the Company of its
obligations under the Certificate of Designation and the consummation by the
Company of the transactions contemplated hereby and thereby
-6-
<PAGE>
(including, without limitation, the issuance and reservation for issuance, as
applicable, of the Common Shares, the Preferred Shares, the Conversion Shares
and the Warrant Shares) will not (i) result in a violation of the Certificate of
Incorporation or By-laws or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment (including, without
limitation, the triggering of any anti-dilution provisions), acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including U.S. federal and state
securities laws and regulations and rules or regulations of any self-regulatory
organizations to which either the Company or its securities are subject)
applicable to the Company or any of its subsidiaries or by which any property or
asset of the Company or any of its subsidiaries is bound or affected (except,
with respect to clause (ii), for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect). Neither the
Company nor any of its subsidiaries is in violation of its Certificate of
Incorporation, By-laws or other organizational documents and neither the Company
nor any of its subsidiaries is in default (and no event has occurred which, with
notice or lapse of time or both, would put the Company or any of its
subsidiaries in default) under, nor has there occurred any event giving others
(with notice or lapse of time or both) any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, except for actual or possible
violations, defaults or rights as would not, individually or in the aggregate,
have a Material Adverse Effect. The businesses of the Company and its
subsidiaries are not being conducted, and shall not be conducted so long as any
Purchaser owns any of the Securities, in violation of any law, ordinance or
regulation of any governmental entity, except for possible violations the
sanctions for which either singly or in the aggregate would not have a Material
Adverse Effect. Except as specifically contemplated by this Agreement and the
Registration Rights Agreement, the Company is not required to obtain any
consent, approval, authorization or order of, or make any filing or registration
with, any court or governmental agency or any regulatory or self regulatory
agency in order for it to execute, deliver or perform any of its obligations
under this Agreement, the Warrants or the Registration Rights Agreement or to
perform its obligations under the Certificate of Designation, in each case in
accordance with the terms hereof or thereof. The Company is not in violation of
the listing and maintenance requirements of the Nasdaq SmallCap Market
("SmallCap") and does not reasonably anticipate that the Common Stock will be
delisted by the SmallCap for the foreseeable future.
f. SEC Documents, Financial Statements. Since December 31, 1994, the
Company has timely filed (within applicable extension periods) all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (all of the foregoing and all exhibits
included therein and financial statements and schedules thereto and documents
incorporated by reference therein, being hereinafter referred to herein as the
"SEC Documents"). The Company has delivered to the Purchasers true and complete
copies of the SEC Documents. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Exchange Act or
the Securities Act, as the case may be, and the rules and regulations of the SEC
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<PAGE>
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. None of the
statements made in any such SEC Documents is, or has been, required to be
amended or updated under applicable law (except for such statements as have been
amended or updated in subsequent filings made prior to the date hereof). As of
their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
applicable with respect thereto. Such financial statements have been prepared in
accordance with U.S. generally accepted accounting principles, consistently
applied, during the periods involved (except (i) as may be otherwise indicated
in such financial statements or the notes thereto, or (ii) in the case of
unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements) and fairly present in all material
respects the consolidated financial position of the Company and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to immaterial year-end audit adjustments). Except as set
forth in the financial statements of the Company included in the SEC Documents
filed prior to the date hereof, the Company has no liabilities, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to the date of such financial statements, (ii) liabilities
not required by generally accepted accounting principles ("GAAP") to be
disclosed on a balance sheet prepared in accordance with GAAP, and (iii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under GAAP to be reflected in such financial
statements, which liabilities and obligations referred to in clauses (i), (ii)
and (iii), individually or in the aggregate, are not material to the financial
condition or operating results of the Company.
g. Absence of Certain Changes. Since December 31, 1997, there has been
no material adverse change and no material adverse development in the business,
properties, operations, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole, except as disclosed in
Schedule 3(g) or in the SEC Documents filed prior to the date hereof.
h. Absence of Litigation. Except as set forth on Schedule 3(h) and
except as disclosed in the SEC Documents filed prior to the date hereof, there
is no action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the Company or any of its subsidiaries, threatened
against or affecting the Company, any of its subsidiaries, or any of their
respective directors or officers in their capacities as such, which could
reasonably be expected to have a Material Adverse Effect. There are no facts
which, if known by a potential claimant or governmental authority, could give
rise to a claim or proceeding which, if asserted or conducted with results
unfavorable to the Company or any of its subsidiaries, could reasonably be
expected to have a Material Adverse Effect.
i. Intellectual Property. Each of the Company and its subsidiaries owns
or is licensed to use all patents, patent applications, trademarks, trademark
applications, trade names, service
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marks, copyrights, copyright applications, licenses, permits, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures) and other similar rights and
proprietary knowledge (collectively, "Intangibles") necessary for the conduct of
its business as now being conducted and as described in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997. To the best
knowledge of the Company, neither the Company nor any subsidiary of the Company
infringes or is in conflict with any right of any other person with respect to
any Intangibles which, individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect.
Neither the Company nor any of its subsidiaries has received written notice of
any pending conflict with or infringement upon such third party Intangibles,
which alleged pending conflict or alleged infringement, if adversely determined,
would result in a Material Adverse Effect. Except as disclosed in the SEC
Documents, the termination of the Company's ownership of, or right to use, any
single Intangible would not result in a Material Adverse Effect on the Company.
Neither the Company nor any of its subsidiaries has entered into any consent
agreement, indemnification agreement, forbearance to sue or settlement agreement
with respect to the validity of the Company's or its subsidiaries' ownership or
right to use its Intangibles and, to the best knowledge of the Company, there is
no reasonable basis for any such claim to be successful. The Intangibles are
valid and enforceable and no registration relating thereto has lapsed, expired
or been abandoned or canceled or is the subject of cancellation or other
adversarial proceedings, and all applications therefor are pending and in good
standing. The Company and its subsidiaries have complied, in all material
respects, with their respective contractual obligations relating to the
protection of the Intangibles used pursuant to licenses. To the best knowledge
of the Company, no person is infringing on or violating the Intangibles owned or
used by the Company or its subsidiaries.
j. Foreign Corrupt Practices. Neither the Company, nor any of its
subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any subsidiary has, in the course of his actions
for, or on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977;
or made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.
k. Disclosure. All information relating to or concerning the Company
set forth in this Agreement or provided to the Purchasers pursuant to Section
2(d) hereof and otherwise in connection with the transactions contemplated
hereby is true and correct in all material respects and the Company has not
omitted to state any material fact necessary in order to make the statements
made herein or therein, in light of the circumstances under which they were
made, not misleading. No event or circumstance has occurred or exists with
respect to the Company or its subsidiaries or their respective businesses,
properties, prospects, operations or financial conditions, which has not been
publicly disclosed but, under applicable law, rule or regulation, would be
required to be disclosed by the Company in a registration statement filed on the
date hereof by the Company under the Securities Act with respect to the primary
issuance of the Company's securities.
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l. Acknowledgment Regarding Purchasers' Purchase of the Securities. The
Company acknowledges and agrees that none of the Purchasers is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to this Agreement or the transactions contemplated hereby, the
relationship between the Company and the Purchasers is "arms-length" and any
statement made by any Purchaser or any of their respective representatives or
agents in connection with this Agreement and the transactions contemplated
hereby is not advice or a recommendation and is merely incidental to such
Purchaser's purchase of Securities and has not been relied upon by the Company,
its officers or directors in any way. The Company further acknowledges that the
Company's decision to enter into this Agreement has been based solely on an
independent evaluation by the Company and its representatives.
m. Form S-3 Eligibility. The Company is currently eligible to register
the resale of its Common Stock on a registration statement on Form S-3 under the
Securities Act. There exist no facts or circumstances that would prohibit or
delay the preparation and filing of a registration statement on Form S-3 with
respect to the Registrable Securities (as defined in the Registration Rights
Agreement).
n. No General Solicitation. Neither the Company nor any distributor
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as such term is defined in Regulation D,
with respect to any of the Securities being offered hereby.
o. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would require registration of the
Securities being offered hereby under the Securities Act or cause this offering
of Securities to be integrated with any prior offering of securities of the
Company for purposes of the Securities Act or any applicable stockholder
approval provisions.
p. No Brokers. Except for fees payable to HNY Associates, LLC, no fees
or commissions will be payable by the Company to any broker, financial advisor,
finder, investment banker, or bank with respect to the transactions contemplated
hereby. The Purchasers shall have no obligation with respect to such fees or
with respect to any claims made by or on behalf of other persons for fees of a
type contemplated in this Section 3(p) that may be due in connection with the
transactions contemplated hereby. The Company shall indemnify and hold harmless
the Purchasers, their respective employees, officers, directors, agents and
partners, and their respective Affiliates (as such term is defined under Rule
405 promulgated under the Securities Act), from and against all claims, losses,
damages, costs (including the costs of preparation and reasonable attorney's
fees) and expenses suffered in respect of any such claimed or existing fees. In
the event such a claim is made against the Purchaser, the Company shall have the
right to participate in, and to assume control of, the defense thereof with
counsel mutually satisfactory to the Purchaser and the Company; provided,
however, that the Company shall not be entitled to assume such defense and the
Purchaser shall have
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the right to retain its own counsel with the fees and expenses to be paid by the
Company, if, in the reasonable opinion of counsel retained by the Company, the
representation by such counsel of the Purchaser would be inappropriate due to
actual or potential conflicts of interest.
q. Acknowledgment of Dilution. The number of Common Shares issuable
pursuant hereto and the number of Conversion Shares issuable upon conversion of
the Preferred Shares may increase substantially in certain circumstances,
including the circumstance wherein the trading price of the Common Stock
declines. The Company's executive officers have studied and fully understand the
nature of the Securities being sold hereunder. The Company acknowledges that its
obligation to issue Common Shares pursuant hereto and Conversion Shares upon
conversion of the Preferred Shares in accordance with the terms of the
Certificate of Designation is absolute and unconditional, regardless of the
dilution that such issuance may have on the ownership interests of other
stockholders. Taking the foregoing into account, the Company's Board of
Directors has determined in its good faith business judgment that the issuance
of the Common Shares and the Preferred Shares hereunder and the consummation of
the other transactions contemplated hereby are in the best interests of the
Company and its stockholders.
r. Title. The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in Schedule 3(r) or such as do not
materially affect the value of such property and do not materially interfere
with the use made and proposed to be made of such property by the Company and
its subsidiaries. Any real property and facilities held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of such property
and buildings by the Company and its subsidiaries.
s. Tax Status. Except as set forth on Schedule 3(s), the Company and
each of its subsidiaries has made or filed all foreign, federal, state and local
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. Except as set forth on Schedule 3(s), there are no unpaid taxes in any
material amount claimed to be due by the taxing authority of any jurisdiction,
and the officers of the Company know of no basis for any such claim. The Company
has not executed a waiver with respect to any statute of limitations relating to
the assessment or collection of any federal, state or local tax. Except as set
forth on Schedule 3(s), none of the Company's tax returns is presently being
audited by any taxing authority.
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t. Listing. The Company is currently in compliance with the
requirements for continued listing on the SmallCap, and, upon consummation of
the transactions contemplated hereby and by that certain Agreement and Plan of
Merger, dated as of April 22, 1998, among the Company, Rugby Acquisition Corp.,
Rugby National Corp. and Harvey Weinstein, or any amendment thereto, the Company
will be in compliance with the requirements for initial listing on the SmallCap.
4. COVENANTS.
a. Best Efforts. The parties shall use their reasonable best efforts
timely to satisfy each of the conditions described in Section 6 and Section 7 of
this Agreement.
b. Form D: Blue Sky Laws. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Purchaser promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Securities for sale to the Purchasers
pursuant to this Agreement under applicable securities or "blue sky" laws of the
states of the United States or obtain exemption therefrom, and shall provide
evidence of any such action so taken to the Purchasers on or prior to the
Closing Date.
c. Reporting Status. So long as any Purchaser beneficially owns any of
the Securities, the Company shall timely file all reports required to be filed
with the SEC pursuant to the Exchange Act, and the Company shall not terminate
its status as an issuer required to file reports under the Exchange Act even if
the Exchange Act or the rules and regulations thereunder would permit such
termination. In addition, the Company shall take all actions necessary to
continue to be eligible to register the resale of its Common Stock on a
registration statement on Form S-3 under the Securities Act.
d. Use of Proceeds. The Company shall use the proceeds from the sale of
the Securities as set forth in Schedule 4(d).
e. Additional Equity Capital; Right of First Offer. The Company agrees
that during the period beginning on the date hereof and ending on the date which
is 180 days following the Closing Date (the "Lock-Up Period"), the Company will
not contract with any party to obtain additional financing in which any equity
or equity-linked securities are issued (including any debt financing with an
equity component) ("Future Offerings"). In addition, during the period beginning
on the date hereof and ending 180 days following the expiration of the Lock-Up
Period, the Company will not conduct a Future Offering unless it shall have
first delivered to each Purchaser, at least ten (10) business days prior to the
closing of such Future Offering, written notice describing the proposed Future
Offering, including the terms and conditions thereof, and providing each
Purchaser and its affiliates an option during the ten (10) business day period
following delivery of such notice to purchase all of the securities being
offered in the Future Offering on the same terms as contemplated by such Future
Offering (the limitation referred to in this Section 4(e) is referred to as the
"Capital Raising Limitation"). The Capital Raising Limitation shall not apply to
any transaction involving
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issuances of securities as consideration in a merger, consolidation or
acquisition of assets, or in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital), or as
consideration for the acquisition of a business, product or license by the
Company. The Capital Raising Limitation also shall not apply to (i) the issuance
of securities pursuant to an underwritten public offering, (ii) the issuance of
securities upon exercise or conversion of the Company's options, warrants or
other convertible securities outstanding as of the date hereof or (iii) the
grant of additional options or warrants, or the issuance of additional
securities, under any duly authorized Company stock option or restricted stock
plan for the benefit of the Company's employees or directors.
f. Expenses. The Company shall pay to the Purchasers, or at their
direction, at the Closing, reimbursement for the expenses reasonably incurred by
the Purchasers and their affiliates and advisors in connection with the
negotiation, preparation, execution and delivery of this Agreement and the other
agreements to be executed in connection herewith, including, without limitation,
the Purchasers' and their affiliates' and advisors' reasonable due diligence and
attorneys' fees and expenses (the "Expenses"). In addition, from time to time
thereafter, upon the written request of any Purchaser, the Company shall pay to
such Purchaser such additional Expenses, if any, not covered by such payment, in
each case to the extent reasonably incurred by such Purchaser in connection with
the negotiation, preparation, execution and delivery of this Agreement and the
other agreements to be executed in connection herewith. Notwithstanding the
foregoing, the Company shall not be obligated to reimburse the Purchasers for
more than $25,000 pursuant to this Section 4(f).
g. Financial Information. The Company agrees to send the following
reports to each Purchaser until such Purchaser transfers, assigns or sells all
of its Securities: (i) within ten (10) days after the filing with the SEC, a
copy of its Annual Report on Form 10-KSB or Form 10-K, its Quarterly Reports on
Form 10-QSB or Form 10-Q, its proxy statements and any Current Reports on Form
8-K; and (ii) within one (1) day after release, copies of all press releases
issued by the Company or any of its subsidiaries.
h. Reservation of Shares. The Company shall at all times have
authorized and reserved for the purpose of issuance a sufficient number of
shares of Common Stock to provide for the full conversion of the outstanding
Preferred Shares and the issuance of the Conversion Shares in connection
therewith and the full exercise of the Warrants and the issuance of the Warrant
Shares in connection therewith subject to and as otherwise required by the
Certificate of Designation and the Warrants. In that regard, a "sufficient
number of shares" with respect to the Preferred Shares shall be deemed to be
equal to the number of shares of Common Stock required to be reserved for
issuance by the Company pursuant to Article V of the Certificate of Designation.
The Company shall not reduce the number of shares reserved for issuance upon
conversion of the Preferred Shares and the full exercise of the Warrants (except
as a result of any such conversion or exercise) without the consent of the
Purchaser.
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i. Listing. The Company shall promptly secure the listing of the Common
Shares, the Conversion Shares and the Warrant Shares upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance) and shall
maintain, so long as any Purchaser (or any of their affiliates) own any
Securities, such listing of all Common Shares issued pursuant hereto, all
Conversion Shares from time to time issuable upon conversion of the Preferred
Shares and all Warrant Shares from time to time issuable upon exercise of the
Warrants. The Company will take all action necessary to continue the listing and
trading of its Common Stock on the New York Stock Exchange ("NYSE"), the
American Stock Exchange ("AMEX"), the Nasdaq National Market ("NNM") or the
SmallCap and will comply in all respects with the Company's reporting, filing
and other obligations under the bylaws or rules of the National Association of
Securities Dealers (the "NASD") and such exchanges, as applicable. The Company
shall promptly provide to each Purchaser copies of any notices it receives
regarding the continued eligibility of the Common Stock for trading on the
SmallCap or, if applicable, any securities exchange or automated quotation
system on which securities of the same class or series issued by the Company are
then listed or quoted, if any.
j. Corporate Existence. Subject to the provisions of the Certificate of
Designation and the Warrants, so long as any Purchaser (or any of their
affiliates) beneficially owns any Securities, the Company shall maintain its
corporate existence, and in the event of a merger, consolidation or sale of all
or substantially all of the Company's assets, the Company shall ensure that the
surviving or successor entity in such transaction (i) assumes the Company's
obligations hereunder and under the Certificate of Designation, the Warrants and
the agreements and instruments entered into in connection herewith regardless of
whether or not the Company would have had a sufficient number of shares of
Common Stock authorized and available for issuance in order to effect the full
conversion of all Preferred Shares and the exercise in full of all Warrants
outstanding as of the date of such transaction and (ii) is a publicly traded
corporation whose common stock is listed for trading on the NNM, SmallCap, NYSE
or AMEX.
k. No Integrated Offerings. The Company shall not make any offers or
sales of any security (other than the Securities) under circumstances that would
require registration of the Securities being offered or sold hereunder under the
Securities Act or cause this offering of Securities to be integrated with any
other offering of securities by the Company for purposes of any stockholder
approval provision applicable to the Company or its securities.
l. Legal Compliance. The Company shall conduct its business and the
business of its subsidiaries in compliance with all laws, ordinances or
regulations of governmental entities applicable to such businesses, except where
the failure to do so would not have a Material Adverse Effect.
m. Stockholder Approval. The Company shall hold an annual or special
meeting of its stockholders no later than one-hundred-twenty (120) days after
the date hereof and use its best efforts to obtain at such meeting such
approvals of the Company's stockholders as may be required (i) to ratify the
issuance of the Common Stock at the Closing hereunder, and (ii) to issue all of
the
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shares of Common Stock issuable upon conversion of, or otherwise with respect
to, the Preferred Shares or the Warrants without violating NASD Rules
4310(c)(25)(H) or 4460(i) (or any successor rules thereto which may then be in
effect) (the "Stockholder Approval"). The Company shall comply with the filing
and disclosure requirements of Section 14 promulgated under the Exchange Act in
connection with the solicitation, acquisition and disclosure of such Stockholder
Approval. The Company represents and warrants that its Board of Directors has
adopted resolutions to, among things, unanimously recommend that the Company's
stockholders approve the proposal contemplated by this Section 4(m) and shall so
indicate such recommendation in the proxy statement used to solicit such
Stockholder Approval.
5. TRANSFER AGENT INSTRUCTIONS.
a. The Company shall instruct its transfer agent to issue certificates,
registered in the name of each Purchaser or its nominee, for the Common Shares,
the Conversion Shares and the Warrant Shares in such amounts as specified from
time to time by such Purchaser or such Purchaser's agent to the Company
(including upon conversion of the Preferred Shares or exercise of the Warrants,
as applicable). To the extent and during the periods provided in Sections 2(f)
and 2(g) of this Agreement, all such certificates shall bear the restrictive
legend specified in Section 2(g) of this Agreement.
b. The Company warrants that no instruction other than such
instructions referred to in this Section 5, and stop transfer instructions to
give effect to Section 2(f) hereof in the case of the transfer of the Common
Shares, the Conversion Shares or the Warrant Shares, as applicable, prior to
registration thereof under the Securities Act or without an exemption therefrom,
will be given by the Company to its transfer agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement, the Certificate of Designation, the
Warrants and the Registration Rights Agreement. Nothing in this Section shall
affect in any way each Purchaser's obligations and agreement set forth in
Section 2(g) hereof to resell the Securities pursuant to an effective
registration statement or under an exemption from the registration requirements
of applicable securities law.
c. If (i) (A) the Common Shares, the Conversion Shares and the Warrant
Shares, as applicable, have been registered under the Securities Act as
contemplated by the Registration Rights Agreement, or (B) a Purchaser provides
the Company and the transfer agent with an opinion of counsel, which opinion of
counsel shall be in form, substance and scope customary for opinions of counsel
in comparable transactions, to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from
registration, or (C) a Purchaser provides the Company with reasonable assurances
that such Securities may be sold under Rule 144, and (ii) (A) such Purchaser or
such Purchaser's agent has delivered to the Company certificates representing
the Common Shares, the Conversion Shares and/or Warrant Shares, as applicable,
along with a written request for the removal of any restrictive legend set forth
thereon or (B) in the case of the conversion by such Purchaser of the Preferred
Shares or the exercise by such Purchaser of the Warrants, the Purchaser has
complied with the procedures for conversion set forth in Article IV of the
Certificate
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of Designation and the procedures for exercise set forth in the Warrants, the
Company shall permit the transfer and promptly instruct its transfer agent to
issue the Common Shares, the Conversion Shares and/or the Warrant Shares, as
applicable, in such name and in such denominations as specified by such
Purchaser. If the Company's transfer agent is participating in the Depository
Trust Company ("DTC") Fast Automated Securities Transfer program, the Company
shall cause its transfer agent to electronically transmit the Common Shares, the
Conversion Shares and/or the Warrant Shares, as applicable, to such Purchaser or
its transferee by crediting the account of such Purchaser or its transferee with
DTC through its Deposit Withdrawal Agent Commission system ("DTC Transfer"). If
the aforementioned conditions to a DTC Transfer are not satisfied, the Company
shall deliver to the Purchaser or its transferee physical certificates
representing the Common Shares, the Conversion Shares and/or the Warrant Shares,
as applicable, which certificates shall not bear any legend restricting transfer
of the Common Shares, the Conversion Shares and/or the Warrant Shares
represented thereby. Further, a Purchaser may instruct the Company to deliver to
the Purchaser or its transferee unlegended physical certificates representing
the Common Shares, the Conversion Shares and/or the Warrant Shares, as
applicable, in lieu of delivering such shares by way of DTC Transfer.
d. The Company shall deliver such unlegended Common Shares, Conversion
Shares and/or Warrant Shares, as applicable, to the Purchaser no later than the
second day following the receipt of such shares and the request for legend
removal from the Purchaser or such Purchaser's agent. If the Company fails (a
"Legend Removal Failure") to deliver such unlegended Common Shares, Conversion
Shares and/or Warrant Shares to a Purchaser or its transferee in accordance with
Section 5(c) within four (4) business days after the conditions to such delivery
have been satisfied (the "Legend Removal Period"), then the Company shall pay to
such Purchaser an amount equal to:
(.24) x (N/365) x (MP)
where:
"N" means the number of days after the expiration of the Legend Removal
Period through and including the Legend Removal Cure Date;
"MP" means the product of (x) the Closing Bid Price (as defined in the
Certificate of Designation) of the Common Stock in effect on the date of the
Legend Removal Failure and (y) the number of Common Shares, Conversion Shares
and/or Warrant Shares which are the subject of such Legend Removal Failure; and
"Legend Removal Cure Date" means the date the Company issues freely
tradeable shares of Common Stock in accordance with Section 5(c).
The payments to which a holder shall be entitled pursuant to this
Section 5(d) are referred to herein as "Legend Removal Payments." A Purchaser
may elect to receive accrued Legend
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Removal Payments in cash or to convert all or any portion of such accrued Legend
Removal Payments, at any time, into Common Stock at the lowest Conversion Price
(as defined in the Certificate of Designation) in effect during the period
beginning on the date of the Legend Removal Failure through the date of
conversion of such Legend Removal Payments. In the event a Purchaser elects to
take such payment in cash, cash payment will be made by the Company within five
(5) days after its receipt of written notice of such election from such
Purchaser. In the event a Purchaser elects to convert all or any portion of the
Legend Removal Payment into Common Stock, such Purchaser shall provide written
notice of such election specifying the amount of such Legend Removal Payment to
be converted and the applicable Conversion Price at which such amount is to be
converted. The Company shall deliver the shares of Common Stock issuable upon
any such conversion to such Purchaser within five (5) days of its receipt of
such written notice from such Purchaser.
e. Buy-In Cure. If there shall occur a Legend Removal Failure and
thereafter such holder purchases (in an open market transaction or otherwise in
a bona fide arms-length transaction) shares of Common Stock to make deliver in
satisfaction of a sale by such holder of the of the unlegended Common Shares,
Conversion and/or Warrant Shares (the "Sold Shares") which such holder
anticipated receiving upon a request for legend removal pursuant to Section 5(c)
hereof (a "Buy-In"), the Company shall pay such holder (in addition to any other
remedies available to the holder) the amount by which (x) such holder's total
purchase price (including brokerage commissions, if any) for the unlegended
shares of Common Stock so purchased exceeds (y) the net proceeds received by
such holder form the sale of the Sold Shares. For example, if a holder purchases
unlegened shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to shares of Common Stock it sold for $10,000, the
Company will be required to pay the holder $1,000. A holder shall provide the
Company written notification and supporting documentation indicating any amounts
payable to such holder pursuant to this Section 5(e).
f. Redemption Right. If the Company fails, and such failure continues
uncured for five (5) business days after the expiration of the Legend Removal
Period, for any reason to deliver shares of Common Stock with respect to any
request for legend removal pursuant to Section 5(c) hereof, then the holder may
elect at any time and from time to time prior to the Legend Removal Cure Date
for such Legend Removal Failure, by delivery of a written notice to the Company
(a "Redemption Notice"), to have all or any portion of such holder's Common
Shares, Conversion Shares and/or Warrant Shares that are subject to such Legend
Removal Failure purchased by the Company for cash, at an amount per share equal
to the product of (x) the highest Closing Bid Price (as defined in the
Certificate of Designation) in effect during the period beginning on the date of
Legend Removal Failure and ending on the date the holder delivers the Redemption
Notice and (y) the number of Common Shares, Conversion Shares and/or Warrant
Shares which are the subject of such Legend Removal Failure.
Nothing herein shall limit a Purchaser's right to pursue actual damages
for the Company's failure to deliver unlegended Common Shares, Conversion Shares
and/or Warrant Shares pursuant
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to Section 5(c), and a Purchaser shall have the right to pursue all remedies
available at law or in equity (including a decree of specific performance and/or
injunctive relief).
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Units to
a Purchaser at the Closing is subject to the satisfaction, on or before the
Closing Date, of each of the following conditions thereto, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion. The obligation of the Company to issue and
sell Units to any Purchaser hereunder is distinct and separate from its
obligation to issue and sell Units to any other Purchaser hereunder and any
failure by one or more Purchasers to fulfill the conditions set forth herein or
to consummate the purchase of Units hereunder will not relieve the Company of
its obligations with respect to any other Purchaser.
a. The applicable Purchaser shall have completed and executed the
signature page to this Agreement and the Registration Rights Agreement, and
delivered the same to the Company.
b. The applicable Purchaser shall have delivered the Purchase Price for
the Units being purchased by such Purchaser in accordance with Section 1(b)
above.
c. The representations and warranties of the applicable Purchaser shall
be true and correct as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which representations and warranties shall be true and
correct as of such date), and the applicable Purchaser shall have performed,
satisfied and complied in all material respects with the covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the applicable Purchaser at or prior to the Closing Date.
d. No litigation, statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.
e. The aggregate number of Preferred Units being purchased hereunder by
all Purchasers at the Closing shall be 3,250 and the aggregate number of Common
Units being purchased hereunder by all Purchasers at the Closing shall be 1,750.
7. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE.
The obligation of each Purchaser hereunder to purchase the Units to be
purchased by it at the Closing is subject to the satisfaction, on or before the
Closing Date, of each of the following
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conditions, provided that these conditions are for such Purchaser's sole benefit
and may be waived by such Purchaser at any time in the Purchaser's sole
discretion:
a. The Company shall have executed this Agreement, the Warrants and the
Registration Rights Agreement, and delivered the same to such Purchaser.
b. The Certificate of Designation shall have been accepted for filing
with the Secretary of State of the State of Delaware and a copy thereof
certified by the Secretary of State of the State of Delaware shall have been
delivered to the Purchaser.
c. The Company shall have delivered to such Purchaser duly executed
Warrants and certificates (in such denominations as such Purchaser shall
request) representing the Common Shares and/or the Preferred Shares, as
applicable, being purchased by such Purchaser at the Closing in accordance with
Section 1(b) above.
d. The Common Stock shall be authorized for quotation and listed on the
SmallCap and trading in the Common Stock (or the SmallCap generally) shall not
have been suspended by the SEC or the SmallCap, nor shall any such suspension be
pending or threatened.
e. The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date, which representations and warranties shall be true and correct as of such
date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Closing Date. Such Purchaser shall have received a certificate, executed
by the Chief Executive Officer of the Company, dated as of the Closing Date, to
the foregoing effect and as to such other matters as may be reasonably requested
by such Purchaser.
f. No litigation, statute, rule, regulation, executive order, decree,
ruling, injunction, action or proceeding shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction or any self-regulatory organization having authority over the
matters contemplated hereby which questions the validity of, or challenges or
prohibits the consummation of any of the transactions contemplated by this
Agreement.
g. Such Purchaser shall have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to such Purchaser and in substantially the form of Exhibit D
attached hereto.
h. The Company shall have delivered evidence reasonably satisfactory to
the Purchasers that the Company's transfer agent has agreed to act in accordance
with irrevocable instructions in the form attached hereto as Exhibit E.
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i. There shall have been no material adverse changes and no material
adverse developments in the business, properties, operations, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, since the date hereof, and no information, of
which the Purchasers are not currently aware, shall come to the attention of the
Purchasers that is materially adverse to the Company.
j. The aggregate number of Preferred Units being purchased hereunder by
all Purchasers at the Closing shall be 3,250 and the aggregate number of Common
Units being purchased hereunder by all Purchasers at the Closing shall be 1,750.
k. Each of the officers and directors of the Company identified on
Exhibit G-1 attached hereto shall have executed and delivered to the Purchasers
an agreement, in the form attached hereto as Exhibit G-2, pursuant to which such
officers and directors agree to vote all shares of capital stock of the Company
which they own and/or control in favor of the proposals set forth in Section
4(m) hereof.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts and
the state courts located in the State of New York in any suit or proceeding
based on or arising under this Agreement and irrevocably agrees that all claims
in respect of such suit or proceeding may be determined in such courts. The
Company irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. The parties hereto agree that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
b. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party. This Agreement, once executed by a party, may be
delivered to the other parties hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
In the event any signature is delivered by facsimile transmission, the party
using such means of delivery shall cause the manually executed Execution Page(s)
to be physically delivered to the other party within five (5) days of the
execution hereof.
c. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of
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the remainder of this Agreement or the validity or enforceability of this
Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein. No provision of this Agreement may be
waived other than by an instrument in writing signed by the party to be charged
with enforcement and no provision of this Agreement may be amended other than by
an instrument in writing signed by the Company and each Purchaser.
f. Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
If to the Company:
Compu-Dawn, Inc.
77 Spruce Street
Cedarhurst, NY 11516
Telecopy: (516) 374-3410
Attention: Mark Honigsfeld, Chief Executive Officer
with a copy simultaneously transmitted by like means
to:
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, NY 11554
Telecopy: (516) 296-7111
Attention: Fred Skolnik, Esquire and
Gavin C. Grusd, Esquire
If to any Purchaser, to the address set forth under such Purchaser's
name on the Execution Page hereto executed by such Purchaser.
Each party shall provide notice to the other parties of any change in
address.
Upon a Purchaser's submission of a Notice of Conversion to the Company
in accordance with the Certificate of Designation, such Purchaser shall also
send a courtesy copy of such Notice of Conversion to:
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, NY 11554
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<PAGE>
Telecopy: (516) 296-7111
Attention: Fred Skolnik, Esquire and
Gavin C. Grusd, Esquire
The failure of a Purchaser to send a courtesy copy of the Notice of
Conversion as set forth above shall not render the Notice of Conversion so
submitted invalid or defective and, notwithstanding the failure to provide such
Notice of Conversion as aforesaid, such Notice of Conversion shall be deemed to
be valid and effective.
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. Except as
provided herein or therein, neither the Company nor any Purchaser shall assign
this Agreement, the Registration Rights Agreement or the Warrants or any rights
or obligations hereunder or thereunder. Notwithstanding the foregoing, any
Purchaser may assign its rights hereunder to any of its "affiliates" (as that
term is defined under the Exchange Act) who are Accredited Investors without the
consent of the Company (provided such assignees agree to be bound by all of the
terms and conditions hereof), or to any other person or entity with the consent
of the Company, which consent shall not be unreasonably withheld. This provision
shall not limit a Purchaser's right to transfer the Securities pursuant to the
terms of the Certificate of Designation, the Warrants and this Agreement or to
assign such Purchaser's rights hereunder and/or thereunder to any such
transferee.
h. Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. The respective representations, warranties, agreements and
covenants of the parties set forth in Sections 2, 3, 4, 5 and 8 hereof shall
survive the Closing hereunder notwithstanding any investigation conducted by or
on behalf of any Purchasers. Moreover, none of the representations and
warranties made by the Company herein shall act as a waiver of any rights or
remedies a Purchaser may have under applicable federal or state securities laws.
The Company agrees to indemnify and hold harmless each Purchaser and each of
such Purchaser's officers, directors, employees, partners, members, agents and
affiliates for loss or damage arising as a result of or related to any breach or
alleged breach by the Company of any of its representations or covenants set
forth herein, including advancement of reasonable expenses as they are incurred.
In he event such a claim is made against the Purchaser by a third party relating
to the foregoing, the Company shall have the right to participate in and to
assume control of, the defense thereof with counsel mutually satisfactory to the
Purchaser and the Company; provided, however, that the Company shall not be
entitled to assume such defense and the Purchaser shall have the right to retain
its own counsel with the fees and expenses to be paid by the Company, if, in the
reasonable opinion of counsel retained by the Company, the representation by
such counsel of the Purchaser would be inappropriate due to actual or potential
conflicts of interest.
j. Publicity. The Company and each Purchaser shall have the right to
review before issuance any press releases, SEC or NASD filings, or any other
public statements with respect to the
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<PAGE>
transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior review of any Purchaser, to make any press release
or SEC or NASD filings with respect to such transactions as is required by
applicable law and regulations (although the Purchasers shall be consulted by
the Company in connection with any such press release and filing prior to its
release and shall be provided with a copy thereof).
k. Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Closing shall not have occurred
on or before June 10, 1998, unless the parties agree otherwise, this Agreement
shall terminate at the close of business on such date. Notwithstanding any
termination of this Agreement, any party not in breach of this Agreement shall
preserve all rights and remedies it may have against another party hereto for a
breach of this Agreement prior to or relating to the termination hereof.
m. Joint Participation in Drafting. Each party to this Agreement has
participated in the negotiation and drafting of this Agreement, the Certificate
of Designation, the Warrants and the Registration Rights Agreement. As such, the
language used herein and therein shall be deemed to be the language chosen by
the parties hereto to express their mutual intent, and no rule of strict
construction will be applied against any party to this Agreement.
n. Equitable Relief. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Purchasers by
vitiating the intent and purpose of the transactions contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations hereunder (including, but not limited to, its obligations pursuant
to Section 5 hereof) will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Agreement (including,
but not limited to, its obligations pursuant to Section 5 hereof), that each
Purchaser shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach and requiring immediate issuance and transfer
of the Securities, without the necessity of showing economic loss and without
any bond or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have
caused this Agreement to be duly executed as of the date first above written.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
Name: Mark Honigsfeld
Title: Chief Executive Officer and
Chairman of the Board
PURCHASER:
JNC STRATEGIC FUND LTD.
By: /s/ Thomas H. Davis
Name: Thomas H. Davis
Title: Director
RESIDENCE: Cayman Islands
ADDRESS:
c/o Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House
20 Reid Street
Hamilton HM11
Bermuda
Telecopy: (441) 295-2305
Attention: Thomas Davis
with copies of all notices to:
Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive
Suite 460
Reston, VA 20191
Telecopy: (703) 476-7711
Attention: Neil T. Chau
AGGREGATE SUBSCRIPTION AMOUNT
Number of Preferred Units to be Purchased at Closing
Purchase Price ($1,000 per Unit) $
Number of Common Units to be Purchased at Closing 1,750
Purchase Price ($1,000 per Unit) $1,750,000
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<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have
caused this Agreement to be duly executed as of the date first above written.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
Name: Mark Honigsfeld
Title: Chief Executive Officer and
Chairman of the Board
PURCHASER:
JNC OPPORTUNITY FUND LTD.
By: /s/ Thomas H. Davis
Name: Thomas H. Davis
Title: Director
RESIDENCE: Cayman Islands
ADDRESS:
c/o Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House
20 Reid Street
Hamilton HM11
Bermuda
Telecopy: (441) 295-2305
Attention: Thomas Davis
with copies of all notices to:
Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive
Suite 460
Reston, VA 20191
Telecopy: (703) 476-7711
Attention: Neil T. Chau
AGGREGATE SUBSCRIPTION AMOUNT
Number of Preferred Units to be Purchased at Closing 3,250
-----------
Purchase Price ($1,000 per Unit) $ 3,250,000
--------------
Number of Common Units to be Purchased at Closing
Purchase Price ($1,000 per Unit) $
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<PAGE>
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May 31,
1998, by and among COMPU-DAWN, INC., a corporation organized under the laws of
the State of Delaware (the "Company"), and the undersigned (together with
affiliates, the "Initial Investors").
WHEREAS:
A. In connection with the Securities Purchase Agreement of even date
herewith by and between the Company and the Initial Investors (the "Securities
Purchase Agreement"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell to the Initial Investors (i)
Three Thousand Two Hundred Fifty (3,250) shares of its Series A Convertible
Preferred Stock (the "Preferred Stock") that are convertible into shares of the
Company's Common Stock, par value $.01 per share (the "Common Stock"), upon the
terms and subject to the limitations and conditions set forth in the Certificate
of Designations, Rights and Preferences with respect to such Preferred Stock
(the "Certificate of Designation"); and (ii) Three Hundred Twenty Seven Thousand
One Hundred Three (327,103) shares of Common Stock issued at the closing under
the Securities Purchase Agreement (the "Common Shares") and (iii) warrants to
acquire Ninety Thousand Two Hundred Seven (90,207) shares of Common Stock (the
"Warrants"); and
B. To induce the Initial Investors to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investors hereby agree as follows:
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investors" means the Initial Investors and any transferees
or assignees who agree to become bound by the provisions of this
Agreement in accordance with Section 9 hereof.
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<PAGE>
(ii) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement
or Statements in compliance with the Securities Act and pursuant to
Rule 415 under the Securities Act or any successor rule providing for
offering securities on a continuous basis ("Rule 415"), and the
declaration or ordering of effectiveness of such Registration
Statement by the United States Securities and Exchange Commission (the
"SEC").
(iii) "Registrable Securities" means the Conversion Shares, the
Common Shares and the Warrant Shares (including (A) any Conversion
Shares issuable with respect to the Damages Amount or with respect to
Conversion Default Payments under the Certificate of Designation or in
redemption of any Preferred Stock and (B) any Warrant Shares issuable
with respect to Exercise Default Payments under the Warrants) issued
or issuable with respect to the Preferred Stock and the Warrants, and
any shares of capital stock issued or issuable, from time to time
(with any adjustments), as a distribution on or in exchange for or
otherwise with respect to any of the foregoing.
(iv) "Registration Statement" means a registration statement of
the Company under the Securities Act.
b. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare and, on or before
the seventy-fifth (75th) day following the Closing Date (the "Filing
Date"), file with the SEC a Registration Statement on Form S-3 (or, if Form
S-3 is not then available, on such form of Registration Statement as is
then available to effect a registration of the resale of all of the
Registrable Securities, subject to the consent of the Initial Investors (as
determined pursuant to Section 11(j) hereof)) covering the resale of at
least 1,624,740 Registrable Securities which Registration Statement, to the
extent allowable under the Securities Act and the Rules promulgated
thereunder (including Rule 416), shall state that such Registration
Statement also covers the resale of such indeterminate number of additional
shares of Common Stock as may become issuable upon conversion of the
Preferred Stock (i) to prevent dilution resulting from stock splits, stock
dividends or similar transactions or (ii) by reason of reductions in the
Conversion Price of the Preferred Stock in accordance with the terms
thereof (including, but not limited to, the terms which cause the Variable
Conversion Price to decrease to the extent the Closing Bid Price of the
Common Stock decreases). The Registrable Securities initially set forth in
such Registration Statement shall be allocated to the Investors as set
forth in Section 11(k) hereof. The Registration Statement (and each
amendment or supplement thereto, and each request for acceleration of
effectiveness thereof) shall be provided to (and subject to the approval
of) the Initial Investors and their counsel prior to its filing or other
submission.
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<PAGE>
b. Underwritten Offering. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten
offering, the Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering, with the consent of the
Initial Investors, shall have the right to select one legal counsel to
represent the Investors and an investment banker or bankers and manager or
managers to administer the offering, which investment banker or bankers or
manager or managers shall be reasonably satisfactory to the Company. In the
event that any Investors elect not to participate in such underwritten
offering, the Registration Statement covering all of the Registrable
Securities shall contain appropriate plans of distribution reasonably
satisfactory to the Investors participating in such underwritten offering
and the Investors electing not to participate in such underwritten offering
(including, without limitation, the ability of nonparticipating Investors
to sell from time to time and at any time during the effectiveness of such
Registration Statement).
c. Payments by the Company. The Company shall cause the Registration
Statement required to be filed pursuant to Section 2(a) hereof to become
effective as soon as practicable, but in no event later than the one
hundred and fiftieth (150th) day following the date hereof (the
"Registration Deadline"). If (i) (A) the Registration Statement required to
be filed by the Company pursuant to Section 2(a) hereof is not filed with
the SEC on or before the Filing Date or (B) any Registration Statement
required to be filed by the Company pursuant to Section 3(b) hereof is not
filed with the SEC within twenty (20) days after the applicable
Registration Trigger Date (as defined in Section 3(b) hereof), or (ii) (A)
the Registration Statement required to be filed by the Company pursuant to
Section 2(a) hereof is not declared effective by the SEC on or before the
Registration Deadline or (B) any Registration Statement required to be
filed by the Company pursuant to Section 3(b) hereof is not declared
effective by the SEC within sixty (60) days after the applicable
Registration Trigger Date, or (iii) if, subject to Section 3(c) hereof,
after any such Registration Statement has been declared effective by the
SEC, sales of all of the Registrable Securities (including any Registrable
Securities required to be registered pursuant to Section 3(b) hereof)
cannot be made pursuant to such Registration Statement (by reason of a stop
order or the Company's failure to update the Registration Statement or any
other reason outside the control of the Investors) or (iii) the Common
Stock is not listed or included for quotation on the American Stock
Exchange (the "AMEX"), the New York Stock Exchange (the "NYSE"), the Nasdaq
National Market ("NNM"), the Nasdaq SmallCap Market (the "SmallCap") or in
the over-the-counter market on the electronic bulletin board (the "Bulletin
Board") at any time after the initial Registration Deadline hereunder or
trading in the Common Stock on the AMEX, the NYSE, the NNM, the SmallCap or
the Bulletin Board, as applicable, is suspended for more than three
consecutive trading days, (iv) the Company fails to file a request for
acceleration of effectiveness of any Registration Statement required
hereunder within five days of receipt of notification from the SEC that the
SEC will not be reviewing such Registration Statement, or (v) the right of
an Investor to convert the Preferred Shares held by such Investor under the
Securities Purchase Agreement or Certificate of Designation is suspended
for any reason, then the Company will make payments to the Investors in
such amounts and at such times as shall be determined pursuant to this
Section 2(c) as partial relief for the damages to the Investors by reason
of any such delay in or reduction of their ability to sell the Registrable
Securities (which remedy shall not be exclusive of any other remedies
available at law or in equity). The Company shall pay to each Investor an
amount equal to the product of (i) the
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<PAGE>
aggregate Purchase Price of the Preferred Stock, the Common Shares and
Warrants held by such Investor (including, without limitation, Preferred
Stock that has been converted into Conversion Shares and Warrants that have
been exercised for Warrant Shares then held by such Investor) (the
"Aggregate Share Price"), multiplied by (ii) twenty thousandths (.020), for
each thirty (30) day period (or portion thereof) (A) after the Filing Date
and prior to the date the Registration Statement required to be filed
pursuant to Section 2(a) hereof is filed with the SEC, (B) after the
twentieth (20th) day following a Registration Trigger Date and prior to the
date on which the Registration Statement required to be filed pursuant to
Section 3(b) hereof is filed with the SEC, (C) after the Registration
Deadline and prior to the date the Registration Statement required to be
filed pursuant to Section 2(a) hereof is declared effective by the SEC, (D)
after the sixtieth (60th) day following a Registration Trigger Date and
prior to the date the Registration Statement required to be filed pursuant
to Section 3(b) hereof is declared effective by the SEC, (E) during which
sales of any Registrable Securities cannot be made pursuant to any such
Registration Statement after the Registration Statement has been declared
effective, except during any Disclosure Delay Period (as hereinafter
defined), and (F) during which the Common Stock is not listed or included
for quotation on the NNM, SmallCap, NYSE or AMEX after the Registration
Deadline or suspended for more than three consecutive trading days;
provided, however, that there shall be excluded from each such period any
delays which are solely attributable to changes required by the Investors
in the Registration Statement with respect to information relating to the
Investors, including, without limitation, changes to the plan of
distribution. (For example, if the Registration Statement is not effective
by the Registration Deadline, the Company would pay $200 for each thirty
(30) day period thereafter with respect to each $10,000 of Aggregate Share
Price until the Registration Statement becomes effective) and, further
provided, however, that no amount shall be payable hereunder in the case of
any period referred to in subparagraph (A) above if the Registration
Statement is declared effective by the SEC on or before the Registration
Deadline. Such amounts shall be paid in cash or, at each Investor's option,
may be convertible into Common Stock at the "Conversion Price" (as defined
in the Certificate of Designation) then in effect. Any shares of Common
Stock issued upon conversion of such amounts shall be Registrable
Securities. If the Investor desires to convert the amounts due hereunder
into Registrable Securities it shall so notify the Company in writing
within two (2) business days after the date on which such amounts are first
payable in cash and such amounts shall be so convertible (pursuant to the
mechanics set forth under Article IV of the Certificate of Designation)
beginning on the last day upon which the cash amount would otherwise be due
in accordance with the following sentence. Payments of cash pursuant hereto
shall be made within five (5) days after the end of each period that gives
rise to such obligation, provided that, if any such period extends for more
than thirty (30) days, interim payments shall be made for each such thirty
(30) day period; provided, however, that any amount payable under
subparagraph (A) above shall not be payable prior to the Registration
Deadline and that, if any such amount is thereafter payable, it shall be
payable in accordance with the requirements of this paragraph.
d. Piggy-Back Registrations. If at any time prior to the expiration of
the Registration Period (as hereinafter defined) the Company shall file
with the SEC a Registration Statement relating to an offering for its own
account or the account of others under the Securities Act of any of its
equity securities (other than on Form S-4 or Form S-8 or their then
equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or
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<PAGE>
business or equity securities issuable in connection with stock option or
other employee benefit plans), the Company shall send to each Investor who
is entitled to registration rights under this Section 2(d) written notice
of such determination and, if within fifteen (15) days after the date of
such notice, such Investor shall so request in writing, the Company shall
include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, except that if, in
connection with any underwritten public offering, the managing
underwriter(s) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the Registration Statement because,
in such underwriter(s)' judgment, marketing or other factors dictate such
limitation is necessary to facilitate public distribution, then the Company
shall be obligated to include in such Registration Statement only such
limited portion of the Registrable Securities with respect to which such
Investor has requested inclusion hereunder as the underwriter shall permit
(limited to zero if necessary). Any exclusion of Registrable Securities
shall be made pro rata among the Investors seeking to include Registrable
Securities, in proportion to the number of Registrable Securities sought to
be included by such Investors; provided, however, that the Company shall
not exclude any Registrable Securities unless the Company has first
excluded all outstanding securities, the holders of which are not entitled
to inclusion of such securities in such Registration Statement or are not
entitled to pro rata inclusion with the Registrable Securities; and
provided, further, however, that, after giving effect to the immediately
preceding proviso, any exclusion of Registrable Securities shall be made
pro rata with holders of other securities having the right to include such
securities in the Registration Statement other than holders of securities
entitled to inclusion of their securities in such Registration Statement by
reason of demand registration rights. No right to registration of
Registrable Securities under this Section 2(d) shall be construed to limit
any registration required under Section 2(a) hereof. If an offering in
connection with which an Investor is entitled to registration under this
Section 2(d) is an underwritten offering, then each Investor whose
Registrable Securities are included in such Registration Statement shall,
unless otherwise agreed by the Company, offer and sell such Registrable
Securities in an underwritten offering using the same underwriter or
underwriters and, subject to the provisions of this Agreement, on the same
terms and conditions as other shares of Common Stock included in such
underwritten offering.
e. Eligibility for Form S-3. The Company represents and warrants that
it meets the requirements for the use of Form S-3 for registration of the
sale by the Initial Investors and any other Investor of the Registrable
Securities and the Company shall file all reports required to be filed by
the Company with the SEC in a timely manner so as to maintain such
eligibility for the use of Form S-3.
f. Rule 416. The Company and the Investors each acknowledge that an
indeterminate number of Registrable Securities shall be registered pursuant
to Rule 416 under the Securities Act so as to include in such Registration
Statement any and all Registrable Securities which may become issuable (i)
to prevent dilution resulting from stock splits, stock dividends or similar
transactions and (ii) by reason of reductions in the Conversion Price of
the Preferred Stock in accordance with the terms thereof, including, but
not limited to, the terms which cause the Variable Conversion Price to
decrease to the extent the Closing Bid Price of the Common Stock decreases
(collectively, the "Rule 416 Securities"). In this regard, the Company
agrees to take all steps necessary to ensure that all Registrable
Securities are registered pursuant to Rule 416 under
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the Securities Act in such Registration Statement and, absent guidance from
the SEC or other definitive authority to the contrary, the Company shall
affirmatively support and not take any action adverse to the position that
the Registration Statements filed hereunder cover all of the Rule 416
Securities. If the Company determines that the Registration Statements
filed hereunder do not cover all of the Rule 416 Securities, the Company
shall immediately provide to each Investor written notice (a "Rule 416
Notice") setting forth the basis for the Company's position and the
authority therefor. The Company acknowledges that the number of shares of
Common Stock initially included in such Registration Statement relating to
the Registrable Securities represents a good faith estimate of the maximum
number of shares issuable upon conversion of the Preferred Stock and
exercise of the Warrants.
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
a. The Company shall prepare and file with the SEC the Registration
Statement required by Section 2(a) as soon as practicable after the date
hereof (but in no event later than the Filing Date) and shall cause such
Registration Statement relating to Registrable Securities to become
effective as soon as practicable after such filing (but in no event later
than the Registration Deadline), and keep the Registration Statement
effective pursuant to Rule 415 at all times, except during any Disclosure
Delay Period, until such date as is the earlier of (i) the date on which
all of the Registrable Securities have been sold and (ii) the date on which
all of the Registrable Securities (in the reasonable opinion of counsel to
the Initial Investors) may be immediately sold to the public without
registration or restriction pursuant to Rule 144(k) under the Securities
Act or any successor provision (the "Registration Period"), which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein and all documents incorporated by reference
therein) shall not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein, or necessary to
make the statements therein not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration
Statement as may be necessary to keep the Registration Statement effective
at all times during the Registration Period, except during any Disclosure
Delay Period, and, during such period, comply with the provisions of the
Securities Act with respect to the disposition of all Registrable
Securities of the Company covered by the Registration Statement until such
time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in the Registration Statement. In the event
(i) the Company delivers a Rule 416 Notice to the Investors or the
Investors who hold a majority in interest of the Registrable Securities
shall reasonably determine, or the SEC shall state formally or informally,
that Rule 416 under the Securities Act does not permit a registration
statement to cover securities which may become issuable upon conversion or
exercise of convertible or exercisable securities by reason of reductions
in the conversion or exercise price of such securities and (ii) the number
of shares available under
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a Registration Statement filed pursuant to this Agreement is, for any three
(3) consecutive trading days (the last of such three (3) trading days being
the "Registration Trigger Date"), insufficient to cover one hundred
thirty-five percent (135%) of the Registrable Securities issued or issuable
upon conversion (without giving effect to any limitations on conversion
contained in Article IV.C of the Certificate of Designation) of the
Preferred Stock and exercise of the Warrants (without giving effect to any
limitations on exercise contained in Section 7 of the Warrants), the
Company shall amend such Registration Statement, or file a new Registration
Statement (on the short form available therefor, if applicable), or both,
so as to cover two hundred percent (200%) of the Registrable Securities
issued or issuable (without giving effect to any limitations on conversion
or exercise contained in the Certificate of Designation or the Warrants) as
of the Registration Trigger Date, in each case, as soon as practicable, but
in any event within twenty (20) days after the Registration Trigger Date
(based on the market price then in effect of the Common Stock and other
relevant factors on which the Company reasonably elects to rely). The
Company shall cause such amendment and/or new Registration Statement to
become effective as soon as practicable following the filing thereof. In
the event the Company fails to obtain the effectiveness of any such
Registration Statement within sixty (60) days after a Registration Trigger
Date, each Investor shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a written
notice to the Company (a "Mandatory Redemption Notice"), to require the
Company to purchase for cash, at an amount per share equal to the Mandatory
Redemption Amount (as defined in Article VIII.B of the Certificate of
Designation), a portion of the Investor's Preferred Stock such that the
total number of Registrable Securities included on the Registration
Statement for resale by such Investor exceeds 135% of the Registrable
Securities issued or issuable upon conversion (without giving effect to any
limitations on conversion contained in Article IV.C of the Certificate of
Designation) of such Investor's Preferred Stock and exercise of such
Investor's Warrants. If the Corporation fails to redeem any of such shares
within five (5) business days after its receipt of a Mandatory Redemption
Notice, then such Investor shall be entitled to the remedies provided in
Article VIII.C of the Certificate of Designation.
c. If, at any time prior to the expiration of the Registration Period
(as defined below), in the good faith reasonable judgment of the Company's
Board of Directors, the disposition of Registrable Securities would require
the premature disclosure of material non-public information which may
reasonably be expected to have an adverse effect on the Company, then the
Company shall not be required to maintain the effectiveness of or amend or
supplement the Registration Statement for a period (a "Disclosure Delay
Period") expiring upon the earlier to occur of (i) the date on which such
material information is disclosed to the public or ceases to be material or
(ii) subject to Section 3(d) hereof, up to forty-five (45) calendar days
after the date on which the Company provides a notice to the Investors
under Section 3(f) hereof stating that the failure to disclose such
non-public information causes the prospectus included in the Registration
Statement, as then in effect, to include an untrue statement of a material
fact or to omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. For the avoidance
of doubt, in no event shall a Disclosure Delay Period exceed forty-five
(45) calendar days.
d. The Company will give prompt written notice, in the manner
prescribed by Section 11 hereof, to the Investors of each Disclosure Delay
Period. Advance notice of the
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Disclosure Delay Period shall be given to the extent practicable. If
practicable, such notice shall estimate the duration of such Disclosure
Delay Period. Each Investor agrees that, upon receipt of such notice prior
to Investor's disposition of all such Registrable Securities, Investor will
forthwith discontinue disposition of such Registrable Securities pursuant
to the Registration Statement, and will not deliver any prospectus forming
a part thereof in connection with any sale of such Registrable Securities
until the expiration of such Disclosure Delay Period, provided, however,
that an Investor may complete the disposition of any Registrable Securities
which are the subject of a pending or outstanding conversion of shares of
Preferred Stock or exercise of Warrants. In addition, the provisions of
Section 2(c) hereof shall not apply to the Disclosure Delay Periods.
Notwithstanding anything in this Section 3 to the contrary, there shall not
be more than an aggregate of forty-five (45) calendar days in any twelve
(12) month period during which the Company is in a Disclosure Delay Period.
e. The Company shall furnish to each Investor whose Registrable
Securities are included for resale in the Registration Statement and its
legal counsel (i) promptly after the same is prepared and publicly
distributed, filed with the SEC, or received by the Company, one copy of
the Registration Statement and any amendment thereto, each preliminary
prospectus and prospectus and each amendment or supplement thereto, and, in
the case of the Registration Statement referred to in Section 2(a), each
letter written by or on behalf of the Company to the SEC or the staff of
the SEC (including, without limitation, any request to accelerate the
effectiveness of any Registration Statement or amendment thereto), and each
item of correspondence from the SEC or the staff of the SEC, in each case
relating to such Registration Statement (other than any portion, if any,
thereof which contains information for which the Company has sought
confidential treatment), (ii) on the date of effectiveness of the
Registration Statement or any amendment thereto, a notice stating that the
Registration Statement or amendment has been declared effective, and (iii)
such number of copies of a prospectus, including a preliminary prospectus,
and all amendments and supplements thereto and such other documents as such
Investor may reasonably request in order to facilitate the disposition of
the Registrable Securities owned by such Investor.
f. The Company shall use its best efforts to (i) register and qualify
the Registrable Securities covered by the Registration Statement under such
other securities or "blue sky" laws of such jurisdictions in the United
States as each Investor who holds Registrable Securities being offered
reasonably requests, (ii) prepare and file in those jurisdictions such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify
the Registrable Securities for sale in such jurisdictions; provided,
however, that the Company shall not be required in connection therewith or
as a condition thereto to (a) qualify to do business in any jurisdiction
where it would not otherwise be required to qualify but for this Section
3(f), (b) subject itself to general taxation in any such jurisdiction, (c)
file a general consent to service of process in any such jurisdiction, (d)
provide any undertakings that cause the Company undue expense or burden, or
(e) make any change in its charter or bylaws, which in each case the Board
of
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Directors of the Company determines to be contrary to the best interests of
the Company and its stockholders.
g. In the event the Investors who hold a majority in interest of the
Registrable Securities being offered in an offering select underwriters for
the offering, the Company shall enter into and perform its obligations
under an underwriting agreement, in usual and customary form, including,
without limitation, customary indemnification and contribution obligations,
with the underwriters of such offering.
h. As promptly as practicable after becoming aware of such event, the
Company shall notify each Investor of the happening of any event, of which
the Company has knowledge, as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement
of a material fact or omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and use its best efforts promptly to prepare a supplement or amendment to
the Registration Statement to correct such untrue statement or omission,
and deliver such number of copies of such supplement or amendment to each
Investor as such Investor may reasonably request.
i. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration
Statement, and, if such an order is issued, to obtain the withdrawal of
such order at the earliest practicable moment (including in each case by
amending or supplementing such Registration Statement) and to notify each
Investor who holds Registrable Securities being sold (or, in the event of
an underwritten offering, the managing underwriters) of the issuance of
such order and the resolution thereof (and if such Registration Statement
is supplemented or amended, deliver such number of copies of such
supplement or amendment to each Investor as such Investor may reasonably
request).
j. The Company shall permit a single firm of counsel designated by the
Initial Investors to review the Registration Statement and all amendments
and supplements thereto a reasonable period of time prior to their filing
with the SEC, and not file any document in a form to which such counsel
reasonably objects and will not request acceleration of the effectiveness
of any Registration Statement without prior notice to such counsel.
k. The Company shall make generally available to its security holders
as soon as practical, but not later than ninety (90) days after the close
of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 under the Securities Act) covering a
twelve-month period beginning not later than the first day of the Company's
fiscal quarter next following the effective date of the Registration
Statement.
l. At the request of any Investor, the Company shall furnish, on the
date of effectiveness of the Registration Statement (i) an opinion, dated
as of such date, from counsel representing the Company addressed to the
Investors and in form, scope and substance as is customarily given in an
underwritten public offering and (ii) in the case of an underwriting, a
letter, dated such date, from the Company's independent certified public
accountants in form and substance
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<PAGE>
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the
underwriters, if any, and the Investors.
m. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to
the Registration Statement, (iii) one firm of attorneys and one firm of
accountants or other agents retained by the Investors, and (iv) one firm of
attorneys retained by all such underwriters (collectively, the
"Inspectors") all pertinent financial and other records, and pertinent
corporate documents and properties of the Company (collectively, the
"Records"), as shall be reasonably deemed necessary by each Inspector to
enable each Inspector to exercise its due diligence responsibility, and
cause the Company's officers, directors and employees to supply all
information which any Inspector may reasonably request for purposes of such
due diligence; provided, however, that each Inspector shall hold in
confidence and shall not make any disclosure (except to an Investor) of any
Record or other information which the Company determines in good faith to
be confidential, and of which determination the Inspectors are so notified,
unless (a) the disclosure of such Records is necessary to avoid or correct
a misstatement or omission in any Registration Statement, (b) the release
of such Records is ordered pursuant to a subpoena or other order from a
court or government body of competent jurisdiction, or (c) the information
in such Records has been made generally available to the public other than
by disclosure in violation of this or any other agreement. The Company
shall not be required to disclose any confidential information in such
Records to any Inspector until and unless such Inspector shall have entered
into confidentiality agreements (in form and substance satisfactory to the
Company) with the Company with respect thereto, substantially in the form
of this Section 3(m). Each Investor agrees that it shall, upon learning
that disclosure of such Records is sought in or by a court or governmental
body of competent jurisdiction or through other means, give prompt notice
to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. Nothing herein shall be deemed
to limit the Investors' ability to sell Registrable Securities in a manner
which is otherwise consistent with applicable laws and regulations.
n. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to
avoid or correct a misstatement or omission in any Registration Statement,
(iii) the release of such information is ordered pursuant to a subpoena or
other order from a court or governmental body of competent jurisdiction,
(iv) such information has been made generally available to the public other
than by disclosure in violation of this or any other agreement, or (v) such
Investor consents to the form and content of any such disclosure. The
Company agrees that it shall, upon learning that disclosure of such
information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give
prompt notice to such Investor prior to making such disclosure, and allow
the Investor, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.
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<PAGE>
o. The Company shall use its best efforts to promptly either (i) cause
all of the Registrable Securities covered by the Registration Statement for
resale to be listed on the NYSE or the AMEX or another national securities
exchange and on each additional national securities exchange on which
securities of the same class or series issued by the Company are then
listed, if any, if the listing of such Registrable Securities is then
permitted under the rules of such exchange, or (ii) secure the designation
and quotation of all of the Registrable Securities covered by the
Registration Statement on the NNM or SmallCap and, without limiting the
generality of the foregoing, to arrange for or maintain at least two market
makers to register with the National Association of Securities Dealers,
Inc. ("NASD") as such with respect to such Registrable Securities.
p. The Company shall provide a transfer agent and registrar, which may
be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
q. The Company shall cooperate with the Investors who hold Registrable
Securities being offered and the managing underwriter or underwriters, if
any, to facilitate the timely preparation and delivery of certificates (not
bearing any restrictive legends) representing Registrable Securities to be
offered pursuant to the Registration Statement and enable such certificates
to be in such denominations or amounts, as the case may be, as the managing
underwriter or underwriters, if any, or the Investors may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Investors may request, and, within three (3)
business days after a Registration Statement which includes Registrable
Securities is ordered effective by the SEC, the Company shall deliver, and
shall cause legal counsel selected by the Company to deliver, to the
transfer agent for the Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement)
an opinion of such counsel in the form attached hereto as Exhibit 1 and/or
Exhibit 1A, as applicable.
r. At the request of any Investor, the Company shall prepare and file
with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and the prospectus used in
connection with the Registration Statement as may be necessary in order to
change the plan of distribution set forth in such Registration Statement;
provided, however, that the Company shall only pay the costs and expenses
relating to three (3) such amendments or supplements, and the Investor
requesting any amendment or supplement in excess thereof shall pay the
reasonable costs and expenses relating to the preparation of such amendment
or supplement.
s. The Company shall comply with all applicable laws related to a
Registration Statement and offering and sale of securities and all
applicable rules and regulations of governmental authorities in connection
therewith (including, without limitation, the Securities Act and the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated by the SEC.)
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<PAGE>
t. The Company shall take all such other actions as any Investor or
the underwriters, if any, reasonably request in order to expedite or
facilitate the disposition of the Registrable Securities.
u. From and after the date of this Agreement, the Company shall not,
and shall not agree to, allow the holders of any securities of the Company
to include any of their securities in any Registration Statement under
Section 2(a) hereof or any amendment or supplement thereto under Section
3(b) hereof without the consent of the holders of a majority in interest of
the Registrable Securities.
4. OBLIGATIONS OF THE INVESTORS.
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
a. It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the
Registrable Securities held by it as shall be reasonably required to effect
the registration of such Registrable Securities and shall execute such
documents in connection with such registration as the Company may
reasonably request. At least five (5) business days prior to the first
anticipated filing date of the Registration Statement, the Company shall
notify each Investor of the information the Company requires from each such
Investor.
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by
the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such
Investor's Registrable Securities from the Registration Statement.
c. In the event Investors holding a majority in interest of the
Registrable Securities being offered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such
other actions as are reasonably required in order to expedite or facilitate
the disposition of the Registrable Securities, unless such Investor has
notified the Company in writing of such Investor's election not to
participate in such underwritten distribution.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Sections
3(h) or 3(i), such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering the
resale of such Registrable Securities until such Investor's receipt of the
copies of the
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supplemented or amended prospectus contemplated by Sections 3(h) or 3(i)
and, if so directed by the Company, such Investor shall deliver to the
Company (at the expense of the Company) or destroy (and deliver to the
Company a certificate of destruction) all copies in such Investor's
possession, of the prospectus covering such Registrable Securities current
at the time of receipt of such notice.
e. No Investor may participate in any underwritten distribution
hereunder unless such Investor (i) agrees to sell such Investor's
Registrable Securities on the basis provided in any underwriting
arrangements in usual and customary form entered into by the Company, (ii)
completes, in a manner reasonably acceptable to the Company, and executes
all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees to pay its pro rata share of
all underwriting discounts and commissions and any expenses in excess of
those payable by the Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 4, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, the
fees and disbursements of counsel for the Company and the fees and disbursements
contemplated by Section 3(m) hereof shall be borne by the Company. In addition,
the Company shall pay all of the Investors' costs and expenses (including legal
fees of one (1) firm or counsel) incurred in connection with the enforcement of
the rights of the Investors hereunder.
6. INDEMNIFICATION.
In the event any Registrable Securities are included for resale in a
Registration Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable
Securities, and (ii) the directors, officers, partners, members, employees,
agents and each person who controls any Investor within the meaning of
Section 15 of the Securities Act or Section 20 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), if any, (each, an
"Indemnified Person"), against any joint or several losses, claims,
damages, liabilities or expenses (collectively, together with actions,
proceedings or inquiries by any regulatory or self-regulatory organization,
whether commenced or threatened, in respect thereof, "Claims") to which any
of them may become subject insofar as such Claims arise out of or are based
upon: (i) any untrue statement or alleged untrue statement of a material
fact in a Registration Statement or the omission or alleged omission to
state therein a material fact required to be stated or necessary to make
the statements therein not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus
if used prior to the effective date of such Registration Statement, or
contained in the final prospectus (as amended or supplemented, if the
Company files any amendment thereof or supplement thereto with the SEC)
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or the omission or alleged omission to state therein any material fact
necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading,
or (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any other applicable securities law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities (the matters in the foregoing clauses (i) through (iii) being,
collectively, "Violations"). Subject to the restrictions set forth in
Section 6(c) with respect to the number of legal counsel, the Company shall
reimburse the Investors and each other Indemnified Person, promptly as such
expenses are incurred and are due and payable, for any reasonable legal
fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by such Indemnified Person expressly
for use in the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not apply to amounts paid in settlement of
any Claim if such settlement is effected without the prior written consent
of the Company, which consent shall not be unreasonably withheld; and (iii)
with respect to any preliminary prospectus, shall not inure to the benefit
of any Indemnified Person if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely
basis in the prospectus, as then amended or supplemented, if such corrected
prospectus was timely made available by the Company pursuant to Section
3(e) hereof, and the Indemnified Person was promptly advised in writing not
to use the incorrect prospectus prior to the use giving rise to a Violation
and such Indemnified Person, notwithstanding such advice, used it. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9 hereof.
b. In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees severally and not jointly to
indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, its employees, agents
and each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, and any
other stockholder selling securities pursuant to the Registration Statement
or any of its directors or officers or any person who controls such
stockholder within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "Indemnified
Party"), against any Claim to which any of them may become subject, under
the Securities Act, the Exchange Act or otherwise, insofar as such Claim
arises out of or is based upon any Violation, in each case to the extent
(and only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such
Investor expressly for use in connection with such Registration Statement;
and subject to Section 6(c) such Investor will reimburse any legal or other
expenses (promptly as such expenses are incurred and are due and payable)
reasonably incurred by them in connection with investigating or defending
any such Claim; provided, however, that the indemnity agreement contained
in this Section 6(b) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of
such Investor, which consent shall not be
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unreasonably withheld; provided, further, however, that the Investor shall
be liable under this Agreement (including this Section 6(b) and Section 7)
for only that amount as does not exceed the net proceeds actually received
by such Investor as a result of the sale of Registrable Securities pursuant
to such Registration Statement. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9 hereof. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(b) with respect to any preliminary prospectus
shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary
prospectus was corrected on a timely basis in the prospectus, as then
amended or supplemented, and the Indemnified Party failed to utilize such
corrected prospectus.
c. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to made against any
indemnifying party under this Section 6, deliver to the indemnifying party
a written notice of the commencement thereof, and the indemnifying party
shall have the right to participate in, and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly
noticed, to assume control of the defense thereof with counsel mutually
satisfactory to the indemnifying party and the Indemnified Person or the
Indemnified Party, as the case may be; provided, however, that such
indemnifying party shall not be entitled to assume such defense and an
Indemnified Person or Indemnified Party shall have the right to retain its
own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the
indemnifying party, the representation by such counsel of the Indemnified
Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential conflicts of interest between such
Indemnified Person or Indemnified Party and any other party represented by
such counsel in such proceeding or the actual or potential defendants in,
or targets of, any such action include both the Indemnified Person or the
Indemnified Party and the indemnifying party and any such Indemnified
Person or Indemnified Party reasonably determines that there may be legal
defenses available to such Indemnified Person or Indemnified Party which
are different from or in addition to those available to such indemnifying
party. The indemnifying party shall pay for only one separate legal counsel
for the Indemnified Persons or the Indemnified Parties, as applicable, and
such legal counsel shall be selected by Investors holding a
majority-in-interest of the Registrable Securities included in the
Registration Statement to which the Claim relates (with the approval of the
Initial Investors if they hold Registrable Securities included in such
Registration Statement), if the Investors are entitled to indemnification
hereunder, or by the Company, if the Company is entitled to indemnification
hereunder, as applicable. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is
incurred and is due and payable.
15
<PAGE>
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
such fraudulent misrepresentation, and (iii) contribution (together with any
indemnification or other obligations under this Agreement) by any seller of
Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE EXCHANGE ACT.
With a view to making available to the Investors the benefits of Rule
144 promulgated under the Securities Act or any other similar rule or regulation
of the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
a. file with the SEC in a timely manner and make and keep available
all reports and other documents required of the Company under the
Securities Act and the Exchange Act so long as the Company remains subject
to such requirements (it being understood that nothing herein shall limit
the Company's obligations under Section 4(c) of the Securities Purchase
Agreement) and the filing and availability of such reports and other
documents is required for the applicable provisions of Rule 144; and
b. furnish to each Investor so long as such Investor owns shares of
Preferred Stock, Warrants or Registrable Securities, promptly upon request,
(i) a written statement by the Company that it has complied with the
reporting requirements of Rule 144, the Securities Act and the Exchange
Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities under Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights of the Investors hereunder, including the right to have the
Company register the resale of the Registrable Securities pursuant to this
Agreement, shall be automatically assignable by each Investor to any transferee
of all or any portion of the shares of Preferred Stock, the Warrants or the
Registrable Securities if: (i) the Investor agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company after such assignment, (ii) the Company is furnished
with written notice of (a) the name and address of such transferee or assignee,
and (b) the securities with respect to which such registration rights are being
transferred
16
<PAGE>
or assigned, (iii) following such transfer or assignment, the further
disposition of such securities by the transferee or assignee is restricted under
the Securities Act and applicable state securities laws, (iv) the transferee or
assignee agrees in writing for the benefit of the Company to be bound by all of
the provisions contained herein, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with written consent of the Company and
Investors who hold a majority in interest of the Registrable Securities;
provided, however, that no amendment hereto which restricts the ability of an
Investor to elect not to participate in an underwritten offering shall be
effective against any Investor which does not consent in writing to such
amendment; provided, further, however, that no consideration shall be paid to an
Investor by the Company in connection with an amendment hereto unless each
Investor similarly affected by such amendment receives a pro-rata amount of
consideration from the Company. Unless an Investor otherwise agrees, each
amendment hereto must similarly affect each Investor. Any amendment or waiver
effected in accordance with this Section 10 shall be binding upon each Investor
and the Company.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of
instructions, notice or election received from the registered owner of such
Registrable Securities.
b. Any notices required or permitted to be given under the terms of
this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five (5) days after being placed in the
mail, if mailed, or upon receipt or refusal of receipt, if delivered
personally or by courier or confirmed telecopy, in each case addressed to a
party. The addresses for such communications shall be:
If to the Company:
COMPU-DAWN, INC.
77 Spruce Street
Cedarhurt, NY 11516
Attention: Chief Executive Officer
Telecopier: (516) 374-3410
17
<PAGE>
with a copy to:
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, NY 11554
Attention: Fred Skolnik, Esq. and Gavin C. Grusd, Esq.
Telecopier: (516) 296-7111
and if to any Investor, at such address as such Investor shall have
provided in writing to the Company, or at such other address as each such
party furnishes by notice given in accordance with this Section 11(b).
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
d. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware applicable to contracts made and to
be performed in the State of Delaware. The Company irrevocably consents to
the jurisdiction of the United States federal courts and the state courts
located in the State of New York in any suit or proceeding based on or
arising under this Agreement and irrevocably agrees that all claims in
respect of such suit or proceeding may be determined in such courts. The
Company irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. The parties hereto agree that a
final non-appealable judgment in any such suit or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on such
judgment or in any other lawful manner.
e. This Agreement, the Securities Purchase Agreement (including all
schedules and exhibits thereto) and the Warrants constitute the entire
agreement among the parties hereto with respect to the subject matter
hereof and thereof. This Agreement, the Securities Purchase Agreement and
the Warrants supersede all prior agreements and understandings among the
parties hereto with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile
18
<PAGE>
transmission of a copy of this Agreement bearing the signature of the party
so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such
other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
j. All consents, approvals and other determinations to be made by the
Investors or the Initial Investors pursuant to this Agreement shall be made
by the Investors or the Initial Investors holding a majority in interest of
the Registrable Securities (determined as if all shares of Preferred Stock
and Warrants then outstanding had been converted into or exercised for
Registrable Securities and by the inclusion of the Common Shares) held by
all Investors or Initial Investors, as the case may be.
k. The initial number of Registrable Securities included on any
Registration Statement and each increase (if any) to the number of
Registrable Securities included thereon shall be allocated pro rata among
the Investors based on the number of Registrable Securities held by each
Investor at the time of such establishment or increase, as the case may be.
In the event an Investor shall sell or otherwise transfer any of such
holder's Registrable Securities, each transferee shall be allocated a pro
rata portion of the number of Registrable Securities included on a
Registration Statement for such transferor. Any shares of Common Stock
included on a Registration Statement and which remain allocated to any
person or entity which does not hold any Registrable Securities shall be
allocated to the remaining Investors, pro rata based on the number of
shares of Registrable Securities then held by such Investors. For the
avoidance of doubt, the number of Registrable Securities held by any
Investor shall be determined as if all shares of Preferred Stock and
Warrants then outstanding were converted into or exercised for Registrable
Securities and by the inclusion of the Common Shares held by such Investor.
l. For purposes of this Agreement, the term "business day" means any
day other than a Saturday or Sunday or a day on which banking institutions
in the State of New York are authorized or obligated by law, regulation or
executive order to close.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
COMPU-DAWN, INC.
By: /s/ Mark Honigsfeld
Name: Mark Honigsfeld
Its: Chief Executive Officer and
Chairman of the Board
INITIAL INVESTORS:
JNC OPPORTUNITY FUND LTD.
By: /s/ Thomas H. Davis
Name: Thomas H. Davis
Its: Director
JNC STRATEGIC FUND LTD.
By: /s/ Thomas H. Davis
Name: Thomas H. Davis
Its: Director
20
<PAGE>
Compu-DAWN, Inc.
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited)
<TABLE>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------- ------------------------------
1998 1997 1998 1997
------------ --------------- -------------- ----------
<S> <C> <C> <C> <C>
NET (LOSS) $(422,711) $(2,366,571) $ (899,038) $(2,879,627)
========= =========== =========== ===========
WEIGHTED AVERAGE SHARES:
Common shares outstanding 2,936,312 1,415,469 2,888,445 1,202,269
Assumed conversion of cheap options and warrants - 505,202 - 590,704
---------------- ------------- ---------------- ----------
2,936,312 1,920,671 2,888,445 1,792,973
========= ========= ========= =========
BASIC (LOSS) PER COMMON SHARE: $(.14) $(1.23) $(.31) $(1.61)
===== ====== ===== ======
</TABLE>
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Compu-DAWN, Inc.
EXHIBIT 27
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
consolidated financial statements for the six months ended June 30, 1998 and is
qualified in its entirety by reference to such statements.
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001028079
<NAME> Compu-DAWN
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<CASH> 6,825,637
<SECURITIES> 0
<RECEIVABLES> 127,776
<ALLOWANCES> 13,635
<INVENTORY> 0
<CURRENT-ASSETS> 7,108,835
<PP&E> 476,312
<DEPRECIATION> 222,962
<TOTAL-ASSETS> 7,400,284
<CURRENT-LIABILITIES> 287,167
<BONDS> 48,784
31,795
0
<COMMON> 33
<OTHER-SE> 7,032,505
<TOTAL-LIABILITY-AND-EQUITY> 7,400,284
<SALES> 535,890
<TOTAL-REVENUES> 535,890
<CGS> 0
<TOTAL-COSTS> 1,490,345
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,705
<INCOME-PRETAX> (899,038)
<INCOME-TAX> 0
<INCOME-CONTINUING> (899,038)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (899,038)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
